Top Five Mistakes for Small Business Owners to Avoid

Article written by Eric Bank

Starting a small business can be rewarding, but also challenging. Sometimes, entrepreneurial spirit is great for launching a company but not so good for the day-to-day running of the business. But it doesn't have to be that way. Here are five common mistakes that new owners make -- avoid these and you'll have a much better chance of long-term success.

1.  Poor Planning. You can avoid a lot of grief by creating a business plan and budget for the first year of operation. A business plan indicates to investors and vendors that you have seriously thought about your enterprise, including finances, marketing, selling, organizational policies and operational procedures. The budget proves your ability to project numbers and make reasonable assumptions. You'll have to address issues of compensation, taxes, buying inventory and paying interest, among others.
2. Poor Accounting Procedures: Bookkeeping can't wait for a convenient time. You must keep your books up to date and accurate. Without precise information, you are likely to make mistakes that can cost your business dearly. Poor accounting procedures can lead to unpaid bills, uncollected revenues, cash shortages, illiquidity and even bankruptcy. If accounting isn't your thing, by all means hire a bookkeeper or an accounting service to keep your books in good order. The service is worth its weight in gold, and it's tax-deductible.
3. Poor Internal Controls: Even if you have a bookkeeper, you must also create internal controls so that no one employee can hide mistakes or embezzle. Either you or a trusted partner must periodically inspect primary financial documents and make sure they match your financial reporting. These documents include cancelled checks, bank statements, purchase orders and bills. Always sign all check personally. You can use an outside service to reconcile and audit your books, but you should also remain personally involved in creating and maintaining internal controls.
4. Poor Delegation Skills: Some entrepreneurs are, unfortunately, megalomaniacs. They find it impossible to delegate the smallest task, habitually micro-manage every employee and generally make the staff's working lives a nightmare. Inevitably, your product or service will suffer, your employees will turn surly or quit, and you'll be spread so thin that things will fall between the cracks. You can get a grip by replacing this anti-social behavior with good communication and delegation skills. Regularly meet with and talk to your staff, ask for updates (but not six times a day), and establish procedures by which you can judge whether the company is performing well. Use outside vendors as needed to supplement your staff.
5. Poor Involvement: The opposite of #4 is a detached owner who loses control of the business out of neglect. Just as you can't do everything yourself, you can't delegate all the work, because your vision will be quickly lost. Other employees might be more interested in exploiting the business for their own purposes than in following your agenda. You must find the right balance between the two extremes of involvement and lack thereof. Seek the assistance of outside lawyers, accountants and financial advisors to help you evaluate how well you are running your business and be open to their suggestions.

Top 10 Ways to Promote Your Small Business During the Holidays

Article written by EricBank

The holiday spirit puts people in a buying mood. Don't let your small business miss out on its fair share of Christmas cheer. Here are 10 tips for attracting customers and stimulating sales. Don't forget, most of these are tax-deductible -- consult with your tax preparer for all the details.

1.     Say it with music. You can turn just about any business into a festive venue by hiring a few musicians and/or singers. Christmas carols really set the mood, and live music attracts new potential customers. Couple this with some holiday decorating and promote the event on social media.

2.     Shopper guidance. Join your fellow business owners and put together a holiday buying guide featuring local merchants. Include special sale announcements and feed the information to local media and bloggers.

3.     Holiday hoopla. Set up Christmas-themed grab bags, contests, lotteries and other giveaways to attract visitors and reward them for their patronage. If you are a service company, offer a holiday tie-in, such as a free decorating or free tickets to the latest Christmas movie.

4.     Holiday cards. Don't forget to send out holiday cards. Use your customer database to dispatch cards for Thanksgiving, Christmas, Hanukah, Kwanza, New Year's or Festivus. If you have the time, pen a thoughtful, personal note that lets your customers know you're thinking of them this holiday season.

5.     Promote a holiday-appropriate charity. The poor, hungry and homeless -- humans and animals -- need help in the cold winter weather. Hospitalized children need toys, and our fighting forces overseas need CARE packages. Adopt a charity and aggressively promote your interest in it.

6.     Special customer loyalty offers. Say "Merry Christmas" to your best customers by offering them special deals on gifts and other holiday paraphernalia. Make them understand that the deals are exclusively for your longtime customers as a thank you for their business.

7.     Sales spectacles. Team up with your neighboring businesses for sales spectaculars. For example, the business on your block can set up sidewalk sales, festooned with balloons and maybe Santa himself. Bring in some petting animals and you'll be a hit with young kids and their parents. Let your imagination run wild and you'll be surprised at how many good ideas you can develop.

8.     Put out food. NOTHING attracts customers like free snacks. Sure, it might be a little costly, put almost invariably you are repaid with ramped-up sales. Do everyone a favor and gear your offerings toward healthy holiday foods like fruits, nuts and wholesome eggnog. If you live in an area that favors vegan or ethnic foods, stock up on delights that you know will be appreciated.

9.     Promote New Year's resolutions. Help your customer's improve their lives by tying-in a promotion to offer free fitness training, business consulting or other useful services.

10.  Holiday gift cards are a great promotion. Sell them at a slight discount to encourage sales. You win twice --- the sale of the cards and possible incremental sales made to the recipients when they come in to redeem the cards.

How is your small business celebrating the holidays? We'd love to hear from you! 

Leave us a note and let us and our readers know what you're up to. 

Happy Holidays from all of us at Small Business Financials!

Small Business Charitable Contribution Tips

Article written by EricBank

As we enter the final month of 2014, many small businesses are planning charitable contributions. This is a good idea, for many reasons beyond the tax deduction. Let's explore the why's and how's of intelligent charitable giving during this holiday season.

Benefits Beyond Taxes

Charitable giving is great for business, because it helps instill a positive image among your customers, especially when you pick a charity that is important to them. One feature of running a small business is that you get to know your customers, so that you can often figure out which causes they find the most appealing. If in doubt, just ask! In one 2010 survey, 90 percent of respondents said they wanted a business to tell them how it is supporting a cause. You also can boost employee morale by giving to a cause they find important, helping to foster a community feeling inside the company. Giving helps your marketing efforts by allowing you to connect with local leaders in a different context, and even garner some coverage on the local news.

How to Proceed

You need to plan the amounts and recipients of your charitable giving early enough in the year so that you can budget and put aside sufficient cash. This can be a challenge to a busy business owner, but consider it another necessity of the job. Select a charity to which your business has some plausible connection. Do you sell food as a retailer or restaurant? Contribute to a charity that runs a food bank or sends food packages to our military personnel overseas. Dentists, doctors, lawyers and other professionals can offer free services to the needy who otherwise couldn't afford to pay. Involving your employees in the decision helps to empower them and increase job satisfaction. Make sure the recipient is legitimate -- the well-known charities are usually a safe bet. Let your customers know what you are doing -- don't hide your light under a bushel basket!

Get Your Tax Deduction

Your business does good when it contributes to charity and does well by its bottom line through the resulting tax deduction. Make sure the recipient's tax status provides you with a deductible expense. The charity is usually a tax-exempt 501(c)(3) outfit and will probably accept volunteered services, inventory and sponsorship of local events in addition to cold hard cash. In general, you can deduct up to 50 percent of your adjusted gross income for charitable contributions, although non-cash contributions can be a little tricky. Here are some tips:

• You can't deduct contributions to a specific person, only to the organization.

• Sole proprietors itemize their deductions on Schedule A of Form 1040. 

• You can deduct the fair market value of contributed inventory or property, but use Form 8283 when the value exceeds $500. 

• You can't deduct volunteer work, but you can deduct some of the expenses you encounter while performing the work -- mileage, special uniforms, hosting a fundraiser, etc. 

• If you receive anything in return for your contribution, you'll have to subtract its value from your deduction. Be aware of this at charity auctions -- only the amount above the auctioned item's fair market value is deductible. Unless, of course, you donate the item as well.

7 million new jobs! Way to go small business!!

https://www.sba.gov/blogs/small-businesses-drive-us-job-recovery

Small Business Health Care Tax Credit 2014

Article written by EricBank

One of the features of the new health insurance landscape is a tax credit for small businesses to offset part of the costs of employee coverage. The amount of the credit has increased in 2014 to 50 percent of the premiums that a small business employer pays. The credit also increases to 35 percent for small tax-exempt employers. Eligible employers can receive the credit for two consecutive years.

Qualified Health Plans

To be eligible for the credit, the employer must pay premiums for employees enrolled through the Small Business Health Options Program Marketplace, although certain exceptions apply. For example, if you pay $50,000 a year for employee premiums and receive the maximum credit, you cut your tax bill -- or increase your refund -- by $25,000. The refund is limited by the total of your income tax withholding and Medicare tax liability. If you forget to apply for the credit, you can file an amended return within three years of the original filing or two years after paying the tax, whichever is later. 

Eligibility Requirements

A business can claim the tax credit if it pays at least 50 percent of each employee's health insurance, not counting employees who are dependents or family members. The business must have fewer than 25 full-time-equivalent (FTE) employees with average wages below $50,800, although the math is a little tricky -- see example below. One FTE can be achieved by one full-time or two half-time employees. The credit works on a sliding scale such that the smallest businesses -- ones with 10 or fewer employees, get the biggest credit, on a percentage basis. For an employee count between 11 and 24, the credit is reduced by a fraction in which the numerator is the number of FTEs minus 10, and the denominator is 15. If the average annual FTE wages exceeds $25,000, the reducing fraction has the excess average wage in the numerator and $25,400 (for 2014) in the denominator. The final reduction is the sum of the employee count and employee average wage reductions, and could possibly wipe out the credit entirely.

Example Calculation

Imagine an employer in 2014 has 12 FTEs and average annual wage of $30,000. The employer shells out $96,000 to pay for qualified employee health insurance premiums. The starting credit is 50 percent of the premiums, or $48,000. The employee count reduction for employees in excess of 10 is (2/15 x $48,000) or $6,400. The average annual wage reduction is (($30,000 - $25,000) / $25,400) x $48,000, or $9,449. Therefore, the total credit is equal to $48,000 - $6,400 - $9,449, or $32,151.

Claiming the Credit

To receive the credit, you must complete IRS Form 8941, Credit for Small Employer Health Insurance Premiums. Include the tax credit in your general business credit when you file your business income tax return. You may be able to carry the credit back or forward. If you are a small tax-exempt organization qualifying for the credit, file IRS Form 990-T, Exempt Organization Business Income Tax Return -- even if you normally don't file this form -- to receive a refund.

Eight Tax-Saving Tips for Small Businesses

Article written by EricBank

If you are a sole proprietor, a small partnership, LLC or S corporation, or run a small business from your home, it's especially important to take advantage of all the tax deductions and benefits due you, since small businesses usually have limited financial resources. We've assembled eight tax-saving tips that will help reduce your tax bill and keep more money working inside the business.

·         Keep Excellent Records -- Every time you lose a receipt or transaction record for a deductible expense, you are throwing money away. It usually a matter of having good bookkeeping habits and using either a qualified tax preparer or tax-preparation software. The latter can be economical, but the former can help represent you in front of the IRS, an important consideration.

·         Professional Fees -- It's easy to remember to deduct any business taxes and licensing fees you've paid during the year. But also remember to deduct the costs of memberships to business-related organizations and the cost of books and subscriptions used by the business. This can add up to hundreds of dollars a year.

·         Borrowing Expenses -- Many a small business requires a loan or line of credit to help get through rough times or to finance operations and growth. Make sure you account for and deduct all the interest you pay for business-related loans during the year. Don't forget to deduct any debt-related fees, including ones for applications, rate-reductions, appraisals and legal activity.

·         Insurance Costs -- No, you can't deduct life insurance premiums, even on policies for key people within the company, but there are plenty of business-related insurance costs that are deductible. These include insurance policies that cover business assets -- machinery, property, equipment and so forth -- and liability insurance for a wide variety of business-related contingencies. Also, be aware that self-employed individuals can deduct health care insurance costs directly from gross income rather than as an itemized deduction.

·         Maintenance and Repair Expenses -- If you have property you use to earn income, the upkeep and repair expenses are deductible. Normally, this includes the total cost of materials and labor. If you do the labor yourself, you can only deduct the cost of materials.

·         Office Supplies -- Sheets of paper and the clips that hold them together are deductible when used for business purposes. The same is true for staplers, pens and all those other supplies necessary to keep your business humming. Different businesses often need special supplies that are deductible -- printing ink for photographers, drugs and syringes for veterinarians, etc.

·         Management and Administration -- Any money the business spends on management and administration fees is deductible. This includes banking fees and the costs of tax return preparation.

·         Home-Office Expenses -- You can deduct many of the costs of running your business from your home. This includes a pro-rated portion of mortgage interest, utilities, insurance, repairs and depreciation. The IRS even provides a simplified option to quickly figure the tax deduction based on the square footage of the office. Check IRS Publication 587 for all the details.

Four Important Factors Affecting Inventory Management

Article written by EricBank

Small merchandisers and manufacturers rely heavily on the profitable sale of inventory to stay in business, because these companies often have limited funding and sources of credit. Your gross margin -- the difference between selling price and acquisition cost -- can be affected by several factors, both internal and external. Here are four of the most important ones:

o   Economic Environment: It's always wise to run a tight ship, but never more so than when the economy slows down. In this case, a "tight ship" means buying or making only enough inventory for sale in a relatively short time period. On the other hand, when business is strong, interest rates may climb to the point where you can't afford the interest payments on the money you borrow to acquire inventory. You might have to cut back on your inventory if this happens, an unfortunate decision in a strong economy. Instead, prepare for higher interest rates by establishing a fixed-rate line of credit when rates are still reasonable. If the economy turns inflationary, consider using last-in, first-out inventory costing. By doing so, your cost of goods sold will mirror the most recent inflationary price hikes and therefore result in lower taxable income and income taxes.

o   Market Environment: Today's taste may be tomorrow's waste -- that's the way it can go with a fickle consumer base. When some of your inventory goes out of style, you'll have to mark down its price and take an accounting loss. This means restating your inventory value at the lower of cost or market, which in this case is market. Doing so boosts your COGS and thereby cuts your annual taxable income -- or even hands you a net loss for the year. Either way, it reduces your tax bill. You might have to write off inventory because of external factors like product recalls, boycotts, obsolescence, bad publicity and tariffs, to name a few. 

o   Inventory Management: Shrinkage -- theft, spoilage, damage, short shipments, misplacement -- is a big enemy of profits. Fight back with cycle counting, in which you perform a daily physical count of a different part of your inventory. Repeat the cycle until you've surveyed all of your inventory, then begin again. The advantage is that you'll detect shrinkage much sooner than if you had waited for year-end inventorying. The sooner you discover a problem, the sooner you can address it. You might have to adjust storage and security procedures, change management or security personnel, choose new suppliers, or perhaps fire a worker or two.

o   Inventory Tracking: Consider automating your inventory tracking from inception (on the manufacturing floor and/or receiving dock) to sale. High-tech features such as bar code scanners and radio frequency guns can track all movements of your stock items, allowing you to establish a perpetual inventory system. By doing so, you'll always have timely information about goods on hand and COGS. You also might be able to delay physical inventory counts, and in any event, you can integrate the information into your accounting and procurement systems