Expectations for Your Bookkeeper

A business owner’s time is too valuable for keeping accounting records and running financial reports. Also, most business owners don’t have enough accounting expertise to keep the books accurately and completely. Between a lack of time and expertise, business owners can wind up with inaccurate accounting records that lead to expensive mistakes.

Outsourcing your bookkeeping to a qualified professional is one of the best decisions you can make as a business owner. A bookkeeper provides accurate and up-to-date financial information. Engaging a bookkeeper also frees up your time to develop new sales and plan for growth.

So, after you engage a bookkeeper, how do you ensure that she or he provides that accurate financial information so you can make good business decisions? Sounds simple, but setting these four expectations is the best way to get the bookkeeping services that you need:

  • Standard Tasks

Clarify the tasks and deliverables that will meet your needs, such as keeping accounting records up-to-date, ensuring information is categorized correctly, and reconciling financial activity. Establish a schedule for monthly financial statements and other reporting needed to manage your business.

  • Critical Thinking

You need someone who can focus on the details and on the big picture, and who also understands how they work together. She or he must be a problem solver, assessing information and developing solutions. Projects and tasks must be logically prioritized and followed through to completion.

  • Two-Way Communication

If your instructions or processes are not understood, your bookkeeper must be willing to ask for clarification or help. Communication is critical; it is better for your bookkeeper to ask questions rather than guessing or keeping quiet. Good bookkeepers handle day-to-day issues and know when to escalate an issue to you.

  • Technical Proficiency

A 21st-century bookkeeper can conduct most, if not all, of your financial business electronically. That includes accessing the bank statement, paying bills, and sending financial reports. Your bookkeeper should be proactive about securely using technology. It will save both of you time and reduce human error.

You depend on your bookkeeper to provide complete and accurate financial information so you can make good business decisions. Setting expectations for what your bookkeeper will deliver, when, and how is the best way to get things done the way you need them. Once you and your bookkeeper have that important conversation about expectations, your time and attention can be focused on building your business.

Mid-Year Financial Checkup

Mid-year is here! Due to COVID-19, you may feel like 2020 is only two months old – or two years old – instead of being half over. Also due to COVID-19, you may have already taken a hard look at your business finances. Even so, mid-year is a good time for a financial checkup. 

Think about it. You get a physical checkup to detect any serious problems that can result in a medical crisis that stops you in your tracks. A financial checkup will help you to detect problems with income, expenses or other financial concerns that can stop your business cold. 

At a minimum, your Mid-Year Financial Checkup should cover these three areas:

  • Actual vs. Budget

Compare actual financial performance to planned, or budgeted, financial activity. Focus on variances in income and expense categories that most significantly impact achieving your organization’s goals. If the budget was not met, figure out why. Did conditions change?  Were projections unrealistic? Focus on “why” and use that information to refine your current and future budgets.

  • Cash Flow

Project your cash flow for at least three months, preferably for six months or more. Start with expected income and expenses, like contract income, payroll, and leases, then add other income and expense items based on history and your assumptions. You may need to revisit your assumptions often during volatile times, like now. Be realistic about payment timing and what it really costs to sustain your business.

  • Expense Control

Control planned expenses to ensure they remain within established plans. Carefully consider unplanned expenses, such as additional safety equipment and supplies related to COVID-19, and how necessary those expenses are to business operations, strategy, and branding. Keep in mind that you may also need to spend on growth and technology to remain relevant and competitive. 

Yes, it’s time for your 2020 Mid-Year Financial Check-up to detect any serious problems that could impact your business finances and stop your business cold. Like your body, your business needs to undergo a periodic financial checkup to alert you to existing or impending problems. During volatile times like now, it’s even more important than ever to perform a Mid-Year Financial Checkup on actual vs. budgeted financial performance, cash flow and expense control. 

Who’s Keeping your Workplace Safe during COVID-19?

Businesses that are re-opening or expanding from limited operations want to be safe. Wanting to be safe is important, but not enough, especially these days. Keeping a safe workplace for workers and customers until we get COVID-19 under control requires even more planning than usual, because there are more health-related risks than usual. No business wants to be part of a coronavirus case spike.

American workers and businesses usually depend on the Occupational Safety and Health Administration, known as OSHA, for workplace safety guidance and oversight. Now, when businesses and workers need OSHA’s help to implement safety guidance, little assistance is being provided, according to a report from NPR’s Weekend Edition on July 4th. You can listen to the whole story about OSHA inaction on the thousands of COVID-related complaints OSHA has received here – https://www.npr.org/2020/07/04/887239204/many-say-osha-not-protecting-workers-during-covid-19-pandemic.

This news is unbelievably bad for American workers and businesses who are essentially left on their own to figure out how to protect their people and keep their doors open. Knowing where to start is daunting, so here are three tips for getting started to keep your workplace safe during COVID-19:

  • Review Available Resources

Even though direct federal safety oversight is not available, written guidance is online from OSHA and the Center for Disease Control (CDC). You will have to review it yourself, determine what parts apply to you, and how to make any necessary adjustments. A good place to start is OHSA’s Guidance on Preparing Workplaces for COVID-19 at https://www.osha.gov/Publications/OSHA3990.pdf. Check out these sites for more information –  https://www.osha.gov/SLTC/covid-19/controlprevention.html and https://www.cdc.gov/coronavirus/2019-ncov/community/office-buildings.html.

  • Engage Your Team

Gather your team to share the safety planning workload and to get different perspectives on what will be effective for your operations under the new COVID-19 scenario. People who do the work provide the best insight about the impact of operational changes. Talk through different situations you and your team will encounter to help you identify where changes need to be made.

  • Assess Your Operations

Use the OSHA and CDC guidance and your team’s insights to perform a coronavirus safety review specific to your business. The goal of the review is to identify gaps that need some adjustment under COVID-19. Walk through your workspace with your team to see how work areas and public spaces should be adjusted for physical distancing, high-touch surfaces that need frequent cleaning, protective equipment requirements, etc., etc. 

Businesses that are re-opening or expanding from limited operations need help being safe for workers and customers. Use these three tips to get started on the daunting task of keeping your workplace safe under the new COVID-19 scenario.

Projecting Cash Flow

Many organizations get two monthly reports to monitor their financial progress – the Profit and Loss Statement (P&L) and the Balance Sheet. But there’s another report that every business and nonprofit needs for making informed financial decisions and foreseeing impending challenges – the Cash Flow Projection. Projecting cash flow provides decision-makers with a snapshot of the money expected to come in and go out for each month. However, just dividing the annual budget by twelve gives the false impression that cash flows along at a steady pace. In reality, cash flow varies from month to month.

So how do you project monthly cash flow to get a realistic view of your organization’s ability to pay its obligations without dipping into reserves or a line of credit? 

Here are four tips for projecting cash flow:

  • Start with What You Know

Revenue and expenses connected to a contract, lease, or other document are a good place to start because those payment amounts and frequencies are defined. Examples are compensation and rent. Be sure that you consider the timing of each item. For example, if you pay wages every two weeks, some months will have three pay periods instead of two.

  • Look at Your History

Last year’s financial transaction details are a gold mine for projecting cash flow where revenue and expenses vary from month to month. Look at when items were historically received or paid out. Calculate how many days it takes, on average, for customers to pay your invoices and build that time into your projections. 

  • Document Assumptions

After including all the known revenue and expenses, you will undoubtedly have more “blanks” in your projections that need to be addressed. For income and expenses where you have no history or documents for guidance, you will have to estimate based on some assumptions. Be sure to document your assumptions. Chances are that you will need to revisit and update your assumptions as you learn more and circumstances change.

  • Start Small and Build

Projecting an entire year of cash flow may be too daunting to start with. You could start by projecting your cash flow for three months. Once you get comfortable with three month projections, expand to six months, eventually working up to a year. Once you get accustomed to projecting your cash flow, the process will get easier.

Organizations that project cash flow as a planning and assessment tool make more informed decisions. They can also foresee financial challenges and act before they become expensive issues. Projecting cash flow every month provides a realistic view of your organization’s ability to pay its obligations and avoid dipping into reserves or a line of credit and allows decision-makers to see opportunities to fund future growth.

When Small Businesses Need a CFO

Recording financial transactions and reconciling bank accounts are important tasks for running your day-to-day business and getting your taxes done. Turning that financial data into useful information for making business decisions takes a specialized skill set. It takes analytical and management skills to plan for growth and adopt a long term view.

A Chief Financial Officer, or CFO, has the experience and expertise to provide the analysis and financial direction that businesses need to make informed financial decisions and detect impending issues before they morph into expensive crises. Most small businesses can’t afford a fulltime CFO, but they often can afford to engage a CPA firm or financial consultant to perform the CFO role for a few hours a month. 

So, when is it time to engage a part time CFO? Small businesses need a CFO when:

  • Cash Flow Isn’t Flowing

Knowing how much cash is available to run and invest in your business is crucial to keeping your doors open. Dire and expensive surprises happen to businesses that can’t clearly project their bank balances, revenues coming in, and payments going out. If your monthly cash flow isn’t flowing in and out like you think it should, a CFO can establish cash flow projections that provide reliable information.

  • Your Budget is Last Year Plus 5%

A budget spells out the financial resources needed to deliver your services or product, maintain your infrastructure, and invest in growth or improvements. If it’s just based on last year, it probably doesn’t address all your financial objectives or changes in your business. A CFO can help you build a budget that effectively addresses all the essential elements for costs, revenues, and short- and long-term investments in your business.

  • Price Doesn’t Cover Costs

Charging the same price as the competition might work for the other guy, but if it doesn’t cover your costs you won’t be in business for long. Pricing your service or product requires knowing your costs and understanding the value that distinguishes your business from that “other guy”. A CFO can examine your costs, identify the fixed, variable, direct and indirect cost components, and advise you on pricing and profit margins. 

A part time CFO is a business investment in sustaining and growing your business. Her or his skill set and experience focus on the analysis to make higher-level financial decisions needed to plan for growth and sustainability. Investing in a part time CFO will pay you back over and over again, as your business thrives and grows.

Payroll Tax Deferral and Federal Employees

In response to lack of Congressional action to assist Americans impacted by the pandemic-related economic downturn, the Trump Administration issued an Executive Order to defer payroll taxes through the end of calendar 2020. Most people probably don’t even know what that means. If you are not employed, it means nothing. If you are an employer, it means figuring out the news rules and how to follow them.

Payroll taxes are paid on wages and other earned income to support the Social Security and Medicare benefit systems. In general, employers and employees each pay half of the total 15.3% tax. Employers withhold the employee portion and remit the total amount to the IRS as wages are paid. The Executive Order allows employers the option to defer payroll tax payment for income earned from September 1 to December 31, 2020. Deferred taxes would be due by April 30, 2021, after which past-due interest will accrue.

Many private employers are hesitating to take the deferral option. Tracking the deferral is a headache. Withholding extra tax in early 2021 is another headache. All these changes are a burden on payroll processors and create additional expenses. Not to mention that if your business does not have the cash for payroll taxes now, chances are you will not be able to absorb the “double” expense a few months from now.

Federal agencies and employees don’t have an option. Guidance from the IRS is still not entirely clear, but federal representatives have stated that the government will begin deferring the withholding of payroll taxes for federal workers in September. The quasi-good news is that the payroll tax deferral will apply only to employees making less than $104,000 in annual gross wages, calculated on a pre-tax basis. Still, this is going to impact tens of thousands of workers.

The Secretary of the Treasury expressed a desire to explore forgiving the repayment of these taxes. However, a “desire to explore” is not a rule, so the IRS is advising federal and other impacted workers to hold on to those extra funds to have them available to pay back. The IRS guidance says that employers should withhold the deferred taxes from wages and compensation paid between January 1, 2021 and April 30, 2021. That might be okay when impacted workers are still employed by the same employer, but what if a worker leaves before the deferred taxes are repaid? Well, the IRS guidance advices employers to take collection action against former employees. Sounds unpleasant, not to mention more work for employers.

Regardless of your politics, this Executive Order certainly seems like extra cost and effort, plus some added risk, in exchange for questionable gain. Unfortunately, federal workers earning less than $104,000 annually will have to be aware of why their paychecks are a little higher in late 2020. They also need to know to save that extra money for early 2021, when their paychecks are going to be surprisingly low.

Taxes and Your Subchapter S Corporation

Whenever I get a “run” of client calls about a specific topic, I assume that the Tax Universe is telling me to blog about it. Lately, that topic has been the tax rules for business owners who have elected to operate as a Subchapter S Corporation (Sub S). Business owners often form an LLC to protect their personal assets. An LLC can be operated for tax purposes in one of several ways, including the election to operate for tax purposes as a Sub S. That election has some advantages, but it adds more complexity as well.

If your business operates for tax purposes as a Sub S, or you are thinking about forming one, here are a few things to know:

  • Qualification – To qualify for Sub S status, the business must be a corporation that has between one and 100 shareholders who are domestic individuals, certain trusts, or estates. A Sub S can only have one class of stock. The corporation must have legal formation documents, an operating agreement, a separate tax ID, and documented shareholder meetings. 
  • Avoid Double Taxation – Sub S Corporations pass corporate income, losses, deductions, and credits through to their shareholders for tax purposes. However, there are a few exceptions when a Sub S is responsible for tax, such as built-in gains and passive income. Shareholders of a Sub S report their pro rata share of income and losses on their personal tax returns, subject to tax at the shareholder’s individual income tax rates. 
  • Shareholder Compensation – Sub S Corporations must pay reasonable compensation in the form of wages to a shareholder-employee if that the employee provides services to the corporation. Wages are reported on a W-2 and are subject to employment taxes. Net profits or losses from operations are reported on a Form K-1 and treated as non-wage distributions, which are not subject to employment taxes. 
  • Limited Losses – The fact that a shareholder receives a K-1 reflecting a loss does not mean that the shareholder is automatically entitled to deduct the loss. She or he must first have adequate stock and/or debt basis to claim that deduction. Each shareholder is responsible for tracking her/his own basis. Loss deduction amounts also depend on at-risk and passive activity loss limitations. 

These are just a few of the things to know when operating your business as a Sub S for tax purposes. There are a lot of rules on this topic, so visit https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations and the “Related Topics” links on the right to get more details, instructions, forms, and all the other stuff you’ll need. Like I said, electing to operate as a Subchapter S Corporation has some complexities, so make sure you do your homework before getting started. Or think about consulting a qualified tax professional.