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Business Finance Crisis Management

Businesses are all being affected differently by the current coronavirus pandemic. Many are experiencing a steep drop-off in business activity and revenue. Some businesses have stopped operating altogether. But they all have one thing in common – times of crisis require a plan for crisis management, especially when it comes to finances. 

Planning for a crisis will not prevent the crisis from occurring; crisis management is intended to mitigate the impact of the crisis on business finances. It’s analogous to your physical health. Planning for a healthy lifestyle doesn’t prevent illness, but it can reduce the duration and severity of the illness.

Businesses should follow these three steps to mitigate the impact of a crisis on their finances:

  • Assess Financial Position

As soon as a crisis occurs or appears to be imminent, business owners should immediately assess overall financial positions related to liquidity and payment commitments. Up-to-date, complete and accurate financial recordkeeping and a monthly review of financial reports will arm business owners with the knowledge to adapt quickly. Immediately knowing the financial status of your business is immensely important, especially during, or leading up to, a crisis.

  • Conserve Cash

During times of crisis, cash is king. Even more than usual. When business activity slows down or stops, businesses are less able to predict revenues and cash flow, resulting in a reduced ability to forecast how long cash balances will last. The only thing to do in a crisis is to hang onto cash to avoid missing crucial bill payments, like rent and payroll. Also, verify the availability and interest rate for any existing signature loans or lines-of-credit that could be needed to keep the doors open during a crisis.

  • Scrub the Budget

Assuming that a crisis was not baked into this year’s budget – and let’s face it, that almost never happens – many businesses probably budgeted for expense and revenue items that no longer make sense, under the circumstances. Examine each budget category for both revenues and expenses to identify what items will not occur, increase, decrease, or need to be added based on the type and anticipated duration of the crisis.

Businesses that are affected by a crisis can take steps to mitigate its impact on business finances. Assessing the business’ financial position, conserving cash and scrubbing the budget are three steps that businesses can take to adapt quickly to a crisis and withstand a steep drop-off in business activity.

Small Business Tax Workshop

Piece of paper that says "TAX" with hand holding pen

One of the zillions of events recently canceled because of the coronavirus is my Small Business Tax Workshop hosted by the Virginia Department of Small Business and Supplier Diversity (SBSD), the City of Falls Church Economic Development Authority and the Falls Church Chamber of Commerce. My Small Business Tax Workshop was designed to help small business owners understand their tax filing and payment responsibilities, and to gain awareness on getting assistance. We planned to cover several key elements of business tax and financial practices that are essential to understanding and controlling business finances. 

I was all ready to go when we got the official word about workshops and other gatherings being canceled. So, here is an overview of what I planned to share in the workshop:

  • What and When to File 

Small businesses usually operate in one of three ways for tax purposes. By default, one person operates as a sole proprietor who files a Schedule C with her or his individual income tax return. Two people, by default, operate as a partnership and file an IRS Form 1065, U.S. Return of Partnership Income, due on the 15th day of the third month after the tax year ends (i.e., March 15 for a calendar year-end). Businesses with up to 100 domestic owners can form a Subchapter S Corporation, which files an IRS Form 1120S, U.S. Income Tax Return for a Subchapter S Corporation, also due on the 15th day of the third month after the tax year ends. Confused? The IRS spells it all out in detail here – https://www.irs.gov/businesses/small-businesses-self-employed/business-structures

  • Tax Payments

Employees pay taxes through the payroll process. It’s done for you. Like everything else in your business, tax payments are DIY. The tax agencies require payments to cover your annual tax liability on a quarterly basis. That means tracking your finances, projecting your taxable business income and making payments on April 15, June 15, September 15 and January 15. The IRS and state tax agencies accept payment via check/coupon, electronic bank account withdrawal, and other options. In addition to income taxes, business owners need to pay self-employment taxes, equal to 15.3% of net profits. More details are right here – https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

  • Business Expense Deductions

Businesses can deduct from income the “reasonable and customary” expenses needed to operate her or his business. The 2017 tax law contained several favorable changes for small businesses, including higher asset depreciation limits and the new Qualified Business Income Deduction. The IRS has an incredible amount of information about business expenses at  https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses.

My Small Business Tax Workshop will probably be rescheduled. Until then, I hope that this overview helps to make your aware of the tax and financial practices that are essential to understanding and controlling your business finances. 

Financial Recordkeeping for Artists

Tax season isn’t “nose to the grindstone” every minute. I got a fun break from my computer last week when I taught a financial recordkeeping workshop for the Arts Enterprise Institute, a unit of Arlington Economic Development. The workshop, Business Skills for Artists, provided artists who create beauty in many forms – sculpture, painting, and ceramics – awareness about business finances with their needs in mind. 

The twelve creators in the workshop started their businesses to create art, not to keep financial records. They came to the workshop to understand their business finances and to make informed financial decisions. I am very happy to say that the attendees said that they got what they came for from the workshop. Yay!

We covered a lot of ground in two hours. Here are a few artist-focused highlights:

  • Cost and Pricing – Pricing artistic creations was a popular topic. There is no easy formula, so we focused on what to consider. We started with knowing the direct and indirect costs of creating your art. Your time investment is important, but it is not possible to be remunerated for your time. Price should reflect the special piece of your heart and soul that goes into your creations. Another consideration is the market for art in your area or within your creative niche or genre.
  • Hobby or Business – Many creative endeavors do not make a profit, even after working hard at it several years in a row. That doesn’t necessarily mean that you are dabbling in a hobby. If you satisfy nine IRS tests, you are running a business. The nine IRS tests include whether you maintain complete and accurate books and records, whether the time and effort you put into the activity indicate you intend to make it profitable and whether your losses are due to circumstances beyond your control (fairly typical for an artist).
  • Track Income and Expenses – Like any other type of business, collecting the details of all funds that are coming in and going out is essential to understanding the financial health of your creative business endeavor. How do you know the status of your business finances without a complete and up-to-date report of where your money is? Many user-friendly tools are available to help you track and report financial information.

Artists who attended my Business Skills for Artists workshop certainly didn’t start their businesses to keep financial records. They showed a lot of commitment to the financial success of their art to invest time and effort learning to understand their business finances and make informed financial decisions. Based on the feedback that I received after the workshop, they considered their time investment well spent.

One Action Saves Taxes and Your Future

Business owners – just like most taxpayers – are constantly on the hunt for ways to reduce their tax bills. I know, because my tax clients ask about it regularly. Another topic that my tax clients ask me about is saving for retirement. Then I get to tell them the good news – they can save taxes and save for their future retirement at the same time! 

When you work for someone else, your employer may offer a retirement plan where you can contribute and reduce your taxable income. When you work for yourself, you can do the same thing. There are several retirement plan types where you (and your eligible employees, if you have any) can contribute on a pre-tax basis. If you want to explore all of the options, knock yourself out at this IRS website – https://www.irs.gov/retirement-plans.

One popular option selected by many small business owners is a retirement plan called a “Simplified Employee Pension Individual Retirement Arrangement,” commonly called a SEP IRA. Here are three reasons why:

  • Easy and Flexible

A SEP IRA is easy to set-up with your bank, your investment advisor or a mutual fund. Set it up and make your contributions by the tax return due date, including extensions. Annual contributions amounts are flexible, which is good if your business cash flow varies from year-to-year.

  • Generous Contribution Limits

A SEP IRA allows you an annual contribution of up to 25 percent of net business profits, after netting out the deductible half of self-employment taxes. That calculation is a little tricky, so you’ll need some help to get it right. There is an annual dollar limit, too. For 2020, it’s up to $57,000. Contributions must be made for eligible employees.

  • No Costs

A SEP IRA has no start-up or operating costs that can be required for a conventional retirement plan. However, any investments selected to fund the account may have a management or investment advisory fee. It’s important to get a clear understanding of any fees or charges that will defray your retirement funds.

Other costs need to be considered when deciding if a SEP IRA is for you, like taxes and early withdrawal penalties. Distributions from a SEP IRA works just like a traditional IRA – any funds taken out before age 59½ are subject to a 10% early withdrawal penalty. That’s on top of the federal and state income tax. 

Small business owners on the hunt for ways to reduce their tax bills can save on taxes and for future retirement by setting up and funding a SEP IRA. Saving for today and tomorrow at the same time could be the best news that you get all year.

Risk and the Top Performer

During tax season, NPR on WAMU-FM is my constant companion while I prepare tax returns for my clients. I don’t hear every word, but some interviews are so riveting that they pull my attention away from my work. It happened again last week when Susan Fowler was interviewed about her 2017 blog post and 2020 book, “Whistleblower: My Journey to Silicon Valley and Fight for Justice at Uber,” where she outed Uber about its unethical and misogynist work environment. 

Ms. Fowler’s experiences really make you shake your head, wondering how any organization could function with the level of sexual harassment and retaliation against female employees that she described. Unsurprisingly, Ms. Fowler observed that Uber’s leaders ignored and excused bad behavior because the perpetrators were “top performers.” 

Focusing on money rather than ethics proved to be a huge risk for Uber. What about your organization? Ignoring that rules are being broken, even by a top performer, costs money and reputation. Plus, it tells all your workers that inappropriate, or even illegal, behavior is tolerated, or even encouraged, to make a buck. That’s a very dangerous message that some workers will take advantage of. Workers who won’t tolerate lax ethics could resign.

Organizations use three weapons to battle the risk of unethical or illegal behaviors:

  • Codes of Ethics and Policies

People don’t do the right thing just because you have expectations written down in your policies and codes of ethics. However, if expectations aren’t written down, no one can be held accountable. Enforcement is essential for policies to be effective. Above all, leadership must set the tone that inappropriate behavior will not be tolerated.

  • Structure and Defined Roles

Reporting relationships and defined oversight roles must be set up to ensure that independent reviews and approvals exist. No one person should have unchecked control over a contract, transaction, or other financial decision. Lack of oversight provides opportunities to commit fraud by misdirecting funds or altering key information.

  • Incentive-Based Pay

Commissions and other incentive-based pay programs are intended to reward workers for achieving specified goals. Those incentives can end up backfiring. Workers could pad their numbers or reverse sales to inflate their commission. Design incentive-based pay programs with safeguards that reduce opportunities to engage in fraud.

Don’t ignore the warning signs that a worker, even a top performer, is a risk to your organization. Learn from the mistakes of others…use these three weapons to battle the financial and reputational cost of ignoring the signs of inappropriate, or even illegal, behavior.

Business Financial Records

Record keeping is probably the least interesting part of your business, but it is one of the most important. During this time of year – tax season – I meet business owners who are scurrying to scrape together their financial records to file their income taxes. They don’t realize that they need up-to-date and complete financial records all year long.

Many businesses fail because they don’t have the necessary financial information to make decisions that are right for them and identify financial warning signs before they become real problems. Recordkeeping may be boring, but good financial records are key to monitoring progress, in addition to getting organized to file all required income tax returns.

Here are four recordkeeping tips to get you started:

  1. Maintain separate records and bank account for each business and for personal transactions to identify income that derives from your business vs. personal (e.g., investments and wages). A separate business account also makes it easier to reconcile business financial activity between the bank and your financial records.
  1. Business income should be recorded as it is received. Income should be supported by invoices, bank deposit slips, online receipt records, cash register tapes or other documents that show the source of the income, the amounts and the dates received. Generally, income is taxable when received, not when the invoice is sent, or funds are deposited.
  1. Business expenses must be documented to prove the amount, date, business purpose, and expense type in order to deduct them. That proof, or documentary evidence, should consist of a disbursements register, canceled checks, and/or invoices. Additional evidence is required for travel, entertainment, gifts, and auto expenses.
  1. “Mixed use” assets, such as vehicles and computers, must be allocated between business and personal use to determine the amount that is deductible for your business. For vehicles, use an app or other method to track the mileage and keep a report. For other assets, like a cell phone, use reasonable judgement to determine the business portion. 

You didn’t start your business to do financial recordkeeping, but it’s one of the most important part of monitoring the progress of your business and getting organized to file your income tax returns. Up-to-date and complete business financial records are key to knowing what’s going on in your business. And yes, the IRS requires business financial records. 

Believe it or not, the IRS provides a lot of tips for keeping business financial records. A good place to start is their website https://www.irs.gov/businesses/small-businesses-self-employed/how-should-i-record-my-business-transactions. IRS Publication 583, Starting a Business and Keeping Records, has even more information at https://www.irs.gov/pub/irs-pdf/p583.pdf.

Monitoring Nonprofit Finances

Managing your household or business finances is a big job. Your financial decisions impact the financial health of your family’s or business’s future. Sure, those financial decisions have an impact, but we’re talking about your funds. It’s an entirely different story when decisions are being made about funds entrusted to you by community members and other donors.

Managing nonprofit finances is an even bigger job. One significant part of that job is fiduciary responsibility for donor funds. Fiduciary responsibility involves treating funds entrusted to you with duty and care, and to only use them to support the nonprofit’s mission. Regularly monitoring finances is one way that a nonprofit fulfills its fiduciary responsibility.

What does “regularly monitoring” mean? It starts with focusing on these three areas:

  • Budget vs. Actual Performance

Every month, the nonprofit’s year-to-date budget should be compared to actual financial performance. Variances between budgeted and actual performance should be explained, especially for key income and program expense categories. Identify why variance from plan are occurring and take remedial action, as needed. Assess the potential for overreliance on one individual funding source, indicating the need to diversify.

  • Cash Reserves and Liquidity

A monthly review of checking and money market account balances should be performed to determine whether cash reserves are adequate. The cash reserves target should be based on the amount needed to cover operating expenses without any funds coming in and without liquidating any investments. Other methods to assess the nonprofit’s financial health are to assess current assets vs. current liabilities and total liabilities vs. unrestricted net assets.

  • Long Term Objectives

Once or twice a year, nonprofits should monitor whether the financial aspects of long-term objectives are being met. Long term objectives are often stated in the organization’s strategic plan, and may also be reflected in the annual budget, Investment Policy and Board Resolutions. Monitoring activities should address whether long term objectives are on track to be met within the defined time frame. Remedial action should be taken, as needed.

Nonprofits have fiduciary responsibility for donor funds to use them in support of the mission. Monitoring finances as a nonprofit involves focusing on budgeted vs. actual performance, cash reserves and long-term financial objectives. Focusing on these three areas gives nonprofits the information necessary to fulfill fiduciary responsibility and make prudent financial decisions. 

Is It Too Late to Find a Tax Preparer?

Tax filing season is here! Time to gather all your tax documents, hunker down and file your income tax returns before the deadline, April 15th. It’s a good idea to get started soon, especially if you think that you will need help from a tax preparer. Those folks (including me) are pretty darned busy this time of year. 

Piece of paper that says "TAX" with hand holding pen
Photo by rawpixel on Unsplash

When you are running against the tax deadline and you just can’t figure out how to file your return yourself, what can you do? Well, you can ask friends, hit the Internet or head to the local tax preparation office. But how can you feel confident that the tax preparer you find is qualified and can do what’s best for you (within the rules, that is)?

When “shopping” for a tax preparer, taxpayers should ask these three questions:

  • How Do You Keep Up with Tax Law Changes?

Tax laws are constantly changing. Some changes are major, as we saw two years ago with the Tax Cuts and Jobs Act. It’s important to work with a tax preparer who keeps up with all those changes, so you don’t have to. A qualified tax preparer will describe attending conferences, webinars, or other methods to stay current.

  • What Experience and Credentials Do You Have?

Tax preparation is an unregulated industry where anyone can participate, so asking about years of experience, training and education is essential. Preparers with professional credentials, such as a CPA or Enrolled Agent (EA), are required to complete annual continuing education requirements and to follow ethical and professional standards. 

  • How Do You Communicate with your Clients?

Does the tax preparer meet regularly with clients? Are meetings in person? Is she or he available to you if a tax-related question or issue comes up? Make sure you feel comfortable with the tax preparer’s style, manner and process. If not, keep looking. You’ll be sharing a lot of personal information so you must be comfortable.

It’s important to have a qualified and knowledgeable tax preparer that is up to date on the tax laws and is prepared to meet your needs. That starts with feeling confident and comfortable with the answers to these three questions. If you feel good about the answers, it’s a good sign that your tax preparation needs will be met. Still need help getting started? The IRS has a website for you with tips and tools – https://www.irs.gov/tax-professionals/choosing-a-tax-professional