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Financial Health Checkup

We just passed the half-way point in the year. A perfect time for your organization to get a financial health checkup! Think about it…your personal health and your organization’s financial health are very similar. Serious problems could exist that you cannot see or feel without a checkup. A sudden loss of income or an unexpected expense can stop your organization, just like a medical crisis can stop your body.

Organizations should do a financial health checkup that covers these three areas:

Actual vs. Planned Finances

Financial performance should be compared to planned, or budgeted, performance to determine how actual events compare to what you thought would happen. Focus on variances in income and expense categories that most significantly impact achieving your organization’s goals. If the budget or plan was not met, figure out why. Did conditions change?  Were projections unrealistic? Focus on “why” and use that information to refine future budgets and plans.

Cash Flow

Project your cash inflows and outflows for at least three months, preferably for six months or more. Determine whether expected income will cover expected (and some unexpected) expenses. Sounds easy, but this projection and analysis will take some thought and effort. You need to know your payments receivable and payable, regular payments that are required no matter what, such as payroll and rent, and your reconciled bank account balances. Be realistic about payment timing and what it really costs to sustain your organization.

Expense Control

Spending control is the most important and most difficult part of running an organization. Demands to fund day-to-day operations, in addition to investing in technology and infrastructure, are constant. Prioritizing essential expenses and growth investments is a challenge that requires regular attention. This is particularly true in newer organizations where infrastructure investments are most crucial. Ensure that planned expenses are within established plans or parameters. Carefully consider unplanned expenses to ensure that they are aligned with the organization’s objectives.

Your organization’s finances, like your body, should undergo a periodic checkup to alert you to existing or impending problems. Monitoring a few key health areas can alert you to problems on the horizon, and give you an opportunity to act before it’s too late.

Want Clarity? Put Agreements in Writing!

Small businesses and nonprofits sometimes need a professional with specialized skills to help them out, like a human resources or financial consultant. Most organizations need to purchase materials or inventory items. Getting services or goods from a third party, or outsourcing, can add significant value to an organization, as long as it’s managed right. Outsourcing management starts with a clear, written agreement that both parties understand and follow.

A written agreement should address key components of both parties – the vendor’s responsibilities, as well as the organization’s. These four components should be addressed in all vendor agreements to clarify expectations and hold all parties accountable:

Objective and Scope

Clearly describe the results or accomplishments that the vendor should achieve on the organization’s behalf, as well as any requirements for the organization. Specifically describe what the organization expects to get when the vendor’s work is completed. For example, an agreement for an IT vendor to install and maintain a new system would describe, among other things, the end state after the system is installed, performance requirements and any ongoing maintenance.

Time Frame and Frequency

Specify delivery dates and how often your organization needs the goods or services provided. Clarify any unusual needs you have, such as nights or weekends, to avoid misunderstandings   that will prevent the organization from meeting its customers’ expectations. How would it look if a 24/7 café couldn’t get fresh food delivered on a Sunday? Highlight timing and frequency to make sure the vendor knows when she or he is needed.

Delivery and Acceptance

Describe the expected condition, appearance, format, or other requirements that are essential for the goods or services to achieve the organization’s objective. Do the flyers need to be blue with your logo? Does the training class need to be two-hours long and meet specific learning objectives? Should goods be delivered in a certain way? Don’t presume that the vendor will understand all specific needs. Put them in writing.

Cost and Payment

Last, but certainly not least, be clear about the vendor’s total cost and when payment will be made. Specify what is included in the total cost and how that cost is calculated. For example, is the cost for paper per box or per carton? Does the consultant cost an hourly rate plus expenses, or will she or he absorb those expenses? Hold vendors accountable by stipulating that payment will only be made after goods or services have been accepted, or when a specified objective is met.

All organizations need help with professional services or purchase from an outside source. That help can be great, but not if it doesn’t meet the organization’s needs. Having a written agreement that clarifies expectations and holds all parties accountable is the best way for organizations to successfully manage outsourced needs.

Project Cash Flow to Meet Objectives

Objectives are the goal posts for moving your organization forward – adding staff, expanding locations or increasing capacity. Cash makes all of that happen. Reliably projecting when cash will come in and when it goes out may seem like an unnecessary exercise while you are busy running your organization. Not true! Cash flow projections are an essential tool for meeting your objectives.

Can you afford that new position or storefront? When will that new equipment pay for itself with added income? Answering these and other important questions depends on reliable and realistic cash flow projections. That’s great to know, but how in the world do you project your cash flow?

Three tips for projecting cash flow to meet your organization’s objectives:

Payment Commitments

Start by projecting payments that you know are going to happen. Some expenses, like payroll and rent, happen at a specific time, no matter what. Scheduled income payments, like retainers, are also known in advance. Plot out when those payments will come in and go out. Add other payments that are seasonal or occasional in the month or week that you expect or estimate that they will occur.

Past Experience

Past years’ payment history is a gold mine for projecting cash flow. What unexpected items have happened in the past? How likely is that to happen again this year? Timing when payments come in and go out highlights periods when you might be in danger of running low on cash. Seeing in advance that cash your cash will be tight gives you opportunities to make adjustments.

Invest to Keep Up and Grow

After plugging in all the known income and expenses, estimating the variable amounts and adjusting the timing, sit back and examine the results. Is there cash available to invest in technology, improvements or growth? Can you afford that new piece of equipment that you need just to keep up with the competition? Cash flow projections will help you answer those and other important questions.

Meeting objectives requires planning. Organizations need to reliably project when cash will come in and go out to successfully meet objectives, and to make adjustments when projections indicate that cash is about to get tight. Answer important questions about sustaining and growing your organization with reliable and realistic cash flow projections, and meet your objectives.

Retirement and Tax Savings with a SEP IRA

Entrepreneurs and small business owners are constantly on the hunt for ways to reduce their tax bills. I know because my tax clients ask about it regularly. Some tax clients also ask me about saving for retirement. Super good news – they can do both!

When you work for someone else, your employer may set up a retirement plan where you can contribute and reduce your taxable income. When you work for yourself, you can set up a retirement plan for yourself (and your employees, if you have any). Retirement plan types vary, and there are quite a few options. If you want to explore them all, knock yourself out at this IRS website – https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans .

Many entrepreneurs and small business owners choose 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. Just get it done by the end of the calendar year and fund the account 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 2019, it’s up to $56,000. 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 if 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.

Entrepreneurs and small business owners on the hunt for ways to reduce their tax bills can save on taxes and for 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.

Start on the Right Track with an Entrepreneur Express Workshop

Wow is it June already? That means it’s almost time for my next FREE workshop to help entrepreneurs understand and get control over their business finances. On Wednesday, June 12th, 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 are hosting the Entrepreneur Express – Moving Your Business Forward workshop. 

The workshop is designed to help small business owners take their business to the next level by providing interactive discussions covering key elements of business practices. I am excited to be one of three presenters to discuss topics where small businesses can get into expensive problems – HR Issues, Insurance and Tax Requirements. It’s free but advance registration is required at this link: https://www.sbsd.virginia.gov/event-directory/

Here’s an overview of my portion of the Entrepreneur Express Workshop, “Small Business Tax Requirements” –

Income Tax Basics

Entrepreneurs can file their taxes as one of the three different types of tax entities, a sole proprietor, a partnership, or a Subchapter S Corporation. One person in business by her or himself could choose to operate for tax purposes as a sole proprietor or a Sub S. Two or more people must operate as a partnership or a Sub S. Many other rules apply. Setting things up right the first time will save time and money over the long run.

Non-Income Tax Considerations

In addition to federal and state income taxes, entrepreneurs also need to consider self-employed Social Security taxes, even if the small business has no employees. Sole proprietors and other pass-through businesses pay self-employment taxes equal to 15.3% of net profits. Small businesses also need to register for a local business license and report business assets (e.g., computers and equipment). Both require a small fee.

2017 Tax Law Highlights for Small Business

Recent tax law updates had some really good news for businesses, including small business. Higher asset depreciation limits and the new Qualified Business Income Deduction provide opportunities to invest in equipment and to deduct a portion of profits to reduce tax liabilities. Small businesses need to be aware of tax laws and how they impact business financial decisions.

The Entrepreneur Express – Moving Your Business Forward workshop is from 9:00 AM – 12:00 PM in Falls Church, VA. If you can make it, please come up and say hello afterward. Want to register? Here’s the link https://www.sbsd.virginia.gov/event-directory/

Any questions? Contact Chris Ley at [email protected]

Bankruptcy and Your Taxes

You may have wondered what tax professionals do after the filing deadline. What? You’ve never wondered about that? Well, I’ll tell you anyway. Tax professionals use “down time” to keep up with tax law changes with continuing education. Last week, I got one of my 2019 continuing education hours by taking a free IRS webinar, all about what an individual or business taxpayer should know about taxes when filing for bankruptcy.

Hopefully, none of you (or any of my clients) will be in this situation. But, just in case, I’m sharing a few tips I learned from the IRS webinar, “Understanding Bankruptcy from an IRS Perspective”:

Notify the IRS

Anyone who has filed for bankruptcy, or who is in the process of filing for bankruptcy, should contact the IRS’ Centralized Insolvency Operations (CIO) Unit to report the filing. The bankruptcy could be related to unpaid taxes or not. The CIO will place a “hold” on any federal tax collection activities for the duration of the bankruptcy case. They also coordinate the IRS’ representation if there are any unpaid federal taxes.

Check Your Status

For individuals, the most common type of bankruptcy is a Chapter 13, although they sometimes file under Chapter 7 or Chapter 11. Chapter 13 bankruptcy is only available to wage earners, the self-employed and sole proprietors. To qualify, a taxpayer must have regular income, have filed all required tax returns for the four years prior to the bankruptcy filing and meet other requirements in the bankruptcy code.

Meet All Deadlines

During the bankruptcy case, the taxpayer must continue to file, or get an extension of time to file, all required income tax returns. All current taxes must be paid as they come due. Failure to file returns and/or to pay current taxes for the duration of the bankruptcy case may result in the case being dismissed with no discharge of tax debt.

What Else to Expect

Tax refunds can be received while in bankruptcy. However, refunds may be delayed or used to pay down tax debts. Successfully completed bankruptcy plans result in a discharge of debt, releasing the debtor from personal liability for the discharged debts. Some taxes may be discharged, depending on the facts and circumstances of the case.

You now have an idea of what to do about taxes when filing for bankruptcy. Plus, you’ve learned what tax professionals do after the filing deadline – keep up with tax law changes with continuing education.

Preventing Fraud

It’s been over six months since I last blogged about fraud risk in small businesses and nonprofits. Tax season and the new tax law must have distracted me. But fraud has not stopped lurking, robbing organizations of their hard-earned funds.

In case you forgot, fraud is an illegal act involving deceit, concealment, or a violation of trust. Fraud doesn’t involve physical threats of violence or force. Fraud is committed to obtain money, property, or services; to avoid payment or loss of services; or to secure personal or business advantage.

Fraud is not unique to any one type of organization. The opportunity to commit fraud exists everywhere, including public and private businesses and nonprofits. Small businesses and nonprofits are even more susceptible to fraud because of typically lower levels of staffing and technology. Plus, the environment at nonprofits and small businesses espouses trust that could be exploited by people who are unscrupulous or experiencing extreme financial pressures.

First — recognize that fraud can happen. Second — implement an action plan to help prevent fraud from happening. How? Minimize the chances that fraud will happen at your organization with these three tips:

  • Separate Tasks – The most powerful weapon against fraud is separating tasks or duties that should not be performed by the same person, like separating expense approval and payment from the person who reconciles the bank account. Separating duties prevents one person from having too much control over financial activities so that she or he could take funds without detection.
  • Investigate Anomalies – Identify anomalies, or exceptions, from expected conditions or results. Is your cash flow within a normal expected range? Are your sales returns higher than usual? Investigate performance and results that fall outside the expected range and take action. Looking into unusual activity could draw attention to and end fraudulent activities. Even if no fraud has occurred, you can take corrective action as needed.
  • Independent Monitoring – Periodic independent monitoring by a knowledgeable party is another way to safeguard financial assets. Methods include supervisor reviews, periodic audits and effective governance. Exception reports or anomalies should ideally be investigated by someone who is independent of the original activity. Nonprofits with limited staff can involve the Board Treasurer in the monitoring process.

Important steps for preventing fraud are to recognize that fraud can happen and to implement an action plan to mitigate the risk of loss. Powerful weapons like separating tasks, investigating anomalies and independent monitoring all reduce the risk of losing money, property, services or reputation. Trust is great; implementing fraud prevention tips is priceless.

Financial Basics for YEA! Entrepreneurs

Last week, I was thrilled to discuss business finances with the 2019 Class of the Arlington Chamber of Commerce Young Entrepreneur Academy, also known as YEA! In the YEA! Program, entrepreneurs grades 8-12, develop their ideas into robust business plans and launch their business. YEA! Entrepreneurs also pitch their business plans to an investor panel and compete for funding.

YEA! Entrepreneurs, like all business owners, need to know about planning and managing their finances. We only had an hour, so we covered three basic areas that support every entrepreneur’s success, regardless of age:

Separate Business Accounts and Financial Records

Open a separate business account soon as possible to avoid commingling personal and business funds. Apply for a business credit card to support cash flow needs and to avoid putting business expenses on your personal credit card. Establish separate financial records from records used to maintain your personal income and expenses. Separating personal and business finances gives you an isolated view of your business so you can better track your progress. Separate records also help to establish that you are operating business, not a hobby.

Track and Monitor Financial Activity

Keep a record of all business income and expenses up-to-date. Updated records allow you a clear view of your financial situation at any point in time. Expenses should be tracked by category, such as rent and advertising, so you know where your funds are going. No particular system or format is required for your financial records. The IRS just requires that financial records are accurate, complete, and provide enough detail to identify the underlying source documents. Produce and review monthly financial reports.

Adjust as Needed

A budget is a plan for your income and expenses, to prioritize your activities and provide a baseline to monitor your progress toward achieving your goals. Assess the significant variances between your monthly financial reports and your budget. Focus on the income and expense variances that relate to the most critical areas for achieving your business goals. Didn’t meet your budget? Don’t see it as a failure; see it as an opportunity to assess your plan, adjust your activities and try again.

My time discussing business finances with the 2019 Class of the Arlington Chamber of Commerce YEA! was fun. The YEA! Entrepreneurs asked sophisticated questions and shared experiences in their own business that I learned from. I’m so glad that the future business world is in these YEA! Entrepreneurs’ capable hands!