Mid-Year Business Finance Check-up

Can you believe that we’re coming up on the mid-point of 2021? Time sure flies when you’re running your own business! It’s a real challenge to take a pause to do a “check-up” on your business to make sure it’s financially healthy. Mid-year is the perfect time for a business finance check-up to see if that financial health is tip-top! 

Think about it…your physical health and your business’s financial health are remarkably similar. A sudden loss of income or an unexpected expense can stop your business cold, just like a medical crisis can stop your body from functioning. A check-up can detect serious problems that you cannot see or feel, many of which are preventable if you take a pause for a finance check-up. 

At minimum, a mid-year business finance check-up should cover these three areas:

  1. Compare Actual Results to Plans

Financial performance should be compared to your planned budget 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 business goals. If the budget or plan was not met, figure out why. Did conditions change?  Were assumptions realistic? Focus on “why” to refine future budgets and plans.

  1. Cash Flow

Project your business cash inflows and outflows for at least three months, working up to six months or more when you get more comfortable with the process. Determine whether expected income will cover expected (and some unexpected) expenses using information on-hand about payments receivable and payable, scheduled payments, like payroll and rent, and bank account balances. Be realistic about payment timing and amounts.

  1. Expense Control

Spending control is the most important and most difficult part of running a business. Demands to fund day-to-day operations, in addition to investing in technology and infrastructure, are constant. Prioritize essential expenses and ensure that other planned expenses are within established parameters. Carefully assess the need for any unplanned expenses to ensure that they contribute to meeting your business objectives.

Your physical health and your business’s financial health are remarkably similar. Both need a periodic check-up to detect an unforeseen problem that can stop your body or your business cold. Taking a pause for a business financial check-up is challenging, but necessary. Now, at the mid-point of 2021, is the perfect time for a business finance check-up to make sure that its financial health is in tip-top shape!

Are Social Security Benefits Taxable?

Most workers have heard about Social Security their entire lives and laughed, “Ha! I’ll never see those benefits!” Then, suddenly, those workers are approaching retirement age and thinking about when that “free money” is going to start. But is it free money? Sure, it’s free, in the sense that you don’t need to work to get it. However, a portion of those Social Security benefits could cost you because they are taxable.

If Social Security is going to be your only income in 2021, your benefits will probably not be taxable. If you receive income other than Social Security, such as wages, interest, dividends, capital gains, or net business income, you must do a few calculations to determine whether any of your Social Security benefits are subject to federal tax.

Here’s a quick way to find out if a portion of your Social Security benefits are taxable:

  1. Determine the total Social Security benefits that you will receive in 2021.
  1. Multiply the total benefits by 50%.
  1. Add the 50% of your Social Security benefits received during 2021to all your other income received in 2021, including tax-exempt interest. 
  1. If you’re married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring the taxable portion of your benefits, even if your spouse didn’t receive any Social Security benefits.
  1. Compare the total from #3 to the Base Amount for your tax filing status:
  • $25,000 – For single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2021
  • $32,000 – For married filing jointly
  • $0 – For couples married filing separately and lived with your spouse at any time during 2021
  1. If the total from #3 is higher than the Base Amount, a portion of the Social Security benefits above the Base Amount is taxable, up to 85% of the benefits. The higher your income, the higher the percentage of Social Security benefits subject to federal tax.

If you are approaching retirement age and thinking about your “free money” from Social Security, you need to check on whether it really is free. A portion of those Social Security benefits could be subject to federal tax, depending on your other income and your Base Amount.

Have questions? The IRS has answers for you at https://www.irs.gov/faqs/social-security-income.

Clarify Expectations with Written Agreements

Most businesses and nonprofits simply can’t afford to employ all the professional expertise they need to help them navigate issues around complex topics, like finance and human resources. Mistakes related to HR, finance or legal can be expensive. To avoid expensive mistakes, organizations get their professional services from a third party, or outsourced, provider.

Outsourcing for professional expertise can help tackle issues, or it can backfire and become an issue itself. This can happen when expectations for the services to be provided are not clearly understood by the organization and the professional. Assumptions about what words or terms mean and omitting specifics or requirements are the ingredients for a disaster recipe. The best way to prevent this sort of disaster from happening to your business or nonprofit is with a clear, written service agreement that both the organization and the outsourced provider can understand and follow.

A written service agreement clarifies expectations in four important areas:

  • Objective and Scope

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

  • Time Frame 

Specify delivery dates and how often your organization needs the 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 business or nonprofit couldn’t get timely financial statements to manage the organization’s performance? Highlight timing and frequency to make sure the needs are clear.

  • Quality

Describe the industry requirements, conditions, or format that are essential for the services to achieve the organization’s objective. Does the training class need to be two-hours long, taught by a credentialed instructor, and meet specific learning objectives? Are processes required to comply with any laws or regulations? Don’t presume that the provider will know all the organization’s specific needs. Put them in writing.

  • Cost and Payment

Last, but certainly not least, be clear about the total cost and when payment is expected. Specify what is included in the total cost and how that cost is calculated. For example, does the consultant cost an hourly rate plus expenses, or will she absorb those expenses? Are progress payments required based on meeting specific milestones? Accountability is easier to manage when performance expectations are stipulated are clearly documented in a service agreement.

All organizations need help with professional services that they cannot afford to hire full time. A clear service agreement can help prevent wasting time, effort, and money because the provider or the organization did not understand the scope, timing or requirements involved. A written service agreement is the single best way for organizations to clarify expectations and get the help that they need.

Attempted Ransomware Scam Averted

Within hours of writing last week’s blog post, Low-Cost Cybersecurity Tips, I was the victim of a ransomware attempt. Ironic, eh? The scammer’s approach was sophisticated and targeted. I was drawn in by the message, initially replied, and was astounded by what happened next. Good news – this story has a happy ending. But it could have turned out much differently.

I’m sharing this recent brush with cybercrime to illustrate just how insidious online scammers are, and how capable they are of masquerading as a trusted sender. Perhaps reading about my experience will help you avert a ransomware or other cybercrime.

As an established tax professional, I often receive emails from prospective tax clients. Some are referred or introduced to me by an existing client or referral partner. Some prospective clients find me through my website or the IRS’ Tax Pro Directory. On May 20th, I received a message from an individual saying that he and his wife needed a new tax preparer. He acknowledged that he had missed the May 17th filing deadline and provided a few details about their income. He asked me to tell him how much it would cost to prepare their 2020 income tax returns.

Even though I am not taking new tax clients now, I didn’t want to be rude and not respond. I also wanted to be as helpful as possible to a taxpayer in need without committing to perform any work. So, I took a few minutes to write back to explain that I am not available and to share an IRS website link with tips for finding a tax professional and a directory by location of individuals with tax credentials (https://www.irs.gov/tax-professionals/choosing-a-tax-professional).

I noticed that the sender’s email address contained extensions that indicated his location to be in the United Kingdom. That did not make me suspicious of the sender’s identity because I have tax client who live or used to live in the UK. It did, however, prompt me to also send the prospective client another IRS link to information about US taxpayers living overseas (https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-outside-the-united-states). Feeling like I had done a good deed, I hit “send”.

Within a few minutes, I received a second message from the sender saying that he had scanned his 2019 returns for my review with a link to access the return copy. Red flag! I stopped in my tracks to absorb what I was reading. It was a clear indication that my “prospective client” was a scammer luring me to click on a link that would probably have held my data for ransom. My valuable tax client files that that contain all sorts of confidential and private information, like bank account and Social Security numbers.

I quickly shifted from “helpful” to “obstructive”. I erased the message string and dumped my email trash. It’s only been a few days, but it looks like that scammer is not coming back. I managed to avert that ransomware scam attempt, but there will be others. We all need to be aware and diligent to avert them. Want some tips? Check out last week’s blog post!