Month: August 2021

Projecting Your Cash Flow

You’ve heard the adage “Cash is King”. Whoever came up with that sure was right; your business can’t run without enough cash to keep it going. So, how do you assess the amount of cash you have compared to what’s “enough”? You can look at your bank balance, but that won’t tell you how much cash you will have next week, next month, or at the end of the year.

Projecting your cash flow is the only way to get the information you need to figure out if you have enough cash to get your business through the week, month, and year. Standard financial reports that businesses generally produce – a Profit and Loss Statement (P&L) and a Balance Sheet – don’t answer questions about your future cash situation. But the P&L and balance sheet can be used as the starting point to project your cash flow.

How do you project cash flow to get a realistic view of your business’s ability to pay the bills? 

Here are four tips to project cash flow:
  1. Start with What You Know

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

  1. Look at Your History

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

  1. Document Assumptions

For income and expenses where you have no history or documents for guidance, you will have to estimate the amounts based on your assumptions. Be sure to document your assumptions to preserve them. Chances are that you will need to revisit and update your assumptions as you learn more, and circumstances change.

  1. Start Small and Build

Projecting an entire year of cash flow may be too daunting to start with. 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.

Projecting cash flow gets you the information needed to assess if you have enough cash to get your business through the next week, month, and year. Follow these four tips to get a realistic view of your business’s ability to pay the bills. If you don’t, that Cash King could become a Penniless Pauper.

Summer School for Tax Preparers

In the last few weeks of summer, many taxpayers are headed to the beach. But for nearly 11,000 tax preparers across the country, it’s time for Summer School, also known as the annual IRS Tax Forum. The IRS provides the Tax Forum every summer to help tax professionals keep up with tax law updates and issues that affect their clients.

Why does this matter to you? Taxpayers need to keep up with the income tax changes on their own or hire a tax preparer who does it on their clients’ behalf. Taxpayers are responsible for all the information on their income tax return, no matter who prepared it. Hiring a tax preparer who keeps up is essential, especially in years when there are multiple tax law changes (like now).

Feel confident that your tax return is prepared by a qualified tax preparer who keeps up with all the tax law changes by following these five tips:

  1. Ask about professional credentials, such as a Certified Public Accountant (CPA) or an Enrolled Agent (EA). Credentialed return preparers are required to fulfill annual continuing education. The IRS maintains a Directory of Federal Return Preparers with their credentials and qualifications at https://irs.treasury.gov/rpo/rpo.jsf.
  2. Verify that the preparer has a Preparer Tax Identification Number (PTIN) and enters it on your return that is electronically filed with the IRS. Tax preparers who charge a fee are required to have a PTIN and to file returns electronically or submit a reason for paper filing with the return.
  3. Inquire about the tax preparer’s education and training, and how she or he keeps up with tax law changes and IRS processes. Tax pros who are not a CPA or EA should still get annual tax updates to keep up their knowledge. 
  4. Ask about service fees and get a cost estimate in writing. Steer clear of tax preparers who base fees on a percentage of the refund, or who want their fee paid by direct deposit from your refund. These are both unethical practices prohibited by IRS regulations.
  5. Make sure the tax preparer is available all year, after tax season is over, in case you need her or him. For example, notices can come from tax agencies any time of the year. Tax projections sometimes need refreshing before estimated tax payments are due again. 

Getting dependable tax services starts with selecting a qualified tax preparer who keeps up with tax law changes and issues. Whether that person went to Summer School for Tax Preparers or not, following the five tips above will help you to get qualified tax help. 

Need more? The IRS has it for you at https://www.irs.gov/tax-professionals/choosing-a-tax-professional.

Protect Your IRS Tax Identity

It’s not big news that scams, frauds, and identity theft are on the rise. New, pandemic-inspired scams related to Economic Impact Payments (EIPs) and Paycheck Protection Program (PPP) funds have started, while income tax filings and financial information remain big, juicy targets for criminals. 

Scrabble tiles spelling "who are you" in a square.

The IRS has responded by expanding its Identity Protection Program to any taxpayer who can verify her or his identity, instead of being limited to taxpayers who report an identity theft issue. The IRS and the tax preparer community want to inform taxpayers about the Identity Protection PIN Opt-In Program to protect against tax-related identity theft when filing a federal income tax return.

Six things to know about the Identity Protection PIN Opt-In Program (IP PIN):

  1. The IP PIN is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayers’ personally identifiable information.
  1. To obtain an IP PIN, the best option is Get an IP PIN, the IRS online tool. Taxpayers must validate their identities to access the tool and their IP PIN. Before attempting the process, see Secure Access: How to Register for Certain Online Self-Help Tools. 
  1. Once issued by the IRS, the taxpayer’s tax account is locked, and the IP PIN serves as the key to opening that account. Electronically-filed federal income tax returns that do not contain the correct IP PIN will be rejected and a paper return must be filed.
  1. An IP PIN is valid for one specific calendar year. A new IP PIN must be obtained for each filing season.
  1. Current tax-related identity theft victims who have been receiving IP PINs via mail will continue to receive an annual IP PIN to file her or his federal income tax return.
  1. There is no opt-out option. The IRS is working on it for 2022. Taxpayers who cannot provide an IP PIN or obtain a replacement can’t unlock her or his tax account and must file the return in paper form. Any refund will take several weeks to process.

The IRS IP-PIN Program is an option for taxpayers to protect her or his identity from theft and fraudulent tax filings. For taxpayers that want to use the program, the IRS offers more information and instructions at this link – https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.

Seven Years and Going Strong

A few days ago, I suddenly realized that it’s been seven years since I quit my corporate J.O.B. and started my business. Wow, seven years and going strong! With diligence and good luck, I’ve achieved my business and personal goals. Plus, I’ve had some fun along the way. The fun is probably why the time has flown by so quickly.

Milestones are worth celebrating – albeit briefly – and are the perfect time for reflection. It’s also important to periodically step back to assess your progress, identify areas of potential improvement, and update your goals. Businesses that survive long enough to celebrate many milestones are the same ones that invest some time and effort in these four activities:

  • Plan to Meet Defined Objectives

A business plan is a road map to get where you want to go and help to keep your “Eye on The Prize”. Unless you know what you’re reaching for, you can’t grab it. Set your overall objectives and describe the detailed steps to achieve them. Set interim milestones along the way to help measure your progress and keep you motivated.

  • Execute Your Plan

Actively work through the detailed steps in your plan. It’s exhilarating to achieve goals and move forward. Executing your plan also gives you opportunities to get more information. Use new information to adapt your plan and make course corrections. Also listen to how your network receives your message and adjust the wording to get your message across better.

  • Outsource Needs You Can’t (or Shouldn’t) Meet

Be realistic about aspects of your business where you do not have the necessary expertise or can’t take the time away from your core business to do yourself. Legal, accounting, and social media are some areas where engaging an expert can accomplish specialized tasks, free up your time, and prevent you from making costly mistakes.

  • Give Back

Answering general questions in your area of expertise and presenting at workshops are ways that you can share knowledge with your network and establish your credibility. Sharing tips and perspective helps to create your brand and draw people to you and your business. Being generous is often its own reward, over the long run.

The last seven years of having my own business have been hard work, fun, and rewarding – all at the same time. It takes a lot more than investing in the four activities described above to be successful. But businesses that invest in planning, executing, outsourcing, and giving back have an opportunity to achieve seven years in business and keep going strong.