S-Curve of Business: Stage 2

ConcentrationToday we’re talking about making your dream into a reality. Welcome to the second stage of the S-curve of business: concentration. Here, you turn your attention to how to implement all of the ideas you generated during formulation (Step 1). So if you haven’t completed stage one, there’s no way to move on to stage two.

So why is Stage 2 so important? Well concentration involves building value for your organization. This means understanding:

Market Alignment – This is obtained when a business consistently delivers a compelling value proposition in a simple exchange. Misalignment happens when an entrepreneur has little or no contact with customers. To avoid this, the values and behaviors of the entrepreneur need to be systematized into the operations of the business.

Management – Outgrowing your original management team is an extremely common occurrence. This causes an entrepreneur to pause at a critical junction and ask the following question: Do you continue to dance with the ones you brought? The management principle will allow you to address the changes you’ll need to make in order to grow your business.

Model – This is a theory of how the company will operate in a profitable way in the future. You have to decide whether or not you have a scalable business model. In other words, are you testing and developing continually to ensure profitability as your business scales upward?

Money – The fuel that drives growth! There is a limit to the amount of growth that can be funded based on the margins in the business, as well as capital intensity. The answer is to have a profitable, asset light business model and enough cash to carry you through a controlled growth period until professional and strategic debt and equity money is available. To break it down into simple terms, you have to follow the money trail!

We’re not going to lie to you. Concentration is hard work, mainly because you’re putting in lots of energy to make your dream a reality, but you’re seeing very little return. To be completely honest, this is usually the stage when most entrepreneurs give up. You have doubts and sometimes, you believe your doubts.

Here’s a tip: even if it’s hard, keep concentrating on making it happen and moving forward. Often, we think it sounds weak to say something is hard. It’s not. Saying something is hard can simply be an observation which allows you to focus on pursuing your goals.

So stay the course. After all, by taking time in the concentration stage, you’ll have great navigation to bring your business into stage three: momentum. Stay tuned!

An Ode to Kicking “Butt”

1 Million Thanks 2016Okay, we’re not going to lie. We’re pretty proud to have won the Kick Ass Award at 1 Million Thanks (read more about it and all the other great honorees here). No, it’s not because we like having an excuse to use the adult version of “kick butt” around the office and in every day conversation … okay, fine, that’s not the only reason.

We’re proud because we believe hard work should be honored. And believe us, we’ve worked hard this past year. We’re working hard to change a mindset. Externally, we often hear we’re intimidating or boring accountants who talk in jargon. That’s why we’re trying to talk differently and really help you understand and embrace your accounting journey (yes, we just said that). To learn more, subscribe to this blog.

We’ve also heard that we’re too big. Well let’s be clear on this, we love working with startups, entrepreneurs and small to mid-sized businesses. We have a lot of resources and nifty people who are more than willing to help you imagine what’s possible through our Possibilities Center (see what we did there?).

In addition, we’re working hard to share our story. Because you see, our story is pretty cool.

In 1917, our business started because of the dream of an entrepreneur right here in Fargo. In May 2017, we’ll celebrate our 100 year anniversary (man we’re old, but you have to admit, some of us look pretty good). During that time, we’ve grown from a one stop shop in Fargo to a Top 25 CPA Firm in the nation with over 1,600 employees (yeah, there’s a lot of us EBers around) in 29 offices in 13 states. And we’re still headquartered right here in Fargo.

While we’ve come a long way, we also know that, to reach the next 100 years, we have to adapt and innovate. So we’re more than proud to have won the award. We’re also truly honored and INSPIRED.

In the past year, we’ve learned so much from so many of you and it has changed our thinking and altered the way we do business.

Here’s just a few of the lessons we’ve learned along the way:

  • It’s really fun to host parties with fabulous people. Our first foray into the entrepreneurial ecosystem in Fargo was Startup Weekend. What a kick off it was. We heard amazing pitches and celebrated with some of the brightest in Fargo Moorhead. It was a stinking blast.
  • Collaboration is so important. We’re proud to call ourselves members of the Prairie Den and partners with the NDSU Research & Tech Park. Through these collaborative efforts, we’ve met amazing people and fostered relationships that (we hope) are beneficial to both parties. We’ve seen new businesses form and grow and have been honored to even be part of the ride on some.
  • Dreams really do come true. It’s unreal to us the amount of cool things happening in Fargo. The people who wake up and decide to make their dream a reality. From Cooper’s Protosthetics research to Girl Develop It, from Co.Starters to Emerging Leaders, we’re thinking our future looks pretty stinking bright with these dreamers. And don’t even get us started on the kids in The Chamber’s YEA! Program.
  • It’s all about community. There are people all over this area who are building a community they want to live in (we’re looking at you Emerging Prairie). There are entrepreneurs making things happen and starting new companies. But there are also community partners coming alongside and lifting these individuals and companies up and collaborating with them to build a better place for all. It’s a beautiful thing to watch.

So before this gets too mushy, we’ll just say this. You inspire us. Thank you for sharing your stories with us, for coming to parties with the numbers nerds and for genuinely caring about your community. Thank you for taking this almost 100 year old company along for the ride and helping us rewrite our story. We think you’re pretty kick ass (or butt if you prefer) too.

 

 

 

Do You Need an ERP Solution?

Let’s face it. No one likes to waste time, especially when you’re starting (or running) your own business. So why do you settle for technologies that give you a headache and a gnawing feeling in the pit of your stomach? Maybe it’s time you consider an ERP solution.

ERP stands for enterprise resource planning. It’s a fancy term for business process management software, which is essentially a tool that can help your business operate more efficiently. ERP solutions allow businesses to manage across their organization and automate many back office functions related to technology, services and human resources. In simpler terms, it integrates all facets of your business from product planning to marketing.

Everyone wants to run a healthy business, but sometimes it’s hard to tell the difference between a genuine problem and a less than ideal process. To help, we’ve identified some of the common symptoms signaling the need for an updated business management tool.

ERP Solution (1)

Don’t know where to start? We can help.

A version of this blog first appeared on techTalk.

Record Retention

Record RetentionToday we talk about another exciting and exhilarating part of running a business: record retention. Before you doze off, let’s talk about why record retention is important and can save you from a lot of headache and heartache later on.

When you start a business, there’s a lot of stuff that comes with it. At the end of the day, it amounts to a little more than a lot of paper, or data, or both. That’s where record retention, and a retention policy or guidelines, come in handy. Record retention is the amount of time a document needs to be kept or retained, whether it be electronic or paper. After the record retention time has been completed, the document can be destroyed.

Preemptively tossing a record can be a nightmare. Why? Well, for one thing, it’s required to retain records by law. Yep, there are federal and state laws which require businesses to have a record retention period, regardless of format. If a record is destroyed too soon, it can wreak havoc on your personnel (try doing your taxes or working with an internal auditor when you don’t have the right documentation) and could even result in fines or legal action … doesn’t that sound fun?

But don’t let the above scare you into thinking you should never destroy ANYTHING. Business records can be voluminous and bulky and, if you’re not careful, will make your business look like an episode of Hoarders. So how do you know when to keep it and when to toss it? Well, I’m glad you asked, because Eide Bailly has developed this handy sheet with record retention guidelines. Check it out!

The moral of the story? Don’t just throw it away, but don’t just keep it either. Rather, develop a record retention policy, using the above as a guide, to ensure that you have just the right amount of stuff as you progress within your business.

 

S-Curve of Business: Stage 1

All companies go through a phenomenon known as the “S” curve, aptly named because it follows the shape of an S (clever huh?). These stages include:

 Stage 1: Formulation
Stage 2: Concentration
Stage 3: Momentum
Stage 4: Stability
Stage 5: Breakthrough

Over the next few weeks, we will walk you through each stage, its purpose and what it entails. Consider it a lesson in the progress and journey of your business. Come on, it will be fun!

So let’s begin with the Formulation Stage (we’re pretty biased toward this stage as it involves taking your dream and making it a reality). This is the stage where you think about and plan your business.  In other words, it’s a brain dump!

Here’s a few more specifics for your spectacular brain dump. You commit to paper everything you can possible think about for your business, including:

Organizational Structure—Sole Proprietorship, Corporation(C or S) or Limited Liability Company (LLC). Check out some questions to ask when choosing an org structure here.

Your Foundation of Culture

  • Mission: Why are you in business? What do you want to accomplish?
  • Vision: Inspiring state of  where and what your organization is striving to become in the future—this is your guiding star
  • Purpose: An inspiring statement of why you exist
  • Core Values: Your beliefs—what you stand for. You will use this to  guide your actions and decisions
  • Strategies: Your plan for accomplishing your mission, making your vision a reality, all while living your purpose,  guided by your values.

Strategic Business Plan, which includes a five year look into your business that supports your overall strategic plan. (Want to know more about business planning? Check this out.)

Exit Strategy. As Stephen Covey says in the 7 Habits “Begin with the End in Mind”

While the Formulation Stage may be fun, especially because you’re finally starting to formulate (see what we did there?) your dream, it’s also the most critical stage. Why? Well if you skip this stage, you may have a lot of activity but no direction or purpose!

Formulation

Up next: Concentration. Stay tuned!

 

 

Entity Selection

Entity SelectionIt’s a new year with a new set of resolutions. Which will you conquer first? One of the first things to cross off your list when starting a new business is selecting your entity type. Do you want an S-corp, C-corp, LLC, GP, LP, LLP, LLLP, Sole Proprietorship?  Should your LLC elect to be treated as an S-corp or a C-corp? Does it really make a difference?

Of course there are different legal ramifications for each entity type, which should be discussed with an attorney, but there are different tax ramifications as well.  It is possible to change entity type down the road, but it may be costly to do so.  Here is a short, non-inclusive list of items to consider.

  • How will you capitalize the business? In other words, how are you getting money? Will you contribute your own outside assets?  Will you bring in outside investors?  IPO?
  • How will profits/losses/distributions amongst owners be handled?  Based on ownership or will there be a preferential return for certain investors/owners?
  • What are your plans for future disposition of the business? In other words, what’s your end game?
  • What is your business type?  What kind of assets does your business own?
  • Will the business be making distributions to the owners?
  • How will owners be compensated for services provided to the business? (Also, owners may be treated differently than other employees in terms of compensation and benefits.)
  • Is it beneficial to use the business losses on the owners’ personal tax returns?
  • In what state(s) do you operate?
  • What are current and expected tax rates?
  • What are the complexities and administrative requirements?

As you can see from the list above, this is not an easy process. In fact, it’s complex and has several facets to consider before you make the decision. So don’t jump at the first entity type that catches your eye. Instead, take time to look and see what’s the best match for where you want to go with your business.

What You Want to Know: Basis

We want to give you a better experience, where you feel connected to your financial journey and confident that you’re making the best decisions for your business. As part of this, we’ll feature blog posts on frequently asked questions. No question is a dumb question, so if you want to learn more about something, just ASK.

BASISToday we address the topic of basis as it relates to flow-through loss limitations (it’s a tax issue). True to form, this complicated mechanism is different depending on your taxable entity type (read, the type of organization you decide to form when you start a business). Whether you’re an S-corporation or partnership, basis can impact the amount of flow-through losses you will be able to recognize in the current year or carryover to future tax years.

So why is this so important?

Understanding basis is one of the keys to tax planning. So in case you hadn’t guessed, it’s an important one to get right. Getting it right, however, is more than just a simple calculation.

It’s a three part test.

There are three hurdles a taxpayer must pass to deduct a flow-through loss. Pay particular attention, because the order matters:

  1. There must be basis (value) in the activity. We call this outside basis.
  2. There must be an amount at-risk. We call this at-risk basis.
  3. You must have passive income to deduct passive losses. (We have no clever name for this one)

Calculating basis is different based on the type of taxable entity.

Part I: Outside Basis

Below are the basic components of outside basis:

+ Capital Contributions

+/- Income/losses of the entity

+/- Change in debt basis

+Tax exempt income

– Capital Distributions

– Non-deductible expenses

Unlike partnerships, S-corporation shareholders do not receive basis for debts owed by the company to third parties. The only way for an S-corporation shareholder to have debt basis is to make a direct loan to the business. With a partnership, the partner has basis in his/her share of the partnership’s debt.

With us so far? Let’s keep going. In addition, there are slight differences in the ordering rules. For partnerships, basis is first adjusted by all positive basis adjustments and items of income, and is then decreased (but not below zero – you can’t have negative basis) for distributions, and lastly by items of loss.  For an S-corporation, first increase basis for capital contributions and items of S-corporation income.  Then decrease by distributions (again, basis can’t be negative, so not below zero), followed by non-deductible expenses, and lastly by S-corporation losses/deductions.  A permanent election can be made to reduce shareholder basis by items of S-corporation losses/deductions before the reduction for non-deductible expenses.

In case you hadn’t noticed, here it is again: basis cannot be negative. Distributions in excess of basis result in taxable income (capital gain) for both partnership and S-corporation owners.  Of course there are different rules/issues to consider if distributions are non-cash items or liquidating distributions.  Losses/deductions in excess of basis carry forward and may be deducted when sufficient basis exists.

Part 2: At-Risk Basis

As a taxpayer, you are only able to deduct flow-through losses against basis for which you are at-risk (you’re personally on the hook). At-risk basis is similar to outside basis except in the handling of debt. In an S-Corporation, at-risk basis is generally the same as outside basis. However, there are exceptions (when isn’t there an exception in the tax world). If the source of the funds contributed or loaned by the shareholder to the S-corporation is from a nonrecourse obligation (no risk of loss if the loan defaults) or from an investor that has an interest in the S-corporation, those funds are not included in at-risk basis. As mentioned above, an S-corporation shareholder does not have basis in any debts of the S-corp that are from a third party (such as a bank).

Partners have at-risk basis for their share of the partnership’s qualified nonrecourse debt and recourse debt (a.k.a. the portion you are personally on the hook for).

Isn’t debt, debt?

Not quite. Here’s why:

  • Qualified nonrecourse debt is debt borrowed in the connection of real property such as real estate. In addition, there are several other requirements to include qualified nonrecourse debt in at-risk basis.
  • Recourse debt is debt for which you are personally, ultimately liable (read, you have personally guaranteed partnership debt, pledged personal assets to secure partnership debt, or personally loaned funds to the partnership).
  • Nonrecourse debt is debt that does not meet the requirements of either recourse or nonqualified nonrecourse

Part 3: Passive Loss Rules

If the business is considered a passive activity according to the IRS rules (don’t even get us started. We’ll save this topic for another time), you are only able to deduct passive losses against passive income.

I seriously have no idea what you just said.

Okay, here’s the short version. Basis matters. If you do not have enough basis there are two tax implications. If you take distributions (a company’s payment of cash or other assets) without sufficient basis, the distributions would be considered capital gains and taxed at the applicable rates. In addition, you may need to suspend flow-through losses until you have the basis to deduct them.

What the?!

Basis is important to get right. It also can be incredibly complicated. This post gives you the highlights, but does not encompass every situation/issue.  So it’s really best to work through this with your tax professional.