Cloud Based Accounting: Is it Right for Your Business?

You may have heard a buzzword that’s been floating around a lot lately: the cloud. We’re not talking about the big white things in the sky. No, the cloud refers to a big network of servers that work together virtually to store and compute data, run processes and house information that is easily accessible no matter where you are.

The cloud is becoming a buzzword because it’s changing up the tech world. For example, remember how you could buy the Adobe Suite in a box, than you would have to install it onto your computer using the disc provided? Well, if you’ve updated Adobe in recent years, you know you now have to purchase and download it online. This switching away from a physical product and moving to an online based system is all thanks to the cloud.

Adobe isn’t the only program adopting a new way of operating. In fact, your bookkeeping and accounting software is starting to become some of the most popular cloud based systems available. Don’t believe it? Intuit found that in 2016, 64% of small businesses in the US are adapted to the cloud. In fact, the cloud is becoming so popular that by 2020, it is anticipated that 78% of businesses will be fully operating on the cloud. This 64% has nearly doubled the 37% that were cloud adapted in 2015. Our point? Cloud based systems are becoming wildly popular for business use.

With cloud based accounting becoming so popular, have you thought about moving your business away from the OnPrem systems you’re currently using and moving to the cloud? Here are some considerations to keep in mind when making this decision.

Updates | With OnPrem systems, you have to wait until the new, updated version comes out, drive to the store and buy it and then install it on your computer (which is where it would stay). When it comes to cloud based systems, updates are ready to be downloaded as soon as they become available (and in many cases, you don’t need to download anything). While some cloud based updates you have to pay for, many software subscriptions include all updates (and support)! Not to mention the updates are typically pushed out to you without lifting a finger. The cloud makes it easier to stay up to date so you can ensure your business doesn’t fall behind on the latest technology has to offer.

Accessibility | OnPrem solutions can be great, but not if you have to travel for work, or aren’t near your computer at all times. If you need to use these programs out of the office, you will need to bring your computer, use your specific server or VPN, etc. In other words, it’s inconvenient. Cloud solutions, such as Quickbooks Online, are the opposite. Because they are stored in the cloud, they are accessible virtually anywhere. Whether you’re on a mobile device or your home desktop, all it takes is logging into your account via the internet and your information is all available for you. Gone are the days of dragging your computer with you everywhere you go.

Security | In the Share the Cloud Security Spotlight Report, 21% of respondents felt there was a higher risk of security breaches in the cloud than for OnPrem programs in 2016. This was down from 28% in 2015. Although there are still thoughts of the cloud being unsafe, this trend is quickly declining. Breaches, although a scary concern, aren’t the only security issue to keep in mind. With OnPrem solutions, all of the information is housed on your computer. If your computer is stolen or damaged, you lose all of that information. In the cloud, the information is available wherever you access the program. The cloud also uses encryption to keep data safe from attacks. As with all data storing methods, security issues are real. Taking steps and putting security measures in place can help prevent your data, no matter where you store it.

Cost | Cost is always a concern, especially if you’re trying to make and maintain a profit. It’s easy to look at the cloud and say “that’s too expensive.” However, there are hidden costs that come with OnPrem solutions that you may not be considering when doing a comparison of the two. When you purchase your OnPrem solution, it’s easy to look at it as a one and done cost. However, you should keep in mind all the updates you will have to buy (and the hassle of getting them installed manually). You also should keep in mind the infrastructure involved with OnPrem solutions. You will need a computer, a server, security systems and other various IT pieces to keep the program running smoothly. The cloud has this all built in, resulting in no extra costs.

When it comes to OnPrem solutions versus cloud based accounting systems, it’s good to know your options. Having a clear vision of what’s available and how it may impact your business can help you stay on top and ready to make changes to keep your business running smoothly.

 

The Importance of Understanding Money

Let’s face it: some people just aren’t good with money. Whether it be reading financial statements, balancing a checkbook or managing cash flow, money can be a real struggle. This lack of understanding can also carry over to your business.

Money is the fuel for your business. Just like your car needs fuel otherwise it won’t run, your business works the same. Money is the driving force and energy behind all of your business processes. Whether it be your marketing activities, innovation strategies or even just how you pay wages to your employees, money is pumping life into these important functions. Without these functions, your business would not be able to survive.

If you take an even deeper look into your business, you will realize there is not one part of your business that is not or has not been impacted by money in some way, shape or form. Here are a few other reasons to start getting an understanding of your money.

Less Worry, More Freedom | When you don’t understand your money, you’re faced with a cycle filled with anxiety and panic. You might be constantly worrying about how much money you have to pay the bills, pay your employees, make routine payments or just keep up with the maintenance. And when you find out money is too low, you’re faced with the panic of not knowing where the money will come from.

This could all be avoided by having a better understanding of your financials. When you know what your monetary situation looks like at a point in time, you are able to eliminate some of those hidden surprises. By doing this, you are able to take the time and energy you spent worrying about your money and put it back into other aspects of your business where it can be better used.

No Discrimination | You might be reading this blog and thinking, “this makes sense for numbers people, but this doesn’t really apply to me.” Wrong. The understanding of money does not discriminate based on what type of business you are in or what position you hold. In any industry or role, it’s important to understand what the numbers mean and their impact on you (and you on them). Be it a dog walking business or a tech startup, understanding your money can help you create a top notch business that you know both inside and out.

Educated Decision Making | When you’re making business decisions without understanding your financials, you’re taking a shot in the dark and hoping it works out for the best. Understanding your money gives you more power when it comes to making decisions that will impact your business. There will be less guessing and more knowing, which will ultimately lead your business away from the negative side effects of making blind decisions and hoping you will be able to financially support them.

Money is an integral part of your business, and understanding it can help your business – and you – make smart choices, have less stress and gain more financial freedom. To get started understanding what’s going on with your money, consider visiting with professionals, taking a class or even reaching out to other business people. If money is getting you down, just remember help is available!

The Best of Class

The cloud has revolutionized the way we look at software selection for accounting software (got to love those numbers). Not so long ago, companies sourced out a system that was all-in-one (a suite). One software, trying to meet all the demands of your company.

With the help of the cloud (because integrations in the cloud are much easier), we have entered into the best of class world; “There’s an app for that!” has taken on a whole new meaning. The cloud has given us freedom to add-on functionality and automation. And most of these add-ons aren’t trying to do it all. Rather, they do one thing very well, hence the term “best of class.”

Best of class refers to being able to choose an accounting package that best fits each part of your business. Let’s say you’re using QuickBooks Online – it’s pretty basic when it comes to inventory tracking, time tracking and reporting. Plus, it’s light on customer relationship management (CRM). That’s where best of class comes in play. Within QuickBooks, you are able to go integrate an app that best fits your needs to add that functionality. You could choose Salesforce for your CRM, Unify for your inventory, T-Sheets for time tracking and/or Fathom for reporting. Each of these applications focuses on their specific uses and tries to be the best in class.

*Note: We are not promoting any of these programs, this is simply an example of options available.

But, there is some resistance to this change, so let’s try to clear the air.

But my old software makes life easier…

Yes, the all in one programs are handy. They give you all of your information, in one central location. And if you’ve been using the program for a while, you’re probably pretty acquainted with using it. You know what to enter, where to enter it and what kind of output you will get. What you may not realize is being in the cloud could make life even easier. Sure there will be a learning curve, but if the cloud makes your life even easier, this new way of doing things might not be so bad.

But these new options don’t have everything all in one…

When you opt to move into the new world of accounting software, you’re often faced with choices for each function, rather than all being included in one program. This can seem annoying and unnecessary when you’re used to everything being ready and available all in one place. But the truth is, you’re opening your business up to options that fit each function perfectly, rather than trying to make a one-size-fits-all program fit your business. Your business is unique, and the programs you have in place to run it should be too.

So, I can tailor my selections to match my business?

Yes! When you step away from the all in one system and start seeking out new programs and applications that are available, you are able to find solutions to fit the exact needs of your business. For example, your old software may have had everything all in one place (think accounts receivable, accounts payable, inventory, time tracking, payroll, human resources, etc.). However, maybe it’s not great from a time tracking perspective or an inventory tracking perspective. That’s where these best of class applications come in. You are able to choose a specific app to fit your needs whether it be inventory, time and employees, storing documents, and more.

How do I make it all come together?

These cloud based systems can be integrated in the virtual ecosystem and can be managed and accessed virtually anywhere. When you choose programs that best fit each part of your business function, rather than using a cookie cutter approach, you can integrate the pieces together to make sure your business is running as smoothly as possible; not to mention automation so you are able to work on your business.

At the end of the day…

We’re not trying to persuade you one way or the other. We are, however, letting you know there are more options available for your business than meets the eye. You want what’s best for your business, and finding the right mix of accounting software and applications can help keep your business in tip top shape.

Break-Even: What You Need to Know

So, you’ve started a business and everything is up and running. You’re selling your product or service to customers and you’re seeing an increase in sales and satisfaction. But, there’s a problem. Your books tell you that you’re not making a profit. So what’s it going to take to make a profit? That’s where understanding how to calculate your break-even point becomes handy.

The break-even point? Huh?

In its simplest sense, the break-even point can be defined as the moment a business isn’t losing money or making a profit, but breaks completely even at $0. All the money coming in from sales will be equal to the money going out for costs. The break-even point will be equal to the number of units a business must sell to reach this $0 point.

Let’s dive a little deeper.

First, let’s look at the break-even equation:

Break-Even Point (in units) = Fixed Costs / Gross Profit (per unit)

The equation takes fixed costs and divides them by gross profit. The fixed costs (sometimes referred to as operating costs) can be any recurring expense that you have to pay to keep your business up and running. These costs have to be paid, even if no sales are made. Some common operating costs include rent, insurance and internet, to name just a few.

Gross profit is broken down into the item or service sales price minus variable costs. The variable costs are determined to be the amount of money it takes to produce one unit of your offering. In some cases, the offering may have multiple variable costs. For example, if you sell brownies, your variable costs would include the sugar, eggs, cocoa, etc. needed to go in the brownies. All of the variable costs to create a product can be added up and known as the cost of goods sold, or as us accountants lovingly refer to it: COGS.

So, taking this information, we can conclude that gross profit is the amount of money you make on each sale after subtracting COGS from your sales price. The broken down equation is as follows:

Break-Even Point = Fixed Costs (aka Operating Costs) / (Sales price – Variable Costs (a.k.a COGS))

Putting it all together

So, how do you put all this information together to find your break-even point? Let’s look at an example. Let’s say you are in the business of selling widgets. Your operating expenses, which include rent, internet and insurance, total $10,000. The COGS for each widget is $20, and you sell each widget for $40, leaving you with a gross profit of $20. We can put these numbers into the break-even equation to find how many widgets you must sell to break even.

Break-Even Point = $10,000 / ($40 – $20)

Break-Even Point = $10,000 / $20

So, to break-even, you would need to sell 500 widgets.

Take it one step further

Not only can the break-even point be used to calculate point zero, you can also use the calculation to determine what it’s going to take to get to your desired profit. Building on the previous example, let’s say you want to make $10,000 (meaning when all the numbers are in, you want the bottom line (aka net income) to be $10,000 not $0). You can simply add the $10,000 to your fixed costs.

Break-Even Point = ($10,000 + $10,000) / ($40 – $20)

Break-Even Point = $20,000 / $20

So, to break-even, you would need to sell 1,000 widgets.

Wrapping it up

The example provided above is simple, yet provides a good explanation of the break-even point and how to reach it. Of course, every business will incur different types of costs and expenses which will need to be taken into account when calculating this amount. If all this seems a bit confusing, our Accounting Coach 1.0 service can help you navigate through the waters.

Common Mistakes on the Sales & Use Tax Form

In our line of work, we have the privilege of working with numerous businesses. This exposure gives us insight into what’s working, what’s not working and what are common mistakes.

Recently, we have run into some confusion surrounding the preparation of sales and use tax returns (we know, this stuff can be confusing); specifically understanding the correct information to enter into the boxes.

The following example is specific to North Dakota, however the moral of the blog is applicable in all taxing jurisdictions.

The first step of a North Dakota return requires you to enter the information for the system in order to calculate the State portion of the sales and use tax. See below for a visual representation.

tax

Section 1: Sales Tax

Remember, these are the taxes imposed at the time of the sale.

Total sales: Your gross sales (taxable and nontaxable).

Nontaxable sales: The amount of your gross sales that is nontaxable.

Net taxable sales: The amount of your gross sales that is taxable (this is calculated for you based on the preceding information entered).

We have noted instances where businesses are only reporting their taxable sales in the total sales box (ignoring the nontaxable sales). While you still arrive at the correct sales tax amount, the report itself is not being prepared properly.

Let’s take a look at an example. You own a store that provides both retail (taxable) and wholesale (nontaxable; the customer is a reseller and you have their current exemption certificate on file). In December, your total sales were $10,000. Of that amount, $1,000 was purchased by wholesalers and $1,000 was sold to a MN customer. This means that this $2,000 is nontaxable sales. The remaining $8,000 in retail sales is your North Dakota net taxable sales.

Section 2: Use Tax

The next section relates to use tax. Remember, these are the taxes are imposed on the use or consumption.

Items subject to use tax: The amount subject to use tax.

In this scenario, we will say that your store purchased $100 worth of office supplies online. There was no sales tax charged at the time of the purchase. The office supplies are considered taxable in North Dakota; therefore you would need to report $100 as items subject to use tax. Although having no items subject to use tax is possible, we have noted instances where businesses overlook the use tax portion because they do not understand the concept of use tax.

Want more information on the difference between sales and use tax? Check out our blog on the topic here.

The moral of the story…

With over 10,000 different tax jurisdictions it would be impractical to cover each jurisdiction (which is why the example is specific to North Dakota). However, no matter the taxing jurisdiction, it is important to understand the components of the sales and use tax return to ensure you are reporting your numbers correctly. As always, if you have questions, our trained professionals understand (and enjoy!) this stuff, and are always ready to help you.

Nonprofit 101: How to Maintain a Nonprofit

Earlier we brought you more information on how to become a nonprofit. Now we’re here to tell you ways to KEEP that status. You’re welcome.

 Can you lose your exemption status?

Once tax exempt status has been obtained, the organization must continue to follow specific rules in order to maintain this status.  The following are common ways an organization can have its exempt status revoked:

  1. Not completing your annual filings for three consecutive years (it seems obvious, but it happens more than you think).
  2. Unrelated business income becomes more than an insubstantial amount of your gross receipts. The IRS states that unrelated business income (income generated from activities not related to your stated exempt purpose) should be insubstantial to your organization. There is no bright line definition of substantial, but a good rule of thumb is more than 15% of the revenues or activities of the organization.
  3. Supporting/opposing a political candidate. Organization exempt under 501(c)(3) are prohibited from engaging in any political activity including endorsing candidates. Political activity is different from lobbying and an insubstantial amount of lobbying may be allowed.
  4. Income which inures to the benefit of any individual. The activities of the organization must be for the benefit of the public, not specific individuals. Therefore, operating for the benefit of individuals or providing specific benefits to individuals can impact tax exemption. Here’s an example. If a hockey association (organized as a tax-exempt nonprofit) requires its members to fundraise on behalf of the association, the funds raised must go the association as a whole, not individual members. Therefore, if Johnny raised $1,000 and Billy decided not to participate in the fundraising, the $1,000 collected must be used for the benefit of the association as a whole; not credited to Johnny’s account for his benefit.

In closing…

Starting a nonprofit is an exciting journey, but it’s also complicated. There are numerous resources that can help you along that journey. If you need help getting started, reach out; we would be happy to help.

 

Nonprofit 101: How to Begin

What is a tax-exempt nonprofit?

The “simple” answer is it is an entity that doesn’t have to pay taxes. While technically true, there’s a little bit more to it …

A tax-exempt nonprofit corporation is an entity formed to carry out a specific purpose which allows it to qualify for tax exemption.  The most common types of exempt missions are charitable, educational, promotion of health or lessening the burden of government.

Here are some of the main differences between a tax-exempt nonprofit corporation and other corporations:

  • A nonprofit corporation is not owned. Therefore, it cannot be sold. Rather, if a tax-exempt nonprofit corporation is dissolved the assets of the corporation must be distributed to another tax-exempt nonprofit.
  • A nonprofit corporation with tax exempt status under 501(c)(3) is exempt from paying income taxes. However, it is not necessarily exempt from all taxes. It may still be subject to sales tax, property tax, payroll tax, unrelated business income tax, and excise taxes unless a specific exemption exists.  Most exemptions depend on specific state rules and often are impacted by the type of entity and the activities of the entity.
  • Once a nonprofit corporation has obtained tax-exempt status under IRC Section 501(c)(3) it may accept tax-deductible donations. Donation receipts should identify the tax-exempt nonprofit (ex. letterhead), the date of the gift and a description of what was received. For cash donations, the amount received should be listed. For donations of goods, a descriptor of the item should be listed. The organization is not required to include the value of the donated good, this is the donor’s responsibility.  In addition, the donation receipt should indicate whether the donor received anything from the organization in exchange for the donation.  If not, a phrase such as “no goods or services where given in exchange for the donation” should be included.

How do you create a tax-exempt nonprofit?

The steps to set up an entity are fairly straightforward. However, you will likely need the assistance of legal and tax professionals to help you navigate through them.

Step 1: File the Articles of Incorporation with the State

Articles of Incorporation are typically filed in the state where the organization will be operated.  You can do it alone but may need the assistance of legal counsel. There are a tax related clauses which must be in the Articles of Incorporation in order for the entity to gain tax-exempt status:

  1. The activities of the organization must be limited to exempt purposes and the Articles must not allow it to engage more than insubstantially in activities that are not in furtherance of this purpose. In determining the exempt purpose, you should consider what you are hoping to accomplish with the nonprofit? The IRS provides the following as an example of an acceptable purpose clause:

The organization is organized exclusively for charitable purposes under section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code.

 You can elaborate on the specifics of the charitable purpose, but make sure that the details do not expand beyond the tax exempt requirements.

  1. Your articles must limit the conduct of lobbying activities to an insubstantial part of your activities and specifically prohibit the organization from conducting political activities.
  1. As mentioned earlier, a nonprofit corporation does not have owners. As such, the Articles must include a dissolution clause dedicating the assets upon dissolution to another exempt organization. The IRS example is as follows:

Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose.

 Step 2: Obtain an Employer Identification Number (EIN)

What is an EIN and how do you get it?

An EIN is the corporation’s unique identifying number with the IRS. You can obtain an EIN through an online application process (make sure you select Tax Exempt/Nonprofit as your entity type).

Side Note: Once you have your EIN, it’s a good idea to open a business banking account; it is very important not to mix personal expenses with business expenses.

Step 3: Request tax-exempt status with the IRS

If you wish to be a 501(c)(3), you MUST request an exemption from the IRS.  If you do not apply for tax exempt status, your corporation will be treated as a taxable corporation, subject to corporate income taxation. You must have your state approved Articles of Incorporation and EIN prior to filing the request.

There are two options for applying for tax exempt status, based on the estimated gross receipts you expect to generate on an annual basis.

  1. Form 1023-EZ: This form is available if your gross receipts are expected to be less than $50,000 per year for the first three years of operations. This form can be completed online.
  1. Form 1023: If your gross receipts are expected to be more than $50,000 per year, the longer form must be completed. The form is available online, however it cannot be submitted electronically.

If you need assistance with filing your forms, a tax professional is a good resource.

Step 4: Operate for Exempt Purposes

You should receive notice from the IRS acknowledging your application within two to six weeks. Assuming the IRS approves your application, you will receive a determination letter confirming your exemption within three to six months of filing. Once you receive your confirmation, you can operate the organization for the exempt purpose as stated in your Articles of Incorporation.

If you expand your operations beyond the initial exempt purpose for which your exemption was granted, the expansion may result in unrelated business income (UBI) that results in a tax liability or may result in potential loss of tax exempt status.

Step 5: Complete your annual filings

There are filing requirements at both the federal and state level.

  • Federal Filings: You will be required to submit Form 990-N, 990-EZ or 990 on an annual basis with the IRS. The return is due 4 ½ months after your fiscal year end. The amount of information and the complexity of the filing varies with each form. Use the chart below to help determine what form you need to file.

 

  990-N 990-EZ 990
Gross Receipts <$50,000 <$200,000 No limit
Assets No limit <$500,000 No limit

Note: Annual filing are required even if you have not yet received your determination letter.

  • State Filings: The filing requirements vary by state however here are a few examples of potential requirements:
    • Secretary of State Annual Report- Confirms ongoing existence of the organization.
    • Charitable Report-Typically filed due to holding charitable assets in a state or to solicit contributions in the state
    • State Income Tax Return–Filed to report unrelated business income

We would recommend enlisting legal and/or tax guidance throughout the process if you have any questions or hesitations. These professionals want to see your mission succeed from the start. If you need help finding the resources, we can help!