Have Questions? We have Answers

In our line of work, we get a lot of questions on anything and everything related to owning and operating a business (and we’re happy to answer them, too)! While a lot of these questions are usually pretty easy to answer, sometimes we get a few that really make us think. Even then, we enjoy researching and finding the answers to help business owners be successful.

So, what questions do you have about your business? We would love to help you reach your dreams and goals.

In case you think your question might be too far out there, we promise it’s not. Check out some of these questions (and our answers) to get you started on finding the information you need to watch your business succeed.

“I have invoices coming out of my ears! What do I do with all of them?”

When you have a large amount of invoices to deal with, it’s easy to get overwhelmed and lose track of what needs to get done. When invoices aren’t being properly managed, your business can see some serious negative side effects, such as fraud. Looking to an automated system, such as QuickBooks, is also a great way to keep your invoices at a manageable level.

“Where in the world did all of my cash go?”

This question is more common than you may think. While your business may be profitable, you can still be running out of cash, which might be a concern. Financial struggles can be hard, but our professionals are available to help. Check out this blog – and then, let’s talk!

“Why don’t I have enough time to do everything that needs to get done?”

We get it: owning and operating a business means you have a lot on your plate. From accounting and finance, to human resources to the day-to-day operations, you probably don’t have enough time to do it all yourself. The good news is you don’t have to! Consider your team of employees. What can you delegate to take some of the burden off your shoulders and free up some time? Another option is outsourcing. When you outsource some of your business activities, such as your accounting processes, you free up time to focus on why you got into business in the first place.

“What is this accrual accounting thing I hear so much about? Am I doing it?”

Knowing the specific ins and outs of accounting can be a confusing, daunting task. What it comes to what method of accounting you are using, the water may get even muddier. Maybe you’ve heard of cash based accounting and accrual accounting, but you really have no idea where to begin. We’ve written multiple blogs on how to tell the difference and how to select what fits your business and set up your books. Check them out!

“Taxes terrify me. Where do I even begin?”

Taxes are a complex issue, and questions regarding this topic are common. Whether you want to know more about R&D tax credits, employer vehicles and mileage, how to track your taxes or even all those pesky (yet necessary) forms, we’ve got you covered. Check out our tax archive for answers to all your most pressing questions. If you can’t find the answer, let us know.

Remember, although we numbers nerds really like our financial lingo, we promise to answer your questions in a way you will understand, not just a bunch of accountant talk. After all, we want to see your business succeed!

Even in 2017, Cash is Still King

We’ve all heard the phrase “cash is king”, and we’ve even written a blog about it, but what does it really mean? In the business world, it means even a company with a healthy equity balance can get into trouble if their cash balance cannot support short term operations.

Here’s an example to help illustrate our point. The below table shows three scenarios. In each scenario, the company has $4,500 in current assets, $1,500 in current debt, and $7,000 in equity. The income statement remains unchanged in each scenario, however management in Company C is managing their working capital better, due to a larger chunk of their current assets coming from cash.

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How Long Until We Get Paid?

One of the best ways to understand how to improve cash and working capital management is to monitor “Days to Cash.” Days to cash measures how long it takes for a company to convert resource inputs into cash flows.

The days to cash formula measures the amount of time from when inventory is first purchased and the company has a cash outlay (payment period), how long it is held (turnover period) and how long until the customers pay their receivable balance (collection period)Publication1

In other words, where the balance in accounts receivable is greater and cash is down (scenario A), the collection period is 49 days, as compared to the 21 days noted in scenario C. With the turnover period and payment period the same in each scenario, it is easy to see how the balances in receivables and cash impact the number of days until the entity has cash deposited in the bank.

Why Do Good Companies Run Out of Cash?

There are many reasons a company runs out of cash. Sometimes, it is due to poor collection policies or overspending on equipment and inventory. Other times, it is based on how the company is structured; entities like colleges and universities are able to collect tuition dollars before the students start school, padding the cash balance. Yet other entities run out of cash because of their successes. These companies may grow too fast and their cash gets tied up in inventory or receivables.

With low interest rates and payments being automated and billed over longer periods of time, it might seem like cash isn’t worth all that much on the balance sheet anymore. However, the above example doesn’t lie: to keep your business operating smoothly, you need to remember that cash is king. Our team is available to help you manage your money and keep cash flowing smoothly through your business.

Getting Your Business Back on Track

There are a lot of considerations that go into running a small business, especially one in the process of growing and improving, but it’s not always easy. In fact, often times it might feel like your business just won’t cooperate and you might feel like you’re losing control.

How do you get back on track and help your business live up to its potential? Here are six areas you as a business owner can focus on:

  • Sales – Sales figures can help you determine revenue and inventory purchases, so keeping accurate records is important. To do this, implement detailed policies and procedures for all types of sales, whether it be cash, checks, credit cards or online sales. Consider using an invoicing system when shipping goods and having proof of delivery when goods are shipped. Also be sure to check your invoices against sales and payments to ensure everything matches up correctly.
  • Accounts Receivable – We’ve mentioned this a lot: keeping up on accounts receivable is important. Income from your operations is what keeps your business going, so making sure you collect, and on time at that, is very important. To keep up on AR, establish collection policies in writing, and make sure to follow through on implementing these policies. Here are some ideas:
    • Establish a solid system for billing, such as numerical or batch processing
    • Have a timely review process for all accounts
    • Keep your accounts receivable separate from cash
    • Have security measures in place for communicating
  • Accounts Payable – Just like it’s good when your business receives cash, other businesses need to be paid as well. Keeping up on payments can help your business establish a trustworthy reputation which can ultimately lead to more success and growth. Unfortunately, AP is an area that many businesses struggle with. To stay out of hot water in this area, consider setting up procedures for cross checking payments, always check pricing options from competitors and vendors and be sure that billing amounts are being entered correctly.
  • Cash – Businesses that accept cash (especially a lot of cash) are at a high risk of loss due to theft or other discrepancies and errors. Keep your cash in control by having employees balance cash at the end of their shifts, have controls in place to ensure employees can’t pocket the cash without entering the transaction, check and reconcile bank balances regularly, keep all cash payment methods secure and pay attention to your business’s cash flows.
  • Human Resources and Payroll – Technology has made it easier for hackers, scammers and even bad-egg employees to commit fraud or other harm to your business. To keep your people (and your business) safe, consider the following:
    • Require password updates regularly- for you and your employees, and make sure to keep all passwords safe and not written down.
    • When it comes to payroll, review the details (do you know all those employees?) and checks/direct deposits to make sure pay is being disbursed properly.
    • Pay attention to any differences between payroll expenses and monthly budgets – this could be a red flag that someone or something has gotten access to your books.
  • Physical Assets – The physical assets your business owns, such as machinery or laptops, are of great value to your business – you don’t want anything happening to them. When it comes to laptops and other electronics, make sure they are safeguarded or locked up. This makes it difficult for someone to steal the physical piece itself, along with the information stored on it. Cyber security problems are on the rise (seriously, check this out), so keeping these assets on lock down can help prevent data breaches and other cyber-crimes. Record asset purchases and monitor use and depreciation on them to stay up to date on their value. Also consider setting a usage policy so assets aren’t falling into the wrong hands or being mishandled.

While there are many areas of your business that deserve your time and attention, these are some areas that can help you keep control over the growth and direction of your business. Your trusted business advisors can help you set goals and policies to ensure that everything is running smoothly in your business. If you need help, just ask!

 

 

 

What is Unclaimed Property?

Unclaimed Property? What’s that you say? I have no idea what you’re even talking about!

Don’t you worry, it’s not as scary as it sounds, but it can cause some headaches and have some pretty devastating (and expensive) consequences if not handled correctly. And that’s why we’re here.

So what is Unclaimed Property? Simply put, it’s a dormant or unclaimed financial asset that your business owes to another business or individual. A lot of times these include un-cashed checks, inactive savings accounts, life insurance proceeds, customer overpayments and even unused gift certificates. Easy enough, right?

Now, what do you need to do with these assets? Here’s the short answer: Give them back or turn them over to the state.

Make sense? Well now let’s talk about the longer answer (you knew it was coming):

Why would these things go unclaimed or inactive?

There are a number of reasons. Maybe the owner forgot about them or is deceased. Maybe they are ill and unable to keep up with their finances. The company may no longer be in business, sold, or changed their name. Or maybe they simply don’t know about the asset or it is too small for them to even take the time to claim it.

Fair enough. So let’s say I have some of these assets. What do I do now?

Ah, now we’re getting into the good stuff. Let’s start out with some of the basic terminology you need to know.

  • Holder – This is the company in possession of the assets that belong to someone else. This is you.
  • Dormancy Period – The amount of time an asset must be outstanding before it has to be reported to the state.
  • Escheatment – I know what you’re going to say. You’ve never “escheated” on your taxes in your life. (Bad pun, we know. But come on, it is kind of funny). This one’s actually pretty easy. It’s the act of turning the property over to the state. Once you do this, they now have the responsibility for it. But before that…..
  • Due Diligence – This is the act of making one final attempt to locate the property owner.

After you have these down it’s a simple three step process.

  1.  Identify the dormant accounts
  2. Notify the property owners (due diligence)
  3. Remit to the property owners or the state (escheatment)

Sounds easy. So why is this so important?

One of the big reasons is to protect consumers. This system is supposed to create a centralized location where businesses can report and remit the property, and the owners can search for and claim these funds.

So I might have some of these funds out there that somebody owes me?

Maybe. Check out www.missingmoney.com. Maybe you have a few bucks left in the checking account you opened up in college.

Earlier you mentioned devastating and potentially expensive consequences for not following these rules.

Alright I’m not trying to scare you, but there can be some pretty bad consequences if you’re not in compliance. And, frankly, states are increasing enforcement efforts. Also, you can be audited in relation to unclaimed property for things like your taxes. Plus, there’s no statute of limitation, meaning the IRS can come knocking at any time.

Think we’re joking? There’s a case currently in litigation where a mere $147.30 of unclaimed property found by an auditor turned into an extrapolated assessment of nearly $2 million!

Ok. So I have to report everything to the state right now?

Not so fast. You don’t have to report everything right now, but you at least need to start thinking about it.

There are a lot of unique questions surrounding unclaimed property:

  • What types of property do I have that may be subject to these rules?
  • What is the value that should be reported?
  • To what State should the property be reported to?
  • How do I go about tracking down the property owner?
  • Is the account dormant or not?
  • How long after the account is dormant do I have to report it?

Different states have different rules for reporting, and there are strict timelines to follow. This is where you may want to get an expert involved. They will help you navigate the process and ease the compliance headaches.

 

What You Want to Know: Cash & Pass Through Income

What do you mean I owe tax? I didn’t get any cash!

Welcome to the world of cash distributions versus pass-through income of an entity. Confused yet? Stick with us on this. It’s important.

This is a common question for owners of pass-through entities. A pass-through entity is a fancy tax term which boils down to that a business doesn’t pay income tax. Rather, the profits “pass through” the company to the owners. We’re talking here about organizations structured as S-corporations, partnerships or LLCs.

It’s a pretty common misconception that income tax is paid on cash distributions from the business. And yes, this is partly true. There are certain instances where cash distributions from partnerships or S-corporations are taxable. But the majority of the time, this is simply not the case.

As an owner of an S-corporation or partnership, you are taxed on the activity of the business, which is reflected as income or losses on the Schedule K-1 issued with the business tax return. It is possible for a business to generate taxable income and have no cash distributions to owners. So you would still have to pay income tax, regardless of if you received cash distributions or not.

Common reasons for this include:

  • Cash is used to pay down debt
  • There is income attributable to uncollected accounts receivable
  • Business expansion

And to complicate things even further, it’s also possible for a business to have losses, yet still issue owner distributions. This is most commonly due to depreciation and other non-cash expenses. Another reason is collection of accounts receivable included as income in prior years.

The moral of the story is that taxes are rarely straightforward. So even if you didn’t receive a cash distribution, there’s still the potential tax is owed. The best way to know for sure is to consult with your tax professional. They’ll help you see what’s coming round the bend and then, even if you owe, you hopefully won’t be surprised by it.

Cash is King

Cash is KINGWhen you’re just starting out, it’s important to remember one thing (well, a lot of things, but this one is really important). CASH is king. Why? In the early stages of a business, traditional financing may be hard to come by, so cash in hand is necessary to run your business.

You guys are really on the cash bandwagon.

Sure are. When you have limited financing as a startup, cash is a necessary commodity. You need it to pay vendors, make payroll, fund product or service development and buy equipment. You know, the kind of important stuff it takes to make sure your business is actually running.

Plus, cash can really benefit you in way of discounts. Some vendors may offer purchase discounts in return for prompt payments.

Okay, okay. Cash is important. So what do we need to watch for?

You can’t just use all your cash in hand to pay all your expenses. While you need to pay your bills and keep the lights on, you also need to be able to survive slow periods (all businesses have them) and be prepared for when cash is not coming in.

But you also need to prepare for when times are good. When growth is strong and increasing revenue generates higher inventory and receivables, you have to be prepared to meet demand. Increased working capital needs can consume cash, especially in periods of high growth.

What else should I pay attention to?

What industry are you in? Industry sectors can have an impact on when you collect cash and when you spend it. Some industries have the benefit of collecting cash early in the sales cycle. Think schools here. They collect tuition before classes even start. Other industries require spending cash early in the sales cycle. We’re looking at you manufacturing and wholesale. So examine your entire sales cycle when mapping out your finances and know that no two businesses are exactly alike.

Plus, while it might not seem like it when you’re just starting out, but you may want to acquire other businesses down the road. You’ll need cash to do this.

So cash is a good thing. Can I do anything to get a handle on it early?

Monthly projections can help you understand your cash cycle. Look ahead to periods of high cash outflow and plan. Take into account periodic events like taxes, bonuses, capital expenditures, prepaid expenditures and one-time events and account for them. Cash will not only help you in the early stages of your business, it can also be a catalyst to map out your overall financial journey (which we think is pretty fun, and a really good thing to do).