Things that Should Scare Small Business Owners

HalloweenWhen you’re running a business, there are a lot of things to consider. From payroll to people to marketing, you have a lot on your plate. In fact, we’re guessing there’s more than a few things that keep you up at night.

There are all sorts of scares lurking around the corner when it comes to owning and running a small to mid-sized business. Here are a few of the ones we find particularly frightening:

You hire without doing your research.

It’s true, you wear a lot of hats as a small business owner. It’s also true that quite a few of those hats are ones you don’t know anything about. Small business owners normally get into business because they have a dream to pursue, not to worry about the day-to-day details of running a business.

To solve that problem, you hire quickly for areas you don’t know anything about. Sounds good right? Not so fast …

  • Are they qualified? When you don’t know anything about the position you’re hiring for, you don’t know if the person (or consultant) is qualified to take on that role. For example, if you’re thinking about hiring someone to look at your financials, do you want a bookkeeper or a CFO? Or somewhere in between? There are several differences, including experience, duties and even pay.
  • How do you measure success? If you don’t know anything about the subject or position you’re hiring for, how do you measure success for that individual? How do you know your expectations and proposed timelines are reasonable?
  • Have you checked all the boxes when it comes to hiring? Another thing to consider is the entirety of the hiring process. Maybe you found the perfect candidate and you want them to start right away. But have you taken into account the necessary steps when it comes to hiring? There are several forms to fill out, items to consider and that pesky thing called onboarding. All of this has to be taken into account before you make that hire.

We’re all for hiring (whether it’s an employee or a consultant) to help you run your business. Just make sure you do the research and know what you want and need in order to help your business run more effectively.

You don’t take your financials seriously.

Having up-to-date, accurate financials is of paramount importance. If you don’t, you’re in for a world of hurt. Without it, you don’t know how much money you’re making (or losing), nor can you even begin to understand the basic state of your business.

Further, you won’t be able to make strategic business decisions and set a course for the future of your business. Plus, financial information is pretty important to creditors, investors and buyers.

Only 40% of small businesses say they are “extremely” or “very knowledgeable” in accounting and finance. (source)

Bookkeeping is not as simple as just throwing numbers into a spreadsheet. You need to understand basic accounting terminology in order to make informed decisions. For instance, just because your books say there’s money coming in, doesn’t mean you’re in the clear. Cash flow and profit are two different things.

The solution? Invest in accurately tracking your business financials. Find a consultant or hire an accountant (once you’ve done your research) who can help you navigate your current situation and also look out for potential pitfalls.

You don’t have accountability.

Success matters to small businesses, especially in the early stages of your company. But what does success mean? Can you define it in a measurable way? Can your employees?

Businesses work when roles are defined and individuals understand their performance expectations. That’s why it’s important to have KPIs (key performance indicators) in place for your company and your employees.

It’s here where we remind you that KPIs are quantifiable measurements for critical success. Quantifiable is key as it helps you track progress and whether or not you’re accomplishing your goals. If you’re not tracking, then you have no idea if it’s working or if you need to find ways to improve.

You don’t value your product … or yourself.

Let’s start with the basics … one of the keys to starting a business is that you have a product or service people actually want. Once you’ve got that, the next step is pricing it effectively.

Often, business owners play the cheapest option game to get their product into the market. This path undermines the real value of your product. Plus, it’s a lot of work to come back from under pricing your product.

Take the time, instead, to do some market research and really find a price point that shows the value of your product and also allows for market entry. Also, ensure the price point you’ve chosen will help your business financially … which is why it helps to have up-to-date financial information from the beginning.

But let’s not forget about YOU. In addition to your product’s value, you have value as the business owner. At the beginning you’re trying to do it all. It’s important to realize when you’re in too deep and you need help.

“Your new venture demands that every aspect is handled by someone who understands what they’re doing. And no amount of good intention will turn an IT specialist into a good bookkeeper.” (source)

The moral of the story here is to value yourself. Value your time, know your strengths and why you got into business. Let someone whose passion is for numbers or marketing or HR or whatever the subject may be handle the tasks you need done. And remember, if you don’t want to hire someone full time, you can always outsource it.

You’re not playing by the rules.

To say there are more than a few updates to rules and regulations affecting small businesses each year would be an understatement. Did you know, for instance, the General Services Administration annually updates the federal maximum per diem rates? This update would affect any business that has employees travel for work.

Or did you know that several states and cities are now introducing mandatory paid sick leave policies? If you have workers, your policies (if your business is in any of the affected areas) will have to align with this new ruling.

These are just a few examples of the rules and updates small business owners face on a regular basis. Many of these rules directly affect your financials, how you report information about your company and its customers and the benefits and rights your employees get.

That’s why it’s important to know what’s going on and ensure you’re in compliance. Find a consultant who can stay on top of these updates and regulations and ensure your business is following the rules.

 

 

 

 

 

 

R&D Tax Credit: Benefiting Small Businesses

Happy New Year! Today we bring you good news for your 2016 tax return. Yes, we’re still talking about last year … all the way up until you file those tax forms.

One of the ways your company can potentially save is through the use of the research and development (R&D) tax credit (here’s your refresh). R&D tax credits were made permanent at the end of 2015, thanks to the Protecting Americans from Tax Hikes Act (PATH) and went into effect in 2016. Included in the PATH act were some significant enhancements.

What does this mean for you? Many small to mid-sized businesses are now able to take advantage of the R&D Tax credit for the first time. Get excited.

What kind of enhancements are we talking about?

One of the big deals related to the PATH Act’s enhancements is eligibility for small business.

For the purpose of this act, small businesses are less than $50 million in average gross receipts for the three prior years.

Prior to the PATH Act, R&D tax credits were only used against regular tax. Basically this was a hindrance for small to mid-sized businesses. Why?  Small to mid-sized businesses are often subject to alternative minimum tax (AMT).

As a reminder, AMT is a tax system that limits certain tax benefits taxpayers receive in order to ensure they pay at least a minimum amount of tax. Now, however, R&D tax credits can be used to offset AMT as well.

Anything else?

Yes! There was another enhancement introduced related to “qualified small businesses.” These are businesses with less than $5 million in annual gross receipts and that have had gross receipts for no more than five years.

Why does this matter? Well these particular small businesses will now be able to use R&D tax credits to offset the FICA employer portion of payroll tax, up to $250,000 per eligible year.

There are specific stipulations about how a qualified small business goes about doing this. For more specifics, contact your tax professional or you can always reach out to us!

The moral of the story

This is a big deal, especially for smaller organizations and startups, as you’ll no longer have to wait until you’ve generated taxable income to take advantage of the savings.

If you think your organization may qualify, or if you have questions, feel free to ask. We’re always here to help.

A version of this post first appeared on EideBailly.com.

 

 

Why Legal Help Matters

Guest Blog by Adam Wogsland, Attorney at Law, Severson, Wogsland & Liebl PC

 If you plan to start a business, you should get a lawyer involved right away. Why, you may ask? Well, here are just a few of the main reasons:

  1. Lawyers Save You Money.

Successful businesses know the value of time and allocate resources accordingly. We’re going to go out on a limb here and guess that you probably didn’t get into business to read legal documents. So you can spend the time reading laws and regulations to put your company on solid legal footing, or you can hire a lawyer who already knows how to do it.

For instance, every new business needs to form an entity. If you don’t form your entity correctly from the start, you’ll be dealing with it continually until it gets fixed. And as fun as that sounds, a lawyer could have helped you do it correctly the first time. The time you save and the peace of mind you have knowing it’s done right will outpace what you will spend on an attorney.

Still don’t believe us? Here are a few tips on how to save money by hiring a lawyer:

  • Get a lawyer involved early. If you get a lawyer involved late, chances are that the lawyer has to fix something or that a filing deadline has been missed. This means lost time on your side and more money to pay for your lawyer’s time to fix the problem. As a general rule, prevention is cheaper than fixing, and both are cheaper than fighting.
  • Be organized. If you do not have your thoughts and documents organized, then you will be spending money on your lawyer organizing everything for you. Organization by a lawyer is an inefficient use of your money.

 2. Lawyers Reduce Your Risk.

Successful businesses reduce risk in all forms. Without a lawyer, you may not choose the right type of entity. You may undercapitalize. You may fail to observe corporate formalities. You may not properly organize governance of your entity. You may not properly govern your entity. You may not file the correct regulatory or licensure documents with the state or federal government. You may not structure and operate your entity in a way to avoid personal liability. You may not have the right documents memorializing the relationships between the owners in the event of a dispute. You may not plan for impactful contingencies like disability, death, bankruptcy, termination of employment, or divorce. You may not implement measures to reduce your employment liability risk. Lawyers will help you plan for and reduce these risks.

The risks are real. Liability protection is not automatic. Courts may disregard the corporate entity and allow creditors or plaintiffs to pierce the corporate veil if your entity is not structured and operated pursuant to the law. This means you (as the owner of the business) will be held personally liable for the entity’s debts and obligations. To drive this point home, this means your judgment creditor can reach your personal assets: personal property, deposit accounts, pets (yes, you read that right. Pets are personal property), cars, boats, homes (in North Dakota, any equity over $100,000.00), ERISA qualified plans like IRAs (in North Dakota, amounts over $100,000.00 for each plan; $200,000.00 in the aggregate), and wages.

3. Lawyers Provide Non-Legal Value.

Successful businesses know the value of relationships. We’ve seen many different clients in many different business spaces confront many different issues. Even if it’s not a legal problem and we will not be directly involved, we can help you find someone who can help. It’s good to have a network of trusted business advisors on your side.

Adam Wogsland is an attorney licensed in North Dakota and Minnesota and concentrates on helping small and medium sized businesses. This information is for informational purposes only. Please contact a lawyer to discuss the specifics of your situation.

 

 

 

 

R&D Is Here to Stay

We’re ringing in the New Year with more good tax news. Congress has permanently extended the research and development (R&D) tax credit, retroactively as of January 1, 2015. Get excited.

What’s the R&D Tax Credit?

The intent of the R&D tax credit is to encourage and incentivize businesses to conduct qualified research and development (hence, its name). Thanks to the PATH (Protecting Americans from Tax Hikes) Act of 2015, which was signed into law by the President on December 18, it’s now a permanent piece of tax law.

Why is its permanency a big deal?

This story starts long ago, when the R&D tax credit was first enacted as a temporary credit in 1981. Since that time, the credit has remained temporary and has expired 16 times. The R&D tax credit is great for supporting business, but its continual uncertainty has rained on a lot of people’s parades.

So it’s looking sunny from here?

Pretty much. The now certain future of the R&D tax credit is considered a big win for businesses who are investing in research and development. Further, the legislation gave another gift and broadened the impact of the credit for many small to mid-sized businesses.

Under the previous rules, the R&D tax credit was only used to offset regular tax, which limited many small to mid-size businesses from using the credit. The reason? A number of small to mid-sized businesses are subject to alternative minimum tax.

Alternative minimum tax (AMT) is a tax system that limits certain tax benefits for taxpayers with high income in order to make sure that those taxpayers pay at least a minimum amount of tax.

However, as of January 1, 2016, “Eligible Small Businesses” will be able to use the R&D tax credit to offset AMT. So what exactly constitutes an “eligible small business”? Well, it’s a business with less than $50 million in average gross receipts for the three preceding years.

But wait, that’s not all. There’s also a “Qualified Small Businesses” provision for those businesses with less than $5 million in annual gross receipts and having gross receipts for no more than five years. These “qualified” small businesses can use the R&D Tax credit to offset the FICA employer portion of payroll tax, capped at $250,000 for each eligible year.

Confused? Trust us, this is a good thing, especially for start-ups. These new provisions will allow you to use the credits now, instead of waiting until you are able to generate taxable income. This could result in more immediate cash benefits for many companies.

5 Things You Didn’t Know Your CPA Could Do

Picture1By: Amber Ferrie, Partner

I laugh out loud when friends ask me to do their taxes. If they only knew that I don’t do my own! The initials behind my name (of which I have way too many: CPA/ABV/CFF, CMAP) can be deceiving. After all, not all CPAs specialize in tax and not all auditors work for the IRS. Below are five areas you may not have known your CPA can offer assistance in.

Forecasting. We’re not talking about channeling your inner weather girl/guy. Rather, we’re talking about mapping your future into something that banks and potential investors can relate to. Forecasting allows you to have a better indicator of things like profitability, growth rate and capital needs going forward. By having a business advisor help you forecast your business, you can plan ahead for things to come and, hopefully, take a lot of guess work out of the equation.

Dashboards. No, not the one inside your car. It’s a reporting tool that takes your critical success indicators (CSIs) and the metrics behind them and turns them into dashboards. These dashboards are highly customizable to whatever drives your business. As CPAs we have a sweet place in our hearts for spreadsheet applications like Excel, but to efficiently manage a company you shouldn’t have to dig through rows, columns and tabs to find the key pieces of information to analyze operations. These CSIs should be identified and then made readily available to management so that timely decisions can be made.

Strategic Planning. Is your accountant ready to think outside the box? While boxes often remind most CPAs of spreadsheets or tax forms (which get our hearts racing), a few outsiders in the group would rather help you plan strategically. They have a knack for analyzing dilemmas and finding solutions that can propel an organization to the next level, overcome a barrier or solve personnel issues that can be dicey. Strategic planning sessions can involve various levels of management and ownership, be on site or offsite in a retreat setting. The options are endless, and the outcomes pay dividends.

Personnel. North Dakota is in a unique position with a strong economy and a low unemployment rate. This leads to a workforce issue, where employees are difficult to find and expensive to train and retain. Positions that are even more difficult to fill can include CFOs and controllers who provide strategic advice, guidance and direction for your organization. Without these positions filled, the organization may suffer from a lack of timely reporting and decision making. Outsourcing this accounting and/or finance function is another possibility, allowing for real-time data and guidance while you’re still in growth mode.

Exit. Here’s a question … why did you get into business in the first place? Was it to be your own boss? Try something new? Make your first million? Take a company public? Your business advisor can help you plan for your end game, even if you’re just beginning to run the race. CPAs are not only the go-to for the life cycle of the business, but can also help you ensure a proper exit/next step when the time comes. Whether your goals are to transition to a family member or employee, sell to a third party, or start a new gig, your CPA should be able to assist you in that process. (Of course, I wouldn’t mind talking about your new Arizona retirement home on site or discussing how to make your first million over a round of golf or with a cocktail.)

The important thing is to truly use your accountants and CPAs to their full advantage, making them your business advisor, rather than just someone you visit once a year.

Eide Bailly can help with any of the opportunities listed above. Learn more at www.eidebailly.com/ebpossible or call 701.239.8500.

Your End Game: Selling Your Business

By: Amber Ferrie, Partner

No matter whether you’re just starting out, already getting going or ready to take the next strategic step, it’s important to think about your end game when it comes to your business.

If your end game is to sell, it’s crucial to consider your potential buyers and determine the best solution for you and your company as your business matures. In other words, it’s never too early to start thinking about who might want to buy once you’re ready to sell.

Think about it like the dating game. Let’s meet our potential dates … er, buyers:

The Employee
For some owners, it’s appealing to sell directly to current employees. This is very attractive to owners who want to take care of their people, and there are various strategies to structure these types of transactions, such as an Employee Stock Ownership Plan. However, relatively few employee groups have the financial capacity to pay an owner what the business is worth.

The Outsider: Private Equity Group
real estate_sold signAnother reliable option is to sell to a private equity group (PEGs). PEGs are similar to the date who wants to flip a house. They invest in a home (company), make improvements and then, hopefully, sell for a gain. Each PEG is different and some groups like to have the owner involved in continuing to grow the business and business value. This gives both the PEG and the owner an upside in that the owner remains involved in the success of the business while the PEG is assured that they have maintained corporate knowledge and time to make the transition successful.

The Family
There are many great companies with success stories about long-term family ownership. However, family ownership can also see its fair share of problems when the company value declines due to the next generation not being able to run the business properly. A transition to family needs careful guidance, structure and often benefits from an unbiased third-party consultant.

One option to consider is a family office. A family office operates similarly to a private equity group, but is unique in the fact that it is established solely to manage a family’s wealth. As a result, family offices control their own wealth and are not required to work with other investors, which allows for quicker decision-making and more flexibility with respect to investment timelines. Furthermore, these organizations are less restricted in their selection criteria for investments.

So who would you choose? There are several options consider, each with their own set of pros and cons. However, even with all of these viable options, in the end the majority of sales are actually to an outside party. This could include competitors, or other potential buyers.

Regardless of who you choose, it’s important that you prepare for your date in advance, to ensure a smooth transition process. Here are a few simple steps to help you be date/transition ready:

  • Get real. It’s important to get a realistic expectation of what your business is worth now and how to increase that value.
  • Gain understanding. It’s helpful to truly understand what your transaction options are. You can do this by arranging to talk with a transaction advisor who can introduce you to PEGs, investment bankers and brokers.
  • Be on the lookout. It’s never too early to start exit planning. You may face a challenging and highly competitive market when the time comes to sell your business. Even if a potential exit is years away, it’s important to focus now on key business issues, develop a planning process for the future exit and coordinate services with a wealth management team.

A version of this article originally appeared on BizWest.com.

Imagine the Possibilities

By: Jenni Huotari, Partner, Director of the Possibilities Center

I’ve been an accountant my whole career. Believe it or not, I love numbers and everything about them. I love what they can tell you about a business, how they can project the next stage of growth or predict what needs to change.

Numbers can also tell you about a community. For instance, the population can tell you that Fargo and the surrounding communities are growing. Area organizations can tell you that our business community is thriving.

Essential to this business community is the entrepreneurial and startup movement. This movement is awesome … awe inspiring. These individuals are developing their own products, filling needs in our community, becoming their own boss. They’ve taken risks and jumped in with both feet to create, envision and, hopefully, succeed.

That’s why I’m proud to head the newly formed Possibilities Center within Eide Bailly’s Fargo office. Its concept is simple: helping businesses imagine what’s possible.

Through a variety of services, we’re helping businesses and startups get out of the day-to-day operation of their organization and instead concentrate on doing what they love. These services include:

  • Business planning
  • CFO 2.0
  • Bookkeeping Services
  • Tax Services
  • Technology
  • Your End Game

Update_Handout_Startup Week_2015_Page_2

 

We’re excited to help these small to mid-sized businesses and entrepreneurial startups grow and thrive in our community. Let’s imagine what’s possible.