Tag Archives: financial

Business Strategy , , , 2 Comments

Seven Resolutions for 2011 Part 1 of 2

by

Happy New Year!  You had to see this coming,  so here we go with the resolutions.  We’re at the top of the year and it’s a time-honored tradition to look forward and plan to succeed.  I hope the list that I’ve pulled together inspires you to get busy.

1.   Set financial goals  

Whether you’re 35 or 55,  financial goals are a must.  Establishing these goals as a Freelancer presents a  unique challenge,  because our incomes are often neither predictable nor secure.  A fickle revenue stream makes adequate planning even more of an imperative.  We must get our arms around the money thing and take as much control as possible.  Our ability to live a comfortable life throughout our lives depends on it.  The idea is to avoid going broke,  especially in the elder years.  Those with a  steadily employed spouse have a huge financial advantage,  while those who are single or married to a fellow Freelancer have more variables and hence  a more challenging mountain to climb.  Consider what you want your balance sheet to look like in five years and make an appointment to discuss your financial wish list with your accountant.

2.   Develop a budget  

You may be expert at monitoring and tracking expenses,  but developing a budget encourages one to anticipate the year’s fixed and variable financial obligations,  as well as revenue that is likely to be generated.  One budgeting objective can be to prepare for the inevitable peaks and valleys in a Freelancer’s revenue stream.  When do you typically bill the most hours and when the least?  Which annual conferences do you like to attend,  when and where are they held and what is the cost?  Where and when is it (or might it be) advantageous to advertise?  Have you been mulling over the idea of making upgrades in certain of your marketing materials?  What about your credit needs—do you need to apply for another card to help float strategic expenses,  or can you cancel one?  When can you make contributions to your retirement fund and what should that amount be?  Can you take a vacation this year,  when can you take it and how much can you spend?  The idea is to figure out how to pay for what you must do and also cover a couple of items from your wish list,  to reward yourself.

3.   Review business priorities  

Should you form a strategic partnership,  to give your business entrée to a new segment of your market?  Should you aim to sign more new clients,  or focus on obtaining repeat business from previous clients?  Or would it be wiser to try wringing more billable hours out of your current roster?  Which clients might be most amenable to which strategy?  Also,  should you do more teaching and/or speaking this year? Which institutions will benefit your reputation and client list the most?

I’ll be back to complete the list of resolutions next week. 

Thanks for reading,

Kim

Administrative , , 5 Comments

Year End Tax Reducing Strategies

by

President Obama’s tax plan will probably pass before Congress recesses for Christmas. The $250K + crowd can once again relax as they glide by in their Lincoln Navigators,  splashing mud on the hoi polloi.  Nevertheless,  those of us who are somewhat closer to the earth (flat on our backs financially speaking, perhaps?) still have a few defensive measures to take,  regardless of whether Bush’s tax cuts get extended by Obama and Congress.

Get the money now

In addition to giving a nice boost to your cash flow to help with Christmas shopping,  this is also a most clever way to approach clients and entice them to either pay on time,  finally make good on a late payment or even request payment a couple of weeks early.  You are not chasing money,  this is all about tax planning… Your accountant would like you to show X dollars in 2010,  for tax purposes.  The client will benefit by cleaning up accounts payable as the year ends.  That’s how you’ll phrase it when you speak to the finance director and ask that your outstanding invoices,  late or early,  get paid by 31 December.

Or, take the money later

Did you buck the trend and have an extraordinary year in 2010,  but expect less than thrilling billables in 2011?  In that case,  income deferral is your best strategy.  Mail invoices in January and sign contracts that require an up-front payment after the calendar turns.

Pump up the write-offs

If you have a few dollars available,  then stock up on office supplies before 31 December.  If you have more money,  then take advantage of the sales and purchase big-ticket items such as office furniture,  a more powerful computer,  a good camera,  or software that will help you manage business more effectively.  For example,  the right accounting software will make tax planning and business financial analysis easier.  Evaluate whether what you’re using now is sufficient for the needs of your business.

You get to choose how and when the expensive purchases will be written off,  either slowly over a period of years as depreciated assets or immediately,  by using the Section 179 deduction.  You can make that decision at the April 2011 filing.  Conversely,  if you suspect that you will come up short on deductions next year,  shop after the new year.

Review your retirement plan

If you’ve thought about establishing a Solo 401K,  do it by 31 December.  Add extra dollars to your pre-tax funded and tax-deductible SEP IRA or Solo 401K (if you’re age 50 +,  remember the catch-up contribution feature of the latter).  Exercise the profit sharing or salary deferral benefits of your Solo 401K if you’ve had a lucrative year and would like to keep some money away from the tax man for a few years.

Review your choice of business entity

Especially if you operate as a Sole Proprietor,  try to squeeze in an appointment with a business tax attorney or an accountant,  so that your financials can be reviewed and you can talk about where your business is now and what you’d like it to become in the future.  Do you envision selling your business,  or passing it to a family member? Perhaps you would be better served if you changed your business entity to either an LLC or S  Corporation.

2010 Tax Tactics

  • The health insurance deduction for Freelancers,  including Sole Proprietors,  LLC members (single or group),  general partners and S  Corporations (single or group and owning 2% or more of the stock),  will reduce taxes owed on income generated by self-employment and also the amount of self-employment tax owed.  Health insurance premiums are 100%  tax deductible if one is self-employed and does not participate in  a group health insurance plan.  Health plan premiums to insure your spouse and dependent children are also fully deductible.  However,  your business must show a Schedule C profit in order to claim this tax benefit.  Businesses that show a loss will not be eligible for this deduction.
  • Those launching a new business venture in 2010 will have a more generous start-up expense deduction of $10,000.00 ($5,000.00 is the usual limit).  File your registration paperwork toute de suite.
  • The Section 179 deduction has been increased to $500K for 2010 (and 2011).  Maybe you need commercial property for your business,  or a company vehicle or two?
  • If you’ve been thinking about hiring an employee and can find someone good within two weeks,  a one-time hiring credit can be taken in 2011 for an employee hired by 31 December, 2010.  The tax credit will equal 6.2%  of wages paid,  not to exceed $1000.00,  for each employee who is retained for one full year.  Your new employee(s) must have been either unemployed for the 60 days that preceded the hire or underemployed,  having worked a maximum of 40 hours in the 60 days preceding the hire.  Family members hired are ineligible for the new hire tax credit.

Thanks for reading,

Kim

 

Administrative , Leave a comment

Follow the Money: How to Hire a Bookkeeper

by

Some business owners hire a bookkeeper because they loathe even the thought of diving into financial waters.  Their strengths are  “front of the house”  sales and marketing and not “back of the house”  accounting and finance.

While it is  smart to outsource what you know you won’t do and thus make sure that what must be done will be  done,  ignorance of business financial management  is unwise.  You may hate it,  but little by little you must learn to understand those docs and interpret what they reveal about how to effectively manage your business.

Another practical  way to keep tabs on business finances  (and make sure that your bookkeeper is honest)  is to do a monthly bank reconciliation.  Does the record of deposits and withdrawals make sense to you? Are the signatures on checks and withdrawal slips correct and authorized? Some businesses hire a separate bookkeeper to perform this function,  so that an unbiased  pair of eyes can scrutinize the financials and will be unafraid to question anything that looks questionable.

That said,  an expert bookkeeper will save you money and aggravation,  keep you out of tax and legal trouble and contribute to the profitability of your business.  It is imperative that this person is chosen carefully.  A dose of good luck is also very helpful! Here is what you can do to find the best bookkeeper for your business:

  • Learn the types of businesses that he/she has worked with.  It is useful to hire a bookkeeper who has worked with clients in your industry (but not direct competitors) or with clients of a similar profile (e.g. Freelancers).  An understanding of expectations and common practices,  typical problems and good solutions will then be brought to the table.
  • Ask  about your candidate’s  education,  certifications and professional society memberships.  Education and associations reflect the level of professionalism and priority that the candidate places on his/her career.  This quality will  likely be demonstrated in work done for clients.  See also the candidate’s web site and/or LinkedIn page.
  • Inquire about the candidate’s  employment history prior to going into business independently.  Previous employment in corporate finance is a big plus.  Especially if  this person will take charge of your books,  you’ll want someone who knows how to analyze the financials and make smart recommendations.  You want more than a data entry clerk.
  • Tell the prospective bookkeeper what you need managed.  Do you need payroll and payroll tax services,  handling of accounts payable and receivable,  financial statements and tax prep for the accountant (data into QuickBooks),  or complete management of your books?
  • Confirm the fee schedule.  Depending on your location and the services requested, expect to pay $50-$100/hour.  The more services you need,  the more per hour you will pay.
  • Find out your candidate’s availability.  Many bookkeepers have a full or part time job, or a second business.  Make sure your candidate can be there when needed.
  • Ask for references and follow up.

Best of luck and thanks for reading,

Kim

Administrative , , , Leave a comment

When to Hire a Bookkeeper

by

Occasionally,  I am asked to refer a bookkeeper.  The one time I was able to make such a referral,  the whole thing blew up in my face.  I introduced a former  student in the business plan course that I sometimes teach to a restaurant owner friend.  Unfortunately,  Ms. bookkeeper  flaked out and never came through.  The restaurant owner and I are still pals, thank goodness.  The bookkeeper’s contact info has been deleted from my files.

A couple of months ago,  a member of one of the CEO forums that I lead hired a bookkeeper whom I’ve known for 20 years (the referral was not mine).  Because my colleague is a smart cookie,  she decided to review the financial statements that were generated by her new bookkeeper.  Right away,  there was a problem.  A significant data entry error was made— yet somehow the bookkeeper managed to make the numbers balance.  Fortunately,  my colleague  was able to recognize the problem and call  it to the bookkeeper’s attention.

The interesting thing is,  her now former bookkeeper is highly regarded by many.  She has a sub-specialty in forensic  bookkeeping and regularly testifies in court proceedings.  So I guess that’s where she learned all the tricks! My colleague was mortified.  Thank God that was not my referral.

I deduce from these incidents that a  reliable bookkeeper may be difficult to find.  A sharp and trustworthy bookkeeper is a hugely valuable  asset for your business.  They can spot and resolve  money drains  and alert you to money saving practices  that you never knew existed.  A good bookkeeper is worth their weight in gold.

Like many Freelancers,  I keep my own books.  I  invoice,  make  deposits,  pay bills,  record transactions in Excel,  receive the 1099s and pay the taxes.  June 15 is fast approaching, quarterly tax time folks!  I manage to stay on top of things.

Nevertheless,  at some point it may become too expensive to perform certain administrative tasks.  Working and looking for work are the primary focus of the self-employed.  Our time and energy are best applied to making sales calls,  networking,  prospecting,  staying visible and generating income through our projects.  When administrative tasks encroach upon the time available to make money,  it then becomes  cost  effective to outsource those functions.

It is the responsibility of every business owner to develop a basic understanding of the  financial statements.  Our ability to make sound business decisions depends upon it.  A good bookkeeper (and accountant) will further analyze the data and provide more sophisticated advice for you.

Because they possess intimate knowledge of your financial history and flow of business capital,  bookkeepers know where you are most vulnerable and know  where the bodies are buried.  A dishonest or sloppy bookkeeper can really hurt you.  The best way to protect yourself  is to know what’s  going on,  so that like my colleague,  you can read  financial  statements and periodically review your bookkeeper’s  work.  You’ll  have a fairly good idea of what the numbers  should  look  like and know what questions to ask  if  things don’t quite add up.

To get started on the path to understanding financial docs,  I recommend  that  you  first examine the Pro Forma Cash Flow statement.  It’s like  a  household budget and is easy to read.  Pro Forma Cash Flow gives  reasonable  estimates of expected business income and expenses  for  a given month.  Go next to the Cash Flow Statement,  which might be generated either monthly or quarterly.  This document shows what was actually spent on business expenses and how much money was actually paid to you.

From those statements,  move on  to the Profit and Loss.  It’s  not much different from the Cash Flow Statement.  Notice that several categories on the P & L are also found on the  Schedule C tax form,  Profit or Loss  From a Business.  Lastly,  take a look at the Balance Sheet and notice it’s resemblance to a bank statement.  The Balance Sheet records your net worth at a given time,  the tally of business assets and liabilities,  and is usually generated quarterly.

Next week,  learn what you can do to make sure that the bookkeeper you hire is both a top drawer professional and appropriate for your business needs.

Have a good week,

Kim

Business Strategy , Leave a comment

Man Up and Lead! Part I

by

I’ve been on the board of a small arts organization since 2006.  I love the organization and its unique mission; I really like the founder, who is a painter and 88 years young;  I appreciate that I’ve been able to lend energy and creativity to a wonderful organization;  I like my fellow board members.

The downside is, we’ve got money problems.  We’ve also got a couple of marvelous opportunities, at least one of which will be realized.  The other faces an uncertain fate.

At a committee meeting last Wednesday,  our executive director announced that the organization has a $60,000 budget shortfall.   With some creative cost-cutting,  he feels that the deficit can be reduced to $40,000.  How did that happen? In September,  his financial report was cautiously optimistic.  In November he said little about money, except to note that he expected a certain level of donations to be received.  Now,  as of January 1, we’re rather deep in the hole.  Ouch!

In truth,  the signs were there.  Examination of past balance sheets reveal distressing losses in our investments and income.  For reasons I do not understand, the full board does not view monthly P & L statements;  we receive only 6 month “condensed” statements.   There is insufficient documentation of expenses, e.g.  a couple of lump sum categories called “personnel” and “outside fees and services”.

Why the finance committee (and the executive committee) has allowed the ED to be so cavalier with the financial records, I will never know.  Why the full board sat in meetings for years with eyes glazed over while he droned on about budget projections,  expenses and donations received and expected—well,  I should have questioned it,  but I was hesitant to rock the boat.

However,  in November ’09 I questioned the “outside fees and services” listed on the P & L and I was given a flip,  off-hand answer that went something like oh that’s for accounting, insurance…and then he drifted off.  I was not pleased with the answer.  No other board member pushed the matter.  But once again my intuition was on target because here we are,  running out of money.

The ED has not spent wisely,  his budgets are a fairy tale and the board (including myself) allowed him to get away with it. The organization’s founder enabled the ED’s bad behavior by writing checks to cover previous shortfalls.  She claims that habit is over,  but I don’t know.  There is a board meeting scheduled this month and I plan to ask a few pointed questions.  I hope that others will join me.  The meeting will be very interesting.

So what is the lesson for business people?  Do not delude yourself about money.  The picture may not be pretty, but going into denial will only hurt you in the end.  Keep accurate financial records and take the time to examine and interpret them.  Use your financials to guide your business decisions.  Cash flow is the level one warning system.  Are the bills paid on time? Is making payroll a struggle? If your business has been cash strapped of late (especially with credit so tight and costly), then look to trim expenses where practical and  renegotiate payments wherever possible.  Next week,  we’ll talk about opportunities.

Thanks for reading,

Kim

Business Plan , , , Leave a comment

Starting A Business? Consider Your Financials Part III

by

Investors and lenders require significant demonstration of your ability to repay money that will be extended to your business.  Lenders will want to know when  your business can be expected to  make a profit,  so they can be shown in yet another way that you will have the ability to repay the  loan.  Investors will want to know when they can expect some ROI.

Both groups will also want to know the rationale for your financial calculations and for what purposes loan and investment capital will be utilized.  The following three statements will answer those questions.

THE BREAK EVEN ANALYSIS

The point in time when sales revenues generated equal business operating expenses is called the break even point. This is an important calculation for a new business,  perhaps  more so for those who seek funding. The Break Even analysis is also useful for established businesses that will launch a new product or service.

The B-E analysis demonstrates how much product must be sold at a given price for the business to stop losing money.  The business owner can then think about the road to profitability.  Investors will be able to think about getting paid back and eventually receiving their ROI.

Refer to your P & L  2 or 3 year projections and get the data for fixed and variable expenses and  gross revenues. Use an Excel spreadsheet to set up your B-E analysis. You will be able to experiment with different product/service prices to learn how much product must be sold at each price point to bring your business to B-E.  So now you have yet another way to help determine pricing.  Excel will also create graphs for the analyses.

FINANCIAL ASSUMPTIONS

When you have completed each of the five financial statements,  it is customary to explain your rationale for calculating things the way you did.  In a new business so much is an educated guess and in an existing business past performance points the way to the future.

Events beyond your control may occur,  an extreme example being the tanking of Lehman Brothers in September ’08 that set off our global financial crisis.  That ruined a whole lot of financial assumptions, that’s for sure!

Give an overview of the financial picture and then discuss the P & L,  Cash Flow,  Balance Sheet and B-E Analysis.  Let’em know you did your homework.  Explain and defend your decisions.

SUMMARY OF FINANCIAL NEEDS

If you seek funding for your business, then you must document for investors or the bank how you will use their money and when you will need the infusions of cash.

Will you use the loan to finance an expansion of the business? Must you buy new equipment, hire employees, increase advertising expenditures or obtain larger office space? Provide detailed info on the costs associated with making it all happen.

Creating a timetable for the roll-out will make you look very prepared, as will including references to the sections of your plan that discuss these actions.  Be convincing as you discuss how these actions will increase revenue and profits and bring in the money needed to repay the loan on time.

There are categories of financial needs:  Working Capital–money you’ll need to keep the cash flow healthy so you can do business as you should; Growth Capital–money used to expand the business and increase profits; and Equity Capital–money to be used for permanent needs, it is offered to investors who will take a risk and receive a piece of the business or dividends.

Next week we’ll take a look at options for the legal structure of your business.

Kim