Why do many business owners find out their business is worth less than they thought?   It is important to take care of the intangibles.  For example, they should have a database of its customers.  Programs like QuickBooks includer vital information such as customer contacts, customer emails and other vital information in the customer master.  The importance of customer profiles cannot be understated.

     The products customers bought, frequency of those purchases and reminders at the time of reordering is information that should be collected for prospects.  Failure to do so could cause large numbers of interested customers to pass through the owner’s hands over the years.  Quotes or callbacks from salesmen should be stored.  Besides being stored, this type of information should be updated.

     Buyers of businesses are looking for more than cash, receivables and inventory.  They would be willing to pay a lot more for solid intangibles.  A thorough and accurate customer database would bring even more value to the seller.

     Many times, the sellers feel that the completion of the sale is the signal for them to disassociate themselves from their former business.  Without the seller staying for a few years to ensure a successful transition, the value of the acquisition can quickly decline.  A potential buyer of qa small company rarely buys unless they intend to bring the existing management on for some time.  Any buyer would have second thoughts if they knew the seller had plans to leave immediately upon the completion of the sale.  The selling process continues even after the seller no longer is the owner.   They would have to stay for a while.  This would maximize the value of the assets sold.

     The owners may have long term relationships with their customers.  Their presence can affect the decision to remain a customer of the buyer.  Otherwise, customers can jump to a competitor without recourse.  The departure of key employees could seriously affect the future success of the buyer.  We can help you take the necessary steps to enhance the value of your business.

Shocking laggard employees often become necessary to offset their feeling of  job security.  Job performance should certainly improve once the employees realize that their job performance is more important than their relationships.

A common denominator of struggling companies is a lack of strong financial reporting.  I have prepared financial statements for the presidents of family businesses.  In many cases, the only number that received any attention was the bottom line.  After noting a profit, that statement was promptly placed in his top desk drawer, never to be seen again.  The absense of any questions/suggestions by the president always puzzled me. In many cases, these individuals were in no position to discuss inventory turnover, days’ sales outstanding or any other numbers or primary ratios.  Failing to focus on the basics, such as profit and loss statements, and failing to pay attention to the cash flow, can only lead to problems.

Another problem could be the absence of a carefully planned budget.  This problem comes to mind in two prospectives.  One $60,000,000 company I worked for had a chief financial officer while I was the controller.  When I brought this concern up to him, his reply was “We use last year’s numbers as the budget”. The question in my mind was “What if expenses could be better controlled by an organized budget process?”

Getting good people is a great goal but 100 times more difficult than conventional wisdom.  Mediocre people predominate  no matter how hard you may try to weed them out.  A monitor system should be put in place to check on their progress.  If a six month sales goal is set, it should be monitored every day.

An extensive control system is extremely important for a company to succeed.  One area that should be included is sales with new customers.  If a company is not growing its customer base it will become a company fighting  just to keep its current customer base.  Other important considerations should include the current bank balance, and how much of the line of credit has been used.  At one company I worked for, the accounts payable supervisor printed checks but didn’t mail them until  he checked the blance at the bank via online system.

Careful monitoring and early intervention are absolutely necessary as opposed to acting later when you see something going off track.  “An ounce of prevention is worth a pound of cure”.  As long as everything appears to be on track, slow reacting could be fatal to a company.

A family member should be tactfully policed or indoctrinated by the principal of the business.  If not, then they feel entitled, which can adversely affectthe morale of the workers.  This could be like a terminal disease for the company.  As a family member, he or she should set an example of the highest level, which nonfamily members should strive for.

• Implementation of a strategic plan and budget and monitoring of the results

• Improvements in the quality and timeliness of monthly financial statements

• Perform a “fiscal physical” to identify all possible cost savings opportunities including all benefit plans and corporate insurance policies

• Develop a cash flow tracking system to improve credit and collections

• Build, train and oversee your accounting department

• Assist with your year end closing and serve as an interim controller if necessary

Certified QuickBooks ProAdvisors are typically CPAs, accountants, small business advisors or consultants who have been tested and certified on QuickBooks.

ProAdvisors help businesses customize QuickNooks for their unique needs and help them get the most out of the software. ProAdvisors are also a great resource if you run into trouble with QuickBooks. ProAdvisor fees are typically reasonable and many businesses feel the investment is valuable.

Small-business owners are different from their counter-part in the large corporate world.  They tend to be hard-working, highly focused, smart and tenacious.  They have to be since businesses with fewer than 20 employees have only a 9 percent chance of surviving a decade.  Some are successful despite themselves, but fail when it comes to the planning stage.  Their tendency to hone intensely on their business results in them neglecting their personal financial planning.

Employee Benefits

They do not implement proper benefits, such as retirement plans, life and disability insurance and health insurance.  Too many small business owners fall into this class.  Benefits are often a low priority when one begins a business.  Costs may be prohibitive and such benefits are not reconsidered, however the absence of such benefits can play a crucial part in the difficulty of recruiting and the quality of new employees.  As a company grows, they may qualify for discounts that would greatly reduce the expense/employee.

Providing for Family

If the unexpected occurs, they have not properly provided for it.  They probably scrimp on disability or life insurance.  They think that because their business may be worth millions, their family will be taken care of after the business is sold.  This could be a very time consuming process and the business could be worth far less without them.

Saving Money Outside of Business

Small business owners may fail to save for their future because they are so focused on their business and pour money and time into it.  Growing and prospering override saving.  This may be why small business owners work far longer than they planned to –well into their 70s and even 80s.  They never drew sufficient cash out so they would have no other choice but to continue working.

Steps should be taken to prevent this outcome.  Retirement plans need to be funded during profitable times and investments made in a diversified portfolio.  Diversification can help lead to a comfortable retirement.

Business Credit and Loans

Many small business owners rely entirely on personal credit to finance their business venture.  They do not use business loans or establish business credit early on.  Personal credit may be the only option when starting a business but steps should be taken as soon as possible to secure proper financing as the business grows.  Unless owners sink their own finances into the business, growth will be stymied.  It is recommended that a minimum line of credit be secured early on in the business name.  This should be increased over time to show banks and other institutions of the ability of their cash flow to support such credit.

Another type of service to help insure good internal control practices would be one surprise bank reconciliation per year.  This will provide a measure of protection over the cash assets.  People who might be tempted to steal from the account will be deterred, with the knowledge that the bank statement will be examined.  This would include the proper procedures of comparing signatures of check signers to those on file, examine the endorsements to check register, etc.

Implementing the above mentioned procedures can help prevent the need for far costlier forensic services.  Such services would be required upon any suspicion of impropriety, and it would be very time consuming.  This would interrupt the normal operations of the business.

Profitability Ratios

The Gross Profit Margin measures your profit at the most basic level.   Is your sales price reasonable based on the cost of what you are selling?  If this ratio is less than one,  you will never make a profit.  If you sell your product for less than it costs, profitability will not be possible.

The Operating Profit Margin measures your profit based on your earnings before interest and taxes.  It measures the efficiency of the business before considering any financing.  When comparing the operating efficiency of similar businesses, this ratio can determine the most efficient one.

The Net Profit Margin is also referred to as the “bottom line”.  It considers all expenses including interest.  The net income is also referred to as the “bottom line”.

Liquidity Ratios

These ratios refer to the ability of an entity to obtain cash to satisfy financial obligations.  Liquid assets would be found in the current assets section of the balance sheet.

The Current Ratio would determine whether your working capital is sufficient to meet your short-term obligations.  A current ratio of 2.0 is a general rule, but this would be subject to the particular industry.  Some industries are more capital intensive.  A current ratio less than 2.0 might indicate difficulty in paying current obligations.

The Quick Ratio or “Acid Test” helps gauge your immediate ability to meet our financial obligations.   It does not include inventory in the current assets.  A Quick Ratio below .5 might be indicative of a shortage of working capital and difficulty in meeting current obligations.

Operating Ratios

The Inventory Turnover Ratio indicates the number of times the inventory “turned-over” during a given period.   A higher ratio would be preferable and indicates that you are not holding an excessive inventory level in your warehouse, and accumulating costs that accompany it.

The Sales to Receivables Ratio measures the turn over of your receivables.  The higher the number the better, which would indicate an efficient collection of receivables.  A ratio that is too high or increasing over time could indicate an inefficient use of working capital.  Like many of these ratios, they should be compared to similar companies in the same industry.

The Days Sales Outstanding measures the efficiency of your collection efforts.  The lower the number the better, and if the number is increasing, more effort should be directed toward collections.

The Return on Assets is one of the most common financial measures and an effective tool to compare the profitability of two companies.  A lower number may indicate that you found a more efficient way to operate through inventory management, quality control, financing, or technology.

Solvency Ratios

The Debt to Worth Ratio may also be known as “Leverage Ratio”.  It describes how much debt is used to finance the business.  It is never advisable to depend too much on debt financing, which can increase risk, and in addition, the related expenses can overwhelm a business.

Working Capital (Net of Current Assets and Current Liabilities) is used to gauge the ability of a company to weather difficult financial periods.   This number, unlike all of the above, is not a ratio but an absolute amount.  It is difficult to predict the ideal amount of working capital for your business, but an increasing trend should be considered a positive sign.

Tax issues and personal liability are the key issues in determining the best format for your business.  Choosing sole proprietorship when you are the sole employee is the simple way to go.  If you have a regular job and work on the side as a consultant, this format would let you write off expenses such as the use of computers, phones and car mileage for your consulting and maybe your home office subject to IRS rules.   The big disadvantage is the lack of protection of your assets.  In a dispute that could lead to a lawsuit, your personal assets are at risk.  The other four forms of entity offer the protection of your assets.

If it looks like your business is going to take off, any of the other four forms would be more appropriate. They shield personal assets from suits against your business.  A C corp lets you set up a medical plan.  Then you can write-off all of your out-of-pocket medical expenses.  If you run a sole proprietorship and file as an individual taxpayer, there are limitations on those deductions (excess of 7.5% of your adjusted gross income).

The tax rates for a young C corp with low income can be lower than those on the other four types of businesses.  The first $50,000 is taxed at only 15% while the subsequent $25,000 is taxed at 25%.  The third $25,000 is taxe at 34%.  However, above $100,000, the tax can be as high as 39%.  To lessen the high tax rate on the corporation plus the tax on a high salary, other options might be more beneficial.

An S corp, LLC or LLP might be more appropriate.  All thre are similar since they are pass-through entities in which case income is only taxed once.  Income flows to the individual owners.  The differences have more to do with legal issues.  Family businesses are often S corporations, while investments in real estate are often LLCs.

It is extremely important to be thoroughly familiar with the world of 1099s.  One surprise for some people is that the self-employed must pay the full amount of payroll taxes, known as self-employment taxes, while a full-time employee typically pays half.

Maximizing deductions, while minimizing the chance of being audited can be simplified by using such software products as Quicken or QuickBooks.

A professional, such as a Certified Public Accountant, stays abreast of any changes, like the recent increase to 58.5 cents allowed, effective July 1, 2008 as a travel deduction.

There are always changes in the tax code you might not be aware of or might have forgotten.  You should have adequate support for all of your deductions.  Such tools as a travel log should support your deductions for travel and entertainment.

Some people may deduct a portion of their living expense but the space must be used exclusively and regularly for work.  You shouldn’t have an exercise bike or TV in that space.

]]> http://precisecpa.info/taxes/are-you-self-employed-and-pay-taxes/feed/ http://precisecpa.info/taxes/the-irs-and-security-theft/ http://precisecpa.info/taxes/the-irs-and-security-theft/#comments Sun, 17 Feb 2008 06:47:29 +0000 admin http://precisecpa.info/taxes/the-irs-and-security-theft/ Many of us have received emails looking like they might have come from the Internal Revenue Service. These requests for personal and financial information are an attempt at identity theft in as much as the Internal Revenue Service never requests such information as personal financial information, PIN numbers, passwords or information to access bank or credit cards in an email.