Should I Stay a Sole Proprietorship?

Sole proprietorships account for the largest number of businesses in the United States. According to the most recent data from the Internal Revenue Service, nonfarm sole proprietorship tax returns totaled approximately 25.5 million. For comparison, C Corporation tax returns were around 2 million.

While extremely popular, every small business owner eventually has to answer the question: Should I stay a sole proprietorship or should I incorporate?

Sole proprietorships have several advantages, but they also come with a few significant disadvantages. Let’s run through both so you can make your own pro/con list to help you make the decision on whether or not to incorporate.

Advantages of Being a Sole Proprietorship

Simple to create– The business can operate in the owner’s name or a fictitious trade name. Creating a trade name only requires filing with the local government authority and obtaining the necessary business licenses.

No formal filings – Sole proprietorships do not need to hold corporate meetings, keep minutes or file annual reports. If you just start running a business – a landscaping business for example – you’ve become a sole proprietor without having to notify any government authority.

Owner control – The owner in a sole proprietorship has 100 percent control and makes all the decisions.

No unemployment tax – The owner does not have to pay an unemployment tax on himself. However, payment of unemployment taxes are required if the business hires employees who are paid regular wages.

Can comingle personal and business funds – Since the owner and the business are the same, one checking account can be used for both business and personal transactions. Although a single checking account is allowed, it’s still a good idea to separate business and personal transactions.

Owner keeps all profits – A sole proprietorship only has one owner;  and the owner reports all profits from the business on his/her tax returns.

Disadvantages of Being a Sole Proprietorship

Personal liability – The owner is personally liable for all the debts and contractual obligations of the business. This liability is unlimited. An owner could lose all business assets plus personal assets in the event of a loan default or adverse ruling from a lawsuit. The risk of losing a home, car, savings accounts and other personal possessions is the most serious disadvantage of a sole proprietorship.

Difficult to raise capital – Sole proprietorships cannot raise capital by selling shares of stock or interests in the business to attract outside investors. A business that needs to attract more capital to support growth will have to convert to a corporate form.

Harder to get bank loans – Banks prefer to make loans to companies with several years of business credit. Sole proprietorships must rely on the creditworthiness of the owner.

Survivability– Sole proprietorships rarely survive the death of the owner. Since the business is usually run entirely by the owner, there is hardly ever any management level person to take over the business. It simply ceases to operate.  However, with advance preparations, a business owner can pass on the business to their heirs.


Filing a tax return for a sole proprietorship is fairly simple. The only requirement is for the owner to include a Schedule C with the personal tax return.

Schedule C is a summary of the business’s income and expenses. Losses shown on a Schedule C can be offset against other income the owner might have from other sources.

Should I Stay a Sole Proprietorship?

As a business grows, the owner will eventually face the decision of whether to incorporate or stay a sole proprietorship.

The main issues that affect this decision are liability risk and the need to raise funds.

When a business starts to borrow money to expand or finance growth, the risk to owner’s personal assets goes up. If you find yourself in the situation where you need to raise capital to expand or for growth support, then that is the time to consider the change. In addition, if you are in the situation where you need to begin adding employees, you should consider incorporation. Employees can come with their own host of liabilities and incorporation can help you manage that risk.

Because they’re simple to form and don’t require filing complicated legal documents, millions of business owners use sole proprietorships to get started. But, once they begin to grow – and risks to personal assets begin to increase – it’s time to ask yourself the question: Should I stay a sole proprietorship? The answer: looking into incoporation is the right next step.

Key Financial Metrics for Small Business: The Numbers You Need to Track

Just as drivers watch the instrument panel on their cars when driving, small business owners should continuously monitor the performance metrics of their company. An owner needs to know what’s working and what’s not. That’s part of managing a business. Just like it’s part of driving a car.  A water temperature gauge that goes into the red zone needs immediate attention; same with a financial metric that indicates the company is running short of cash. Key financial metrics for small business fall into four primary categories:

  • Profits
  • Liquidity
  • Leverage
  • Efficiency

Within these four categories, there are seven core metrics that act as the most important key performance indicators when it comes to cash flow:

Key Financial Metrics for Small Business

Measures of Profits

Revenue – This may seem obvious, but without revenue, nothing else happens, especially profits. And all revenue starts with sales. So, the first metric to watch is your most recent sales number; it could be daily, weekly or monthly, depending on the type of business,

Are your sales at the level they need to be? Comparisons of sales figures to the budget will help to keep everyone on course to reaching the revenue goal.

Gross profit margin– The gross profit margin is an early measure of a company’s efficiency of operations. It shows how efficiently a company uses its raw materials and direct labor to make and sell a product or service at a price that produces a gross profit.

The gross profit margin must be enough to pay all fixed overhead expenses and make a profit. In some industries, a gross profit margin of 25 to 30 percent may be enough; others need a gross profit of 50 percent or more. A calculation of a company’s profit plan or break-even revenue level will determine the required gross profit margin for your business.

EBITDA – It’s nice to know you’re making a net profit, but the real test is EBITDA. That’s earnings before deductions for interest, taxes, depreciation and amortization. EBITDA reveals the true operational profits of a business without the effects of financing costs, taxes and non-cash accounting entries.

Monitoring EBITDA is important because it is an indicator of the cash flow from operations.

Liquidity to Support Operations

Current ratio– Your current ratio is current assets divided by current liabilities. The timing of the cash flow cycle from inventory to receivables to cash is not perfect. Inventory can be slower to sell and turn over; customers can take longer to pay their bills.

On the liabilities side, expenses and bills to suppliers have specific amounts and due dates – there’s no mystery, there. For this reason, you need more current assets than current liabilities. A good, comfortable ratio is to have $2 in current assets for every $1 in current liabilities. Having less could indicate that you may begin to have problems paying bills on time.

Tracking the trend of your current ratio can provide advance warnings of upcoming cash flow problems, especially if the ratio drops below 1.5.

Financial Leverage

Debt-to-equity ratio – Some debt is good; it increases a shareholder’s return on investment. But too much debt can be dangerous. Lenders have strict schedules for principal and interest payments, and they expect to receive them, regardless of the company’s cash flow availability.

Efficiency of Operations

Accounts receivable aging – The accounts receivable aging metric keeps track of all unpaid customer invoices and/or credit memos. While most customers will pay their invoices before due dates, sometimes clients can run into problems – whether their own cash flow issues or poor record keeping – which keep them from paying you in a timely manner. You should try to track invoices in 30 day buckets (30 days overdue, 60 days overdue, 90 days overdue, etc) so that you can use this information to prioritize collections procedures.

Inventory turnover– Inventory represents a significant investment for most businesses, so turning inventory into sales quickly is important. Turnover is the number of times a company buys, sells and replaces its inventory in a year. It is calculated by dividing annual cost of goods sold by the average inventory level. Depending on the industry, inventory turnover rates can reach up to 10 to 12 times per year.

A decrease in turnover could be a signal that some products are not selling well, and prices should be marked down to move them out.

Owners who regularly monitor these key financial metrics for small business will have a good sense of the pulse of their business, while enabling them to quickly spot potential problems and take corrective actions before they become detrimental to the health of your business.

It takes money to make money: Low Debt-to-income Ratio and specific loans that can help grow your small business

For small business owners there are many options for using debt to meet your small business’s specific needs.

Small business bank loans totaled nearly $600 billion in 2015, according to data from the U.S. Small Business Administration reported in U.S. News: “At the same time, lending from alternative sources such as finance companies and peer-to-peer, or P2P, marketplace lenders amounted to $593 billion.”

For some small business owners, borrowing money taking on debt can be a nerve-racking exercise. The business owner may have to put personal possessions, such as their homes, their cars, or other assets up as collateral for the loan. But being a smart business owner means that while you may take out loans and acquire debt, it is important to make sure that such loans can be paid back through your business activities.

This is where your debt-to-income ratio (DTI) comes into play. You can calculate DTI by dividing your business’s monthly total recurring debt by your gross monthly income. DTI is typically expressed as a percentage.

For example, if you want to purchase a newer, bigger property for your business, and your business generates some $100,000 per year in profits, it may be reasonable to purchase a property that costs $200,000; however, it might be problematic for you to purchase a property that costs $20,000,000.

Having a low debt-to-income (DTI) ratio is ideal.  A low DTI typically means that your business isn’t highly leveraged. It is also an indicator that your business would be able to survive in the event that your sales slumped. However, if you have a high DTI, you would be very much in trouble in the event of a recession or if your industry or business experiences a sudden major slowdown. A 43% DTI is typically the highest ratio that a person can have if they are applying for a mortgage; anything higher would be too risky for a bank to take on. For small businesses this is a good rule of thumb too.

Solutions for all businesses

There are many types of loans that your small business can take out that will allow you to keep your DTI in check so you don’t go overboard and find yourself swimming in an endless stream of debt. Here are examples of some specific types of loans that might benefit your business, depending on your business’s need:

1. Equipment Loan

If you run a construction business that requires you to purchase a bulldozer, you can likely purchase the product with an equipment loan. Typically you will have to make a 10% to 20% down payment.  And, the equipment itself could very well be your collateral. Your loan could come from a direct lender or from the equipment manufacturer itself.

2. Commercial Mortgage Loan

If you are looking to purchase, develop or even refinance property for your business, such as a warehouse or a storefront, you can take out an SBA loan, similar to a residential mortgage. As U.S. News reports, “Loans that are guaranteed by the Small Business Administration are usually 2 to 2.5 percent higher than the prime residential mortgage rate.”

3. Business Credit Loan

Similar to how credit cards work, you receive a maximum amount of money that you can borrow. A strong selling point for business credit loans is that you can use such credit for any business need. This means you may not feel limited and may be able to sprinkle money across many business verticals from leasing property to purchasing supplies.

4. Invoice Finance Loan

If cash flow is a major problem for your business because you have performed services or sent out goods that haven’t been paid for yet by your customers, you can finance this through companies that will cover your gaps in invoicing for a fee and interest.

Also remember, you can take out loans that have to be paid back in varying increments of time. If you don’t anticipate your business being profitable for a few years, you can take out a medium-to-long-term loan.  Loans with these terms may get you through your initial period of setup.  They can also help you make payments to your staff or cashflow required assets. Typically with longer term loans you repay less money per month because payments are spread over a longer period.  But, you must remember that interest compounds over time. So, in the end you will be paying more money in interest with a longer term loan.

Of course it may be beneficial to shop around to make sure you are getting the best rates. It is also important to note that with a low debt-to-income ratio it will be significantly easier for you to attract loans at interest rates that aren’t exorbitant.

Everything You Always Wanted To Know About Income Statements But Were Afraid To Ask

Editor’s Note: This is one of an eight-part series about key financial terms all business owners should know.

Chances are you’ve heard the word “Income Statement” at some point during your entrepreneurial journey. Maybe you’ve even reviewed one from your CPA or CFO (If so, bonus points!). But, if your eyes glaze over a bit when you hear the term.  Or, if you’re not entirely sure how an income statement is different than a balance sheet.  You’re in the right place.

What is an income statement?

It’s a financial report that shows a company’s financial performance over a specified period of time.  Typically income statements are reported on a monthly, quarterly, or annual bases. However, a report can address any time period. An income statement shows revenues and expenses from operating and non-operating activities, along with net profit or loss. Income statements are sometimes referred to as “profit and loss statements.”

Why are Income Statements Important?

Income statements provide an easy-to-review report of your company’s performance over a period of time. Comparing multiple income statements for multiple periods of time can give you insight into how your business is doing overall. For example, if sales are up but expenses are up even more, your net profit may be down.

How can Income Statements Impact Financing Options?

Because they show performance over a period of time, many lenders use income statements to assess how a business’ sales and net income are changing over time. For this reason, many potential lenders require multiple income statements to review.  They could potentially request three or more years’ worth, depending on the sum you’re financing or raising.

If you’re an entrepreneur exploring financing options, start reviewing your income statements. It’s best to review with your CPA or CFO, but if you don’t have one, use your accounting software to generate the monthly, quarterly, and annual reports now so you’re well-versed on your company’s financial health before you begin conversations with outside parties.

Ask An Expert

Bradley Klingsporn is a practicing CPA and Co-Founder/Co-Owner of Aardvark Wine Lounge in Green Bay, Wisconsin, so he knows a thing or two about why income statements are important to entrepreneurs.

Why is it important to have a handle on your income statement if you’re looking to raise capital?

Klingsporn: Not every company is a tech startup that can operate in the red for years and keep raising capital. Most businesses need to show profits or at least growth to convince investors to give you their money. Keeping close tabs on your income statement can help you know when it is a good time to raise capital and when it might be best to wait a few weeks if you expect some significant improvements.

What’s the biggest misunderstanding about income statements that you see from other entrepreneurs?

Klingsporn: Many small business owners have a difficult time differentiating regular ebbs and flows from trends. There is no hard and fast rule to determine whether a bad month is just a bad month or if it’s the start of a trend (the same can be true of good months). The income statement is a starting point that is used to begin understanding where the business is, but requires additional information to determine what that means for the future. For example, restaurants and bars will often see increased sales in months that have five weekends – to interpret these increases as growth could lead an owner to make capital improvements or hire additional staff that they may not be able to afford when the following month sees a decrease with only four weekends.

Give Me More

Just like it’s easier to travel in a foreign country when you know the language, it’s easier to raise capital (or secure any kind of funding for your business) when you’re familiar with key financial terms and their real-life applications. Want to get up to speed on your finances? Check out the other articles in this series which cover: turnover ratiodebt to income ratiopayables turnover ratiodebt service coverage ratiocurrent ratiocash flow statements, and inventory turnover ratio.

Everything You Always Wanted To Know About Cash Flow Statements But Were Afraid To Ask

Editor’s Note: This is one of an eight-part series about key financial terms all entrepreneurs should know. 

Never heard the term “Cash Flow Statement”? The good news is that it’s almost exactly what it sounds like! And, by the end of this article, even a financial-terms-novice can feel comfortable reviewing and discussing a cash flow statement with his or her CPA or CFO.

Feeling comfortable with a cash flow statement is imperative, because these reports are critically important to your business. In fact, CPA and entrepreneur, Bradley Klingsporn, founder of Green Bay’s Aardvark Wine Lounge, says “Many small business owners and small business accountants believe that the cash flow statement is more important than an income statement.” That’s because, “[if] the business is making huge profits, but doesn’t have anything in the bank, it won’t be able to pay its bills and it could still go under. Keeping a close eye on the cash balance is as, if not more, important than keeping an eye on the bottom line.”

What exactly is a cash flow statement?

A cash flow statement is a financial report that shows the amount of cash and cash equivalents used by a company in a given period. Cash flow statements contain three main categories. The three categories are cash flow from:

  1. operating activities
  2. investing activities
  3. financing activities.

Taken together, these three groups account for all cash coming into and going out of a business.

Why are cash flow statements important?

Staying on top of cash balance is critical to the health of a business.  This is of particular importance if you’re a business who is likely to raise money at some point. And knowing your “runway” — or how long you’re able to operate with the cash you have on-hand at the moment — is key.

When reviewing cash flow statements, entrepreneurs should be asking if the cash flows are sustainable. “If cash decreased in the period, was this because of a change that period? For example a capital purchase or large debt payment.  Or is this going to persist? For example, regular loan payments)?” Klingsporn asks. “If cash decreases are expected, is there a need for additional cash inflows? If so, how will the business get the additional cash?”

How can cash flow statements impact your financing options?

Cash flow statements allow potential financing partners to assess a company’s general health, including how quickly your company will be able to pay off outstanding debts. Although it’s not imperative to have a high cash flow to borrow money, lenders may favor companies that do. The more positive a cash flow statement looks, the easier time you likely to have securing favorable financing options.

Can I create my cash flow statement?

If you’re in the early stages of looking to raise capital and have never put together or reviewed a cash flow statement, Klingsporn’s advice is to bring in an expert. “Hire an accountant,” he says. “If you don’t want to do that, the basic process is to identify cash inflows and outflows that don’t affect net income and expenses and income that doesn’t affect cash. The former would include principal loan payments, cash from new debt, and purchases or sales of capital equipment. The latter would include depreciation and changes in receivables or payables. If that sounds confusing, see the first sentence.”

What’s next?

Just like it’s easier to travel in a foreign country when you know the language, it’s easier to raise capital (or secure any kind of funding for your business) when you’re familiar with key financial terms and their real-life applications.  Check out the other installments in this series covering The next installment of this series, where you will learn everything you wanted to know about turnover ratiodebt to income ratiopayables turnover ratiodebt service coverage ratio and current ratio

Want a Better Credit Score? Put Banking and Credit Card Alerts to Work

Staying on top of your personal and business credit scores is important if you plan to apply for business financing. Setting up banking and credit card alerts can make the job easier.  Better still, it can also potentially lead to an improvement in your credit rating.

If you’re not already using banking and credit card alerts to your advantage, here’s what you need to know.

How Alerts Can Help Improve Your Credit Scores

Personal and business credit scores are calculated differently.

Your personal FICO score, for instance, is based on payment history, amounts owed, length of credit history, types of credit used and new applications for credit. Business credit scores focus on different factors. The Experian Business Credit Score looks at your credit obligations to suppliers and lenders, legal filings involving your company and public records. Dun & Bradstreet’s PAYDEX Score is determined by how well your business pays its bills.

While personal and business credit scores can measure different things, alerts can help you stay on top of both by encouraging you to be more conscious of your accounts and credit activity. When you’re paying more attention to your credit, you may become more intuitive about what can help or hurt your score. (That’s a good thing, considering that 72 percent of business owners don’t know their business credit score, according to a Manta survey.)

Getting Started With Banking and Credit Alerts

Your bank and credit card company may allow you to set up many different kinds of alerts or notifications. When you consider the things which are most likely to impact your credit scores, specific alerts may prove useful:

  • Bill due date notifications
    Payment history is the central factor in influencing your PAYDEX business credit score; it also carries the most weight for personal credit scores. Set up bill payment alerts to help you avoid late or missed payments, which could negatively impact your credit score. Even better, ensure you pay your bills on time by pairing alerts up with automatic bill payment through your bank.
  • High credit card balance notifications
    After payment history, your credit utilization is the next most important factor for scoring personal credit. Credit Utilization is the percentage of your total credit line that you’re using. Carrying high balances or maxing out your credit cards works against you. Set up an alert to notify you when your balance hits a certain threshold.  This may help you put the brakes on spending.
  • New transaction alerts
    Fraud can affect both your personal and business credit scores if someone steals your credit card or taps into a line of credit you’ve opened and runs up a balance. An easy way to help combat that is to set up an alert to let you know when a new debit or purchase transaction posts to your bank or credit card accounts.

Remember to Check Credit Regularly

Checking your own credit report won’t hurt your score.  So this is something you should do at least once per year, if not more often. Review your credit to look for things that alerts might miss — a new account opened in your name that you don’t recognize or a credit reporting error that might be hurting your score. If you spot an error, dispute it with the credit bureaus reporting the information. Doing so could get the information corrected or removed, giving your credit score a lift in the process.

Looking for other ways to improve your credit rating?  Check out these articles.

Everything You Always Wanted To Know About Debt-Service-Coverage Ratio But Were Afraid To Ask

Editor’s Note: This is one of an eight-part series about key financial terms all small business owners should know.

Financial literacy is important for all business owners, but it’s absolutely critical for those who are considering raising money in the near future. Here’s everything you need to know about debt-service coverage ratio (DSCR), with an expert weighing in on why it matters.

What is debt-service coverage ratio?

Debt-service coverage ratio is a measure of a company’s ability to pay its debt based on available cash flow. It is calculated by dividing net operating income (noi) by total debt service.”Debt service” is a term that refers to all obligations due within one year. This includes short-term debt and the current portion of long-term debt on the company’s balance sheet.

Why is debt-service coverage ratio important?

Debt-service coverage ratio is important because it shows investors and lenders that you have positive cash flow. Having positive cash flow shows that you have made smart managing decisions in balancing your debt obligations and operating expenses. If you DSCR calulations show that you have a DSCR of less than one (1), that means your business has negative cash flow.  A negative cash flow indicates, essentially, that you will need to borrow money to pay off existing debts.

How can debt service coverage ratio impact your ability to raise capital?

Though varying economic conditions and differences from industry to industry impact the minimum DSCR an investor or lender will look for, generally speaking, the higher your DSCR, the easier it will be to raise capital. If your DSCR is below one (1), raising or borrowing might prove incredibly difficult — or, at least, prohibitively expensive. Conversely, if you have a high DSCR — say, above 1.5 — you can use it as a bargaining chip. Knowing that your company may be considered an attractive investment gives you the power to seek out favorable terms from potential investors and lenders.

How can you improve your debt service coverage ratio?

To better your chances of getting a loan or other infusion of capital, you will need to increase your DSCR.  Doing this may not be as difficult as you may think. One thing you can consider is looking into increasing your net operating income to cover expense.  Another is decreasing your operating expenses. With both of these, you can use the additional cashflow to pay off existing debt. All three of these – increasing your net operating income, decreasing your operating expenses, and paying off some debt – help to improve youre DSCR.

When looking to increase your net operating income, think of some ways you can quickly and easily increase your revenue such as turning excess inventory into extra revenue, leveraging tactics your customers already trust to increase your sales, and making sure you are taking advantage of every lead or potential customer that comes your way.

Giving a boost to your revenue is only one way to increase your net operating incoming.  Another quick and easy way to accomplish this is by decreasing your operating expenses. Believe it or not, there are a number of ways you can decrease operating expenses and free up some of your capital – from revisiting vendor relations and strategies, to splitting core and convenience ordering to improving your negotiation skills, you’re sure to find an area to cut expenses.   You can also find ways to increase employee productivity, and improve processes.

Ask an expert about debt-service coverage ratios:

Vincenzo Villamena, managing partner of entrepreneur-focused CPA firm Global Expat Advisors, breaks down why debt-service coverage ratio is so important for entrepreneurs to track.

Why is debt-service-coverage ratio an important metric investors and lenders consider before funding a business?

Investors and lenders use the DSCR to see if you can make your monthly loan payments.  It is also used to determine how much they can lend you safely on any economic condition. The DSCR makes you more likely to qualify for a loan and receive better terms for the loan, such as lower interest payments and higher borrowing amount.

What’s a solid DSCR business owners should strive to maintain while growing a business?

Generally speaking, a DSCR of 1.2 or better is considered good.  Although, I have seen loans given to companies with 1.1 ratio. I’ve also seen when the economy or an industry is down, the banks requiring a ratio of 1.5 or better.  So there is always a variance.

If an entrepreneur has a DSCR below 1, what explanation might he/she be able to offer to would-be investors and lenders to ease their concerns?

If the DSCR is below 1, there needs to be a good explanation to give to investors and lenders, such as a lot of R&D costs, hirings or a recent product launch in which the true revenues of the company do not reflect the YTD or LTM financials.

What’s next?

A key to success as a business owner is never being afraid to admit what you don’t know. Don’t know as many financial terms as you’d like to? No problem! Check out the other installments in this series covering The next installment of this series, where you will learn everything you wanted to know about turnover ratiodebt to income ratiopayables turnover ratio and current ratio

Six Business Financial Housekeeping Tasks to Get Done Before Year End

There may be several weeks left in the year before you officially close the books and shift your focus to next year, but getting a head start on your financial housekeeping tasks can ensure you end this year on solid financial footing — and start the next one with a plan to succeed. Here are six business tasks to complete before you ring in 2019.

Check your retirement plans

If you don’t have a self-employed retirement plan, there’s still time to establish one, and make contributions to it. In turn, you may also find opportunities to reduce your tax burden. As Forbes explains, a sole proprietor who has a solo 401(k) in the 2018 tax year may be eligible to contribute up to $60,000 to it (based on net business income, and the business owner’s age).

If you prefer a retirement account with little costs and administrative burden, consider establishing a self-employed IRA (SEP IRA). Many providers allow you to complete account set up, funding and management entirely online.  And, you may be eligible to contribute (the lesser of) 25% of your business income, or $55,000, in 2018.

Meet with your accountant (or find one)

If you don’t have consistent contact with your accountant, set aside time to discuss your business’s current financial reality.  You should also discuss  your business goals, future plans and anticipated challenges for the remainder of this year, and next. If possible, schedule the meeting to take place at least two months before year-end.  Doing this will give you enough time to act on any recommendations for optimizing your finances before this year ends.

When you meet, let your accountant know of any additional financial moves you are considering that could have tax ramifications.  Things that could fall into this category include buying or selling new equipment or assets. Beyond the numbers on your financial statements, ask your accountant for any recommendations to improve or optimize your business finances, based on the current and future plans you’ve shared.

Confirm your estimated payments are accurate.

If your business is a sole proprietorship, partnership or S corporation, the Internal Revenue Service says you may be required to make estimated tax payments if you expect to owe $1,000 or more when you file your annual tax return. Corporations have to make estimated tax payments if they expect to owe $500 or more when filing their tax return. (Depending on your business, you may also be responsible for payroll, sales, and excise taxes).

If you picked up new clients or sales were stronger than expected, you may owe more tax than originally estimated. Ideally, your quarterly estimated tax payments are made in equal increments.  But the IRS does put the onus on taxpayers to estimate income as accurately as possible to avoid penalties.  They also expect you to ensure it remains correct based on business or tax law changes that may impact it.

Confirm tax paperwork for independent contractors you’ve hired.

If you’ve hired independent contractors over the course of the year, the IRS requires that you have their completed Form W9 (and that you keep it on file for at least four years). Sites that make it easy to hire virtual help also make it simple to hire contract help.  However, they can also make it difficult to keep in touch with contractors who are several states (or countries) away.

Regardless, the IRS also states that employers who pay an independent contractor $600 or more over the course of one year “may have to file Form 1099-MISC, Miscellaneous Income, to report payments for services performed for your trade or business.” Allow yourself the time to collect the paperwork you need from contractors so you’re prepared to issue the Form 1099-MISC tax forms. Note that you may be required to send them for payments by late January 2019.

Conduct an employee satisfaction survey.

Employee engagement may not seem financial in nature — until you consider the impact that disengaged employees have on business productivity, customer experience, and culture. Experts at Villanova University’s School of Business report that increasing your investment in employee engagement efforts by just 10% can yield $2,400 in profit (either directly or indirectly) from each employee, each year. Engaged employees are also 87% less likely to leave their jobs.  And, having engaged employees may reduce costs associated with employee turnover, hiring and training.

Take a pulse on employee engagement in your company with a basic online survey tool and questions that address what consultancy firm Deloitte says are the five pillars of employee engagement: Whether employees feel their job provides opportunities to do meaningful work, involves hands-on management with positive coaching, guidance and support, a positive work environment and culture, and trust in leadership.

If you find that you have engagement issues, your survey can provide the insights you need to address issues.  Once you know where problems may lie, you can work to improve employee productivity, engagement and satisfaction next year.

Organize your receipts and financial statements.

You have several months until tax season officially arrives.  But, the earlier you compile the receipts, mileage logs and cancelled checks you’ll need to support business-related tax deductions and credits, the less you’ll have to scramble as tax season approaches. If you rely on a bookkeeper or accountant to prepare your business tax return, ask his preference for how you should organize and transfer tax-related documents, to streamline the process (and better manage the billable hours you’re charged for their tax preparation services).

How to Handle Orders without the Danger of Too Much Inventory

You need inventory to fill orders, so having plenty of everything on hand might seem smart. There would never be a stockout and closing sales would be as easy as sending someone to the warehouse. But maintaining too much inventory may undermine your business.

Holding considerable inventory can force you to hold more product than is necessary. What you might consider, instead, is only stocking the amount of merchandise you need, and the inventory turns ratio (ITR) can help you find the inventory levels for your business.

Availability is good, but has a cost

High availability means buying, carrying, and storing a lot of product. Inventory costs money, so you end up using capital that could otherwise help grow and sustain the company. Too much money in inventory can also affect your need to finance and how much you might need.

And there are other problems: Inventory ages, not only on the books, but on the shelves. You may have products fall out of support, become discontinued, get damaged, or otherwise lose value. Then there’s the cost of storage space and increased headcount to manage the additional product.

This all adds up to money your business will have to spend on maintaining a constantly full inventory level.

Increasing inventory turns

Instead of more inventory, consider replenishing stock more frequently. So long as there are enough products on the shelf to satisfy orders that will come in until the next delivery, you can keep customers happy and reduce costs.

This is why you need to look at the ITR. ITR shows how frequently you replace stock over a given period – such as each month, each quarter or each year.

Calculate inventory turns by dividing the cost of goods for the sales you make in a period by the value of your average inventory over the same period.

The idea is to push inventory turns as high as you can to make better use of that inventory.

Setting the right turns level

Finding the right ITR can be a challenge. If you drive turns too high, you may miss filling orders in a timely basis because you don’t have the products you need. Too low, and it means cash is locked up.

Balance inventory turns with sales, vendor stock availability, supplier reliability, and minimum order sizes. Sales fluctuations like seasonality or outsized importance of certain products can also make it tougher to monitor and control ITR. Arrival of new stock in a timely manner becomes more critical.

There is no magic way to know what ITR will be right for your company, but understanding how ITRs work may help you test stock levels and optimize for your operations.

4 Smart Tech Solutions for Cash Flow Management

Small businesses are increasingly using technology across disciplines to grow, attract top talent, and sell products and services. So, applying a digital approach to cash flow management is a natural next step. Four types of tech, in particular, may prove invaluable for improving your business’s cash flow efficiency.

1. CRM Software

Customer relationship management (CRM) software is useful for maintaining customer records, but there are more applications to CRM for small businesses. CRM software can improve cash flow by improving your sales records, and by ensuring that your business focuses its energies on the most profitable activities consistently. For example, that may be attracting and converting a new customer base or taking proactive steps to retain existing customers.

2. Automation

Automating cash flow systems may yield multiple benefits. First and foremost, it’s a time-saver. Rectifying accounts becomes streamlined when your accounts payable and accounts receivable systems are automated.

Automation can also make it easier to monitor cash flow within your business accounts. If your cash flow system is centralized, you can easily see – at a glance – how much cash you have on hand and what payables or receivables are still outstanding.

Additionally, automating can make settling accounts easier for your customers and vendors. When payments to vendors are automated and customers are able to receive and pay invoices via auto payments, it’s possible to smooth out cash flow bumps and know when money is coming in or going out.

3. Virtual Accounts and Digital Payments

Virtual account management is a way to manage multiple business financial accounts under a single umbrella. Your virtual account can be tied to various physical bank accounts in order to act as a gatekeeper. Payments to vendors and payments received from customers move through the virtual account, making reconciliation less of a hassle and resulting in fewer banking fees.

Accepting digital payments through virtual accounts provides another tech-driven cash flow enhancement. Allowing customers to pay using PayPal, Apple Pay, Google Pay and similar payment apps can make settling invoices more convenient and it may offer the added bonus of allowing you to avoid expensive credit card processing fees.

4. Data Analytics

Big data analysis isn’t just for large corporations; small and medium-sized enterprises can also leverage data analytics for improving cash flow.

By analyzing trends in your payables and receivables data, you can generate more accurate cash flow forecasts. Specifically, you can drill down and see how something such as developing a new product or implementing a price change might affect your cash flow. Data analysis can also help you identify and plan for seasonal dips in cash flow, or find out-of-the-ordinary activity that could impact cash flow negatively. Bottom line, data analytics can help you be more insightful when it comes to cash flow management.

7 Mistakes New Small Businesses Make

A great idea is only one part of what makes a business successful.

From not researching your market to not vetting or training your employees, there are plenty of pitfalls small business owners can make that could be easily avoided with a little knowledge and preparation.

Here are seven common missteps to avoid in your small business.

1. Not performing market research.

Making sure customers want your product or service enough to pay for it is an important piece of initial market research. So is having what you’re selling priced at a profitable point, and one that doesn’t price you out of the market.

The Small Business Administration (SBA) says low sales is one of the top reasons a small business closes. That’s why they recommend conducting market research before starting a small business by looking at the following factors:

  • Demand: Is there a desire for your product or service?
  • Market size: How many people would be interested in your offering?
  • Economic indicators: What is the income range and employment rate?
  • Location: Where do your customers live, and where can your business reach?
  • Market saturation: How many similar options are already available to consumers?
  • Pricing: What do potential customers pay for these alternatives?

It is also important, once your business has been established, to continually look into each of these areas to ensure that your product and services portfolio continues to be relevant and profitable.

2. Not preparing for a cash flow crunch.

Many small businesses face cash flow problems at some point in their early stages. In fact, WePay reported in May 2017 that 41 percent of businesses had experienced cash flow issues in the past year and 16 percent had experienced payment fraud.

Projecting when a cash flow disruption might happen and making sure you have access to funds, or enough in reserve, can be difficult. That’s why the nonprofit SCORE has a variety of free financial templates for small businesses, including a cash flow budget worksheet.

3. Not securing financing before you need it.

Even if you start with personal funds and cash from friends and family, sooner or later you probably will need additional funds.

While 57 percent of new businesses used personal savings, according to the SBA, 73 percent of small firms used outside financing. The key to securing financing is planning ahead.

There are a variety of options including:

  • business lines of credit
  • short-term loans
  • medium-term loans
  • short-term line of credit
  • medium-term lines of credit
  • SBA loans
  • equipment financing
  • merchant cash advance
  • invoice financing
  • crowdfunding
  • personal credit cards

4. Not having a website.

It seems almost unthinkable, but according to a Clutch business research survey, 29 percent of all small businesses in the U.S. still don’t have websites. And in the Midwest, 42 percent of small businesses still don’t have websites.

Websites like and make it easy to create your own business site without having to know coding.

5. Not hiring the right team for your culture.

Hiring employees with the right skillsets is important, but so is finding employees who fit with your company’s culture. Look for their passion for the industry, not just their interest in the position. Ask open-ended questions to get a sense of how they think, versus how they respond, especially if your company rewards creativity and problem-solving skills.

Some companies will have perspective employees do a “test run” before an official hire is made to help the job candidate and company decide if the fit is right. For example, why not try 30-days of contract work with a potential new employee before making them full time? Just be sure to check your local employment laws beforehand.

6. Not understanding your creditworthiness as a business.

Unlike your personal credit score which tends to be based on the same financial information across providers, there isn’t one single business credit score methodology that covers everything for lenders.

For example, Dun and Bradstreet rates businesses via a viability rating, a supplier evaluation risk rating, a delinquency predictor score, a financial stress score, a D&B rating and its most well-known Paydex score.

The Paydex score looks at your payment history for the past two years and rates your company. Scores range from 1 to 100 based on your promptness to pay bills.

A score of 80 to 100 is good. The reason, if you score an 80 it means you promptly paid your bills on time. Anything higher means you pay your bills before the payment was due. And, a score lower than 80 indicates a late payment.

Business credit scores help pinpoint your company’s creditworthiness by looking at how much credit your business has used, type of customers, and if you pay your bills on time.

There are plenty of other factors and systems including Equifax Small Business, which doesn’t give a single score, Experian’s Intelliscore Plus and FICO Small Business Scoring Service.

The better your scores, the better the lending rates and your borrowing power may be. Concerned about your company’s credit score? Here are some ways to start improving your business credit score.

7. Not learning the basics of accounting.

Most entrepreneurs don’t start a company because they love accounting. But without some basic skills, it can be hard to keep track of what is going on financially. Even if you offload everything to a bookkeeper, you still need to understand how to read financial statements, and understand what income statements and balance sheets are saying.

Thanks to mobile technology, business owners now have a variety of accounting apps designed for businesses that provide easy ways to understand your business’s finances and to keep on top of accounting.

12 Must-Have Accounting Apps for Small Business Needs

Statistics show that 40 percent of small business owners consider bookkeeping and calculating taxes the most unappealing aspect of running a business according to About 47 percent of respondents hate the financial costs, and 10 percent dislike having to keep up with ever-changing regulations.

Apps for Critical Business Needs

Today’s intuitive apps for businesses offer simple ways to keep on top of your business records while commuting, traveling to clients or working at home. You can do payroll or generate W-2 forms while waiting for the game on New Year’s Day. You probably won’t need all 12 of the must-have apps, but you can choose the apps that are best suited to your business, company size and other criteria. Some of the must-have business accounting apps for today’s lean and mobile businesses include:

1. WagePoint

WagePoint, the online payroll service for businesses, solves one of the most challenging issues for business owners–keeping accurate payroll, deducting the right amounts, filing reports and delivering payroll on-time. There is no business task that is more mission-critical. The online service, which you can access from a mobile app, handles direct deposits, new hire onboarding, contractor payments and deductions for local, state and federal taxes. The service also handles the onerous duties of deducting court-ordered withholding and printing W-2 forms at the end of the year.

There are no setup fees. Semi-monthly and bi-weekly payrolls cost a $20 base fee and $2 for each employee. Weekly payroll costs a $10 base, and quarterly payroll costs a $75 base fee. Payroll preparation typically generates costly errors when self-prepared. A professional online payroll service can ensure that employees are classified correctly, and the service keeps you informed about evolving labor regulations.

2. Expensify

The Expensify app, which automates expense reporting, is designed for staff members and outside salespeople. The app offers one-click receipt scans, next-day reimbursements, automated workflow approvals and automatic synchronization with your record-keeping software. It’s also used by some of the most respected companies in the world including Uber, Forbes, Snapchat, Square, Pinterest and CBS Interactive. Additionally, it can even flag receipts that require staff approval. The cost for the service is $5 per month for each active user during the month.

3. Xero

The Xero mobile bookkeeping app allows you to manage your business from any iOS or Android device. You can upload your receipts with your phone’s camera and review the receipts of your staff to approve expenses. The app allows you to store critical customer information, send invoices immediately after completing work and set custom levels of access. You can try Xero for free and choose from Starter, Standard and Premium plans that run between $9 and $70 per month.

4. Google Analytics

Google Analytics, while not exactly an app, is a critical service that allows you to monitor your apps, improve the customer experience, increase conversion rates and gain critical insights into your marketing efforts. The basic service is free for anyone to use, and you can measure the impact of any business apps that you’re using.

5. FreeAgent

The FreeAgent app is great for non-accountant types who need a reliable app to track expenses, monitor payments and sync your bank account. Data is always backed up to the cloud, so you never lose information.

6. Gusto

Payroll is such a critical area for businesses that this list includes two services. The second recommended payroll app, Gusto, advertises that its service is easier to use than other payroll services. The plans start at $45 per month, and it might be a better deal for some companies depending on their needs. The app makes it easy to enroll in health benefit plans, deal with IRAs and 401(k)s and file monthly or quarterly payroll reports at local, state and federal tax departments.

7. Wave

The Wave app, which handles business invoicing, is a great investment for small business owners because you can use the app to send professional-quality receipts, invoices and payments. Even neighborhood businesses can look like multimillion-dollar companies. The app accepts credit cards and bank payments, so your company gets paid faster. The most amazing thing about this app is that it’s free–free software for invoicing, bookkeeping and receipt scanning. However, you will pay for the POS system that allows you to accept mobile payments. Each credit card transaction costs $0.30 plus 2.9 percent of the total, and bank debits cost 1 percent of the total with a minimum charge of $1.00.

8. Pushover

The Pushover app for simple notifications works with Android, iOS and desktop devices, and you can use it to send unlimited push notifications. The app comes with a free seven-day trial, and the system integrates with other Web apps, software and almost every programming language.

9. Need a Budget

The Need a Budget app is ideal for businesses that must focus on cash flow to survive. Planning and tracking expenses can make the difference between having enough inventory for the busy season and struggling to earn enough income to cover basic expenses. It’s easy to get caught in the trap of reduced cash flow because of slow-paying clients, financing difficulties and seasonal slowdowns, but this intuitive app can generate a budget based on uploaded bank statements. If cash flow is a problem, this app offers an ideal solution for proactively financing your business through careful budgeting.

10. FreshBooks

The FreshBooks mobile app is free to try and works with both Android and iOS phones and tablets. The app includes almost all the features that are available on full versions of the software, so you can handle your record-keeping chores while on the go. The basic plan costs $15 per month, and you can bill up to five clients. The Plus plan–at $25 per month–allows you to bill 50 clients. If you have more clients, the Premium plan costs $50 per month. Also under this plan you can bill and manage up to 500 clients. FreshBooks includes time-tracking and project-management tools. It costs $10 to add each employee to the system.

11. Nutcache

Nutcache, This app is perfect for invoicing and time management needs. This will help your business to create an unlimited amount of invoices, adding your logo, and sending them in bulk to your various client. The features that it offers are for expenses, reporting, and online payments. It will also allow you to communicate with customers globally with its multilingual interface!

Their pro plan is $5 per user/per month when paid on an annual basis, and $6 on a month to month basis. The other plan is the Enterprise. This will cost $12 per user/per month on an annual basis, and $15 when paid monthly.

12. Kashoo

The Kashoo app facilitates using the cloud to keep the books. Kashoo offers a 14-day free trial, and the powerful app is ideal for smaller businesses and owners who have little or no experience in bookkeeping. Owners can choose from monthly or annual payment plans, and the software comes with four introductory videos that walk customers through basic entry tasks. The app doesn’t include any predefined or custom documents, but seven invoice templates are included. There are no hidden fees, and the plan costs $19.95 per month.

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