Financial

To quote an old advertisement for financial software we agree that, “Of all the hats we wear as a small business owner, the accounting fedora itches the most.” We all market our time – so I hope all of you have put those 2005 taxes to bed and are focusing your time on the high priority, high pay off areas of your business in particular, making a profit. At the heart of maintaining a profit is your accounting system. (Ugh, Ugh). Most people get confused and frustrated with their finances and the major cause of the confusion is lack of good financial information.

Your accounting documents provide the structure for helping you make good decisions based on complete knowledge and hard facts. Do you know what your critical numbers are? You need to know them like you know your own birthday.

This is the time of the year to begin the planning process for 2007. The budget is the tool that helps you identify what you plan to spend money on and determine the income potential you want to commit to. Your businesses biggest expense is the money you could be earning but aren’t. Your accounting documents allow you to look backward to the extent required to give proper perspective on your current situation. When you know the profitability of your business and manage it well, then you are in a power position.

It is a perfect time to take a look at how you set your fees or prices on your products; evaluate the hard costs and expenses to run the business and review areas of the business that are out of sink. Don’t wait until January to start making critical decisions, seek the help of your CPA or financial planner. Remember this, more income could be lost, than earned, if you fail to take time to see the difference between what you could have earned and what you actually have. Besides, the value of what you get from your business, can get lost when you feel mired in the unknown.

The Challenge: Make a list of what you think you will need to spend on the business next year, ( New equipment, marketing, software, web site, a new product) so you can start getting quotes or prices to plug into your budget.

The question is always asked, how much should be spent on marketing and advertising. Some businesses start on a shoestring and grow rapidly. Others take hundreds even thousands of dollars and go at a snails pace. While I have never heard a hard and fast answer to how much you should spend, you need a strategy that will produce results for you.

The key here is not how much you spend, but that you consistently reinvest money in your business. Determine how much you can afford, is it $100 or 10% of your gross, or maybe for a new product or service launch you need more.

Here are some rules:

1. Don’t get into bad spending habits, they can kill you. Learn to distinguish between your needs and wants.
2. Know where you are going before you jump in too quickly. Make decisions for new products, services, markets or advertising based on good information. Do your research.
3. Use creative financing solutions. Barter your services in exchange for what you need. Do co-op adverting/promotional programs with businesses that reach your same market. Learn what business loan options are available.
4. Become known in your marketplace as an expert, your customers will send their friends and associates to you. Take advantage of marketing tactics that require more time and energy, then your money can extend your market reach. Write articles for your local newspaper, send a newsletter to your customers with tips or trends they need to know about.

Remember it is the continued investment and perseverance that pay off. Small investments over time produce consistent results.

The Challenge: Get all your accounting up to date and begin your plan for 2006.

Over the past month I have walked several clients in to see the Loan Officer of a local bank to discuss how to plan the growth of their businesses. As business owners it is important to look ahead for not only the needs of the busy last quarter of the year, but also to your plans and projections for the coming year. Most small business owners are under the misconception that bank loans require a full business plan, with projections and a lot of other paperwork and documents. Don’t get me wrong, those things are needed for large loans and investments.

Banks have come to recognize the needs of the small business owner and are making the financing solutions easier. Depending on the amount of credit you need, the application process is shorter and requires very limited paperwork.

For larger short term working capital needs, including the financing of accounts receivable, inventory, or new business acquisitions, the Business Line of Credit can offer you flexibility for business purchases with a revolving credit line and even check access to funds. Your credit availability is continually replenished as balances are repaid, which makes it ideal for working capital needs. It can also offer interest-only monthly payments.

Is SBA Loan Financing Right for You?

Compared with conventional business financing, SBA loans can offer easier qualification, lower down payments, more affordable monthly payments, and full amortization. An SBA loan may be a good choice if you:

• Are starting or buying a new business.
• Have been in business a short time.
• Need additional working capital to finance rapid growth, such as for new equipment, facilities construction or purchasing inventory.
• Need high loan-to-value financing.
• Are unable to obtain conventional financing.

Being prepared and keeping up-to-date, positions you to act quickly on financial needs and/or opportunities. Here are some of the things to have in place:

• Have your accounting records up to date. This is the entrepreneurs’ most important step. How else do you know if you are achieving your goals?
• Are you within budget? Do you stay on top of what is coming in and what is going out? When you are on top of the flow, you are more likely to avoid the pitfalls that consume time and energy, (scrambling to find cash, trying to collect overdue receivables, handling creditors).
• Build a Basic Financial Package for your business; include

1. a Balance Sheet that shows the status of company assets, liabilities and owners’ equity,
2. a Profit and Loss Statement that summarizes the revenues, costs and expenses during one accounting period,
3. a Cash Flow Projection which estimates which money will actually flow into and out of the business. These are some basics; other financial activities may require greater information.
4. Get to know the loan officer of your bank. The better they know you, the more they work to help your business grow.

Staying on top of your business needs is “good business smarts”. Don’t wait until it is too late or you are down to the wire, know what is available for you and be able to act quickly.

The Challenge: Review how close you are to your projected gross profit for this year, 50%, 75%, 80%?

It’s that time of year again. No, not the holly, jolly holiday time but the end of the year tax planning time! So what can you do to keep more of your hard earned dollars in your pocket and out of the IRS’s greedy hands? These ten tax tips might be a starting point. Always remember – be equal parts honest and aggressive, and you will be treating the IRS AND yourself ethically! (Be aware, these tips may not be appropriate for everyone – always get the advice of your tax professional for your individual situation.)

1. Hire your kids

You can pay your child up to $4,850 for 2004 without triggering a tax liability for them. This money is passed through as a payroll expense and saves you the amount of your marginal tax rate (up to 35% Federal and 9.3% State), the 15.3% SSI, and California Disability costs. There are no age limits – your six-year-old can shred papers and wrap gifts – but be reasonable with the compensation. Paying an 8-year-old $50/hour to dust will not stand up to IRS scrutiny and will not give your child a true understanding of what it means to work for pay. Also, although college financial aid considerations may make this an unsuitable option, keep in mind that your child can put up to $3,000 a year of earned income into a ROTH IRA.

2. Open a Health Savings Account (HSA)

An HSA is a high deductible health account that allows all of your health costs to be tax-deductible. For a detailed explanation, go to www.SFSadvisors.com and click on SFS Articles.

3. Track all your expenses

It seems reasonable but many people don’t. Except for commuting from your home to your main office, all the miles you drive for business are deductible. You can either take a flat 37.5 cents/mile or actual costs. Don’t forget to deduct meals with prospective clients and business associates, and the percentage of your cell phone minutes used for business.

4. Deduct your home office

If you have an area of your home used 100% for business (including storage needs) you can usually deduct most of the costs associated with it, such as utilities, taxes, depreciation, cleaning services, HOA dues, and insurance.

5. Be aware of travel costs

Or as I say, “Fly first Class, Stay at the Ritz, Eat at Burger King.” Transportation and lodging are 100% deductible, meals and entertainment only 50%. For meals it might be easier to simply use the IRS allowable per diem amounts based upon the city to which you are traveling.

6. Max out your retirement accounts

Set up a SEP, Simple, Solo 401(k), or Keough and use it to defer taxes. Think about a pension plan if you are close to retirement, have no employees, and can defer large amounts of income.

7. Evaluate your income

In those years when you have an unusually high income (did you ever think that would be a problem?), fully deduct your purchases via Section 179, prepay expenses, defer income, and invest in new equipment and supplies. When your income is going to be less than normal, depreciate everything possible to get the tax benefit in later years, postpone expenses, accelerate income and contribute to a ROTH IRA instead of a traditional IRA or your retirement plan.

8. Don’t overpay FICA

You only have to pay social security on the first $87,900 of income. If you are both self-employed and an employee for another company, you may pay too much into the system. Use your 1040 to claim your refund.

9. Be aware of gifting limits

For years and years the amount you could spend on a gift to a fabulous client was $25. Unfortunately, it still is. Of course, you can still spend more: you just can’t write it off.

10. Deduct Educational Expenses

The cost for classes, seminars, and continuing education in your profession are a deduction. (If you are changing careers you may qualify for the Lifetime Learning Credit.) If you purchase books, newsletters, and magazines to maintain your skills, they are all deductible. And never forget that professional organizations, networking clubs, and skill groups like Toastmasters all qualify.

The Challenge: Spend some time this month reviewing your plans with an eye to areas that need some outside support.