Does your business have any of the following problems beginning to surface – dwindling profits, complaining customers, encroaching competitors?
Heed the warning signs. Problems such as the ones above are warning signs that you should not ignore. Decreases in sales could be a result of any or all of the following causes – customer retention problems, decreases in product quality or an unmotivated sales force. Turning around a struggling business requires humility and a willingness to make tough choices. Uncovering root causes of your business’s problems and admitting your mistakes won’t be easy but you must face the realities to avoid a sure path to failure.
If your company is starting to struggle, consider these three tips to help you get it back on track:
- Focus on the money-makers – Has your business focused on products and services that customers are no longer willing to buy? It makes sense to redirect your company’s available resources toward your most profitable offerings. Do you have a system for determining your margins on your products or services? Is there an accurate way for you to track your expenses and assign them to costs of goods and services sold? These are the factors which determine your profit margin (revenue – cost of sales) and will help you weed out the most unprofitable items you offer. You may be surprised to find that some of your products are loss leaders that actually cost you money instead of making you money.
- Establish your brand identity – This step starts with identifying what you do best and then telling your target market all about it. Your main goal must be to educate not only your customers, but your vendors and your employees on the reasons why your products and services are better than your competition. Be realistic and follow through on any claims you make about your offerings and core competencies or you will lose credibility in the market place. The best way to re-establish your brand identity is to be specific in your value proposition by plainly stating the benefits your customers receive when they buy from you.
- Track your results – This is a biggie, probably the biggest of the three tips presented in this post. Keeping a close eye on your numbers is paramount to managing your business and maintaining or growing your market share. You must measure what matters. This means tracking both quantitative (numeric) and qualitative (non-financial) data and once gathered, analyzing the results. Examples of some things to track include # of customer complaints, cash flow status, trends of items on back order, and profit trends.
Customizing these three tips to suit your particular business will allow you to think more strategically and help you to identify root causes of problems before it’s too late to take corrective measures. If you’d like help getting your business back on track, give us a call, it’s what we do. Our business coaching is an intensive one-on-one program that can help you identify issues you can work on to reach your goals.
Ins and Outs of Family Hand-Outs
A Little Info on the Tax Issues Associated with Loans to and from Family Members –
Tax problems can arise when you first lend money to a family member or when you begin receiving payments or if you’re not repaid. The tax issues usually involve three elements – imputed income on below-market rate loans, the imposition of gift tax on the giver, or the lack of a bad debt deduction in the case of default.
1) Imputed income is revenue presumed earned but neither recognized nor received by the alleged recipient. The IRS may impute interest on a loan at the “applicable federal rate” (AFR) when a lower rate (or no interest) is charged. The agency then assesses tax on the excess of the imputed interest over the amount required by the terms of the loan. In recent years, the AFR has been fairly low, not even reaching 3% at the highest. However, even though the AFR is still relatively low, lenders are required to charge at least the lowest rate as specified by the AFR. Here is a link to the index for AFR rates.
* The Gift Tax issue arises when the IRS imputes phantom interest because it also creates phantom taxable gifts. “Gifting” occurs because the imputed interest is treated as though the borrower actually paid the interest it to the lender and then the lender returned the same amount to the borrower as a gift. Since the lender “constructively received” the additional interest, he or she owes income tax on it. Since the lender then presumably gave the interest back to the borrower, he or she also owes gift tax on it, unless an exclusion or credit applies. Gift tax only applies to annual gifts of $14,000 or more as of the time we posted this entry 6-5-15.
* There are limits on Bad Debt deductions for money lent to a related party. Normally, a loan that goes bad is deductible, either against ordinary income (if made for a business purpose) or as a short-term capital loss. However, when the defaulting party is related, the IRS may demand clear and convincing evidence that the original loan was not actually a gift. Once a loan is recharacterized as a gift, no bad debt deduction will be allowed if the loan isn’t repaid, and the lender also may owe gift tax on the principal unless an exclusion or credit applies. Protect yourself by making sure all loans are structured as an arm’s length transaction and that all the terms are reasonable, and written, and signed by all parties. Having the document notarized by an independent third party is also a good idea.
Interest need not be charged and will not be imputed on a family loan of $10,000 or less unless the loan directly relates to purchasing or carrying income-producing assets. Without a written document imposing interest at the applicable federal rate (AFR) or higher, the loan probably will be considered a gift and thus will not be deductible if not repaid.
Interest will be imputed on a family loan over $10,000 if the stated rate is below the AFR. However, unless the principal exceeds $100,000, imputed interest will be limited to the borrower’s annual net investment income, and no interest will be imputed if that income is $1,000 or less.
Obviously, lending to relatives can create unintended tax consequences. You should always have a written loan agreement on family loans to document the transaction for the IRS. Please contact us for guidance before you make any family loans.
Analyze your break-even point (B/E Point) to make better business choices. Sounds simple enough right? Read on for a little basic guidance on this fundamental business tool.
Break-even analyses are an important and useful tool in business financial management. You can use break-even analysis to help evaluate:
- Starting a new business,
- Expanding current operations,
- Developing a new product line or service offering,
- Contemplating an acquisition,
- Downsizing operations, or
- Approaching banks and other potential lenders,
When we talk about “break-even” we simply mean the point at which costs equal income – no profit, no loss. In other words, it’s a determination of how much income you need to cover all of your costs.
Why calculate break-even?
- The break-even point an excellent starting point for finding out where the business is and where it can go.
- It’s the first step in planning future growth.
- It shows how much sales volume is needed to cover fixed and variable expenses so it’s an excellent budget tool.
- Once a company has reached break-even, all gross profit beyond that point goes directly to improving the bottom line, growing and prospering.
How to calculate a break-even point:
Break-even is relatively easy to understand and use. First, review the annual financial statement in order to figure out fixed and variable expenses. Variable expenses are the cost of goods or services sold and other costs of sales, such as direct labor and sales commissions. They are called variable expenses because the quantity of products (produced/ordered/sold or – in the case of services – hours worked) causes the expenses to either decrease or increase with volume. You must know your unit selling price and the variable costs associated with each unit sold (production or acquisition costs) to be able to compute the gross profit percentage. You will also need to know your fixed costs. Fixed costs are those expenses that are not affected by production such as rents, insurance, telecommunications, and fixed salaries. Once you know all the variables (unit selling price, variable and fixed costs) the rest is just plain-old arithmetic. You will divide your fixed costs by your gross profit percentage to arrive at the break-even point. For example, if you have fixed costs of $10,000 and your gross profit percentage is 25%, your breakeven point is sales of $40,000 ($10,000 ÷ 25% = $40,000). You would have to sell $40,000 worth of products or services in order to cover all of your costs and not be in the red or black.
There are, of course, some costs that are, or seem to be, part fixed and part variable. Management will have to use good business judgment to split these items into reasonable proportions.
There are certain limitations for the use of break-even analysis. It ignores the importance of cash flow and makes the assumption that fixed and variable expenses will stay within the parameters used to calculate the break-even. Again, sound business assessment will overcome these shortcomings.
Call us – we would be happy to assist you with calculating your business’s break-even point to help you with budgeting and evaluating your profit structure.
I have seen many sets of financial statements in my day. Over the years I have worked with companies of many different sizes, in a variety of industries, some with full accounting staff, some just run by “mom and pop”. Most of the time, the business owner is not looking at the balance sheet or cash flow statement because they only care about and understand the profit and loss report – specifically the bottom line of that profit and loss – the net income figure. They only want to see how much money their accounting program says they’ve made.
It’s understandable that business owners will get caught up in the operations side of their business and only care about current performance as far as what’s coming in (sales) and what’s going out (expenses) without taking time to really look at the cumulative position of where the company is, as shown in the balances of the assets, liabilities and equity sections of the balance sheet. It’s a huge mistake for business owners to ignore the other financial statements and not gain an understanding of what valuable information those reports hold. The information contained in the balance sheet and cash flow statement not only supports the results of the profit and loss statement, it also tells the story of how cash and other assets have been used in the business to run operations, to finance purchases and to pay a return on investment to the owners.
Most of the time a business owner will look at the bottom line of the profit and loss and not understand why it shows an unexpected profit or loss. They want to know why the bottom line on the P & L doesn’t jive with the cash balance in the bank. They ask, “if the business is making a profit, then why don’t we have cash in the bank?” So, what’s the first thing I do? I look to the balance sheet and cash flow statement to tell me the story, to give me clues that explain that operational bottom line. What was the change in certain asset or liability accounts over the time period we are examining? Do the statements show that loans or capital infusions were needed for the company to stay afloat? Do they show that prior period loans were paid down or that dividends were paid out? Maybe receivables (the money that is owed to the business) are much higher (or lower) than the last period? Is the company having trouble collecting customer payments or have they been aggressively paying off their own debts? Each of these questions can be answered by looking at the balance sheet and statement of cash flows along with the profit and loss report. The answers provided by the full set of financial statements explain why the company is in its current position, and how to change that position to make the company stronger and to increase profits.
If you are a business owner, are you looking at these reports, or at least having your CPA go over them with you on a regular basis (at a minimum annually, but I recommend quarterly)? As a strategic business advisor, I can enthusiastically tell you, this is the kind of stuff that we actually like to do, so please, ask us, we can help you to understand your financial reports!
While the financial statements show a history of where the company has been, analyzing several time periods allows a business advisor to see trends, compute ratios, and project where your business is headed. For example, I use these important financial statements in benchmarking analyses. All of this valuable information should be used to proactively manage your business, and increase profitability through well-informed strategic decisions and proper planning. Working with a willing advisor who can explain all of the concepts in an easy to understand manner is only half the battle because the business owner must be willing to do their part, by offering their insight and being committed to taking an interest in understanding more than just the bottom line. Commit today to reviewing more than just your bottom line, if you need some assistance with this task please message me on Twitter, I’ll be glad to help!
Photo courtesy of Flickr -http://www.flickr.com/photos/gerlos/3119891607/sizes/m/in/photostream/
More often than not I come across both new and seasoned business owners who think that they have a choice in whether they will treat a worker as a subcontractor or as an employee. By treating a worker as an independent contractor, the business does not have to withhold and remit payroll taxes on the amounts paid to the worker. The business also avoids paying the FICA tax match (currently 7.65%), federal unemployment tax, as well as any state and local employer taxes on the worker’s pay. The business also may be able to avoid having to include the workers in their worker’s compensation and health and welfare insurance coverage if they are not considered employees. Companies also skirt overtime and employer wage rules by classifying workers as independent contractors. Therefore, it is quite tempting for business owners to want to treat workers as independent contractors instead of as employees since it is certainly cheaper in the short run.
At the federal level, the IRS and the Department of Labor are interested in enforcing laws designed to protect workers and the government’s interest (i.e. taxes due to them) and the authorities, not the business owner, have the ultimate say in how workers should be classified. The IRS has dedicated a whole area of their website to the topic – you can view it by clicking the link at the bottom of this page. The site even has nice audio lessons and the training materials that IRS agents use to determine whether a worker is in fact an employee or independent contractor. The DOL also has a nice section about the topic on their site too (link below).
The following conditions are common in an employee/employer relationship:
- Payer retains significant control over the result of the work to be performed.
- Payer retains significant control over when and how the work will be done.
- Payer reimburses worker’s expenses.
- Payer provides most tools, equipment and supplies to carry out the work.
- Payer provides benefits such as insurance, paid time off or retirement pay.
The following conditions, while not all inclusive, are common in an independent contractor/contractor relationship:
- Worker has made a significant financial investment in the equipment used to carry out the work.
- Payer does not reimburse expenses of the worker.
- The worker provides services to more than one payer, or is actively looking for more business by way of advertising etc.
- Worker is paid a flat fee for the work performed (i.e. paid by the job).
- Worker has his own trade name, business license and professional, liability and worker’s compensation insurances.
While none of the conditions above guarantee the classification of a worker as one type or the other – it is more likely that those having more of the characteristics of an employee will be treated as such by any taxing or regulatory authority if it is ever challenged.
As a business advisor, I almost always recommend my clients to err on the side of caution when classifying workers to avoid problems down the road. In cases where there is a dispute, or a worker is hurt on the job, or fired, unemployment and other insurance claims made by misclassified workers can cause problems with state and federal agencies. The IRS can examine company records at any time to determine worker status and can then charge the company with back payroll taxes plus penalties and interest if any workers are reclassified as employees. Even if there is a written contract between the worker and the company stating that the worker is an independent contractor, the IRS can reclassify the worker if they deem there is evidence present for them to justify it. While all situations are different and there truly is no one-size-fits-all yardstick by which to gauge every worker relationship, using common sense while planning for the long-term is the best way to avoid trouble later on. Don’t risk problems down the road just to “save” a few bucks today, it’s just not the smart way to run a business.
Click here for IRS guidance on classifying workers:
Click here for DOL coverage on the crackdown regarding misclassified workers:
Image courtesy of Flickr http://www.flickr.com/photos/chrisglass/347972900/sizes/q/in/photostream/
Here is another little blog post I wrote for Kashoo Accounting – August 2012
Here’s a little blog entry I did for Kashoo Accounting back in August 2012.