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Could Your Business Be Paying More Taxes Than Absolutely Necessary?
The Top 10 Bookkeeping Mistakes Made by Small Businesses
Do You have an Exit Strategy for your Small Business?
Top 10 Small Business Start Up Mistakes
Do You Know What The Key Financial Indicators Are For Your Business?

Could Your Business Be Paying More Taxes Than Absolutely Necessary?

Income taxes are the single largest expense that a small business owner will encounter. This amount is often larger than their home or the cost of getting their kids through college. It is apparent to me that one can never build any real wealth without first getting their income taxes under control.

I am often amazed at the number of business owners looking for ways to reduce expenses. I have seen time and time again many small business owners spending hours fighting over a $200 charge by their credit card company. Yet, they will spend little or no time learning how to reduce their tax burden. And, in many cases the amount could be thousands of dollars. So, which amount do you feel is a better investment of your time to save?

There was a CPA study reported in Business 2000 magazine last year that stated that American small businesses overpaid their income taxes by over $2 billion dollars. The over payments were made because the businesses failed to take the tax deductions they were legally entitled to take. Many of these businesses are still unaware of their errors. In talking with many small business owners over the years, I don?t ever remember a single business owner telling me that they got a call from the IRS because they missed taking a deduction. The IRS is not going to help these businesses by telling them about a tax deduction that they didn?t claim. That?s up to them/you!!

I was recently reading a book by Dr. Stanley titled "The Millionaire Next Door." This guy did extensive research on millionaires and he concluded that most people who became millionaires didn?t win a lottery, inherit a lot of money, or make a big stock market gain. They were, for the most part, average folks who saved a little bit each year, probably from the taxes saved with good planning, and invested the money in an average investment for 30 or more years.

At first I didn?t believe this so I calculated it for myself. If you were to invest $4,000 for 40 years at an average of 9% return per year, your investment would be worth a whopping $1.6 Million at the end. This means that the small business owner who saves money through good tax planning and invests the savings in a retirement account or other investment can become a millionaire. Tax knowledge is lucrative.

You probably know that tax laws are constantly changing. What makes sense today may not make sense tomorrow. If you have a CPA or accountant helping you with this role, they better keep up with the trends! From my experience, many tax and accounting professionals don?t proactively help their clients with tax saving strategies and prefer taking a ?back seat? approach. That does not help the small business owner.

For example, when I talk to many new business owners, they are not taking advantage of many important tax reduction strategies like the home office deduction. Many don?t hire their children to work in their business and hence, miss out on being able to shift income from a higher tax bracket to a lower tax bracket. Many have not set up Roth IRA?s for their children. Others are not sure if they are set up with the best legal structure and overpay the government because its been years since their accountant last reviewed their legal structure. Yet others operate with several owners/members and either don?t have a buy-sell agreement in place or have an agreement that is outdated because it has been years since it was last reviewed.

It is important to sit down with your CPA several times through the course of the year to review your business?s income tax trends. By meeting with a knowledgeable CPA, your business will be able to maximize income tax deductions, act proactively to see what steps to take in the next quarter and properly advise you to help reduce your overall tax liability. If your CPA is not currently working with you in this manner, it could be costing you and your business thousands of dollars per year.

Ike Ikokwu is the leading Alpharetta GA accountant and tax authority. He is the author of the popular special report titled, ?How You Can Legally Reduce Your Taxes By As Much As 70% This Year Alone And Put A Ton of Money In The Bank". His firm provides professional tax preparation, financial planning, and accounting services to small business owners in Atlanta, Sandy Springs, Roswell, Alpharetta, Johns Creek, Duluth, Suwanee, Lawrenceville, Buford, Cumming, Dawsonville, Dahlonega, Gainesville and Marietta GA. To request a free 10 minute phone consult or a 45 minute in person meeting, call my office at (678)513-4146 or complete the ?Contact Us? page and we will contact you shortly.

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The Top 10 Bookkeeping Mistakes Made by Small Businesses

Keeping accurate records for your business is a crucial task. But, many business owners fail to take the necessary steps to ensure that this task is completed properly. Bookkeeping is essential for ongoing record keeping, legal protection and accurate tax filing. By understanding what the most common bookkeeping mistakes are, your small business can work to avoid them.
Here are the 10 most common small business bookkeeping mistakes:

Poor Receipt Record Keeping- Many businesses keep accurate records for larger receipts, but fail to keep accurate records of small expenses under $75. Part of the reason for this is that it is easy to lose receipts or to consider a small expense as insignificant. Maintaining accurate records can not only save you money on your income taxes, but can provide the much needed documentation in the event of a business audit.
Lack of Professional Help- Many small business owners fail to recognize the importance of hiring a professional to manage the task of bookkeeping. A bookkeeper will not only know what to record and how, but they are kept abreast of legal changes that you may not be familiar with on an ongoing basis, many of which can save your business capital.
Poor Tracking- Many business owners pay for expenses out of their own personal funds. For example, they may use their personal credit cards or cash accounts to pay for business expenses. And, they often do not keep accurate records of these expenses. It is important to keep accurate records of any and all expenses and whether or not they were reimbursed.
Improper Employee Classification- Many businesses have a combination of independent contractors and employees. Business must properly classify their employees for tax purposes and must keep these designations separated.
Poor Communication- Strong communication between employees and bookkeepers is essential as this will work to avoid reporting and other financial mistakes. It is advised to schedule regular conference calls and meetings to ensure that mistakes are minimized.
Lack of Financial Reconciliation- It is vital that businesses reconcile their financial records at least on a monthly basis. Errors are more likely to be made if this task is not completed on a timely basis.
Lack of Record Back Up- Even though we live in a technological age, issues can arise. It is important for every business to back up their data to avoid crucial losses.
Poor Sales Tax Reporting- This may not affect every business, but not reporting sales tax and not accurately accounting for sales tax is a common bookkeeping error.
Poor Petty Cash Management- Many businesses operate with a small amount of petty cash, but many lack proper accounting systems to track it. Be sure to set up a system to track the cash kept on hand in the business and what it is used for.
Improper Expense Categorization- For proper tax reporting, business expenses should be properly categorized. Formal bookkeeping practices can be used to help reduce the likelihood of improper categorization.

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Do You have an Exit Strategy for your Small Business?

There will be some point in the future when you may want to ?get out? of your business, that is, exit it. Too often, I see genuine hardworking people who have struggled and persevered to build up a good, successful business become disappointed and confused when they realize, following the sale, that they failed to reap the richly deserved benefits of all their hard work.

The mistake these common business owners make is that they do not start thinking about their exit strategy early. Even though the sale may seem far off, thinking about it now can allow you to have time to work with professionals to develop a proper plan. The degree of care and effort you put into the sales process could have a huge impact on the price you receive and how long it will take to complete that sale.

When selling, business owners may not know what to do or where to start. Without this knowledge, often a business fails in being presented effectively to potential buyers. Even if you are not yet intending to sell, reading about this mistake will not only give you a better appreciation of your own business, but will also expose you to some pertinent principles

There are a number of things that you should be doing to improve the value of your company. Because these things take time, the ideal situation would be to start working on them three years before the sale, since most buyers will want to see three years of financials on your business before making an offer or completing a sale.

Improve your business?s income. One of the first questions that a buyer will typically have is ?what is the revenue and net income of your small business?? The most vital step you'll want to take is to clean up your income statement. You can have your accountant recast your financials to reflect the way the company should look with new owners. This may mean simply increasing your advertising expenditures, hiring another salesperson on a commission basis, or keeping your business open for an extra 8 hours per week to generate more revenue. Also, take a hard look at your expenses to see whether you can reduce them. You may also want to have your accountant capitalize certain items that might otherwise have been expensed, and review your depreciation and inventory reporting methods.
Improve your business?s assets. Assess the assets of the business. You'll want to sell off or dispose of any unproductive assets or inventory that isn?t selling. The buyer won't want to pay for them, and they will only drag you down ? better to get what you can from them now, and write off any losses that may result. The business may own assets that you will want to retain after the sale (the most common example is a company car). Now is he time for you to "buy? the asset from the business, perhaps at the current book value.
If the business owns real estate, you might consider removing it and placing it in a limited liability company so that it will not be transferred in the sale. You can continue to lease it to the new owners, or to someone else, and retain an income stream. This is a judgment call ? for some businesses, the real estate provides the main appeal to buyers and you won't get much for the business without it. Your business broker, if you have one, should be able to tell you whether this is true for you.
Another move you may want to make is to replace any machinery that's nearing the end of its useful life, and do any necessary repairs and upgrades. The average buyer wants to purchase a turnkey operation, meaning that all they have to do is walk in, turn on the lights, and the business will operate with no immediate need for investment on their part.

Clean up potential liabilities. You should make an effort to clear up any pending or potential legal problems, such as product liability claims, employee lawsuits, IRS audits, insurance disputes, etc. A buyer who purchases only the assets of your business (instead of corporate stock) generally won't get stuck with inherited legal problems; however, the very existence of lawsuits or other problems may raise red flags in a potential buyer?s mind. One concern that buyers increasingly have is whether there might be any lurking environmental problems on your property. When problems turn up, it's possible that any and all former owners can be held accountable by the government for very expensive cleanup costs.

If real estate will be part of the sale of your business, you should make every effort to ensure there are no leaking underground storage tanks, asbestos, lead paint, hidden hazardous waste, or other nasty surprises around the property. If it's reasonable to conclude that problems are unlikely, an environmental transaction screen conducted at your attorney's direction may be all that is necessary. This is one area where your lawyer's advice will be very important.

If you are like most small businesses, you have probably shown lower profits to minimize your annual tax burden. While that strategy may be excellent for tax purposes, it could be harmful when determining the value of your business. To obtain the highest price for your small business, you will want to make your company look as profitable as possible to prospective buyers.

The best way to do this is to have your accountant recast the profit-and-loss statements to reflect adjustments for what the business owner takes out of the business in terms of compensation and fringe benefits. This can be especially useful when dealing with a buyer who would operate the business himself.

The next thing is to take these recast financial statements and prepare projected financial statements for the next five years. Remember that the prospective buyer is looking at the future potential growth and profitability of your business and your projections could serve as an important basis for the prospective buyer to pay top dollar for your business.

Unfortunately, most business owners who sell their business end up getting pennies to the dollar and get the short end of the stick because they didn?t properly plan the sale.

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Top 10 Small Business Start Up Mistakes

Millions of people each year start up small businesses around the world. And, the vast majority of them will encounter challenges along the way. By learning what the most common mistakes made by new small business owners, you can work to avoid them as you establish your own small business.

Here are the top 10 small business start up mistakes to avoid:

Lack of Market Research- Before you start a new business, be sure that you complete a thorough market analysis of the industry, the local and regional opportunities and the costs involved with the opportunity. This valuable research can help you to avoid selecting the wrong business opportunity and can also ensure that you correctly price your products and services.

Lack of Accurate Records- Records are crucial for any small business. Some of the most important business records include tax forms, tax payments, expense logs, employment documents and legal documents. Without accurate records, you are placing yourself and your business at risk.

Lack of Capital- Many small businesses begin without sufficient capital to sustain them. Be sure that you have taken an accurate assessment of the required start up and operating capital for your new business and add additional funds in the event that you run into unforeseen challenges.

No Merchant Services Capacity- Many consumers prefer to make payment for their products and services using a credit card instead of with a check or cash. So, if your business does not accept this form of payment, you are limiting your pool of potential customers, and ultimately costing your business revenues.

No Business Plan-While this would seem to be common sense, many business owners fail to build a business plan. And, without a business plan, you have no clear cut business direction.

Lack of Suppliers- Nothing is more frustrating to customers than not being able to obtain the products that they are seeking. Your business needs to establish working relationships with reliable suppliers so that you can consistently provide products to your customers on an ongoing basis.

Over Staffed- Too many employees can place a large financial strain onto your business. So, be sure to under staff until you are comfortable with the number of staff required to manage your business on a day to day basis.

Lack of Employee Supervision- While we would love to trust every employee we hire, leaving employees alone without supervision can open yourself up to theft or lack of work due to personal distractions of the employee. Be sure to install camera equipment in your business if you are unable to be present during all working hours to monitor activity.

Ineffective Hiring- Choosing the wrong employee for a job can be costly. Spend time in the interview process and use systems to improve your chances of a strong hire.

Lack of Business Security- One of the largest costs that many businesses incur is employee theft. Be sure that your business is protected by use of cameras, software programs and cash register programs that monitor activity to reduce your risk of loss.

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Do You Know What The Key Financial Indicators Are For Your Business?

Most accountants will only keep track of historical numbers like gross sales, gross margins and net profits. While these can be useful, there are other equally or more important numbers that should be kept track of that most ?old school? accountants are not aware of. You cannot improve factors that you cannot measure within your business.

The sad fact is most business owners have no idea what their numbers are. And that means there?s no good reason they should expect their business to improve ? because they lack a way to measure the results!

Perhaps the most important financial indicator to know is the net cash flow of your business on a monthly basis. When cash runs out, the business most likely has to resort to closing its doors. If cash is termed by many as ?king? then net profit certainly deserves the title of ?queen.? To illustrate its importance, here?s a personal example. I work really hard, but I stopped working for free a long, long time ago. I insist on generating profit. I track and measure it constantly. I?m very big on keeping score. I?m also very aware that bigger is rarely better, unless running a company up for sale or a public offering.

Very few small business owners spend enough time analyzing, what parts of their businesses?what services?.what clients?.what geographic territories?.etc., are most (net) profitable vs. least (net) profitable. They let low profit stuff consume the same resources as high profit stuff. They over spend money in overly fancy offices, addresses, staff, etc to impress people without profitable purposes.

The two important questions that should be asked are:

How does this contribute to NET?
How much does this contribute to NET?

Every justification I hear for wanting to do things with little or no net profit are invalid.

The other financial indicator that many small business owners don?t do an adequate job of understanding and tracking is the lifetime value of the customer. The lifetime value of a customer is one of the most valuable things you as a business owner can know. It is the total profit of an average client over the lifetime of his or her patronage.

Example: Let?s say that your average new customer brings you an average profit of $100 on the first sale. He or she repurchases three more times a year, with an average profit of $150 on each reorder. Now, with the average patronage lasting two years, every new client is worth $1,000: {$100 + (3 x $150) + (3 x $150)} = $1,000.

Why is this calculation so important?

By knowing what the value of an average customer is, you can then determine two things:
- How much you can afford to spend to acquire a new customer
- How much you can afford to spend to keep an existing customer from leaving you and purchasing from a competitor.

The other extremely important number is the total cost per lead. Most small business owners don?t know what this amount is for their business.

Let me give you an example: If you spend $500 on an advertisement in a magazine and that ad generates 5 qualified leads, then your cost per lead is $500/5 = $100 per lead. Once you know this number, it enables you with the ability to measure and compare the ROI from each advertising initiative you do.

From the above example, if you convert two customers, a 40% closing, then your cost per sale is $500/2 = $250. The cost per sales is the other indicator most small business owners don?t keep track of. If the lifetime value of your customer is $1,000, would you spend $250 to get that customer? How about $500? How about $750?

The response should be a resounding ?yes.?

You would find all the media out (some examples of which are coupon advertising, direct mail, newspaper, Internet, etc,) that would allow you to do that.

Here are three other financial indicators that you should measure and keep track of:

Average transaction size or average client fees per year: Once you know this number, you can find ways to increase it through up-sells, cross-sells, price adjustment, etc.
Number of customers for the day / revenue of the day: Another important number to keep track of.
Capture of names/addresses/birthdays of new customers: A prospect may not purchase from you today but because their name is in your database and you are keeping in touch with them, they may become your customers in the future. By collecting pertinent information, you can keep in touch with your new customers and prospects.

Unfortunately many small business owners I talk have not identified the key financial indicators in their business, hence can?t measure and improve on them.

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Read A Few of Our Articles to Give Your Business a Jumpstart

Free Articles

Could Your Business Be Paying More Taxes Than Absolutely Necessary?

The Top 10 Bookkeeping Mistakes Made by Small Businesses

Do You have an Exit Strategy for your Small Business?

Top 10 Small Business Start Up Mistakes

Here are the top 10 small business start up mistakes to avoid:

Do You Know What The Key Financial Indicators Are For Your Business?