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Five Tips To Know If You Have What It Takes To Start A Home Based Business

By Randall Orser | Small Business

You may see, hear, and read a lot of people constantly raving about the numerous wonders of a home-based business but starting and managing one isn’t immediately a bed of roses. In some cases, having a home-based business is easier than having a business in traditional settings, but in some cases, it’s absolutely the other way around.

Tip #1 You Still Need the M’s for a Home-Based Business

The only difference is that there’s no need for you to pay for rent and possibly, you’ll have lower business costs because your business is based at home. But other than that, the process of starting up and the necessary factors of production are still the same.

Money - Its rarely possible, if at all, to start a home-based business without spending even a dollar for investment and pre-operating costs.

Material - If your home-based business is selling products and not services then you’ll still have to ensure that you’ve got the best materials to produce the best products in the market.

Manpower - for a home-based business, you can usually make use of family members ñ even your kids ñ to help and provide the necessary labor for the business.

Machinery - Usually, a home-based business selling services online can function with a computer and Internet access, but if you’re selling products, you’ll naturally need other additional equipment.

Tip #2 You Still Need to Register Your Home-Based Business

The fact that you have a business based or you’re working from home doesn’t exempt you from your obligation to pay taxes. You can, however, apply for tax deductions that you may be eligible for due to your home-based business.

To qualify for tax deductions, you need to prove that one part of your home is indeed used primarily and exclusively for operating your business. Secondly, if ever personal meetings with your clients, suppliers, and affiliates are required, you use that section of your home for such purposes.

Tip #3 Products, Services, or Both?

A home-based business may sell products, services, or both. The success of your home-based business depends on how marketable your products or services are. Consider the following factors:

Quality - How does the quality of your products or services fare compared to those manufactured or provided by your competitors?

Cost - How much are you selling them for? Since you’re operating a home-based business, you should take advantage of your situation and use it to lower the price of whatever you’re selling. Lowering your price is something you can afford to do because you have lower costs, and it will at the same time allow you to compete against bigger retailers on the same ground.

Tip #4 Online, Offline, or Both?

The success of your home-based business will also depend on how you should to advertise about your business. If, for instance, you’re selling home baked cookies, you’ll probably achieve greater profit by focusing mostly on selling to your neighbors and acquaintances in the area then advertising online on the sides. Setting up a home-based web designing business on the other hand would certainly benefit more from online advertising.

Tip #5 Are You Good at Waiting?

A home-based business will also take time to prove its profitability and stability. Thus, make sure that you’re willing to wait for your business to grow. There are any number of hurdles that your home-based business might face in the future but you need to be prepared to face all of them if you wish to succeed.

That Great Employee Benefit is Probably Taxable 

By Randall Orser | Business Income Taxes , Small Business

You’ve decided to reward your employees with a benefits plan, maybe a company car, gift cards, and such. Now, before you go and give your employee something, you need to find out if that benefit is considered income to the employee, and, therefore, taxable. Sadly, any kind of benefit you give an employee is considered a taxable benefit, and the employee must be taxed on it, some even are taxable for Canada Pension Plan and Employment Insurance. We’ll talk about what is a benefit and how is it taxable.

Your employee has received a benefit if you pay for or give something that is personal in nature: directly to your employee; or to a person who does not deal at arm’s length with the employee (such as the employee’s spouse, child, or sibling).

A benefit is a good or service you give, or arrange for a third party to give, to your employee such as free use of property that you own. A benefit includes an allowance or a reimbursement of an employee’s personal expense.

An allowance is a limited amount decided in advance that you pay to your employee on top of salary or wages, to help the employee pay for certain anticipated expenses without having him or her support the expenses. An allowance can be calculated based on distance or time or on some other basis such as motor vehicle allowance using the distance driven or a meal allowance using the type and number of meals per day.

A reimbursement is an amount you pay to your employee to repay actual expenses he or she incurred while carrying out the duties of employment. The employee must keep proper records to support the expenses and give them to the employer.

Determine if the benefit is taxable

Your first step is to determine whether the benefit you provide to your employee is taxable and should be included in his or her employment income when the benefit is received or enjoyed. Whether the benefit is taxable depends on its type and the reason an employee or officer receives it. To determine if the benefit is taxable, see Chapters 2 to 4 of Guide T4130, Employers’ Guide Taxable Benefits and Allowances.

The benefit may be paid in cash (such as a meal allowance or reimbursement of personal cellular phone charges), or provided in a manner other than cash, such as a parking space or a gift certificate. The way you pay or provide the benefit to your employee will affect the payroll deductions you should withhold.

Types of benefits and allowances

To find out if benefits and allowances are taxable and how they are declared on T4 or T4A slips, see the Benefits and allowances alphabetical index. There are just too many to go through in this blog post.

Calculate the value of the benefit

Once you determine that the benefit is taxable, you need to calculate the value of the specific benefit. The value of a benefit is generally its fair market value (FMV). This is the price that can be obtained in an open market between two individuals dealing at arm's length. The cost to you for the property, good, or service may be used if it reflects the FMV of the item or service. You must be able to support the value if you are asked.

Goods and services tax/harmonized sales tax (GST/HST) and provincial sales tax (PST)

When you calculate the value of the taxable benefit you provide to an employee, you may have to include:

  • the GST/HST payable by you; and
  • the PST that would have been payable if you were not exempt from paying the tax because of the type of employer you are or the nature of the use of the property or service.

Use the “Benefits chart,” here to find out if you should include GST/HST in the value of the benefit. Some benefits have further information about GST/HST in the topic specific section.

The amount of the GST/HST you include in the value of the taxable benefits is calculated on the gross amount of the benefits, before any other taxes and before you subtract any amounts the employee reimbursed you for those benefits.

You do not have to include the GST/HST for:

  • cash remuneration (such as salary, wages, and allowances); or
  • a taxable benefit that is an exempt supply or a zero‑rated supply as defined in the Excise Tax Act.

Policy for non-cash gifts and awards

You may give an employee an unlimited number of non-cash gifts and awards with a combined total value of $500 or less annually. If the fair market value (FMV) of the gifts and awards you give your employee is greater than $500, the amount over $500 must be included in the employee's income. For example, if you give gifts and awards with a total value of $650, there is a taxable benefit of $150 ($650-$500).

you can, once every five years, give your employee a non-cash long-service or anniversary award valued at $500 or less, tax free. The award must be for a minimum of five years' service, and it should be at least five years since you gave the employee the last long-service or anniversary award. Any amount over the $500 is a taxable benefit.

If it has not been at least five years since the employee's last long-service or anniversary award, then the award is a taxable benefit. For example, if the 15-year award was given at 17 years of service, and then the next award is given at 20 years of service, the 20-year award will be a taxable benefit, for five years will not have passed since the previous award.

The $500 exemption for long-service awards does not affect the $500 exemption for other gifts and awards in the year you give them. For example, you can give an employee a non-cash long-service award worth $500 in the same year you give him or her other non-cash gifts and awards worth $500. In this case, there is no taxable benefit for the employee. If the value of the long-service award is less than $500, you cannot add the shortfall to the annual $500 exemption for non-cash gifts and awards.

Items of small or trivial value do not have to be included when calculating the total value of gifts and awards given in the year for the exemption. Examples of items for small or trivial value include: coffee or tea; T-shirts with employer's logos; mugs; plaques or trophies.

Basically, anything you give an employee becomes a taxable benefit. Ensure you chat with your bookkeeping/accountant before deciding on any employee benefits, as more than likely, they are taxable.

Annual Clean-Up and Backup of Your Files

By Randall Orser | Small Business

The end of the year is a good time to put some time and attention into cleaning up and backing up your files. Cleaning up your files lets you clear up physical, digital and psychological space so everyone can get more done. Backing up is essential in case something goes wrong.

Here's how to do your annual file clean-up and backup.

Delete Clutter from Project Management

If you still have old projects open in your project management software, delete them or archive them now. People on your project management software should only be seeing projects that are actually relevant to their work right now.

Archive Physical Files

If you have a lot of physical files lying around that aren't being used anymore, archive them. Small businesses can open a small storage facility to store their archived files. Larger businesses can open an account with a file archive facility.

What to Back Up

At least once a year, you should back up:

§ An entire copy of your website. You should have the "front" end of your website, including the CSS and HTML code, as well as the "back" end infrastructure (e.g. server code) all backed up somewhere.

§ Your entire database should be backed up as well.

§ Your email list and newsletter list should be backed up, along with any mailing sequences.

§ Your customer list should also be backed up.

§ Your forums or any other communication channels should be fully backed up. You should be able to restore your community if anything happened.

Basically, anything that could critically cripple your business if it disappeared should be backed up regularly.

At Least Three Backup Sources

You should have at least three backups of all your most important data. Each offers a different level of protection.

§ Online backup - Online backups work well for small files and for files stored on personal computers.

§ On site backups - These can be done as frequently as once a month. Simply take all your digital data and dump them on a hard drive, then store that drive.

§ Off-site backups - On site backups can't protect your data against earthquakes, fires, floods and other disasters that could affect the physical devices your data is stored on. Off-site backups will hold your data for you, so you're protected in case of a disaster.

Just one level of protection isn't enough to protect you against a catastrophe. Higher levels of protection require more work and are generally performed less frequently.

Change Dropbox Passwords

At least once a year, ask all your employees to change their Dropbox, Google Drive and other backup passwords. Passwords now need to be more complex, and best are ones that are 16 or more characters.

If you perform these tasks regularly, you'll be well protected against disasters in all forms.

Taxpayer Bill of Rights

By Randall Orser | Personal Income Tax

The Canada Revenue Agency (CRA) operates on the fundamental belief that you are more likely to comply with the law if you have the information and other services that you need to meet your obligations. These obligations may include paying taxes or providing information.

CRA wants to make sure you receive all your entitlements and that you understand and can exercise your rights. They describe and define these rights in the RC17, Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer.

The Taxpayer Bill of Rights describes and defines 16 rights and builds upon the CRA's corporate values of professionalism, respect, integrity, and cooperation. It describes the treatment you are entitled to when you deal with the CRA. You can expect that the CRA will serve you with high standards of accuracy, professionalism, courteousness, and fairness. The Taxpayer Bill of Rights also sets out the CRA Commitment to Small Business to ensure their interactions with the CRA are conducted as efficiently and effectively as possible.

In addition to the 16 rights that apply to all taxpayers, the Taxpayer Bill of Rights also has a five-part Commitment to Small Business. The five commitments made to small business acknowledge their importance as the engine of growth in the Canadian economy. These commitments also complement the Government's pledge to create a competitive, dynamic, business environment in which Canadian businesses will thrive. They recognize the role the Canada Revenue Agency can play in minimizing the compliance burden, specifically the amount of paperwork involved in complying with the tax system.

The Minister of National Revenue has identified a need for greater awareness among taxpayers (particularly small businesses) about what they can expect when they deal with the CRA. This includes awareness about what their rights are, and what avenues of redress are available to them when they believe they have received inadequate service from the CRA. This was developed through interactions with taxpayers, their representatives, business groups, professional associations, and Members of Parliament, and in consultation with CRA managers and front-line employees.

It’s thought that the Taxpayer Bill of Rights will increase transparency and accountability on the part of the CRA and, as a result, improve the quality of all taxpayers' service experiences with the CRA. The more you know your rights, it’s thought that the more your compliance level will increase, and the less CRA has to check on said compliance.

Here are the 16 rights:

1. You have the right to receive entitlements and to pay no more and no less than what is required by law.

2. You have the right to service in both official languages.

3. You have the right to privacy and confidentiality.

4. You have the right to a formal review and a subsequent appeal.

5. You have the right to be treated professionally, courteously, and fairly

6. You have the right to complete, accurate, clear, and timely information

7. You have the right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review

8. You have the right to have the law applied consistently

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings

10. You have the right to have the costs of compliance taken into account when administering tax legislation

11. You have the right to expect us to be accountable

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances

13. You have the right to expect us to publish our service standards and report annually

14. You have the right to expect us to warn you about questionable tax schemes in a timely manner

15. You have the right to be represented by a person of your choice

16. You have the right to lodge a service complaint or request a formal review without fear of reprisal

Here are the 5 commitments to business:

1. The CRA is committed to administering the tax system in a way that minimizes the costs of compliance for small businesses

2. The CRA is committed to working with all governments to streamline service, minimize cost, and reduce the compliance burden

3. The CRA is committed to providing service offerings that meet the needs of small businesses

4. The CRA is committed to conducting outreach activities that help small businesses comply with the legislation we administer

5. The CRA is committed to explaining how we conduct our business with small businesses

Why You Need More Than a Brilliant Idea to Succeed as an Entrepreneur

By Randall Orser | Small Business

Entrepreneurs are more than clever business people who see a need for a new product or service and fulfil it. Successful entrepreneurs not only have brilliant ideas, but also can build relationships, understand customers’ wants, and interpret the constant signals from the market. If you want to succeed as an entrepreneur, you will need vision and the skills to see your plans come to fruition; otherwise, you are just are a dreamer.

Entrepreneurs Need Emotional Intelligence

Emotional intelligence is about having an awareness of your own emotional state of being and not allowing emotions to overrule your decision-making facilities. At the same time, a high level of emotional intelligence enables entrepreneurs to read other people very well and to know when and how to build instantaneous rapport with potential customers or business partners. Some entrepreneurs may use emotional intelligence to manipulate other people or may get another person to tell more than the individual originally intended to say.

Entrepreneurs Need to Build Relationships

Entrepreneurs are extremely good at building relationships, and will often build long term business partnerships with several different businesses. Entrepreneurs excel at marketing, but are not necessarily good salespeople.

A sales person will push to close the deal and to get the sale, while a good entrepreneur will focus on the relationship and may stop short of closing the deal to maintain the good relationship. Often entrepreneurs need to work in conjunction with a sales person who can close the deal, after the entrepreneur has set up the foundations by building a strong relationship with the potential customer or affiliate business.

Entrepreneurs Need to Have a Vision

Small business coaches will often tell individuals who are starting a small business to plan everything and to set up a five year plan. However, entrepreneurs work towards a vision and may not plan every single step along the way. Entrepreneurs will often work with a big picture idea and plan the details to fit in with the overall vision, rather than focus on the details of a plan and forget where the plan leads the business.

Entrepreneurs Need Flexibility to Change the Plan

Entrepreneurs will feel free to change the details of the plan to take advantage of new opportunities. The difference between a small business owner and the entrepreneur is often most visible when a new opportunity knocks. The entrepreneur will be willing to change the plan and to take risks if the opportunity that presents fits into the overall vision, whereas the small business owner will be more likely to ignore the opportunity if it was not in the original business plan.

Entrepreneurs Need Good Timing

An understanding of the cyclical and rhythmic nature of business allows entrepreneurs to know instinctively when the time is right to launch a new business venture, or a new product. Entrepreneurs possess good timing and will know when to hold back on a launch of a new venture until the market reaches the right step in the cycle to ensure the new venture is a success.

Entrepreneurs Need Industry Knowledge

Although entrepreneurs rarely react to what competitors are doing, entrepreneurs do study the competitors and the industry. This industry knowledge enables the well-informed entrepreneur to lead the industry rather than react to it, and to have that impeccable timing to know when to launch the new products.

A brilliant idea will only get you so far in the business world. However, blend the clever business idea with a high emotional intelligence, relationship building skills, vision, flexibility, good timing, and strong industry knowledge, and an entrepreneur has the world at his or her feet.

New Rules for Principal Residence

By Randall Orser | Personal Income Tax

In late 2016, the Liberal government decided to make changes to Canada Revenue Agency’s (CRA) reporting requirements for the sale of your principal residence. Supposedly this will improve compliance and administration of the tax system. Is this the beginning of a new way to tax you, the taxpayer? Well, probably will be though not now. Never underestimate a government to tax its citizens.

When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.

Starting with the 2016 tax year, due by April 30th, 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption. If you sell your principal residence will have to report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. Reporting will be required for sales that occur on or after January 1, 2016.

The principal residence exemption is an income tax benefit that generally provides you an exemption from tax on the capital gain realized when you sell the property that is your principal residence. Generally, the exemption applies for each year the property is designated as your principal residence.

For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.

The penalty is the lesser of the following amounts:

  1. $8,000; or
  2. $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.

More information on late designations is available on the CRA website under Late, amended, or revoked elections.

The CRA will focus efforts on communicating to taxpayers and the tax community the requirement to report the sale and designation of a principal residence in the income tax return. For dispositions occurring during this communication period, including those that occur in the 2016 taxation year (generally for which the designation would be required to be made in tax filings due by late April 2017) the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.

Your Home is used for a Business or Rental

If only a part of your home is used as your principal residence and you used the other part to earn or produce income, whether your entire home qualifies as a principal residence will depend on the circumstances.

It remains the CRA’s practice to consider that the entire property retains its nature as a principal residence, where all the following conditions are met:

  • the income-producing use is secondary to the main use of the property as a residence;
  • there is no structural change to the property; and
  • no capital cost allowance (CCA) is claimed on the property.

If your situation does not meet all three of the conditions above, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, if the split is reasonable. Instructions are provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.

If you’ve sold your home, and it’s your principal residence, in 2016, then remember to have the information necessary to report said sale on your income tax return. Now, no gain will be attributed to said sale, however, that may change in the future.

If I Have Foreign Income, What Exchange Rate Do I use?

By Randall Orser | Personal Income Tax

Nowadays many people have income from outside Canada, and when it comes to filing their income taxes must include said income. Many businesses are selling outside of Canada, too, and may receive funds in the country from which they sell. The question then becomes, ‘what exchange rate do you use?’

What is the exchange rate? The exchange rate is the price of one national currency, such as the Canadian dollar, expressed in terms of another currency, for example, the U.S. dollar, or a basket of currencies.

Canada Revenue Agency (CRA) used to recommend what exchange rate to use when filing your personal taxes, and, usually, did an average exchange rate for the year. You weren’t required to use this rate; however, it did make it easier to file your taxes. This save you of having to go to the bother of looking up exchange rates for the date you earned the income; if you even remember the date you received the income.

Now, CRA just recommends you use the Bank of Canada exchange rates. At the BOC website, you can get exchange rates for up to 26 currencies, based on a single rate reflecting the daily average exchange rate per currency pair, which will be published each day. If your foreign income is form outside these 26 countries, you will have to either find an exchange rate elsewhere, or check what the rate was on the day you received the income. There was the average exchange rate for the year, however, I can’t see on the site where this will continue nor does it say it will be discontinued, so we’ll just have to wait and see.

Using the Exchange Rate on Your Personal Taxes

When you go to file your personal taxes, look at what foreign income you have and go to the BOC website. Do you remember when you received that income? If yes, use the exchange rate, or find the amount that was deposited into your bank account, and use that rate. If it’s from multiple deposits, such as the British Pension, then you’ll have to calculate the exchange rate each time, or add up the amounts from each month.

If you just received a slip, and have no idea when the money was deposited or what it’s for, then use the average yearly rate, if it’s still available, or the rate at December 31st for that tax year.

Using the Exchange Rate for Business

For business, it’s a bit easier on when to use the exchange rate.

For sales, when you create the invoice for the customer pick the rate for that day, if available, or the previous day. Fortunately, accounting software now can link to the Bank of Canada website and pick the rate, normally it’s for the previous day and that’s okay. You could also just pick an average rate and go with that for a time, until it changes. For example, say the US dollar, you can pick an exchange rate of 1.35 and go with that until you feel it’s changed too much to keep using it.

For customer payments, use the exchange rate the bank gives you when you deposit, if into your Canadian dollar account. Otherwise, use the rate on the day of the deposit, or the previous day. Are you receiving a lot of foreign currency? You may want to setup a bank account in that currency.

For purchases, you can follow the same advice as for sales. One client I have uses an average, and then adjusts that rate up or down depending on how the Canadian dollar is doing compared to the currencies he makes purchases in. However, when he sends the supplier money, he uses the rate from the currency exchange house.

That’s something else to think about for business, if you do a lot of purchasing in foreign currencies, I suggest using a currency exchange house. They usually give better rates than the banks, and can send bank drafts and wires at much cheaper rates than the banks (many banks are charging $40+ for a wire transfer).

Also, think about purchasing forwards when you have a large volume of transactions in a currency. A forward is a contract to buy so much of a foreign currency at a fixed exchange rate. You’re basically hedging your bets about the currency going up. So, you lock in the exchange rate for a certain period, then much purchase the forward at the rate agreed upon at its creation.

For example, you agree to buy a forward on the US dollar at an exchange rate of 1.35 and it expires in three months. At the expiration, you purchase the agreed amount of dollars at the 1.35 rate, or pay a penalty for not doing so. If the exchange rate goes up to 1.40 then you’ve saved 5 points and depending on the amount quite a bit of money. However, if the rate goes down to 1.30 then you’ve paid 5 points more than you needed to. This is the risk you take doing forwards.

Having foreign income can be a great, especially when the Canadian dollar is low compared to that foreign currency. However, when it comes time to reporting that income on your tax return, or in your business, ensure you are using the correct rate.

Understanding Your Financial Statements

By Randall Orser | Small Business

So, you’re going to your accountant’s office tomorrow to review your company’s year-end financial statements. They have already sent to you a draft copy of the statements so that you may prepare for tomorrow’s meeting. But without going over the details in person with your accountant, you’re not sure what it all means.

A well-prepared set of financial statements, which should include comparative figures for the prior year, provides information about the company’s performance and financial position. Fundamental to understanding your financial statements is an analysis of its components by calculating certain financial ratios and comparing them to industry-wide ratios or those which are relevant to your business. These ratios will reveal important information about your company’s past, which will help you choose the path you want it to follow for the future.

Although a complete set of financial statements includes a statement of income, a balance sheet, a statement of retained earnings and a statement of changes in financial position, this article will be devoted to explaining ratios that are useful in understanding the statement of income and the balance sheet.

The Statement of Income

This is where you’ll find your company’s “bottom line”. With some simple analysis, however, there is a lot more information available.

By comparing sales from year to year, you’ll see if sales have increased more than any price increases that you implemented during the year. If they have, great! If not, it means you’re either losing customers or your customers are buying less from you. If your sales are analyzed by major categories, you may also be able to identify meaningful changes in your sales mix.

You can figure out your inventory turnover ratio by dividing the cost of sales by the average inventory for the year. The higher the ratio, the better off you are. A drop in your turnover ratio, however, may reveal an overstock situation that has yet to be corrected.

The gross profit (or gross margin) represents the excess of sales over cost of sales. A change in your gross profit ratio, which means dividing gross profit by sales, may be a symptom of many different conditions. It may mean that your sales force has maintained margins, or that you had to give in to competitive forces. On the other hand, a change may also mean that your suppliers have increased or cut their prices. If you’re a manufacturer, it may also mean using various production elements efficiently. If your sales and cost of sales figures are analyzed by major categories, you may be able to spot a trend for a type of product, rather than for the company.

For operating expenses, your primary concern should be cost control. You should focus on significant variances in the amount of expenses for any one line item, or on any changes in relationships between line items. For example, if there is a strong relationship between commission expense and sales, check to see if the commission rate on the financial statements is in line with your expectations. Furthermore, fixed expenses such as rent, insurance, and other overhead expenses, should generally be the same amount from year to year. Big variances in fixed expenses may require further investigation.

The Balance Sheet

The balance sheet gives you a financial “snapshot” at the year-end date. As you know, the balance sheet reports the company’s assets (the things that it owns), its liabilities (the things that it owes) and its shareholders equity (net worth). Using some basic balance sheet ratios will help you identify trends about your company’s finances and ability to meet its commitments.

The current ratio, being current assets divided by current liabilities, is one indicator of a company’s liquidity. The higher the ratio, the better; but a drop in the ratio may indicate trouble, such as using a demand line of credit to finance new capital equipment or other long-term assets. Another reason for a deterioration in the current ratio would be recent decreases in operating cash flow to pay your trade suppliers and other current debts as promptly as in the past. The quick assets ratio, which represents the ratio of current assets less inventory over current liabilities, is another good indicator of liquidity.

To analyze accounts receivable, you should use the accounts receivable turnover ratio, being the amount of credit sales divided by the average accounts receivable balance. When this ratio drops, it means that it’s taking longer to collect your receivables, which might be a problem that’s widespread throughout your customer base, or may be concentrated with just a few of your major customers. Although both situations require corrective action, the latter is especially dangerous. You may get hit with a big loss because of an unhappy customer or because of their own financial difficulties.

On the liability side, the most commonly used ratio is the debt-to-equity ratio, which is the sum of the liabilities divided by tangible net worth (shareholders’ equity less the book value of intangible assets). The more debt that you take on, the higher this ratio will become. Taking on too much debt means less flexibility in making business decisions or taking on new projects. This is because your lenders will have become your business partners, and that’s not the reason you went into business in the first place, is it?

To determine return on investment, which shows a shareholder’s yield on his / her investment, simply divide net income (or loss) by tangible net worth. An unusually low ratio may mean that the company’s profitability isn’t what it should be when compared to prior years or to industry standards. Alternatively, if cash balances are high, the current ratio is higher than normal and the debt to equity ratio is lower than normal, a low return on investment ratio may mean that it’s time to make either make a substantial distribution of excess company cash to shareholders or make an investment in another venture that will improve the company’s overall profitability.


Now that you’ve analyzed the statements, you will have come to certain conclusions about how well your business has fared over the past year. But was this year’s performance in line with your real expectations? Had you even set targets and goals for the year?

Planning for success, by preparing financial and operational budgets, is an important part of effectively managing your business. You should also make sure that your financial reporting system is set up in such a way that reporting actual to budgeted results is a snap. If you need help in preparing budgets or in setting up a financial reporting system, seek your accountant’s advice. He / she will be qualified to advise you on what methods and systems are best suited to you and your business.

What is a Pooled Registered Pension Plan?

By Randall Orser | Investments

A few years back the Canadian government was realizing that people weren’t saving for retirement, and that the Canada Pension Plan (CPP) would have to go through drastic rate increases that would devastate the economy. So, the Pooled Registered Pension Plan (PRPP) was created.

A PRPP is a retirement savings option for individuals, including self-employed individuals. A PRPP enables its members to benefit from lower administration costs that result from participating in a large, pooled pension plan. It's also portable, so it moves with its members from job to job. Since the investment options within a PRPP are like those for other registered pension plans, its members can benefit from greater flexibility in managing their savings and meeting their retirement objectives.

Contributing to a PRPP

Like RRSPs, the maximum amount that a member or employer can both contribute to a PRPP in each tax year without tax implications is determined by the member's RRSP deduction limit.

Any employer PRPP contributions, combined with a member's contributions to their PRPP, RRSP, SPP, and spouse or common-law partner's RRSP and SPP, that are above the RRSP deduction limit may be considered excess contributions. It is important for members to know how much unused contribution room they have available in each tax year.

Any contributions made to a PRPP that are not deducted on the member's income tax and benefit return in each year are referred to as unused RRSP contributions. If a member withdraws the unused contributions from his or her PRPP, an offsetting deduction may be claimed. For more information, see What to do with unused registered savings plan contribution and "Withdrawing unused contributions" in Guide T4040, RRSPs and other Registered Plans for Retirement.

A member can make voluntary contributions to their PRPP between January 1 in each year and 60 days into the following year, up until the end of the year in which they turn 71. Member contributions are deductible on their income tax and benefit return, but the deduction must not exceed the difference between their RRSP deduction limit and the employer's contributions to their PRPP.

Death of a PRPP member

Like other registered retirement plans, when a PRPP member dies, all property held in the PRPP account is deemed to have been distributed immediately before the date of death. The fair market value (FMV) of the assets held in the account less any amounts paid to a qualifying survivor is included in the deceased member's income on the final income tax and benefit return.

In the case of the death of a member who had a spouse or common-law partner, if the deceased member's spouse or common-law partner was named in the agreement with the financial institution, the surviving spouse or common-law partner become a surviving member of the plan, taking over ownership and future direction of the PRPP account for the deceased. The surviving member is then entitled to receive a lump-sum payment from the PRPP or can choose to transfer the funds directly, on a tax-deferred basis, into another investment plan such as another PRPP, RRSP, SPP, RRIF or RPP.

Financially-dependent child or grandchild

In the case of a PRPP member who has a financially-dependent child or grandchild, the child or grandchild, if designated, will as a qualifying survivor, receive the funds from the deceased's member's PRPP account up to any amount designated. Since payments made from the PRPP are taxable, the child or grandchild would include the amount received as income on his or her income tax and benefit return. Same as for RRSPs, the amount received can be used to purchase a qualifying annuity.

If the financially-dependent child or grandchild has a physical or mental infirmity and is eligible for the disability tax credit (see line 316 – disability amount), the lump-sum amount from the deceased's PRPP can be directly transferred or "rolled over" on a tax-free basis, into a registered disability savings plan for an eligible individual.

Breakdown of the marriage or common-law partnership

A spouse or common-law partner or former spouse or common-law partner of a PRPP member, who is entitled to the funds from the member's PRPP account because of a breakdown of the marriage or common-law partnership, may transfer the lump-sum amount to: another registered plan such as another PRPP, RRSP, SPP, RRIF or RPP of the individual; or purchase a qualifying annuity.

Investment options

The investment options available for PRPPs are like those available for other registered plans, but there are some restrictions. The Income Tax Act does limit the type of investments that can be held in a PRPP to prevent tax avoidance planning. For example, a member cannot hold restricted investments in a PRPP such as their mortgage or debts, and shares of companies in which members have a significant interest.

The Pooled Registered Pension Plan (PRPP) is another great way for you to save for retirement, and, perhaps, save on the fees associated with other plans. What are you doing for retirement? If RRSPs, don’t make sense then look into the Pooled Registered Pension Plan (PRPP).

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Is Your Company Becoming Too Lean & Losing Out Because of it?

By Randall Orser | Small Business

It seems every business is touting the importance of being lean and mean. Lean manufacturing, lean supply chains and reduced overhead seems to be the recipe for today’s businesses, or at the very least, today’s version of how to succeed in business. It certainly makes sense given the severity of this most recent recession. However, was this move born out of necessity? Was it done to reduce excess, to become more competitive, or was it done simply because some companies wanted to emulate the strategies of other enterprises? Ultimately, was it done because it had to be, or were some companies pursuing this action simply because they read it was the right thing to do? Surprisingly, in a few situations, it was the latter.

There are many benefits to being lean. First, there’s the benefit afforded to companies who reduce their fixed expenditures. This reduces the company’s overhead and allows companies to offer more competitive prices. Second, pursuing vendor consolidation allows companies to streamline their supply chain and reduce inventory costs. However, there are also several drawbacks to pursuing lean principles. Some of these include reduced market presence, a reduction in the company’s service capabilities and the inevitable pursuit of a supply chain strategy that doesn’t meet the needs of the company’s customers or its market. The question you must ask yourself is whether your decision to become lean has limited your company’s ability to capitalize on opportunities. Was this decision made in your company’s best interests, or where you simply pursuing a course of action to keep up with competitors?

Understanding the consequences of lean principles

Lean principles are enticing. They are the ultimate solution to complex business problems. They represent the ideal scenario of reduced expenditures, reduced inventory costs and higher profit. However, are lean principles solid in theory and lacking in practicality? Do they offer the perfect solution to an imperfect business world? Ultimately, do they promise more than can be delivered? While lean principles do work for some companies, for others they are solid in theory, but lacking in their ability to deliver the goods. Becoming lean can lead to companies missing out on opportunities. So how does this happen?

Reduced market presence

One of the first areas companies cut in a recession is their marketing expenditures. Unfortunately, a few companies forget that marketing and sales are one and the same. Cutting back on marketing expenditures often seems like an easy decision. However, why would a company cut back on the one essential function that drives business? Why reduce the effectiveness of marketing and its ability to deliver sales opportunities? Surprisingly, some companies cut marketing expenditures simply because they lack the ability to track its effectiveness.

Several companies fail to see how marketing lowers their costs of finding new customers, how it increases gross profit, how it increases market share and stabilizes the company’s future and ultimately, how it addresses customer needs by answering their most pressing questions. When thinking of marketing, think of how much your customers need you in times such as this. Think of how they need your company’s support, knowledge, help and input during difficult times. Those companies who remain a strong player within their market are the ones who will benefit most.

Reduced service levels

One of the biggest impacts of becoming too lean is the eventual decline in the company’s service capabilities. Companies must clearly define those services that are deemed essential to sustaining business and retaining customers. After all, when times are tough, companies must do everything they can to retain market share. Therefore, it’s essential to clearly define the company’s essential services and to be mindful of the impact of cost reductions on the company’s ability to service its clients. What should companies look for?

A company’s service capabilities are defined by its internal and external clients. Internally, the company must have clearly defined procedures, work processes and seamless operations to improve how work is done and how fast it is completed. Who benefits the most from improved operations? The customer does. Therefore, understand that a company’s service levels include far more than just its customer service department. It includes how products are packaged, delivered, how customers are dealt with by accounting, technical support, as well as how sales & customer service can provide solutions. Becoming too lean will produce savings, but those benefits are easily eroded when customers are lost!

Reduced supply chain effectiveness

Companies need inventory to capture market share, but they loath the financing costs of supporting that inventory. Financing inventory is an extremely expensive part of running a successful business. Companies are right to identify inventory and their supply chain to reduce costs, but the mistake they make is by pursuing an inventory management and supply chain strategy that is not conducive to their business model, their market and their customers’ needs.

Instead of reducing costs by identifying their cost drivers, they instead change their inventory management philosophy by pursuing lean strategies they can’t possibly make work. This often happens when businesses decide to pursue lean supply chain practices like JIT, or Dell’s “Push-Pull”, when they lack the purchasing power, economies of scale and operational abilities to make either of these approaches work. Reduce your company’s inventory costs. However, start by identifying those costs and putting a plan in motion to reduce expenditures. Inventory may be costly, but you need it to capture opportunistic sales and maintain your market share.

Companies must be able to reduce expenditures and continually pursue initiatives that lower costs. However, they must also be mindful of the consequences of becoming too lean. There are benefits to improving operations, reducing inventory costs and streamlining supply chains. However, these benefits must be tempered with the consequences of losing market share and customers. Be sure that the changes your company makes are ones that are needed to improve your bottom line. Do what’s right for your business and not what you think you should do because other companies are pursuing the newest and latest trends.