Category Archives for "Small Business"

Collect Those Overdue Payments, Without Hiring A Collection Agency

By Randall Orser | Small Business

Debt concept TNCollecting past-due accounts can be a hassle for any small business owner. The process can spoil customer relations and waste valuable time. But there are ways to collect payments without the headache of hiring a collections agency or going to small claims court.

Try these four steps to help ease the woes of collections:

Credit Cards

Customers who know they can pay in installments may be more likely to do business with you. Overdue payment issues land between the customer and the credit card company—the business owner is removed from the equation. There are fees for accepting credit cards, so do your research. American Express (Amex) tends to be the most expensive; however, if you are dealing with wealthier clients you may want to accept Amex. Look at your industry association, Chamber of Commerce, Board of Trade, Canadian Federation of Independent Business, etc. as you get a discount on merchant fees through these associations.

Advance Payment

Retainers followed by additional paymentsas the job proceeds increase chances of being paid the full amount. Collect one-third up front; one-third midway through the service; and a final payment upon completion. Work out the percentage that works best for you and the client. You may want to get at least materials costs up front so you’re not out that amount. If your business is mostly labour, you may want to get a good portion to cover your labour costs. 

Transfer Collections Duties

Hire a part-time employee to handle your past due accounts. Your staffer can closely monitor accounts, which could shorten collections times. This strategy also alleviates tension between the business owner and the late-paying customers. Sending statements is also a good idea; there are business people who wait for a statement before paying anything. Plus, there’s no excuse for a missed invoice as they got a statement.

Contracts

Prepare basic contracts in advance and ask customers to sign off on a payment schedule and a specific work plan to reduce the chance of misunderstandings over the service and the payment. Always have a scope of work when working on a project basis, this way the customer can’t complain when you say ‘sorry that’s extra’. Construction is great at this, and anything not in the scope is a ‘change order’, and an extra cost that’s invoiced separately. It even pays to have a ‘scope of work’ for any business, especially a service business. Let the customer know what they’re getting for the price they’re paying.

While the above tips won’t stop all bad debts, they can alleviate the headaches of trying to collect monies owed to your business. Sadly, bad debts are just a part of doing business, so do as much as you can to nip them in the bud.

Cash Flow Management for Small Business Owners

By Randall Orser | Small Business

Dollar Coin Shows Currency Symbol And Cash TNCash flow is the bane of small business owners. Even if you are working on a large project that takes several weeks, you still have to pay the rent, utility bills, supplier invoices, loan repayments, and employee wages while you are waiting for the big payout of the project. Managing your cash flow is not always easy, especially when some clients extend your terms of payment and delay paying your invoices on time. Providing credit terms over several months can make your customers happy, but can make it tough for your business to pay the regular bills.

You can manage your small business cash flow by various methods. You can encourage your customers to pay invoices sooner, you can invoice in stages for the project, and you can factor your invoices to receive the payment from a credit agency before the customer actually pays the invoice. Some businesses will find a mixture of methods helps to balance the ledger book every month.

Encourage Customers to Pay Invoices Sooner

You can encourage your customers to pay invoices quickly in several ways. Some small businesses only work with cash or immediate payments. Customers pay cash on delivery or via credit cards, or your business does not deliver the product. While this is suitable for some businesses, such as those who use web-based ordering systems, this is less suitable for some businesses.

If you cannot ensure your customers pay for the product or service before delivery, you need to encourage your customers pay the invoice as soon as possible. The longer you extend credit to your customers, the longer you have to balance your cash flow without the income. Some small businesses offer a discount to customers who pay up front, or within a short time, such as 7 days of receiving the invoice. While this is a good way to encourage customers to pay on time, it can be costly to your business, depending on the discount you offer.

Invest in good follow up debt collecting practices. Sending out reminder invoices every week with coloured stickers encouraging fast payment of the invoice can encourage customers to pay the invoice sooner. Follow up with personal phone calls when customers have extended the payment of the invoice outside the terms of payment.

Reduce your terms of payment from 30 days to 7 days, if possible. If your customers do not pay on time according to your terms of payment, you may be able to add a surcharge to the invoice. This is a better cash flow solution than offering a discount for early payment, as the business gains more income when the customers pay late, and does not lose money for encouraging customers to pay on time.

Invoice in Stages

For larger projects over several weeks, set up a contract with the customer that allows you to invoice the client periodically over the course of the project when your business meets the key stages. Agree on what the key stages of the project will be with the customer, and decide on deadlines for each stage of the project. This will let the customer know when to expect your periodic invoice, and you will know when to expect the money from the customer for your cash flow balances.

Factor Your Invoices

Factoring is a relatively new form of credit that some credit companies are offering small business owners. Unlike bank loans with set repayments, factoring offers small business owners much more flexibility. Generally, you will be able to borrow up to 90 per cent of the invoices you have sent to your customers at any one time.

You borrow the cash via a draw down account and when the customer pays the invoice directly to the factoring company, you receive the rest of the invoice amount minus the factoring fee. The fee is usually smaller than interest payments from a bank, and the factoring company can help your business to follow up on the outstanding customer debts, which could save your business from the costs associated with debt collecting practices.

Managing your cash flow is managing the life blood of your small business. Without cash flow, you cannot purchase necessary supplies, pay your bills, or pay employee wages when you need to. Manage the cash flow of your small business by encouraging fast customer payments of invoices, invoicing in stages, or factoring your invoices.

Five to Ten a Day for Better Health (of Your Business)

By Randall Orser | Small Business

businessman shows success of business TN

We have been inundated with advice to eat well for our health’s sake. But, what about five to ten tips to better health of our business? Shouldn’t that be as important to the business owner?

Five to ten tips to follow a day can reduce the risk of failure and ensure your business enjoys a long and healthy life!

Five Tips to Overall Health:

Prioritize and get things done.

When prioritizing, keep customers forefront (and suppliers, inventory, and staff). Without customers, where would you be? Complete tasks. Follow through. Finish paperwork.

Plan ahead (but be flexible) – Get Organized.

Keep your eye on the road ahead. Ensure that you (and your staff) focus on the business plan, the marketing plan, and your original vision. Ensure that marketing campaigns are done ahead of time (ideally, a year in advance). Budgets and buying plans should be completed six months ahead, as well as any open-to-buy for product for promotional sales. Staff schedules and training should be well organized in order to coincide with seasonal upswings.

Customers and Customer Service – It’s always about the customers!

Every business owner should prioritize any task that involves customer satisfaction. If you tell a customer that the product will arrive by the end of the week, then ensure that your promise is kept. If you tell a customer that you will call them, then ensure that you do. Broken promises do not impress customers. Always under-promise and over-deliver!

Nurture all relationships including staff, suppliers, those in the business community and in the media.  

Reward your staff, motivate your staff and keep them in the loop. Join professional associations.   Expand your communication channels. Get into the habit of mailing thank you notes to customers, staff, suppliers and those who have benefited your business. Pick up the telephone and have a one on one conversation. Stay in touch.

Core competencies – What do you do best?

To thrive in the marketplace, a business must excel in at least one of the following: product offering, customer service, promotional strategies (branding), price or location.

Reminders to not only keep doing what you do best, but initiatives to keep improving. Never lose sight of what distinguishes your business from the rest. Learn to identify your strengths and build on them.

Five More Tips to Overall Health:

Look after the details – it’s always about the small details.

Is the exterior fresh and clean? Does a brightly painted door welcome your customers? Is there a bench, an attractive door wreath, or an eye-catching window display that attracts new customers? Do you have an area for weary customers? Does your children’s store have a toy area for children? Do you supply customers with coupons if you have inconvenienced them? Do you greet your customers by name? Do you capture their names on your mailing list?

Look after the expenses – Pay your bills on time.

Send out invoices and request payment in a timely fashion. Eliminate unnecessary perks; eliminate waste; eliminate frills that are not important to the customer. Look for less expensive ways to do everything. If not sure where to begin…call your accountant. Better yet, read your expense sheet and cut costs by ten percent. Pay your bills on time. If possible, pay within ten days and get a two percent reduction for early payment.

Grow (innovate)

Successful entrepreneurs are never satisfied with the status quo. They understand that to increase their share in the marketplace the business must grow: better product; newer technology; more effective website; more informed and knowledgeable staff; timelier shipping: better distribution channels; and so on.

Constantly change – re-invent yourself

A healthy business realizes that change is a constant; change will keep customers coming back. Customers will return to see new product displays, new demonstrations, and new content. Customers will brand your business – as a leader. Keep your customers delighted, inspired and motivated.

Old-fashioned principles are still true

Keep your business honest, reliable and trustworthy. Stand behind your policies – with no exceptions. Advocate privacy and honesty on your website and in print. Ensure that all practices value those principles. When a business values old-fashioned principles, customers will learn to trust that business and sales will follow. (There are some values that never grow old.)

You will know that your business is strong and healthy when you have difficulty prioritizing the above tips. Is change more important than principles? Are relationships more important than the bottom line?   A business owner that puts the customer (and customer service) to the forefront understands that the suppliers, the product, the service and the staff make up the equation.

The most successful businesses thrive because their owners understand that all aspects of business must be healthy; one area cannot stagnate or be left unattended for the sake of another area. Because a successful business is a component of all best practices – each integrated to make the whole.

A healthy business will enjoy a long life…so integrate five to ten a day to increase your chances to survive. The life of your business might depend on it.

Six Reasons Many Home Businesses Fail

By Randall Orser | Small Business

Close up of a pink piggy bank with dollars beside miniature house model on white background TNIt is a fact that as many home businesses are started, only a few succeed, many remain so-so, and many more fail with their owners actually losing their money. This is sad because almost all who ventured to do business at home have done so thinking that it is the best way to get out of the 9-to-5 rut while earning lots of money they never even dreamt of as employees. It’s when these owners face the stark reality about running their business that many find themselves falling short of their expectations. Below are 6 common reasons many home businesses become failures and what you can do to make sure your home business doesn’t suffer the same fate.

1. Lack of business plan.

Any business that launches without a plan is bound to fail. Any business owner who wants to succeed in a new undertaking must write a business plan to concretize his visions and what he wants to do with the business. The business plan maps out the directions the owner must take and the strategies that must be adopted to achieve goals.

2. Poor planning.

Many business plans are too optimistic they tend to overestimate the market and demand for the product or service. Sometimes, business owners underestimate the production costs and expenses of running their business. As a result, profits are smaller than projected. Sometimes, the operations result into a net loss and the business is rendered incapable of sustaining its own operations. Know your market thoroughly so you can make more realistic projections.

3. Insufficient working capital.

There are people who boldly start new businesses even without sufficient working capital. And when they finally run out of cash, many resort to mortgaging their homes, risking the financial security of their family. Therefore, make sure that you have enough business funds before establishing your home business. Keep your business funds separate from your personal money and don’t use one for the other. Commit your finances only up to a certain extent. Know when it’s time to quit but you don’t have to if you can manage your business well and grow it to be big and strong.

4. Lack of knowledge, experience and management skills.

Many home businesses fail because the owner does not know enough about the business. Or, he may be too inexperienced and lack the managerial skills necessary to make the right decisions in steering the business into profitability. If you wish to enter a particular industry and you do not have any prior experience in it, you should do your homework first. Read up and do the necessary research. Learn about production, marketing and financial management. Go back to school if you must so you can prepare yourself adequately for the demands of the business.

5. Lack of self-discipline and commitment.

Many home business owners think that they have the right to sleep late and work whenever they feel like. Unfortunately, such an attitude is a recipe for failure. Laziness and procrastination have caused the downfall of many home-based businesses. You should be prepared to toil hard if you want your business to succeed and this means having to work longer hours if necessary, and going out of your way to provide excellent customer service. However, make sure that you take breaks in between and get enough sleep to keep stress from consuming you. Home based businesses can turn into a monster if you don’t take full control at the onset.

6. Inability to cope with changes.

It is common among home business owners to be so absorbed in what they’re doing they fail to notice the changes happening around them. They are unaware of the latest trends and before they know it, the product or service they sell is on its way to becoming obsolete. As a home business owner, keep your nose onto the grindstone but keep your eyes and ears wide open. Maintain contact with your peers in the industry and try to widen your network. Be alert for hints of forthcoming changes so you can prepare to adapt yourself and your business to any developments.

Building your home-based business can give you a sense of fulfillment but you need to be disciplined and driven. Tap into your creativity to make the most out of the many opportunities that are present. If you can’t commit yourself to nurture your business through the highs and the lows, then you might as well continue being an employee and enjoy a more peaceful sleep at night.

Tax Preparation and Filing Help for the Home Business Owner

By Randall Orser | Small Business

One Thousand dollars, Tax Showing Expensive Taxes TNHome business owners can easily prepare their own tax return but many choose to have it done by someone else. They find it easier that way; besides, many home business owners in Canada and the United States think that their country’s income tax laws are complicated and so they prefer not to mess with them. In fact, you have a much higher chance of being audited if you file your own small business income taxes.

Who Can Help in the Tax Preparation and Filing?

When preparing and filing their income tax returns, taxpayers often seek the services of professionals such as attorneys, certified public accountants, tax preparers, or enrolled agents. Alternatively, they can use tax preparation software and online services. Using professional tax preparation services or paid preparers, however, is not entirely foolproof. Not only are their fees expensive but also you, the taxpayer, remain responsible for all the content of your tax return including errors, if there are any. You are liable for any deficiency, interest, and penalties that may result because of erroneous items in your return. For this reason, it is important that you review your tax return for accuracy before signing it.

Other than the honest mistakes, what you will also need to watch out for are the unscrupulous tax preparers. Their fraudulent practices can cause you grave legal and financial problems even if you are not aware of them. Such practices include manipulation of income figures, inflating personal or business expenses, claiming bogus deductions or unallowable credits, and overstating exemptions that allow them to prepare and file falsified tax returns in behalf of their clients.

How to Choose a Tax Preparer

Choose a tax professional who is experienced, honest and reputable. Ask questions about the length of his experience and any training in tax laws that he may have received. Ask people that you know who have used the services of the preparer. Find out if they were satisfied with the kind of service they received.

Choose the preparer who would most likely be available to answer questions about the preparation of your tax return in case of audit. Do remember that tax professionals must sign your tax return and provide you with a copy for your records. Beware of the preparer who does not want to sign your tax form. On your part, never sign a blank tax form and neither should you sign in pencil.

Avoid tax preparers who guarantee a refund or promise larger refunds than anyone else. Only the CRA, after reviewing your return, can determine if you are entitled to a refund. Also, if they prepare your tax return properly, the resulting figures will be similar to what other preparers can get. You may also want to consider the tax professional who can offer you electronic filing or other payment options you may choose.

Make sure to discuss the fees before you allow the tax preparer to work on your return. Fees are usually based on the complexity of your tax return. It follows that you will have to pay a higher fee if your return is complicated or if the tax preparer will need to spend longer hours in its preparation, such as going over a significant number of claims and supporting documents that still need to be sorted out. Avoid a preparer whose fee is based on the amount of refund you are expected to receive.

Keep in mind that your tax return does not have to be prepared by a tax professional. You can request a knowledgeable friend or relative to help you out. Or, you can even make use of the free tax preparation services that are available nationwide, for basic returns only. Check the free programs of the CRA and its industry partners.

However you prepare and file your return, the important thing is for you to file and pay your income tax. If you willfully fail to file and pay your taxes, you risk having major penalties and interest applied against any balance owing, plus the penalty can increase because you were neglectful over too many years for not filing.

6 Economic Questions Business Owners Should Ask About Their Company

By Randall Orser | Small Business

Question Marks Over Man Shows Confusion And Uncertainty TNThe business cycle is important for business owners because the ups and downs in the economy affect the ability of a business to stay afloat financially. Changes in the business cycle are measured against long-term trends.

This article offers an introduction to why managers and business owners need to understand the business cycle and a list of six questions that business owners should consider regularly to keep their pulse on the business cycle. Following changes in economic factors such as supply and demand in the local, regional, national, and global economies is essential for sound business planning.

According to Dr. William B. Conerly in “Businomics,” managers need to know two key things about the business cycle. First, “The manager would like to know when downturns—and upturns—in sales are coming.” For example, in an economic downturn, sales may drop and potentially hurt company profits. Second, “Managers would also like to know when their costs are going to rise or fall.” For example, inflation may cause the cost of goods to rise, resulting in the need for the company to raise the prices for its customers.

If you are a manager, you need to acquire an elemental understanding of economics to assist you with studying changes in your market and in the economy in general. What kinds of questions can you ask yourself to guide your monitoring of the economy? Just waiting for the news media to draw your attention to significant changes in the business economy may not be enough to protect your company.

Here are six questions about the relationship of your company to the business cycle to consider:

1. How have my business costs changed over the last four quarters? If you look at your costs over time for supplies, labor, services, and so on, you can identify trends either upward or downward based on fluctuations in the economy. Decreasing costs may increase your profits, whereas increasing costs may decrease your profits without adjusting your prices.

2. How have my sales been for the last year? Just like studying cost trends, you can study sales trends. You should know on any given week or month how your products are selling overall and how the major categories of products are doing. If you have a flagship product, you might need to prepare more detailed sales figures for that product.

3. How can I decrease my expenses to create more profit? Deciding whether you need to decrease expenses is a difficult issue. If you are hit with an economic downturn, you may be forced to cut your expenses quickly. Knowing when to trim the overhead of doing business is a skill that you build over time.

4. How have my profits changed in the last year? Because your costs are always changing, you can choose not to view profits as fixed amounts and study their trends upward or downward from quarter to quarter and year to year. You can study profits as a percentage of total sales for a constant measure of profit trends over time.

5. Do I need to increase the amount of savings for my business? Savings is an important consideration. Just like many households, many smaller businesses have nominal savings. Often smaller businesses rely upon credit to get cash when needed. If you set the amount you will save out of your monthly or quarterly profits as a percentage, you can adjust that percentage based upon changes in the economy.

6. Do I need the ability to borrow more money to support my business? Sometimes your business will be short on cash. For example, if you spend a lot on purchasing inventory and then you have a drop in sales, your business may take in less money than you were counting on to meet all monthly expenses. The ability to borrow as much as you need for unforeseen economic changes is crucial for keeping the company solvent. You can study your business to determine how much available credit your business might need to climb out of a monetary hole when changes in the business cycle hurt your financial position.

There are many other factors to consider when you study your business activities in relation to the fluctuating economy. The foregoing six questions serve as a starting point for exercising your business mind constantly about the business cycle. The more you study the trends of your business, the better you will become at making strategic moves to adjust business activities such as spending, saving, and setting prices.

What are Key Performance Indicators for Small Businesses?

By Randall Orser | Small Business

Key Performance Indicators diagram TNWhat is the purpose of your business?  What do you need to do absolutely correctly in order for you business to succeed?  What are the activities that you absolutely cannot screw up without losing significant amounts of business?

These questions are answered by examining your Critical Success Factors or CSF’s.  Critical Success Factors are defined as those activities that a business undertakes that allow it to succeed.

It’s more than just the numbers on your financial statements.  Some CSF’s relate to measures of quality, customer satisfaction, and how efficiently you are using your resources.

However, before you can do any analysis on your company’s Critical Success Factors, you need to examine your business strategy.

Ask yourself the following questions: Why is my business better than my competitors’? What do my customers tell me that they like about my business? What don’t they like? What action could I take that would make my customers go elsewhere?

Note that two of the four questions relate to your customers’ perception of your company, not your impressions on what they think.  It’s an important distinction as your customers may have a very different view on you and your business than you think.  How do you know what your customers think?  Ask them!  Set up a procedure where they are asked to fill out a feedback form when they purchase your product or service.  Ask them what they like and don’t like.  Ask why they might choose to shop elsewhere.  Ask what you are doing well and what you could be doing better.  You may be surprised by the results.

The answers to the four questions above give you a list of those activities that you need to make sure your business is doing regularly and consistently.  Review your list.  You will most likely find that the items on it relate more to your customers’ perceived value in your product or service, not just its cost.  Companies that compete only on cost will always suffer in the long run as there will always be someone else that can do it cheaper.

Now that you have defined your Critical Success Factors, you need to be able to make sure you are on track.  But how to measure them, especially when some are non-financial?

The measurements of Critical Success Factors are called Key Performance Indicators or KPI’s.  To recap the jargon, Critical Success Factors are things your company must do to thrive and Key Performance Indicators are the measures of those things.

Here is a typical list of Critical Success Factors:

  1. Personal service- making sure the customer gets to speak with a staff member when the purchase is made.
  2. Product quality- making sure the product does what you say it will do and is durable.
  3. Quick problem resolution- making sure all customer complaints are handled quickly and in a manner that impresses the customer.
  4. Same-day shipping- making sure that your product gets shipped out to your customer the day the order is received.

All four of these CSF’s can be measured, even though some of them are non-financial.

Those are some of the ways that non-financial indicators can be measured and tracked.  Once the measures have been determined, it’s important to set your expectations to measure against.  For example, if your target is to ship 100% of your products same-day, then you would gauge the actual against the standard (100%).

What would happen if your Key Performance Indicators start to slide?

Let’s say you’ve been tracking your key performance indicators for months and this month, several of the indicators seem to show problems.  What do you do?

When this happens (as it inevitably will), you need to discover the source of the problem.  A business could face many problems that would impact its key performance indicators including employee illness, cash flow crunch, breakdown in processes, and inattentiveness to customer needs.  If the problem is short term, such as employee illness, there is no need to take drastic action.  However, you will want to see if there is a way to make your operations less vulnerable to the illness of a single employee.

If the problem seems to be in the underlying processes, it’s time to put new procedures in place to make sure the critical success factor is being met.  Have there been changes in the external business environment?  New competitors in the industry?  Quality control problems with the inventory?  These are all situations that need a rethinking and reformulation of your business plan.  If you can see the icebergs, you will have a much better chance of being able to steer around them.

How Do You Calculate a Break-Even Analysis for Your Small Business?

By Randall Orser | Small Business

Money raining down on a piggy bank TNYou’re running a small business, or maybe you’re thinking about starting one. You don’t want to lose money, and you don’t want to go out of business. So, how do you find out how much you need to earn to break even? The answer is simple. You do a break-even analysis.

Don’t worry, a break-even analysis sounds more complicated than it really is. It doesn’t require a lot of math skills. It just requires some thought and a basic equation.

First, what is a break-even analysis? Very simply, a break-even analysis is the process of discovering your break-even point. What’s a break-even point? It’s exactly what it sounds like: it’s the point where your expenses are exactly covered by your income. It’s where you “break even”. Every sale above your break-even point is profit in your pocket.

Once you know your break-even point, you know exactly how much you need to earn to break even. You will also see whether or not you can realistically stay in business.

For example, if your break-even analysis shows you need to sell 1000 widgets every year just to cover your expenses, and historically you’ve only sold 200 widgets a year, then you’re going to have to do a lot of planning to get your sales up to 1000. You might need to dramatically lower your expenses or come up with a better marketing plan to break even.

So, how do you calculate your break-even analysis?

The first thing you do is add up all your fixed costs. This means all the expenses you have to pay whether you make any sales or not. Your fixed costs include your rent, utilities, and any salaries. Your business may have other fixed expenses like membership dues or insurance premiums. As an example, if you made widgets from home you might discover your fixed costs are $10,000.

Next, estimate the average price of your product or service. To continue the widget example, if all your widgets are sold for $100 each, then $100 is the average price of products. But what if your widgets have different prices? Then you find the average price. You find the average by adding up the different prices and dividing that by the number of products.

For example, say you offer 2 different widgets: one is $50 and the other is $150. To find the average price of product, add 50 + 150 and divide by 2. Your average price of products would be $100.

Finally, estimate the average cost of your product. In other words, how much does it cost you to produce each widget? Or, if you provide a service, how much does it cost you to provide that service (travel expenses, phone calls, etc.)? To conclude the widget example, let’s say your widgets cost $10 to produce.

Okay, now you know your fixed costs, the average price of product, and the average cost of product. You’re almost finished. All you have to do is plug these numbers into the break-even equation. This equation will tell you the dollar amount you have to make to break even.

The break-even equation is:

Fixed costs/ [1 – (average cost of product/average price of product)]

So, for the widgets example, take the fixed costs of $10,000 and divide that by 1 – (10/100). Remember, $10 is the cost of product and $100 is the price of product.

$10,000/[1 – (10/100)] = $10,000/.9 = $11,111

The equation shows that you must make $11,111 in order to break even.

Want to know how many widgets you’ll have to sell to get there? Easy. Just divide this number by the average price of product. For the widgets, divide $11,111 by $100 and you get 112 (round up to the next whole number).  So, in this example, you must sell 112 widgets every year just to break even.

Calculating a break-even analysis for your small business is the best way to find out how much you need to earn to stay in business. Once you know your break-even point, you can design marketing plans and control your expenses to maximize your earning potential.

Your break-even analysis will tell you exactly at what point you start turning a profit. Every sale above your break-even point will be money in your pocket, so take advantage of the break-even analysis to make better business decisions and increase your profits.

I Want To Hire Someone, But They Want Cash

By Randall Orser | Small Business

Broken Piggybank Shows Financial Deposit TNYou may be wondering why I used the word ‘hire’ in the title as to whether I mean an employee or subcontractor. I’m going to be talking about both situations. You basically hire someone whether it’s an employee or subcontractor. Cash is a sticky situation, and while it’s not illegal to pay cash, it’s how you treat the transaction that could make it illegal. In the employee situation, are you legitimately taking off deductions and then paying cash? In the subcontractor situation, are you paying off an invoice and it includes applicable taxes?

For our purposes here, a subcontractor refers to anyone you hire that is not an employee, whether it’s hiring someone to help you with your business work, or to do a website, or just to clean the office.

Employees

There is nothing wrong with paying cash to an employee, as long as you’ve taken off the deductions and are giving them their net pay. That is totally acceptable. You should also give them a paystub, and have a copy that they sign and date as receiving the pay. By having them sign a copy of the paystub, that you keep, you ensure the employee doesn’t come back saying he never was paid.

Now, if it’s a situation where someone wants to do some work for you, and get paid cash without you deducting the appropriate taxes, then you just have to say no. This situation will definitely come back and bite you in the posterior region.

I had a client that was paying employees cash, not doing the proper deductions, and not getting any kind of signed receipt that they actually received funds. By the time the client came to me it was too late, and we had a year-end to complete. Needless to say the client was screwed. All monies paid to these ‘employees’ could not be taken as a deduction for the company, and the client had to claim all these funds as a draw. The client ended up having to claim most of the funds as personal income, and owed thousands to CRA at personal tax time.

Subcontractors

Again, it’s not wrong to pay a subcontractor with cash as long as you get a receipt and pay the applicable sales taxes (unless of course the subcontractor is a small supplier and thus not registered for the GST/HST). Whenever you’re dealing with someone who you’ve hired as a subcontractor, you must get them to invoice you, and charge applicable taxes; whether you’re paying cash or not.

A problem arises when the subcontractor insists on only cash, and then won’t give you an invoice or receipt. If this happens, then don’t do business with that subcontractor, it’ll only come back to haunt you. Canada Revenue Agency always requires you to provide proof of any deductions you claim against revenues, and in this situation you have no proof. With no proof, there’s no way you can claim a deduction.

Let’s go back to the client we discussed in the Employee section above. This client had some dealings with a subcontractor who refused to provide a receipt and would only take cash. By the year-end they had paid this subcontractor tens of thousands of dollars over the course of several jobs. With no proof that the client had paid this subcontractor, all monies paid this subcontractor were considered to be draws taken by the client. These monies were also added to the client’s income.

This scenario involved two people in a corporation; so all monies drawn were divided evenly between the partners. In the end the two partners ended up having to claim tens of thousands of dollars as personal income, and thus ended up owing a lot of money to the government on their personal taxes. Fortunately, the client took these draws as employment income, so the corporation did end up with a deduction.

When you’re in business, or deciding to start a business, it’s imperative that you set a policy when it comes to paying cash. I recommend to clients to never pay cash, and either writes a cheque or some kind of transfer from their bank that can be traced to the recipient. And, remember that subcontractor may not be considered a subcontractor by Canada Revenue Agency, so be careful.

A Straightforward Explanation of a Company’s Income Statement

By Randall Orser | Small Business

Income Statement word cloud TNWhen companies want to track their financial performance over a given week, month, quarter or year, they turn to the information provided through their income statement. Sometimes referred to as an “operating” statement, a “profit and loss” statement or even an “earnings” statement, this financial reporting structure aims to define a company’s performance in terms of its revenue, the changes in its inventory values, its product’s COGS (cost of goods sold), its gross profit on sales, its expenses, and most importantly, its net profit for the period in question. We’ll review the income statement by taking a straightforward look at the activities of a company during a given month.

The Income Statement

The income statement is but one of the three key financial reporting structures for all enterprises. The others include the balance sheet and cash flow statement. However, while the balance sheet is viewed as a snap shot in time, and the cash flow statement tracks incoming versus outgoing cash from the business, the income statement is seen more as a time based representation of the company’s activities. While the income statement itself can be quite complex, ours will be simplified by focusing on the transactions of a company over a single month. In order to do that, we’ll outline the income statement by defining the relationship between a company’s sales, COGS, gross profit, expenses and net profit.

Sales, COGS, Gross Profit, Expenses and Net Profit

Gross profit is simply sales minus COGS. When thinking of COGS, think of those costs that go directly to making a given product. Determining the company’s net profit simply involves taking the gross profit and deducting the company’s expenses. When thinking of expenses, think of the cost of doing business. Expenses are costs that the business must absorb regardless of how many products it makes.

There is a simple approach to determining COGS and how they can be represented on an income statement. In our income statement, the company’s starting inventory values are added to that month’s new inventory purchases. This total is then subtracted from that same month’s unused inventory values. The calculations to determine COGS, gross profit and net profit are summarized below:

A) COGS = Starting Inventory Value + New Inventory Purchases – Ending Inventory Value

B) Gross Profit = Sales – COGS

C) Net Profit = Gross Profit – Expenses

Our income statement is a summary of the company’s activities for the month of July 2011. The company had revenue of $20,000.00 for the month. At the beginning of July, the company had $1,000.00 left over in unused inventory that wasn’t used or sold in the previous month of June. This is represented by the “starting inventory value” ($1,000.00) in the income statement. In the month of July, the company purchased additional inventory, which is included under the section “new inventory purchases”, the total of which is $10,000.00 ($2,000.00 + $2,000.00 + $4,000.00 + $1,000.00 + $1,000.00). At the end of July, the company had used up all but $3,000.00 of its inventory. This $3,000.00 is the company’s “ending inventory value”.

A) Here is the calculation to determine “COGS”.

COGS = Starting Inventory Value + New Inventory Purchases – Ending Inventory Value

COGS = $1,000.00 + $10,000.00 – $3,000.00

COGS = $8,000.00

B) Here is the calculation to determine gross profit.

Gross Profit = Sales – COGS

Gross Profit = $20,000.00 – $8,000.00

Gross Profit = $12,000.00

C) Here’s the calculation to determine net profit.

Net Profit = Gross Profit – Expenses

Net Profit = $12,000.00 – $3,000.00

Net Profit = $9,000.00

Putting the Income Statement Together

The first step is to define the time period of the income statement. Our example is for a company’s activities during July 2011. The second step includes the company’s revenue for the month, which in our example is $20,000.00 in sales. The third step includes stating the starting inventory values for July. This is inventory that was not used or sold in the previous month of June. Don’t be confused with the beginning inventory value. This is inventory the company wasn’t able to sell during the previous month. The fourth step includes accounting for the new inventory the company purchased in the month of July. Why would a company purchase more inventory when it already has inventory from the previous month? Simply put, companies often have large product portfolios, the likes of which forces them to purchase large amounts of inventory. All companies carry some amount of inventory from one month to the next. The fifth step includes summarizing the unused inventory, or better put, the “ending inventory value” for July. The sixth and seventh steps include determining the COGS and gross profit. The eighth step includes itemizing the company’s monthly expenses. The ninth is to add up the expenses and finally, the tenth step determines the net profit. All ten steps are highlighted in bold  in the income statement below.

Income Statement (1) July 2011
  (2)    Revenue $20,000.00
Starting inventory value  (3) $1,000.00
New inventory purchases  (4)
aluminum $2,000.00
nuts $2,000.00
epoxy $4,000.00
steel $1,000.00
copper $1,000.00
Ending inventory value       (5) $3,000.00
COGS    (6) $8,000.00
Gross Profit  (7) $12,000.00
Expenses   (8)
advertising $1,000.00
equipment maintenance $750.00
insurance $500.00
rent $250.00
office supplies $500.00
Total Expenses (9) $3,000.00
Net Profit   (10) $9,000.00

Notice how the net profit is at the bottom of the income statement? That’s why it’s called the “bottom line”. By no means is this the only way to depict the income statement. For instance, it’s not uncommon for companies to simply sum up their COGS separately. However, the basic premise remains. To determine gross profit, take the sales and subtract COGS. To determine net profit, take the gross profit and deduct the month’s expenses.