Category Archives for "Small Business"

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.

A Straightforward Explanation of a Company’s Balance Sheet

By Randall Orser | Small Business

Balance Sheet Word Cloud Concept in red caps TNA company’s balance sheet is one of its three main financial reporting methods. The other two include the company’s income statement and its cash flow statement. However, if ever there was one way to describe a balance sheet, it would have to be that a company’s balance sheet is simply a snapshot in time and must always be in “balance”. What exactly does this mean? Well, it means that both sides of the ledger must be equal to one another. It is a single moment in the company’s history that summarizes the company’s assets, liabilities and owner’s equity. In fact, to make sure the balance sheet is in balance, it must follow one simple rule; the company’s assets must equal its liabilities and owner’s equity. We’ll review this simple rule and show how a company must ensure that its balance sheet is a true representation of its assets, liabilities and owner’s equity.

The Balance Sheet Rule: Assets = Liabilities + Owner’s Equity

Understanding assets, liabilities and owner’s equity

In order to understand the balance sheet, it’s important to define these three aforementioned criteria. A company’s assets include its cash, inventory, equipment and machinery in addition to any real estate holdings. It is found on the left side of the balance sheet. A company’s liabilities are a summary of what it owes to in notes payable and a summary of owner’s equity. The liabilities are always found on the right side of the balance sheet. We’ll take a systematic approach to defining all three of these criteria within the balance sheet by approaching it from the mindset of a company that is just getting started. Along the way, we’ll fill in the gaps in the following table and outline exactly how the balance sheet must always be in balance.

Assets Liabilities
cash notes payable
inventory owner’s equity original investment
equipment and machinery
total assets: total liabilities:

Your first week of operation!

Let’s assume you’ve decided to pursue a new business venture. You have $1,000.00 of your own money to invest in your business. However, you need more. Therefore, you secure an initial loan from a private investor. That initial loan totals $5,000.00 and is money you can use to get your business off the ground. However, that loan isn’t cheap by any means. That investor will easily charge you interest to borrow the money. After all, they’re in it to make money as well! Therefore, you now have $6,000.00, which is made up of $1,000.00 of your own money and a $5,000.00 loan. This $6,000.00 in cash should go on the left hand side of your ledger under “assets”. However, you also have a loan that should go under the notes payable section of your liabilities side, in addition to your own original investment of $1,000.00 that should go under the owner’s equity portion. These changes have been included below and are in blue. The balance sheet is now in balance. Looking at the table below, it’s easy to see how the balance in the balance sheet is maintained. You have cash holdings of $6,000.00 and liabilities of $6,000.00. We’ll consider this balance sheet a representation of your first week of operating a business.

Week 1: Balance Sheet

Assets Liabilities
cash $6,000.00 notes payable $5,000.00
inventory owner’s equity

  • original investment $1,000.00
equipment and machinery
total assets: $6,000.00 total liabilities: $6,000.00

Your second week of operation

In your second week, you move forward with purchasing inventory and equipment in order to get your business off the ground. When thinking of inventory, think of supplies for your business. It’s the same thing. You decide to purchase raw materials that total $4,000.00 in order to make your product. You also purchase a computer system for your new business that costs $1,000.00.

These aforementioned amounts come directly from cash in assets. This means you must place the above amounts under the inventory and equipment portion of the assets side of the ledger. Since you’ve spent this money, you must deduct it from your cash. Therefore, you now have $1,000.00 in cash, $4,000.00 tied up in inventory and $1,000.00 in equipment.

Does the liabilities portion of the balance sheet change? No. You still owe your original loan and still have your original investment of $1,000.00. All you’ve done in this step is account for the inventory and equipment you’ve purchased. The table below is a representation of the balance sheet for the second week of operation.

Week 2: Balance Sheet

Assets Liabilities
cash $1,000.00 notes payable $5,000.00
inventory: $4,000.00 owner’s equity

  • original investment $1,000.00
equipment and machinery: $1,000.00
total assets: $6,000.00 total liabilities: $6,000.00

Your third week: making a sale!

Up to this point, you’ve simply allocated your expenditures in terms of inventory and equipment. Now you’re ready to start making some sales. In this case, you need to determine your product’s “COGS”, which is simply an acronym for “cost of goods sold”. Your new company is able to make 100 units of your new product from the inventory you’ve purchased. Therefore, your COGS are $40.00 per unit which is simply the $4000.00 of inventory divided by the 100 units that can be made from that inventory.

After doing some market research, you determine that you should be able to sell each product for $55.00. Your gross profit is simply your sales total of $55.00 minus the $40.00, giving you a gross profit of $15.00 for each unit sold. In the first week of operation, you manage to sell 60 units for a sales total of $3,300.00 (60 units multiplied by $55.00 per unit). Your total costs are 60 units multiplied by the $40.00 in COGS, which is $2,400.00. This means you’ve generated a gross profit of $900.00, which is simply the sales revenue of $3,300.00 sales minus your total costs of $2,400.00.

For this transaction, we have to add the $3,300.00 of sales revenue into the cash portion of the balance sheet. Our new total in cash is now $4,300.00. Our inventory has been reduced by $2,400.00, which now leaves us with a total of $1,600.00 in inventory. Unfortunately, if we were to stop here, the assets would be larger than the liabilities, and that simply can’t be the case. Remember, both sides must equal each other and must be balanced. So, we add a new category to the liabilities of the ledger portion to include the gross profit we generated for the sale of 60 units in your first week of operation. This new category must go under the owner’s equity portion of the liabilities side. Here is a representation of the entire transaction.

Week 3: Balance Sheet

Assets Liabilities
cash $4,300.00 notes payable $5,000.00
inventory: $1,600.00 owner’s equity

  • original investment $1,000.00
  • earnings: $900.00
equipment and machinery: $1,000.00
total assets: $6,900.00 total liabilities: $6,900.00

From this point on, you’ll continue to invest in your business. Perhaps in your fourth week of operations you’ll start advertising or marketing your product to new prospects. If so, those expenses will come directly from your cash holdings on the asset side and be deducted from your earnings portion on the liabilities side. Over time you’ll want to pay off your loan under your liabilities. Each time you do, you’ll reduce the left side of the ledger by the same amount. Remember the rule with respect to the balance sheet: The right side must always equal the left.

Starting Your Own Business – What It’s Not!

By Randall Orser | Small Business

Piggy bank and success concept TN

Although starting a business may be a dream for many people, the reality can be a jarring contrast. If you’re considering your own business, a hard look at what it really entails can help you to prepare yourself and your family for the sometimes-unexpected twists and turns of a new business.

It’s Not Lucrative–At First

Anyone considering starting a business should take considerable time researching and calculating the expenses required for an adequate start-up. Your idea may require purchasing equipment, renting a business facility, buying inventory, and investing in a major advertising campaign or hiring a sales team. If you have a hefty bank account of savings, you may not require financing of your new business. However, most people must go to the bank and secure a business loan or line of credit to provide funds for the initial expenses. Many people use the equity in their homes as collateral to secure a loan. Others borrow funds from family members. Others rely on financing combined with the income from a working spouse to get them through the early months until they are able to secure a regular income. However, as the year’s pass and your business become established, you will find that you are able to garner a good income from the profits and a number of benefits.

It’s Not Easy Hours

Starting a business requires a complete commitment of time and energy to put together the diverse elements that makes any business succeed. In the early years, a business essentially takes over your life. You will find that you, your spouse and even your children begin to breathe, eat and sleep the business’s many details. You can expect to put in long hours organizing your business physically, financially and legally. You may have to consult with professionals about tax and legal matters. You may have to find and train your new employees. It is likely you will spend long hours designing a marketing plan to find new customers. You will spend time on human resource and insurance concerns. You will attend local conferences and business events to get your business known. You may have deal with small surprises you didn’t expect. In the process, you will come to know your business and yourself better, but it will often feel like you have become a work machine. But soon, your business will take on a life of its own, and you will be able to enjoy the rewards of a job well done and financial benefits of careful organization and planning.

It’s Not Fun For the Family

Although you may have visions of your spouse and children cheerfully working to help the business grow, be aware that they may not appreciate the time and energy spent on growing your business. You may spend long hours away from them planning for your business’s future. You may be distracted and stressed when you’re at home. Your spouse may have work and activities of his or her own, and they may resent time spent on your business. In truth, it is sometimes easier for families when parents work a regular 9-to-5 schedule with plenty of paid time off. A business sometimes requires working weekends and holidays to keep up with a growing customer base. Vacations can be interrupted and family events missed. However, as the business grows, it is likely that you will have a manager or other person in charge to allow you and your family to get away more often.

It Doesn’t Allow You To Do Whatever You Want

Many people start a business expecting it to free them from the constant monitoring from supervisors or bosses. Having your own business entails a different type of “accountability.” Taking care of your customers becomes a major concern. Finding and keeping good employees becomes an ongoing effort. Government regulations, taxes and legal matters become more pressing concerns. You will never quite be free of these types of oversight, but you will learn to integrate them into your business decisions.

Although, the demands of starting one’s own business can be daunting, millions of people embark on this great adventure every year. If you have the enthusiasm to implement your dream of owning your own business, and have the drive to do whatever it takes to grow it, you are highly likely to find success in your venture. Of course, don’t forget all the government regulations, taxes, etc. you must be up on, or at lease hire the right person to keep you up on them.

How should I organize my receipts?

By Randall Orser | Small Business

Euro banknotes and piggy bank TNOrganizing your receipts is important when working with a bookkeeper, accountant, or tax preparer. And, of course, when Canada Revenue Agency (CRA) comes calling wanting to look at your receipts. For the former, having your receipts organized makes entering the information go much smoother, and could result in a cost saving on their fees. For CRA, your ability to find a receipt easily and fast ensures that your audit goes without a hitch, and CRA is happy you provided the information in a very timely manner. As someone once said, ‘Do you want the four hour audit, or the four day one?’ How you organize your receipts determines that.

Bookkeeping

The best way to organize your receipts for bookkeeping is by month, based on your fiscal year. The reason is that when we’re entering your receipts we reconcile by the month, therefore, having everything by the month makes it easy to ensure we have everything. Now once everything is entered how you file those receipts depends on the size of your business.

For most sole proprietorships, filing by category (as per the Statement of Business Activities on your personal tax return) will work just fine. That is by office, meals, travel, telephone/internet (or communications), advertising/marketing, etc. CRA when they do a review or audit will look at the lines on the Statement of Business Activities and want to look at the receipts that pertain to that line item. Bank statements, as well as credit card statements, would be filed together so they are quickly accessible.

If you’re a larger sole proprietorship, or corporation, then you are probably better off filing your receipts based on the purchaser rather than the expense category. If you get your telephone/internet from Telus then have a file for Telus, or Shaw or Rogers. Have a file for each major vendor with which you do business. I do find it helpful to have a file for Meals and Automobile as these two categories get looked at the most; rather than having them under a vendor category.

For bank and credit card statements you can attach the smaller receipts to the statement, so they don’t get lost. Go by the statement dates for attaching receipts not just the month.

Also keep files for each leases, contracts, etc. so you can find them when they come up for renewal, or just to know when they are coming up for renewal.

Employees

You should have a separate file for each employee. This file can contain their employment contract, TD1s, signing up for benefits plans, contact information (including emergency contact information), time sheets, paystubs, T4s, annual or other reviews, disciplinary actions taken (and letters written about such to the employee), etc. Document everything you do with an employee so that you are covered if you have to let them go, or they quit, and some kind of action needs to be taken or has been taken.

Taxes

For your personal taxes, you can keep all your slips together along with a copy of your return. I’d keep each year in it’s own envelope (we have our ‘Tax Stuff’ envelopes) or folder, and attach all donations, medical expenses, etc. together, along with your T-slips (T3, T4, T5, etc.). For the sole proprietor, I’d keep a copy of your income statement and balance sheet for that year in this file too.

For corporations, I’d have a file that keeps all your year-end documents together: the corporate tax return, the year-end financial statements, along with the adjusting entries and the adjusted year-end trial balance. Don’t forget to enter your year-end adjusting entries so your data file matches what was filed with CRA.

Hopefully you never have CRA come calling. However, you will find that as long as you keep everything organized anytime CRA comes calling you won’t be in a panic about finding items as they are at your fingertips. With an organized filing system, you can find things quickly when you need them.

Does my business have to follow International Financial Reporting Standards (IFRS)?

By Randall Orser | Small Business

a man hand graphCurrently Canadian business must follow Generally Accepted Accounting Principals or GAAP. You may have been hearing over the past couple of years talk about International Financial Reporting Standards or IFRS, and talk of businesses in Canada converting to this reporting standard. Do you as a small business have to convert out IFRS? That’s what we’ll talk about here.

What is IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.

The IASB is an independent accounting standard-setting body, based in London. It consists of 15 members from nine countries, including the United States. The IASB began operations in 2001 when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, national funding regimes, and other international and professional organizations throughout the world.

A financial statement should reflect a true and fair view of the business affairs of the organization. As statements are used by various constituents of the society / regulators, they need to reflect a true view of the financial position of the organization, and they are very helpful to check the financial position of the business for a specific period.

IFRS authorize three basic accounting models:

I. Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm.

II. Financial Capital Maintenance in Nominal Monetary Units, i.e., globally implemented Historical cost accounting during low inflation and deflation only under the traditional Historical Cost paradigm.

III. Financial Capital Maintenance in Units of Constant Purchasing Power – CMUCPP – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation under the Capital Maintenance in Units of Constant Purchasing Power paradigm.

Sounds complicated, doesn’t it. It is much more involved than GAAP for sure. It will take time for enterprises to convert to IFRS.

Currently, financial statements reflect, historically, a moment in time rather than what may, or may not, happen with the company. IFRS allows for the probable future economic benefit will flow to or from an entity to be recognized in the financial statements.

Do I have to implement IFRS in my business?

In Canada, The use of IFRS became a requirement for Canadian publicly accountable profit-oriented enterprises for financial periods beginning on or after 1 January 2011. This includes public companies and other “profit-oriented enterprises that are responsible to large or diverse groups of shareholders.”

So, unless you’re a public company you do not have to follow IFRS. This may change over time. Should I ever convert to IFRS? I would say no, not unless you have to for regulatory reasons or you wish to sometime in the future take your company public. Converting to IFRS can be a costly and time-consuming practice and requires the skills of an accountant who’s worked in the IFRS arena.