Business Analysis

When traveling for business, understanding what constitutes allowable business deductions can significantly impact the financial health of your business. The Internal Revenue Service provides guidelines that help distinguish between personal and business expenses, ensuring taxpayers do not overstep boundaries while maximizing their deductible expenses. Sometimes the language in the tax code is complicated, so it’s best to rely on the assistance of a CPA if you have any questions about allowable business expenses, but in general, these are the guidelines that need to be followed:

1. Travel Expenses Defined

The IRS considers travel expenses as the ordinary and necessary expenses of traveling away from home for your business, profession, or job. An "away from home" condition is met when one must be away from their general area of tax home (main place of business or work) substantially longer than an ordinary day's work and needs to sleep or rest to meet the demands of their work while away. These expenses include a wide range of costs, from transportation to accommodation and meals, provided they are strictly business-related. It’s very important to differentiate these from personal expenses, which aren’t typically deductible.

2. Transportation Costs

Transportation costs to and from your business destination are fully deductible. This includes airfare, bus fare, taxi fares, and car rentals. If you use your car for business travel, you can deduct the actual expenses or use the standard mileage rate designated by the IRS, plus tolls and parking fees. Remember, if you choose the standard mileage rate, you cannot also claim actual expenses like gas and maintenance; it’s one or the other. Making the right choice between these methods can significantly impact your deduction amount.

3. Lodging and Meals

Expenses for lodging are fully deductible, as are meals under certain conditions. However, the IRS enforces a 50% limit on meal expenses, which includes food, beverages, taxes, and tips. The Tax Cuts and Jobs Act of 2017 has made changes to meal and entertainment deductions, so don’t make assumptions without consulting with your CPA. This limitation encourages moderation in spending on meals during business travel and requires detailed record-keeping to ensure compliance and maximization of deductible expenses.

4. Entertainment Expenses

Post-2018, the IRS no longer allows deductions for entertainment expenses. This means costs incurred for entertainment, amusement, or recreation purposes, even if directly related to the business itself, cannot be deducted. However, if the expense is for a business meeting or conference, the costs may be deductible under specific circumstances. This change underscores the IRS’s effort to tighten the rules around what constitutes a legitimate business expense, aiming to eliminate deductions for purely recreational or social activities.

5. Incidental Expenses

Incidental expenses are minor costs incurred while traveling for business. These can include tips for services, such as for porters or maids. While individually small, collectively, they can add up and are generally fully deductible. It’s important to track these small expenses as they occur, as their cumulative effect can be significant over time, contributing to a larger overall deduction for business travel expenses. Since many of these expenses will now be digital, such as in tipping apps, it’s much easier to track them.

6. Convention and Seminar Fees

Fees for conventions, seminars, or similar events can be deductible if they are directly related to your business and can improve your professional skills. However, the event must be relevant to your industry. Attendance at these events must serve a bona fide business purpose, such as learning new industry trends or networking, and cannot be primarily for entertainment or leisure. Documentation of the event's relevance to your business and the benefits derived from attending is crucial for substantiating these deductions.

7. International Travel

For international travel, the rules can become more complex. Only the portion of travel that is business-related can be deducted. If the trip is primarily for business but includes personal days, you must allocate and deduct only the business-related expenses. The IRS provides specific guidelines for determining the deductibility of international travel expenses. This allocation often requires detailed planning and documentation, including calendars and itineraries, to clearly demarcate between business and personal activities during the trip.

8. Record Keeping and Documentation

Proper documentation is crucial for substantiating travel expenses. The IRS requires taxpayers to keep timely records that prove the amounts and purposes of travel, entertainment, and gifts expenses. Receipts, invoices, and logs should detail the amount, date, place, and essential character of the expense. This rigorous documentation serves not only to satisfy IRS requirements but also as a valuable practice for managing and reviewing business expenses, ensuring that each is optimized for both tax purposes and budgetary efficiency.

9. Combining Business with Pleasure

When combining business with pleasure, expenses must be clearly divided between business and personal activities. Only the business-related portion is deductible. This requires careful planning and record-keeping to ensure compliance with IRS regulations. The delineation between business and personal expenses must be clear and defensible, as mixing the two without proper documentation can lead to disallowed deductions and potential penalties.

10. State-Specific Considerations

It's also important to note that state tax laws may vary. Some states may not conform to federal tax guidelines, potentially affecting the deductibility of certain expenses. Consulting with a tax professional who is knowledgeable about the specific laws in your state is advisable. Understanding these variances is crucial, as it ensures that deductions are maximized not only on the federal level but also in accordance with state-specific regulations, which can further optimize a business's overall tax liability.

Getting a handle on the nuances of allowable business deductions for travel can lead to substantial tax savings, freeing up more resources to be reinvested into the business. Staying abreast of the evolving tax laws and regulations is key to ensuring compliance and optimizing tax benefits. Engaging with a CPA or tax professional for personalized advice can ensure that your business maximizes its deductible expenses while adhering strictly to IRS guidelines, providing a solid foundation for lasting financial success and growth.

by Kate Supino

Before the pandemic, many workers often fantasized about what it would be like to work from their homes. When the pandemic struck, many of them got to find out. Thanks to employers shutting down offices, employees were suddenly working remotely from home. If you are included in this group of workers, you may now be concerned about how this may impact your taxes. Since numerous factors come into play on this matter, you won't be able to decipher the rules and regulations on your own, which is why you will need to rely on the advice of a CPA you know and trust.

Paying Taxes in Multiple Jurisdictions

If you are like many employees who have worked remotely, you may have found yourself working in a different state from that where your office is actually located. If so, you may be wondering if you now owe income tax in multiple jurisdictions, or if you'll be filing income tax returns in more than one state.

Whether you live in a state or just work there, the fact is each state can choose to tax your income. However, factors such as domicile or residency will come into play, so you will need to talk this over in detail with your CPA.

Needless to say, this can get very complicated. For example, in states that feature large metro areas where most workers live in different states, tax credits are usually put in place to ensure workers are not taxed twice. This is done in Washington, D.C., where payroll tax is based on a worker's state of residency.

However, some states including Arkansas, Pennsylvania, New York, and several others tax workers based on job location, meaning they are expected to pay taxes even if they live and pay taxes in another state.

Working Remotely in Multiple Locations

In some situations, workers like you may find themselves working remotely in multiple locations, which can create even more confusion when it comes to paying taxes.

As an example, you may live in Florida as your primary residence. However, due to a mandatory office closure by your employer, you find you are able to work from a vacation home in North Carolina. In this situation, when it's time to file your taxes, you would need to file a nonresident income tax return on whatever you earned while working in North Carolina, which would be filed with your usual tax returns.

As to why you would do this, it comes down to the tax rate in your remote location. If the tax rate in the remote location is higher than in your home state, or there is no income tax imposed by your home state, the tax credit in your home state will likely not be enough to offset any taxes you may owe. To keep employees from having to pay additional taxes, some employers choose to establish a teleworking office in the location of their remote employees.

Working Remotely: Necessity or Convenience?

When questions arise about employees paying taxes while working remotely, one of the deciding factors states take into consideration is whether the employee was working remotely out of necessity, or did they instead do so because it was simply a more convenient option. If working remotely was a necessity, it becomes easier to win your argument and thus pay fewer or no taxes in the state where you worked remotely. However, if the state determines you worked remotely just out of convenience, expect to be paying more in taxes.

Remote Workers and Tax Deductions

As a remote worker, you may have assumed this will entitle you to a number of tax deductions. However, you may be less than pleased with how the IRS has approached this matter. Before the Tax Cuts and Jobs Act was passed in 2018, taxpayers who were employees could deduct job-related expenses, such as the desk and computer they used while working remotely. In addition, other miscellaneous itemized deductions could be taken, but only if they exceeded two percent of the employee's adjusted gross income. But as tax reform came along, the bad news for you as a taxpayer is that these deductions have been suspended from 2018-2025.

Always Keep Good Records

When it comes to your taxes, you no doubt realize by now that keeping good records is essential to helping you avoid problems big or small. By having excellent records, it becomes that much easier for your CPA to help you navigate the complexities involved with paying taxes while working remotely. Therefore, if you have worked remotely like so many other employees, it is vital you carefully track exactly how many days you worked in various states, how much money you earned doing so, and anything else you deem to be important.

How to Lower Your Tax Bill

If you think you are stuck with having a large tax bill due to working remotely, the good news is that by working with your CPA, you may be able to substantially lower your final tax bill. For example, your CPA may recommend you change your withholding status, which could be a big plus in your favor. In addition, you could also work with your CPA to find other ways to lower your overall tax liability, so keep an open mind and trust the advice you get from your CPA.

Employer Mistakes

Since the pandemic brought about much confusion in the workplace, many employees have dealt with mistakes made by employers that resulted in their tax situations getting muddled. In many situations, employers may not have realized an employee was working in a different location, such as a vacation home. When this occurs, taxes are not properly withheld from income, resulting in a surprise come tax time.

If you want to avoid unexpected surprises come tax time, do all you can to keep accurate records and communicate with your employer. By doing this and consulting regularly with your CPA when you have questions, working remotely will be a bit easier.

If you have a specific societal problem you would like to address, such as a charitable cause, educational issue, or even helping unwanted dogs and cats find their forever homes, you may be thinking about starting a non-profit organization. While you will be able to do much good, it is important you know all the major steps involved in your project. Though certain disadvantages exist, just as there are with any venture, the pros outweigh the cons. Now that you know what you want to do, here are some of the biggest benefits to forming a non-profit.

Federal Tax Exemption

Arguably the greatest benefit of all, your non-profit organization will be given a federal tax exemption, often referred to as 501(c)3 tax code status. With this, your organization won't have to pay any corporate or income tax, since you won't be reporting any profits. However, remember that you will have to continue filing tax returns with the IRS to maintain this exemption, and you may be subject to periodic audits so the IRS can verify your non-profit is playing by the rules.

Tax Deductions

Along with the federal tax exemption as well as state and local tax exemptions, your organization will also be able to offer others tax deductions for their contributions. Whether they donate money or items, giving them a receipt will let them lower the amount of taxes they will be required to pay. As a result, this gives people more incentive to donate to your organization, making it a win-win for everyone.

Tax Credits

If you really want to take advantage of the tax benefits that are associated with non-profits, make sure you learn all you can about the many tax credits that are made available to numerous organizations just like yours. While the majority of these credits will come from federal, state, and local governments, you may even be eligible for some offered by private organizations, so keep this in mind as well. The credits, which are based on how much your organization would owe in taxes for a particular year, then allow your tax amount to be adjusted to what is usually a much lower amount.

State and Local Tax Exemptions

As mentioned earlier, most non-profits are also eligible for state and local tax exemptions that can work together with federal exemptions to save your organization thousands of dollars each year. Since states are always looking for ways to incentivize local organizations and citizens to help solve societal problems, these exemptions often make a tremendous impact.

Access to Grants

Since it can always be a challenge for non-profits to gain the money they need for their causes, taking advantage of the many grants that are available can make a world of difference in a hurry. No matter the focus of your non-profit, there is a good chance you can find many grants that can give you much-needed funding.

Postal Service Discounts

As any non-profit organization knows, mailing costs can often be much higher than anticipated. To help with this, the U.S. Postal Service offers generous discounts on bulk mail rates for tax-exempt non-profits, meaning you can send out newsletters, donation requests, and more while saving a substantial amount of money.

Credibility

If you try to make changes to certain types of problems in your community or elsewhere, having actually formed a non-profit can give you the credibility needed to convince people to donate money to your cause. Due to the tax deductions people can take by giving to charitable causes, actually obtaining non-profit status will increase the chances your group will be able to accomplish its goals.

Strict Management Oversight

While you've already read about many of the biggest benefits to forming a non-profit, you should also be aware of some of the biggest disadvantages, one of which is very strict management oversight. Under U.S. law, non-profit statutes contain strict rules regarding how a non-profit is to be managed. Thus, depending on the type of non-profit you form, its location, and other factors, you may be required to have a board of directors, conduct regular public meetings, take minutes of all meetings and more.

Regulatory Compliance

If there is one thing the leaders of most non-profits hate dealing with on a regular basis, it is the ongoing need to be in full compliance with ever-changing regulations from local, state, and federal agencies. Should you fail to stay in compliance, it is possible your organization could lose its non-profit status, forcing a shutdown. Therefore, you should pay close attention to what is required of your organization, which can include filing annual reports, maintaining records, and drafting bylaws.

Political Campaigning or Lobbying

Even if your non-profit organization is passionate about a certain issue, it is against the law for your non-profit to participate in lobbying or political campaigning of any kind. Since you have tax-exempt status, actively engaging in these activities will be a quick way to bring plenty of legal trouble your way and lose that all-important tax exempt status.

High Levels of Expenses

Last but not least, always plan on having more expenses that you anticipated when running a non-profit organization. For starters, you will have filing fees to pay to the state where your non-profit will be located. In addition, you will probably also be expected to pay annual fees to the state. However, by making yourself aware of these expenses at the time when your non-profit is formed, you can plan your budget accordingly.

While forming a non-profit will allow you and others to bring about significant and positive changes in the lives of others, it can also be quite a challenge keeping up with the rules and regulations. But with so many tax benefits that are ready for the taking each year, it is well worth the effort. After all, once you do your homework and have everything up and running, you will be able to get up each day and know you are changing the world for the better. Be sure to consult with your CPA to ensure that you set up your non-profit the correct way.

According to the Association of Certified Fraud Examiners, businesses lose 5% of their annual revenue to employee fraud and abuse. Businesses with fewer than 150 employees—are the most vulnerable to employee fraud. They lack the resources to absorb losses.

As well, most employers trust the people that they work with every day. A small business can feel like family, and discovering fraud can have an emotional and morale impact. As uncomfortable as it may feel to think about fraud, knowing where to identify it and how to prevent it can protect your business’s future.

Most Common Areas of Employee Fraud

To identify employee fraud, you need to know where it’s most common. This will also help you put checks and processes in place to prevent fraud. 

Check tampering is one place where a fraudulent employee may skim off the stop. They could steal blank checks and forge amounts and signatures on them. It’s also easy to alter a number by shifting a decimal point or adding a zero.

If you make a habit of leaving a few signed, blank checks over the weekend for the restaurant manager, they could take advantage of this. One of the best ways to prevent this type of fraud is to leave your business checkbook locked up, and never sign blank checks. Another way is to shift all your payments to online, automatic payments that can’t be altered.

Your bi-weekly or monthly payroll processing offers another opportunity for fraud. Your bookkeeper could set up and pay a fake employee. They could direct a paycheck to the wrong bank account, or even raise a pay rate without authorization.

How closely do you watch your accounts payable? Billing schemes allow some fraudsters to line their pockets by mocking up and paying fake invoices. Or, they could set up a dummy vendor in your system.

Employees other than your payroll supervisor or accounts payable clerk also have opportunities for fraud. Your salespeople could try to sneak unauthorized expenses past the bookkeeper - such as a hefty bar bill when company policy doesn’t reimburse alcohol-related expenses. Or, they could submit fake expenses that they never incurred.

Preventing Employee Fraud

Keep a close eye on your financial statements. You should review them quarterly, at a minimum, but also performing unannounced spot checks can keep people honest. If they never know when you’re going to request a bank reconciliation, they’re less likely to take the risk of writing a fake check.

If you see unusual spikes, or activity, ask questions. In larger corporations, senior management often reviews a monthly flux explanation file which explains large movements. This could be beneficial to a smaller company.

As often as you feel is necessary, review a list of your vendors and look for anything unusual. Pay particular attention to any new vendors, especially if you’re concerned about a jump in accounts payable. If you’re not comfortable performing this analysis yourself, ask your accountant or tax professional about their fraud and audit services.

Another method of preventing fraud is segregating duties. No one employee should have end-to-end control over payments.

You could set up a process where all invoices for payment go through a supervisor for review. Establish a policy where two signatures are required for payments over a certain amount. Or, have a different person set up all new employees and vendors than the bookkeeper who cuts the actual checks.

Education is also key to preventing fraud. The salesperson could have submitted the expense reimbursement in good faith. Conduct anti-fraud training on at least a yearly basis, if not more often.

Employees who know what to look for can help you find fraud perpetrated by someone else in your organization. If they’re aware of policies and procedures to prevent fraud, it prevents innocent mistakes. And it’s a less confrontational way to let your employees know that you do pay attention.

What If You Find Fraud?

You must act swiftly and decisively if you find fraud, but before you fire an employee make sure that you have fully documented their misbehavior and have proof.

In most cases, it’s not worth the time or money to prosecute small thefts. Letting the person go without a reference may be the easiest way to resolve the problem. Check local laws and involve your human resources department in whatever actions you take, as this protects you from a potential lawsuit.

In the case of large amounts, you may need to prosecute. This could involve working with an accountant, human resources, and legal professionals. In many cases, it’s best to speak with them before the employee is aware that you’ve found their fraud.

Employee fraud is a difficult, and costly, topic. It can feel like, and often is, a betrayal. Prevention is key, but it’s unrealistic to think that you could be in business for years without at least one instance where it rears its ugly head. Knowing how to handle it minimizes its impact and helps you move beyond the situation faster.

In business, risk is anything that could negatively impact your revenues, reputation, or future operations. When you try a new vendor, you take on risk. Their products or services could be below your standards, and cost you customers. When you expand an existing business line, there’s the risk that new products and services could not sell. Think of business risk in terms of exposure to anything that could cause your company to fail.

Risk is an evitable part of running and growing a business, but smart business owners try to minimize and hedge against it.  

Why should small business owners think about risk?

In the midst of ordering stock, talking to your marketing department or managing it yourself, and monitoring your performance, why should you think about risk? Because failing to consider, account for, and protect yourself against risk can leave you even more exposed.

Even taking just five minutes to put together a plan to help you fulfill orders should a key piece of equipment go down could salvage a crisis. Thinking about your company’s weak points, and exposure to risk, helps you form plans to minimize damage.

What are the types of risk?

The risks that your business could face can be divided into four categories; reputational, credit, operational, and strategic. Each risk will have different importance to your business based on your industry, time in business, products, and other factors. Smart small business owners should be aware of all of these risks, think about how they could impact them, and have risk management strategies in place.

Reputational Risk

Damage to your reputation, or how others view you in the community, your industry, and among creditors, can put your business at risk. If someone leaves a poor Yelp review, you could have a harder time attracting new clients. Let’s say your bookkeeper forgets to pay an essential invoice on time; now, your reputation with that vendor has been damaged, and they might not extend you favorable terms on your next order.

Reputational risk addresses the harm that damage to your reputation could cause to your business. In a customer-facing retail environment, it can be particularly important. Restaurants now that one bad review can sink their whole business. Wholesalers might have to worry about reputational risk within their industry, but rarely have to concern themselves with the public’s view of them.

When putting together a risk management strategy, evaluate the importance of your reputation. What would happen if it suffered from bad press? Which stakeholders and customers lean the most upon your reputation? Think about mitigation strategies, whether it’s how you’ll respond to negative online reviews or how you’ll monitor a key employee’s performance to make sure bills get paid on time.

Credit Risk

Credit risk has several components. The first is the risk of non-payment, i.e., what if your customers don’t pay you? For a cash business or one where payment is due immediately upon services or goods being rendered, this risk will have less importance. Businesses that extend credit to their customers, however, will need to manage this risk closely.

The risk of non-payment, and what would happen to your business if several large invoices were past due, is something that you should consider. You can protect yourself from non-payment hurting other aspects of your business by opening a line of credit or business credit card to cover gaps between when you’re paid and when your bills come due. Set thresholds for past-due balances at which you’ll stop supplying a customer or performing work for them. Get firm about collection activities, and try to diversify your income stream so that you’re not too reliant upon one customer for your income.

Another aspect of credit risk relates to your small business’s credit profile and the ability to access credit. Credit risk could take the form of a drop in your credit score, a rise in interest rates, or an unfavorable change in terms. All of these could lead to a higher cost of capital, which eats into your bottom line.

If you need access to a revolving line of credit, or loan, to maintain your business, anything that negatively impacts your credit could hurt your business. Even if you could still access capital, you might pay more for it in terms of interests rates ad fees, and a higher cost of capital would leave you with less to invest in your business.

While you don’t have the power to swing the Federal Reserve’s decisions about interest rates, you can monitor your own credit and work to improve it, if needed. Set up auto-payments on all important credit accounts so that you never miss a payment. Identify key suppliers and vendors with whom you must remain on good terms to stay in business, and always pay them first and on-time.

Operational Risk

Operational risk is the risk that your business could cease operations, either temporarily or permanently. The power goes out, and your plant shuts down, or the warehouse holding your inventory floods. Operational risk can arise if you have inadequate policies, plans, and procedures in place to manage your business when things go wrong, or to protect against human error.

Accounting for this risk could be as simple as purchasing a back-up generator; other times, it may involve soliciting quotes from different vendors who could cover for a key supplier in a pinch. Insurance can help you recoup losses from plant downtime or closures, and is often part of an operational risk strategy.

Accounting for operational risk means looking at important moments in your production process or business work flow, identifying where hiccups could occur, and devising a plan to address a potential issue.

Strategic Risk

Strategic risk might be the hardest risk to protect against. It’s the risk that your business strategy won’t pay off, and that your business plan could fail. The best way to protect against this risk is to have several trusted advisors, including your accountant, evaluate your business plan.

Look at all of your business plan’s components, from planned growth to a projected budget, and ask yourself at each step of the process what would happen if something failed. Ask yourself “what if” questions to determine how you could pivot to keep the business on track in a worst-case scenario. Many businesses put together three simultaneous business plans, once for a different percentage of projected growth.

As you put your plan into action, schedule periodic reassessments of your business’ performance to plan. Reevaluate it if results aren’t coming in as expected. Reevaluation could involve scaling back expansion, cutting a product, or responding to increased demand in an unexpected area. This will help you identify potential problems and areas for succes, whether internal or external, and shift to address them.

The final word on risk

Anyone who opens a small business has a certain comfortability about risk-taking. Calculated, measured risks can grow your business and produce great success. While you can choose which of those risks to take on, some risks come from outside forces that you can’t control. In that case, you can decide ahead of time how you’ll respond to them. There’s nothing worse than being caught off-guard in the moment. By considering risks that confront your business, planning for them, and putting together a risk management strategy, you protect your future from the unknown.

Just because there’s a positive balance in your checking account doesn’t mean that your business is making money. Checks that you’ve written for expenses may not have cleared yet, or customers could have paid in advance. Relying on a positive balance to determine if your business is solvent could be dangerous.

Cashflow represents the movement of cash in and out of your business. Cashflow management seeks to match the inflows and outflows so that you’re never short-handed, though sometimes business owners must borrow to cover gaps.

Learning more about the ups and downs of how cash flows in and out of your business will help you make better strategic and borrowing decisions. The past can inform the future when forecasting cashflow.  But before you get into analyzing a cashflow statement, you must understand it.

Sections of the Cashflow Statement

The cashflow statement is divided into three sections, each of which tells you something different about your business’ health. While your accountant may prepare the statement for your business, you should still learn what each section signifies.

Cashflow from Operations

The top section presents the net cash flows from operations. It lays out the cash in from customers and out for expenses. Consistently negative cashflow from operations means that your business’s activities aren’t generating enough money to cover its expenses. While you may still show a positive balance in your checking account other activity could be keeping your business afloat.

The cashflow from operations contains several items would you should carefully examine. The first, accounts receivable, tells you how much money you’re owed. If this balance keeps growing every month your business has a problem collecting monies owed.

It’s important to act quickly on any possible issues in accounts receivable before the balance grows so high it harms your ability to stay in operations. Digging deeper into accounts receivable, such as with an aging report could reveal customers who consistently pay late. The bucket of more than 120 days past due should be your target for collections activities. You should also consider if a customer costs you more time and money than they’re worth.

Inventory balances could tell you if you’re running on low or lean inventory which could harm your future sales. A high inventory balance but low cash-on-hand indicates that you likely just paid to acquire significant new stock. Seasonal businesses should definitely become aware of these cash-poor, inventory-rich cycles so that they’re ready to borrow working capital if needed.

Accounts payable holds the balance of what you owe vendors and suppliers. Typically, it should be closely tied to accounts receivable. This is because what you pay others for inventory, overhead, or services, should generate revenue.

Cashflow from Investing Activities

In a simple small business, this section could contain just a few lines. The profit and loss from the sale of fixed assets would appear here. If you sold a fixed asset, such as an oven, and saw a net amount of cash deposited into your bank account, you may have thought you made a profit. This isn’t always the case.

Depreciation and the initial price paid could mean that the sale is a net loss on the books. Understanding this concept will help you make wise acquisition and divestiture decisions.

Cashflow from Financing Activities

This section represents your business’s third-party cash generation. Here you’ll find short and long-term loan balances as well as balances on revolving lines of credit. While the Balance Sheet shows you a point in time balance of debt, and the Income Statement tells you how much interest you’re paying, the Cashflow Statement discloses if you’re paying down debt or borrowing more over time.

Increasing loan and debt balances with shrinking revenues and cash from operations indicates that debt could be propping up your business. You should take immediate action to trim expenses and increase revenues.

Important Ratios from the Cashflow Statement

In addition to understanding what each section represents and the story it tells you about your business, you can also calculate ratios from the cashflow statement, which contribute to your understanding. 

Current Liability Coverage Ratio

A more short-term focused ratio, it measures if you can generate cash to cover debts due within a year. To calculate the ratio, take your net cash from operating activities and divide it by your average current liabilities from your average Balance Sheet.  You’re looking for a ratio of 1.5 and above.

Lower ratios are a warning sign that you could struggle to pay your current liabilities from your net cashflow.

Free Cashflow

How much money do you have left over after paying your bills? Your free cashflow ratio answers this question. Subtract capital expenditures from your net operating cashflow to find out.

Cashflow Coverage Ratio

If you’ve grown concerned about your business’ ability to make payments on its long-term debt, this ratio will tell you if your concern is justified. The cashflow coverage ratio divides cashflow from operations by total debt.

This ratio measures if you could pay off all your debt from cashflow from operations if the lender called it due. A ratio greater than one is preferred, and the higher, the better.

Tips on Analyzing a Cashflow Statement

Decide which ratios and metrics matter to your business and create an established procedure for analysis. Perhaps it’s a monthly meeting with your accountant or other stakeholders. Smaller companies could save the cashflow statement for a quarterly review, whereas larger businesses often monitor it monthly. 

Comparing the same metrics over time paints a picture of your business’ activity, so you should always track and compare the same metrics. Talk to your accountant to decide what’s relevant to your business. Monitoring inventory would be useless for a service-based business, for example, but extremely important to a manufacturer.

Over time, as you gain experience analyzing your cashflow statement you’ll also be able to interpret it faster. Then you can pivot and make important business decisions to balance cashflow and keep your company running smoothly.

As technologies advance and real estate costs increase, more and more companies are moving towards allowing workers to telecommute.  With the advantages of having remote employees, comes the question of how these employees interact with the company resources.  While many companies choose to provide workers with computers and cellular phones, technology allowances have also become a method by which companies request that the employee provide his or her own technology.  Additionally, many workers prefer to utilize their own devices for work, even if the company does not provide reimbursement.  Many companies have welcomed this drive in their employees as it lowers their own costs, as well as provides an increase in productivity.  With any remote system accessing company data, security and legal compliance become risk factors that must be analyzed.

For the employee, the loss of privacy can be a key issue.  Most employees worry about the company having the right or ability to access the worker’s personal email communications, social media, financial and health data, photos and contact lists.  Additionally, while many employees may not think about it until it comes up, many companies may not be able to remove their information from the employee’s device without wiping all of the data off of the device.

For the employer, most companies concentrate of the security factors and risks.  Many personal use devices do not carry passcodes, lock features, or time out functions.  Allowing an employee to work remotely may mean that the employee utilizes an unsecure Wi-Fi hotspot or share them with roommates.  And, as with anything that is not kept in the office, there is the risk of losing the device entirely.  But there are things that many employers do not think of when it comes to initiating remote policies.  When an employee is utilizing their own device, or in their own space, many office protocols can become more relaxed.  Sharing of company and/or client interactions on social media, defamation of the company, use of vendors or client contacts, and even harassment of co-workers become easier when an employee is away from the office structure.

Moreover, when allowing an employee to work remotely or with a personal use device, the company can expose itself to liability under the federal Fair Labor Standards Act, state overtime and wage laws.  As technology use has become common place around the home, on the go, at sporting events, even while waiting for a movie, employees will be in a position to access emails and respond to work situations outside of traditional and scheduled work hours.  While many do not take issue with this, and in fact often view it as a benefit to not having to fit everything in set time periods, when push comes to shove it can be an issue that comes to bear.

Reimbursements can be another potential headache that employers do not often look at when first entering into allowing employees to utilize personal devices.  Many reimbursement policies are governed by state law.  Additionally, being clear on whether an employee is required to utilize their personal device, whether a company provided option is available, and what qualifies as company time, can be key elements in structuring reimbursement procedures.

One final challenge facing employers is when business records are stored on personal use devices. Remote access to company servers, email attachments, and cloud-based storage are all ways in which company data can leave company possession and be stored on an employee’s device.  While the employee may never use the records for nefarious purposes, it is still subject to electronic discovery requests during litigation and/or Internal Revenue Service audits.  Failing to retrieve and destroy records in accordance with company retention policies form employee devices can have long reaching consequences for the employer.

To address these issues, employer should have a very comprehensive policy that is given to all employees and updated and maintained as technology changes.  A recent addition to the Human Resources paperwork has become the Bring Your Own Device Policy.  Most BYOD Policies are used to address the risk factors from both the employee and employer perspectives.  When structuring a BYOD Policy, it is important to remember that they are not one size fits all.  Each policy must be tweaked based upon your company’s industry, available IT support, and data that may transfer over remote devices.  Here are some key factors to consider:

• Determine which devices are permitted and supported.  Limiting the devices to non-jailbroken or non-refurbished devices can be essential.
• Keep a registry of all remote devices.  Be sure to require updates to these devices.
• Determine who can utilize their devices.  Limiting device use to exempt employees or setting strict policies around off-clock hours for non-exempt can be crucial.
• Create a virtual partition between work data and personal data.  This protects both the employee’s personal data as well as the company’s data.
• Clearly state the employer’s rights to access, monitor and delete information that is owned by the employer.  Also, be sure to state that while every effort will be taken to protect the employee’s personal data, it may be subject to wipe in order to protect or retrieve company data.  The employer and employee should both beware of what data may be saved in cloud-based back-up and through routine maintenance, despite policy.  Be sure to outline how and when a wipe of the data may occur.  Note how the company will determine company versus personal data, and the methods for obtaining this information.
• Require passwords, automatic locking, and/or establish protocols for public use Wi-Fi, reporting lost or stolen devices, antivirus software, and IT support.
• Determine who can authorize a personal use device and who will maintain adherence to company practices and policies.  Determine if current retention policies will correspond with BYOD policies.

While remote working provides many financial and morale benefits for both the employer and employee, it does not come without risks.  A well composed BYOD policy and careful consideration to the employee and employer needs can assuage many of these risk factors.  The most important thing to keep in mind is that no BYOD Policy should be written and forgotten.  It must be routinely reviewed and revised to keep up with the changing world of technology and workplace advancements.

No business looks forward to the time-consuming process of closing their books at the end of each month. It’s certainly not the fun part of running a business. It can be tedious. (Though when business is doing well, it can be encouraging to see everything closing nicely in healthy shape.)

In either case, tedious or encouraging, it’s crucial to maintain efficient, accurate monthly closings that are completed with painstaking attention to detail. This helps with fiscal governance, but it also feeds helpful data to management as they form strategic decisions.

Smart Business recently conducted an interview with Jennifer Henson, as published by SBN Online. She is a senior business services associate for Sensiba San Filippo LLP, and she discusses how successful businesses are not only doing effective month-end closings, they’re turning the monthly ritual into a tangible value driver for the company.

Here is what Henson discussed with Smart Business:

Why is a streamlined month-end process important?

Month-end can be a very stressful time for finance departments. Management is often eager to get their hands on financial information that will inform their decisions. Developing an efficient, ‘streamlined,’ process for month-end will create a more relaxed environment, free up man hours and ensure that management receives accurate and timely information. 

What pitfalls can slow down the month-end process?

Even a well-designed process can become obsolete as needs change or become cumbersome over time. When data is not recorded correctly throughout the month, it creates a tremendous burden on the month-end process. Finance professionals often find themselves looking for missing expenses, searching for expenses that have been entered multiple times or correcting items that were coded or categorized incorrectly.

How can an organization simplify and improve the month-end process?

Look out for signs of stress within your month-end process. These symptoms might include monthly closings dragging longer and longer into the next month, finance professionals putting in significant overtime at the beginning of each month or general tension related to the process. Month-end problems can also be caused by a failure to define and follow effective recording procedures throughout the month. Set strong deadlines for critical tasks and monitor adherence to your procedures. Many of the symptoms that you see during month-end are actually a manifestation of ongoing problems. Analyze your month-end routine. Follow a checklist, but be able to think outside of it.

What else should business owners know about month-end?

Financial accounting, which includes the month-end process, is an important function within any business. It can either positively or negatively affect overall business performance. Business owners shouldn’t hesitate to ask for outside help when they need it. 

***

Maria L. Murphy of the AICPA Store has a similar perspective as Henson. She sums things up nicely when she makes the statement that speed and accuracy during the month-end close process are necessities in business today:

Speed and accuracy are a constant challenge for those involved in the month-end close process. Many organizations are seeking information at an accelerated pace. But they also need to be able to trust the data they’re acting on. In a recent survey by software provider Adra Match, just 28% of respondents said they trust the numbers reported in the month-end close. At the same time, 90% said they are under pressure to close faster. Meanwhile, just 39% said they are satisfied with the quality of the closing process.

As you examine your month-end processes, here are a few helpful questions (from AICPA) to ask yourself as well as some tips to keep in mind for a faster, better month-end close.

What are the hurdles to your close?

There are many areas in an organization that provide information needed to close the books each reporting period. Each can have process issues that can cause delays. Management’s philosophy about financial reporting and what information management wants to see to run the business directly affect the outputs and timing of the close. To identify current and potential hurdles to a more effective close, areas to evaluate include:

• Internal departments in addition to finance and accounting, including operations, sales, human resources, and systems.
• External sources of necessary data, including vendor invoices, bank information, and customer and supplier information.
• Outdated processes and systems.
• Resistance to change.
• Staff tenure and training, and ability to accept and implement change.

Tips for shortening the close

As mentioned by AICPA’s analysis above, Kathy Lockhart (CPA, CGMA, Vice President and Controller for national restaurant chain Noodles & Company) has shortened the close cycle in various environments. This includes Noodles & Company, whose close process changed under her leadership from almost two weeks to several days. Here are Lockhart’s tips for shortening the month-end close:

• Break the close process into pieces. By breaking it down into little pieces, it is more manageable, easier to get started, and easier to finish. 
• Perform a risk analysis. Identify lower-risk areas of financial statements and processes that may not need to be perfect for each close. Back out of the details to establish a tolerance level that everyone can accept. 
• Change mindsets from looking backward to looking forward. Accountants often deal with history in periods after it happens, rather than projecting where numbers will or should be. By changing the approach, working during the month with the finance team that knows the forecast, it is possible to do a better estimation process along the way. 
• Evaluate close areas that can be done in different time periods. Some financial statement areas can be accounted for on a quarterly basis rather than a monthly basis to save time. Areas such as bad debt allowances can be looked at in detail in the second month of each quarter rather than the third month and then reviewed at a higher level at quarter-end. 
• Use technology. Simple applications, such as Excel, QuickBooks, Dropbox, and SharePoint, can be implemented quickly and result in more efficiency for accumulating and sharing data and for reporting. 
• Communicate. Get the people involved in shortening the close to “own it” by suggesting changes and believing they can make a difference. Hold group staff meetings to identify areas that can change now, where training is needed, where money needs to be spent, and where change is dependent on other departments.

The bottom-line is this: the monthly close process is extremely important because it serves as the basis for decision-making by management. Without a healthy close process, the information fed to management through its financial statements, which are generated by the close, will be untrustworthy and unreliable.

You may have heard about subscription businesses and what owning a subscription business might be like. This article will help clarify what you may or may not have heard by going through some of the basics of owning and operating a subscription business.

According to a well-researched and cited entry in Wikipedia, the subscription business model follows a strategy in which a customer must pay a subscription price to have access to a product or service. The model was pioneered by magazines and newspapers, but is now used by many businesses and websites. Rather than selling products individually, a subscription sells periodic (monthly or yearly or seasonal) use or access to a product or service. A common example of a subscription service would be a monthly cable tv service or a streaming service such as Netflix.

As noted, businesses benefit because they are assured a predictable and constant revenue stream from subscribed individuals for the duration of the subscriber's agreement. Not only does this greatly reduce uncertainty and the riskiness of the enterprise, but it often provides payment in advance (as with magazines, concert tickets), while allowing customers to become greatly attached to using the service and, therefore, more likely to extend by signing an agreement for the next period close to when the current agreement expires. 

In addition, FastSpring notes the following four characteristics about subscription-based businesses:

1. Subscriptions are the Future

The subscription service model has seen a boom in recent years. Although there is a case to be made for having a reliable, physical product in hand, the massive benefits of the subscription model cannot be overstated. And just what are those benefits? Chief among them are ease of distribution, reliable revenue, and a pro consumer structure. 

2. Ease of Distribution

Distribution has always been a challenge for the selling of software as a physical product. To do so, you’ll need to take shipping costs, buyer location, and cost of the product itself into consideration. Not only that, but customers will be expecting support for more physical shipping, and your business will need to repeat the process each time you release a new product. Depending on the popularity and success of your business, the costs and time spent on physical products can add up and impact your growth negatively.

The subscription model solves all these problems in one swoop. Without the need for a physical copy, you can ship your product instantaneously to your customers. Each subsequent release of your product will be in the hands of your customer in the same amount of time, guaranteeing that each of your customers will possess the same product. Depending on your business’ ability to accept and process payments, global markets may become more easily accessible. No longer affected by shipping costs, your business can then redirect its resources to other important areas.

3. Reliable Revenue

One of the largest benefits of the subscription model is its ability to reliably predict revenue that your business will receive. This translates into a more consistent cash flow and a higher predicted value for your business. Subscription business models can be set up as a monthly or annual billing. Given that customer payments are typically tied to the credit card they used for the purchase, there is a much higher chance that the renewal fee will be approved and processed without any issues.

4. The Challenge of Subscriptions

Despite these strengths, the benefits of the subscription model do not necessarily mean the system is without its challenges. Customer incentives to subscribe, retention, and cancellations are continual hurdles that SaaS subscription businesses must face.

Clients (and accountants) are human whether we like it or not. And as we know, humans make mistakes. Identifying and fixing financial mistakes is a large part of the effort expended by clients and accountants. An analysis of these efforts make up the crux of this article.

According to the AICPA’s Journal of Accountancy, clients can face various financial and business predicaments: overextension, employee problems, customer losses, and even bankruptcy. They also may lack proper management training, and they may procrastinate or overreact when problems surface. That’s when they call their CPAs in a panic. Sadly, clients may see their fortunes diminish if they do not take a more proactive approach to managing their personal or business finances.

The Journal of Accountancy’s report, by Cheryl Meyer, recently provided the following discussion points noting the six most common financial mistakes that clients make:

1. Miscalculating startup costs or personal funds.

It's all too easy for gung-ho entrepreneurs to spend money before they have it. "All that cash goes out the door before they have their first sale," said James Bourke, CPA/CITP/CFF, CGMA, a partner at Withum Smith+Brown in Red Bank, N.J. Individual clients, too, can overextend themselves by racking up debt on credit cards or spending more than they earn.

CPAs can help prevent this problem by collaborating with clients and reviewing their cash flow needs early in the game.  You will be putting your client in a position to be successful," Bourke said.

2. Failing to plan and project.

"A majority of my small business clients operate somewhat by the seat of their pants," causing things to spiral out of control and create emergencies, said Robert Cameron, CPA, member at Hughes, Cameron & Company in Springfield, Ill. Cameron meets with clients quarterly to set them up with an annual budget and "teach them some basic management skills," he said.

3. Buying unnecessarily.

Clients often rush to make business purchases at the end of the year to help alleviate their tax bill, which is a serious misstep. "If you need that piece of equipment, great. But if you don't need that piece of equipment, tax is only a percentage of the game," he said. He explains this point to clients, and they usually understand quickly, so that's an easy fix.

4. Failing to analyze all revenue streams.

Companies often have multiple business lines, and some do better than others. With the help of their CPAs, clients need to dive deep into their operations and review their revenue streams to see which business lines are profitable.

5. Ignoring the human element in mergers and acquisitions. 

CPAs involved in M&A should market their advisory service roles to help address a potential crisis before it starts, he said. "This is something beyond the debits and credits—it is the history of seeing things that have failed and succeeded. What a seasoned CPA brings to the table is the experience of transactions."

6. Delaying a succession plan.

Business owners close to retirement may also wait too long to create a company succession plan. CPAs should discuss this with clients upfront so they are prepared.

In conclusion, by reviewing the most common financial mistakes made by clients and their accountants alike, you can come to have a better understanding of what leads them (and you!) to make such mistakes in the first place. Only after familiarizing yourself with the issues at hand can you work towards developing a successful system towards avoiding future failures.