Business Strategies

Does your 2020 business plan include purchasing fixed assets? Maybe you’re expanding your bakery and will need to buy a new commercial fridge and oven. Or, perhaps you need additional machinery to handle planned growth and new orders.

If it’s been a while since you’ve added fixed assets to your balance sheet, take a moment to review fixed asset accounting. Tax laws have changed recently, and your old templates for booking fixed assets might need to be revised. If you’re planning to purchase fixed assets this year, here’s a refresher of how they’ll impact your accounting.

How to Account for Fixed Assets

A fixed asset is generally defined as land, buildings, or machinery, or any asset with a useful life longer than a year. They’re assets which aren’t easily disposed of, and appear on the Balance Sheet under “non-current assets.” 

If you pay cash, you’ll debit the fixed asset account and credit cash to record your new asset. If you finance your purchase, the accounting becomes more complex. You’ll have to set up a new account in your chart of accounts for the loan and record loan payments split between principal and interest. The first entry to add the new asset to your books could split the credit between a cash down payment and a new loan.

After booking the initial purchase, a business will book periodic depreciation entries, impairment write-downs if the asset’s value declines below its net book value, and a disposition entry if it’s sold. Net book value is the asset’s original cost less accumulated depreciation and any impairment, and net book value is how fixed assets appear in financial statements.

When adding a new fixed asset to the books, you’ll need to set up a depreciation schedule.  Depending on the size of your business and accounting department, you may decide to book depreciation monthly, quarterly, or annually.

Fixed Asset Management

Once you own an asset, you have to track it. Fixed asset management is the system your business has put in place to monitor its assets. It includes everything from knowing an asset’s physical location to monitoring its value for impairment.

Once you’ve booked your initial purchase of the asset, make sure that it’s added to your fixed asset management software or spreadsheet. Also, add it to your schedule for impairment reviews. Typically, companies choose to evaluate smaller fixed assets for impairment annually, whereas they decide to assess a larger fixed asset quarterly. This is particularly true if there’s reason to believe that the asset’s value could be at risk.

Equipment Financing Pros and Cons

Equipment financing loans allow small business owners to purchase the fixed asset that they need to run their business. An equipment financing lender evaluates your credit, the asset you plan on buying, and its potential resell value to make a lending decision.

There are several pros to taking out an equipment financing loan. The equipment it finances serves as the loan’s collateral. Therefore, the loan will likely have a lower interest rate than other forms of financing, such as an unsecured loan or credit card. Interest rate is a reflection of risk, and  loan presents less risk to a lender if they could take possession of collateral and sell it to recoup their losses.

Many times lenders will finance more than 100% of the equipment’s value, including delivery and other charges. This can be helpful if you’re trying to manage cashflow and don’t want to pay these expenses out of pocket.

Lastly, the interest on an equipment financing loan will be tax-deductible. Now, there are limits on the tax-deductibility of qualified interest payments. If your company’s annual revenue is above $25 million, you can only deduct interest up to 30% of adjusted taxable income, which is taxable income, less depreciation and amortization, and interest expense and interest income.

Changes in the tax laws in 2018 had other significant impacts on equipment financing, too. Now, companies with up to a $2.5 million investment in equipment can write off up to $1 million of those purchases. Previously, the limits were $2.0 million and $500,000. Depreciation schedules have also changed for vehicles, with options for companies that do or don’t claim bonus depreciation.

For some companies, leasing will be a more attractive option than purchasing if they are attempting to maximize their tax deductions. Another negative to equipment financing loans is that you could lose that equipment should you default. If the lender chooses to repossess it, your business could be in trouble. As well, you can’t get pre-approved for an equipment financing loan. You must have information on the specific equipment you plan on purchasing to provide the lender when you apply.

Lenders sometimes require an independent appraisal of the capital asset, which could delay the time to funding. This could force you to put expansion plans on hold, or you might have to turn down larger orders if you lack the capacity to fill them.  

Depreciation of Fixed Assets

Depreciation reduces the value of an asset over time. Its cost is allocated over an industry-standard period such as two to five years, and slowly the asset is written off to zero.

Before the tax law changes in 2018, companies had to follow a depreciation schedule when writing off capital assets. Now, you can write off the asset’s full expense in the year you acquire it, whether it’s new or used. You do not have to use the modified accelerated cost recovery system (“MACRS"), but can take advantage of this “bonus depreciation.”

The best strategy for your business will depend upon the amount you’re spending on fixed assets and maximizing tax write-offs. With these new changes, it would be wise to enlist the help of a professional tax planner prior to booking a new fixed asset. It might even be a good idea to talk to your accountant before shopping for fixed assets, as they can advise you on buying versus leasing.

Planning for fixed asset purchases has taken on new implications with tax changes, and the old way of doing things may no longer suit your company. Before you call up a lender or visit a dealer, it might be a better idea to call your accountant.

If you ever want to apply for a small business loan, the lenders will want to see your business plan. Your business plan gives lenders a concise snapshot of your business model. Having a small business plan also gives the owner added benefits. Often, business owners refer back to their business plan to ensure that they are holding true to the foundations of the business. A well-written business plan can help you stay on track to reach business goals for years to come.

What Should be Included in Your Business Plan?

A standard business plan is typically comprised of eight sections. Each section explains a different category of information about your company. Investors will look at the business plan in terms of sections and as a whole. Here is everything that you should include in your business plan:

1. Executive Summary

Usually, the executive summary is the first thing investors look at. This section only needs to be a two or three short paragraphs.

Information in the executive summary should include:

• what kind of business you’re in
• the age of your business (when it was founded, etc.
• a snapshot of any business successes
• highlights of the business model
• rough future business goals: 3, 5, 10 and 20 years
• a brief outline explaining your plan to achieve your goals

2. Company Overview

The company overview is just a broad look at your business. It’s a closer look than the executive summary, but still painted with broad strokes. The reader should be able to learn more about what your company is all about by reading this section.

Start off this section with an overview sentence that explains your general business model. For example, you could say, “Acme is a logo design company.” Then the following sentences should elaborate on that. “We provide logo design and embroidery services for local trade businesses and sports teams.” Discuss who your customers are, your target demographic and how many customers you currently serve.

3. Market Analysis

In this section, you want to share how much of the market you serve. This section should have statistics and actual numbers to demonstrate your knowledge of the market you’re in. You should also discuss your competition, with number showing how much of the market they have. This shows your understanding of your competitors and how you fit in with the market.

The Market Analysis section should include:

• a broad overview of your industry
• details of your target demographic
• how your business serves your target market
• names of your competitors
• challenges your business faces

4. Business Organization

This section is all about how your business is organized. You could even use an organizational chart to make this section more visually compelling. Include the key players and what their job titles are.

You’ll also need to do some explaining of how your entity is organized; whether it’s an LLC, S-Corp, C-Corp, or sole proprietorship.

There should also be a section dedicated to the relevant backgrounds of key personnel, including education, degrees and certifications. If a key personnel has related job experience, mention that. Essentially, this section explains why those people are in that job.

Finally, if you have plans to expand personnel, mention it here. Talk about your reasons for wanting to hire additional people and how they will help your business.

5. Products and Services

What is it that your company sells? You’ve already touched on it before in the Company Overview, but in the Products and Services section it’s time to get specific. Be as detailed as possible. Using the example of the logo design and embroidery business, talk about what threads you use. Are the logos hand sewn or do you use machinery? What kind of machinery do you use? Where do you source your materials? Is any part of your product dependent on another business? Where are your suppliers located? Do you use contracts? What are your terms? When are your contracts coming up for renewal? This section should answer any question the reader has about your products and services. 

6. Marketing and Sales Plan

The Marketing and Sales Plan section should include details about how you market your business. It should include your marketing budget, marketing strategies and how you implement your marketing plan. You should also show how much of your marketing budget you allocate to each strategy. For instance, you might write that you allocate 55% to social media, 20% to print ads and 25% to online forum postings. You can make this even better by detailing on what social media platforms your business has a presence and how often you post.

7. Financial Plan and Projections

The Financial Plan and Projections section is one that your reader may have already skipped to. That’s how important this section is. This section reveals how financially stable your business really is. This is where you can demonstrate that you have a strong financial foundation and that you understand how to run a business and make it grow.

This section should include your financials, including:

• income statements over the last year
• cash flow statements covering the last 12 months
• current A/R report
• current A/P report
• A/R aging report
• statement of debts

8. Owner and Key Employees

This last section of your business plan includes the owner and key employees information. This is actually the easiest section to complete. Essentially, it’s just a collection of resumes for you and the rest of your key employees. The reader will be interested in learning about the employment and educational backgrounds of all the essential personnel, including you. If you happen to have a Board of Directors, you should attach their resumes as well.

These eight sections comprise the entirety of what’s needed for your business plan. Although individual business plans vary, formal business plans all contain these eight sections. If you’d like help compiling the information for the Financial Plan and Projections section, consult with your CPA.

Discounts have become a way of life in the American marketplace. You can’t drive down the street without seeing a sign in a retailer’s window blaring, “50% off!” Coupons arrive in your inbox offering discounts for every occasion – even National Cheese Day.

If you’re a business owner, long-standing customers might have asked for a reduction to your goods or services to reward their loyalty. While you might be inclined to say “yes,” think about the pros and cons of discounts first.

Pros of Offering a Discount

How could offering a discount help your business?

Increase Sales

If sales have been lagging, try a sale. It works in retail and the business world. Perhaps a client has been waiting to kick off a big project until more budget came free, but a sale would put your services right in their range. Or customers love to head to the back of the store to the sale rack.

A sale sign, flyer, or email, increases your bottom line. Just be aware of your margins and never discount below cost.

Capture new business

If you’re competing for a new contract that represents significant value to your business, discounting your quote could help you beat out the competition. Be careful of this tactic, however. The risk is that the customer hops around from you to your competitor in search of the best deal. 

Listen to your gut when talking to them and putting together your quote, and have your accounting department calculate their potential long-term value, before discounting. And don’t cut below a reasonable profit margin. 

Build a New Business Line

Bundling discounts, where the client receives a discount if they bundle products or services, can be a great way to grow a new business line. Let’s say you run a graphic design firm and recently added website design to your services. Offer existing customers a discount if they bundled their current services, such as ad copy and design, with the new service. 

This exposes your customers to new offerings, giving you a chance to shine, and reduces their risk when trying you for something else.

Dispose of Older Inventory

Product-based businesses may find themselves with a few odds and ends from last season sitting on the shelves. Discounts can be a great way to move them out the door but also build customer loyalty. 

Keeps Valuable Employees Busy

If you pay your employees on an hourly basis and they’re not getting enough work, they’ll go elsewhere. People need to eat, after all. This could leave you short-handed, however, when work does come in.

The last thing you want is to have to turn down a great opportunity because you don’t have the employees to perform the work. Offering a discount to bring in work during the slow season can keep them on your payroll for when things pick back up. 

Cons of Offering a Discount

There are a few downsides of offering discounts, however, which you should take into consideration. 

Can Create a Perception of Quality Issue

Continually discounting can lead to reputational damage. Customers may wonder why you can’t keep busy at your standard rates, or if your business is suffering. They could worry that you’re selling subpar products.

You could also bring in so much discounted business that, while your sales jump, your service and quality slips and you lose long-term clients. Think carefully about how much of your business rests upon your reputation and the potential impact discounting could have upon it. 

Customers Grow Accustomed to Them

You’ve set your prices for a reason; they cover your costs and produce a reasonable margin to keep you in business. Continually discounting your products and services could ultimately imperil your business. But customers can become dependent upon them.

You may hear phrases like, “Can you give me a discount like last time?” “Oh, the last project cost less.” It’s frustrating for a small business owner trying to run a successful business and support their family. Practice politely explaining that it was a one-time or introductory special. If it’s an important client, be prepared to explain realities such as rising overhead costs.

But avoid offering discounts all the time, and at every occasion, or you essentially train your customer to expect your discounted price as the norm. 

Masks Deeper Business Issues

You can’t discount yourself out of poor cash flow management. If you throw something on sale every time you can’t cover a major bill, you have a deeper problem. Work with your accountant to get a better grasp on cash flow management, or identify areas where you could trim business costs. Otherwise, you risk getting into a discounting cycle to stay afloat.

You Must Keep Track

It’s essential to have a robust POS or bookkeeping system to keep track of your inventory and sales. If you’re giving clients discounts, you must keep track of them. This will be important when calculating your net profit, your margin, and when preparing taxes at year-end.

Only Appeal to Price Shoppers

Great customers value quality and service in addition to price. The risk of offering discounts, particularly to capture new business, is that you’ll only attract price shoppers.

These are customers who shop around to get the best price and always go with the lowest price. To keep their business, you’ll always have to go lower than the guy down the street.

Should you Offer a Discount?

Discounts make you think about how they will impact your bottom line, your business goals, and your future relationship with the customer. Always consider them within your business’ wider context, as used effectively, they can help you meet a sales or growth target. 

A non-profit organization can have several definitions depending on the perspective of the people discussing the matter and the context of the discussion. To the layman, the term generally means a charitable institution or perhaps a church, or an organization which provides assistance to the community which isn't provided by the government.

To a tax accountant, the term refers to a legal loophole which provides deductions and changes the amount of taxes owed in relation to profits earned. Arguably the best explanation is that a person or people realize how important the community is to themselves and their business interests, and with the best of intent want to return the support the community has provided the organization with a show of appreciation for their continued business.

Name the Company

The first step toward forming a non-profit organization is fairly simple, deciding a name for the group. Although the name can be similar and represent the for-profit business sponsor, it does have to be different. It also has to be unique, a name that hasn't already been taken by a different non-profit charity. The given name is followed by “Incorporated,” “Corporation,” Or “Limited Liability Company (LLC)” according to the category it falls under, which is going to be legally defined by the function the charity serves and the type of insurance it has.

File for Official Name Recognition

“Articles of Incorporation” refers to filing the company officially with the local government. The exact process varies by state, but is generally a relatively easy task for someone successful enough already to be starting a non-profit organization. Assuming a lawyer is already involved with the process, that would usually be the person who fills out such paperwork, perhaps in some cases an accountant would do it. With that said, there's nothing which prevents the owner or any of their staff from reading the instructions and filing such papers, as long as it gets done and the company is officially recognized as a non-profit.

File for Tax Exempt Status

Along the same lines, an official 501(c)(3) form needs to be filed with the IRS for recognition of the tax exempt status at a federal level. This aspect is important because it allows the parent company, or an individual person as the case may be, to write off the charity funds from being taxed as regular income or profit. Additionally, and again this varies by state, but some states require a similar but separate form for state tax purposes while other states recognize a copy of the IRS form as adequate to prove tax exempt status.

Declare Company Policy

Policies are important to maintain the appropriate level of responsibility for the company. Bylaws prevent misuse of funds, and routine meetings prove to potential donors their money is being properly managed and going to the cause they intended to support. Casual discussions among members and employees are generally sufficient for daily operations, but formal scheduled meetings have to be held regularly to provide accountability. It isn't very different from how a for-profit business manages itself, there has to be a paper trail to prove what money came in and how it was spent to assure investor confidence and proper tax reporting. The bylaws determine how the organization is going to operate and define what is or is not appropriate use of the funding the company receives.

Appoint an Oversight Committee

An oversight committee, or Board of Directors, is another way to assure the business is operating as intended and according to what is legally required. Essentially, the Board of Directors accepts ultimate responsibility for how the company operates, and determines if or when policies are appropriate or need to be changed. Again, it has to do with investor confidence and tax accountability, in that one person isn't making all the major decisions without being held accountable for their actions. As an example, a charity that provides assistance for homeless people might find a hot tub to be an inappropriate expense, but a small gym could potentially be a boon to the facilities. The Board of Directors prevents any one person from making such a decision, but instead discusses options and work together to determine what is best for the company's long term goals.

Schedule Board Meetings

The first board meeting is going to schedule a timeline for future board meetings, and also assign direct responsibilities to elected officials. The president is going to have the authority to make immediate decisions between board meetings, the treasurer is going to be accountable for funds. An elected secretary will keep minutes for each meeting and often be the first person approached by potential donors or recipients of the charity. Other officials may be elected as needed according to the non-profit organization's setup and purpose. As the saying goes, “the buck stops here,” and elected officials define exactly where that proverbial buck stops.

Accept Appropriate Licenses and Permits

As the company evolves, it is going to be properly licensed and permitted to conduct the actions it uses to achieve its goals. To cite the previous example of helping homeless people, even a free soup kitchen has to be properly licensed according to local regulations of how a restaurant is allowed to operate. If fundraising events include sales, the company has to be properly licensed with a sales tax permit to record such transactions. Even though the company is a charity, or non-profit organization, it has to abide by all federal and state laws and local ordinances when conducting business.

What Are the Benefits of Forming a Nonprofit?

Just as the definitions of a non-profit organization vary according to the context of the conversation, the benefits are also a matter of perspective. The immediate and most obvious answer is that the people involved with the company want to and are doing something good for their community at either a local, state, federal, or global level according to their resources. A less pure but equally acceptable benefit is more individual, as charitable contributions can change a tax bracket or exempt certain money from taxation. Regardless of intent, non-profits are governed in such a way as to be a boon to society with resources not generally available through government budgets and funding.

If you’re planning to form a non-profit, be sure and consult with your CPA. A CPA will help to ensure that you comply with all the regulations surrounding non-profits and help you establish operating procedures that will keep you in compliance for years to come.

Most small business owners hope to, or plan to, grow. When you open one café you may have dreams of a nationwide chain. The first product you use to launch your manufacturing business could be one of many designs you have mapped out.

But how do you know when it’s actually time to open that second café? Or start ordering the supplies to make that new product? Actually taking that step can be nerve wracking, but knowing what signs to look for and how to prepare for growth can make the growth process a lot less scary.

What are the Signs it’s Time to Grow?

You may want to grow, but how can you when if it’s the time to grow? Often, your business will give you clues.

Pay attention to your customer requests. Are they requesting more services, or asking for different products? These could be signs pointing you to potential growth areas. If customers are willing to wait for your services, or to work with you, and you have a wait list then you should consider expansion.

Another sign is when your industry is growing. When there is interest, and capital, pouring into your industry now could be the time to seize the opportunities that interest represents. Opportunities may be coming your way, such as another company reaching out and asking you to partner with them, or a customer bringing you a design idea for development, and if you say “no” you could miss out on the chance to grow.

Take a look around your warehouse or office. Are you running out of room? If your employees are bumping elbows at their desks and product is stacked up on the floor and between shelves it could be time to expand.

If your business is profitable, and you have excess capital, you could be searching for a place to invest your profits. Investing in growth can be a smart move, particularly if that growth would help shield you from economic downturns in the future.

Planning for an Effective Expansion

There can be a lot of moving parts involved in a business expansion. Without a clear plan in place costs can spiral out of control, you could run out of financing, or the expansion could take longer than expected and hurt your cash flows.

If you didn’t create a business plan when you first launched your business, or you haven’t revisited it in a while, now is the time to create one. A business plan provides the guide to inform growth decisions. When looking at an old business plan you may realize that, while you’d planned that one product would only generate 20% of your revenues, it has actually turned into your money maker. You may need to adjust your plan. Plans shift, and no more so than when a business is first starting up.

Revise an older business plan based upon your business’ current situation. If you need help analyzing your numbers and profit margins, reach out to your accountant or finance professional. Once you have a good grasp on your current state, look at where you want to grow. How much would it cost to add additional dining space to your restaurant, and how long would it take to build it? What about research and development of a new product?

Gather estimates as needed, consult experts, and make sure that you have a very good grasp of where you want your business to be after the expansion and what it will cost before you begin.

Should you Borrow to Grow?

It can be difficult for a business to generate the capital they need to fund an expansion through existing revenues. Acquiring a new piece of equipment or paying a contractor to renovate requires a significant sum of capital. Even if you could set aside some money each month from your business’ revenues by the time you have saved enough the growth opportunity could have passed.

It is the rare business that doesn’t need to borrow capital at some point in their history. Borrowing is one of the easiest ways to have access to a large sum of capital to help your business scale up. When deciding whether or not to borrow you should look at your expected rate of return and rate of return.

The expected rate of return is the amount of profit or revenues you expect your spending to generate. You can calculate it by multiplying potential revenues by their chances of occurring and then summing them. 

Let’s say that you think there is a 50% chance that your investment will generate 20% more revenue for your business and a 75% chance that it will generate 30% more revenue. Between these two possible outcomes you’d have an expected rate of return of 40%. As an equation it would be (50%*20% + 75%*30%) = 40%.

How does this help you when deciding whether or not to borrow? It will tell you if an investment has a positive or negative average net income and it will help you when evaluating different opportunities. If adding a new product would generate an expected rate of return of 30% but adding a different product would generate 55%, you know where to invest your money.

The rate of return is slightly different. It measures the profit on an investment, and in this case the investment would be money you’re borrowing. Rate of return is calculated by taking you’re the final amount of revenues or profit you expect your investment to generate and subtracting your initial profit, then dividing by the initial profit.

As an example, let’s say your restaurant generates $20,000 a month in net income. After adding seating you’ve projected it will generate an additional $15,000 of net income and you plan on borrowing $20,000 to fund this expansion. Take the final value of $15,000, subtract $20,000 and divide by $20,000 and you’ll have a negative 25% rate of return.

However, you should calculate this rate of return over time to get a true rate of return after you’ve had that additional seating for a year. These calculations can get complex but you can use an online calculator or ask your accountant to help you with them.

A genera rule of thumb is that the expected return on an investment should always return more than what you paid to borrow. If the rate of return is lower than the interest rate you will pay on the loan you shouldn’t borrow. Would you pay $10 for a part which will only generate $5 of revenue? No, so don’t do essentially the same when borrowing to fund an expansion.

Managing Cash Flow during Expansion

Managing cash flow during an expansion phase is crucial to success. There is typically a gap between when you have to fund the expansion efforts and when they will generate revenues for your business.

If you borrowed to fund your expansion, or are using funds set aside from your revenues, pay careful attention to your budget. Track expansion-related spending to make sure that you don’t exceed your budget and are, in fact, using borrowed funds for their intended purpose. Going over-budget could not only jeopardize the project it could harm your existing business.

If you exceed your budget you may have to borrow more. This, in turn, could change your expected profitability and rates of return. If you decide instead to divert money from your business’ revenues you might not be to able existing bills.

If you already know that you struggle with cash flow management, try the trick of opening a separate checking account for borrowed or ear-marked funds for the growth phase. Pay all of the expansion-related invoices and salaries from that checking account, and don’t mingle those funds with those used in day-to-day operations.

How you plan for growth or respond to unexpected growth can have a big impact on your business’ trajectory. Follow these tips and consult with professionals to maximize your odds of success.

Until the inception of the Tax Cuts and Jobs Act, entity selection by businesses was a fairly easy decision.  In most cases, businesses chose a form of pass-through entity, given the high tax rate of thirty-five percent given to C corporations in the past.  With the new changes brought forth in TCJA, and the lower tax rate of twenty-one percent, change is in the air.  But what are the benefits of considering C corporation status?  Unless you are a very large company, determining if you should change from a pass-through structure to a C corporation will not be an easy one. 

A pass-through entity is a business structure that is used to reduce double taxation.  They are not subject to income tax on the corporate level.  The owners of these entities are taxed on the direct flow-through of their portion of the net income of the business on their personal federal individual Form 1040 return.  Pass-through entities are made up of sole proprietorships, partnerships, S corporations and Limited Liability Companies (LLC). 

In C corporations, double taxation and the higher tax rate were often a determinantal factor.  Double taxation means that the corporate income is taxed at the corporate level and then again when it is distributed to the shareholder as a dividend.  While one strategy is to retain the profits, one then had to be aware of the accumulated earnings tax.

One added benefit that TCJA gave to pass-through entities is the twenty percent deduction under Section 199A on qualified business income.  Generally speaking, qualified business income is ordinary income less ordinary expenses, excluding wages and guaranteed payments earned from the business.  But the bad news is that there are many limitations on the twenty-percent pass-though deduction.  Businesses known as “specified service trades or businesses” where “the principal asset of such trade or business is the reputation or skill of one of more or its employees or owners” are phased out of the deduction, and there are limits based on the size of your payroll, or the amount of property used in the business.  Another hurdle is the definition of trade or business.  When it comes to passive activities such as investment or real estate, the question of whether these qualify as a trade or business has arisen.  At this time, there is no clear guidance.  Additionally, this benefit will sunset in 2025.

With regards to C corporations, the change to the twenty-one percent rate is permanent until a new law changes it.  C corporations also get the benefit of the repeal on Alternative Minimum Tax (AMT).  AMT was originally designed to ensure that a business pay a minimum amount of tax given all of the credits, deductions and loopholes in the codes.  But AMT was not an easy calculation and so its elimination will come as a sigh of relief.  Another change is the simplification of tax method.  Under TCJA, C corporations that have no more than twenty-five million in sales in the past three years can now use the cash method of accounting, even if they have inventory.

So, who may want to consider moving to a C corporation?  If your combined pass-through income and additional taxable income puts your individual tax rate above the twenty percent deduction threshold and passes the phase out threshold, this may be a beneficial move.  If you are a service business, as defined by Section 199A, and are ineligible or phased out of the deduction, then this might be a good choice as well.  Another thought that must be considered is the taxation.  While the tax rate on C corporations is lower, the double taxation still occurs.  And with that, some businesses do not distribute the money to shareholders in the form of taxable distributions, and instead hang on to the funds.  Whereas, with the single taxation of pass-through entities, shareholders receive their distribution funds annually, or do not have to worry about the taxation of a future distribution of withheld funds because it has already been taxed.  Other considerations include: assessing how much changing your entity will save you on your bottom line, the cost associated with making the change, and liability exposure.

If you choose to keep your business as a pass-through entity, the type of pass-through my also come into play.  While originally thought to be an oversight, it has come to be known that there are extensive proposed regulations that confirm the disparity between the Section 199A deduction as it pertains to S corporations, partnerships and sole proprietors. Much of the disparity comes from the use of wages found in the S corporation environment that is not found in the other two pass-through types.  With wages reducing the total net income, the deduction reduces as well.  This further changes with the introduction of property, as the business becomes subject to the wage and property limitations.  If a business operates as an S corporation and is subject to the limitations, the owner(s) will have a W2, and will be able to deduct the twenty percent of the business income but limited to no more than fifty-percent of the W2 income. But given the same income brackets, as a sole proprietor the business would be ineligible for the deduction in its entirety because the threshold would have been reached.

As always, tax choices can be difficult and are very dependent on the specifics or your business.  Reviewing your entity structure, tax benefits, income needs, and determinations of qualifications is strongly encouraged.  It has always been important to consider what type of business entity serves your business best given your field and strategy.  When all relevant factors are considered, switching to a C corporation may not be the best for your business.  Run the numbers with your accountant and see what entity structure works for you, your business, and your goals.  You may be surprised to find that the old standby pass-though entity stays in your good graces.

Poor cash flow can affect much more than the financial performance of your business. The non-financial costs of poor cash flow can have just as negative an impact on your business as the financial costs. Here are a few ways, as noted in Beyond the Numbers, that poor cash flow can affect your business.

1. Increased interest and bank charges – When having to source funding externally from lending institutions extra costs will be involved. These extra costs will affect your profit and cash flow. Bank fees and interest can accumulate very quickly if you go outside their credit terms. Ensure you have the best overdraft and loan for your business.
2. Missed opportunities – Poor cash flow may lead to you having to pass up on great opportunities to grow your business, e.g. you may not be able to invest in the machine that will make production more efficient or will have to pass on a supplier’s special.
3. Poor relationships with suppliers – Being constantly late with payments to your suppliers may cause tension in your relationship with them. Always pay on the day the bill is due.
4. Poor relationships with customers – Contacting customers for overdue invoices when you are stressed may lead to you saying things that you wished you didn’t.
5. Employee morale – The culture of the business comes from the management. If the manager is stressed and worried this will reflect in the staff morale – especially if they are worried about their long term future.
6. Stress – The stress from the lack of cash can influence all areas of your life and business. Stress affects three areas of your life: physical, mental and behavioral
7. Solvency – The extreme cost of lack of cash flow is that you go out of business.

Tips on Managing Cash Flow as a Start-Up

As observed by Entrepreneur, these tips will help start-ups do a better job managing cash flow:

1. Know when you’ll break even.

Knowing the point at which you’ll break even won’t necessarily impact your cash flow, but it will give you goals to strive for and a ready-made target for forecasting where your cash should go in order to reach that goal.

2. Keep your eye on managing cash-flow.

“Every month isn’t enough,” says Derek Flanzraich of Greatist. “Nearly every week I’m checking both my personal and business finances.”

3. Always maintain a cash reserve.

Every startup should expect shortfalls. They happen to everyone, even with the best plans in place. But your survival likely will depend on how you traverse those shortfalls.

4. Manage funds better.

Unless you absolutely have to (which is rare), you shouldn’t handle the money for your business. That includes tracking it and handling your accounting. Hire an accountant or CFO to tackle this task for you

5. Collect receivables immediately.

Try to make any invoices “due immediately” and limit the use of net terms longer than 15 days.

6. Offer discounts to collect payments earlier.

If you don’t want to wait for normal net terms to pay out, then offer your customers a discount if they pay early.

7. Extend payables where you can.

While you want to bring payments in as quickly as possible, work with your suppliers and vendors to get the best deal you can and extend payables to net 60 or more, if possible.

8. Spend only on essentials.

Part of your forecasting model should give you a strong view of the necessary expenses that are coming down the pipe. Outside of the most essential purchases, you want to minimize spending and eliminate costs that aren’t essential to your operation until you’re profitable.

9. Be smart about hiring.

A highly skilled worker is likely to be able to tackle the work of two or more mediocre employees.

The Top 4 Cash Flow Forecasting Mistakes

Forecasting your businesses cash flow is a fundamental element of the cash management process. Without timely and regular forecasts the business owner runs the risk of letting surprises slip by. Note the following cash flow forecasting mistakes:

1. Changes in receivables and payables.

As noted in Simple Studies, companies should set optimal accounts receivables and payables levels through corporate and financial strategy, then forecast those accounts according to their plan.

2. Tax liabilities are another source of variability in projecting cash flows.

Tapping into the expertise of the company’s accountants before the annual cycle begins is a good technique to avoid problems in the tax line.

3. Reporting cash flows from financing and investing activities. 

This requires a relatively high-level understanding of GAAP and/or IAS standards and principles. To read more, see this excellent piece from accounting firm Grant Thornton.

4. The biggest cash flow statement error can start at the top: the income line.

The statement of cash flows is built upon the foundation of income delivered from the business’s operations, and errors in income projections can have a large impact on cash flows. Top financial teams actually build from projected contributors such as pricing, volume and product mix (and that can be across divisions and geographies). Using the basic building blocks to drive forecasts does two things: it provides a solid structure to the operating performance of the business and it raises relevant questions all along the way.

In conclusion, the task of cash management may seem a daunting task. In fact, larger organizations have carved out a function referred to as “treasury,” which is dedicated to the function of cash management. In any case, the effort is far and away worth it because the eventual alternative is going out of business for a shortage of cash.

So, you have an interest in owning and operating a franchise? Or maybe you know someone, such as a family member, who shares your interest? Hopefully, this information is getting to you before you’ve completed your acquisition because many of the following points should ideally be addressed and prepared for prior to making any commitments to purchasing a franchise. The following are some of the higher priority points of relevance.

Entrepreneur notes the following points that are some of the characteristics or skills you will need to increase your chances of success.

1. Risk aversion: Any business start-up involves some risk of failure, but a strong franchise with a proven track record of success will minimize this risk. Successful franchisees do their homework.

2. System orientation: Don't shy away from franchising because you assume you need a burning entrepreneurial spirit to become a franchisee. That's simply not true. Entrepreneurs want to reinvent the wheel based on their incredible confidence in their ability to figure out how things should be done. Successful franchisees, on the other hand, want proven systems. They don't want to have to figure out the best way to do something. 

3. Coachability: The motto of franchising is "In business for yourself, not by yourself." Successful franchisees look for opportunities to learn from others in their franchise system. They understand that they don't know all the answers and are willing to ask for help when they need it.

4. Hard-work affinity: No matter what franchise you're interested in, you can be sure it's going to take work to make it successful. The best franchisees know and accept that fact.

5. Strong people skills: Successful franchisees always have excellent interpersonal skills and can effectively interact with their employees and customers. They use these skills to create loyalty, value and trust.

The International Franchise Association provides the following perspective on what some of the keys to franchise success are.

1. Make sure you have enough money.  

• Determine how much you have to invest, how much you're willing to risk and how much you will need to live on for at least 12 months.   
• Listen to your attorney and accountant and do not be pressured by the franchise salesperson.

2. Follow the system.  

• Franchisees often get their business up and running and then begin to change, add or modify existing products, advertising, hours, services, and even the quality and consistency they are licensed to deliver.  This violates the franchise agreement and puts you in jeopardy of having your franchise terminated!  
• By following the system, you:
  • preserve the brand 
  • protect your investment and that of your fellow franchisees

3. Don't neglect your family and friends.

• Be prepared to work long hours, but also make sure to budget time for your family and friends.   
• Don't forget to acknowledge the sacrifices your family makes.   
  • Allow your family and friends to share in your new life.

4. Be an enthusiastic franchisee. 

• The success of any business is linked to the level of enthusiasm you bring to the job.   
• Enthusiasm brings a level of excitement and energy to the operation that everyone can feel-including your customers and staff. 

5. Recruit the best and treat them with respect.  

• Good help is hard to find-great help is essential.   
• To keep the good staff you've hired:  
  • Rotate routine and boring jobs.   
  • Don't show favoritism.   
  • Keep employees informed of new marketing and other promotions.   
  • Provide timely performance reviews and wage salary increases.

6. Teach your employees.  

• In franchising, training should be continuous.  Employees are your front line. 
• Training classes are a good way to show your employees that they matter to you.  
• Get all the training you can from the franchisor.   
• Alert your franchisor when you need additional training.  
  • Take advantage of every training opportunity, whether it's offered by the franchisor or by local schools, trade associations and other sources.

7. Give customers great service.  

• The most important thing you can do is to get everyone to smile! 

8. Get involved with the community.  Customers like to shop in places that support them.  

• Sponsor Little League team 
• Support a civic or youth group 
• Give tours of your business for school groups 
  • Set up a kiosk at community events

9. Stay in touch with your franchisor and other franchisees. 

The recommendations noted above are tried and tested. Take them to heart and we hope you will see some success with your franchise!

Useful Links:  

IFA: https://www.franchise.org/what-are-the-keys-to-franchise-successEntrepreneur.com: https://www.entrepreneur.com/article/60986
FranDev: https://frandevelop.com/articles/10-tips-franchise-success.html

On many occasions, I’ve seen entrepreneurs embark on operating a family-owned business and thinking that it’s going to be easy to be successful or that there won’t be any of the problems typically encountered in an non-family scenario.

In many cases, however, these assumptions rarely turn out to be the case.

Many of the issues arising in a family business scenario are unique, and it is wise to plan for these accordingly. For example, working with loved ones can give rise to conflicts otherwise not encountered in a non-family scenario.

As Wells Fargo Advisers notes: “In a family business, every decision and policy has to be evaluated based both on how it works for the business and also how it will affect the family dynamic — and that adds an extra dimension,” says Daniel Prebish, Director of Life Event Services for Wells Fargo Advisors.

It’s worthwhile to note that getting into business with your loved ones might indeed be a dicey proposition, particularly when you look at the statistics. Roughly 70 percent of family-run businesses don't make it to the next generation.

Note the following points which are some keys to running a family business, as observed by USA Today:

1. Decide who does which job. In a small business, typically everyone wears several hats and pitches in whenever a job needs to get done. But it’s still a good idea to make sure you spell out everyone’s primary role — whether sales, administration, financial management, whatever. If you’re trying to groom the next generation, you may want to rotate jobs from time-to-time, but give each person an area of responsibility, a job description, and title.
2. Make Sure Everyone Works. Everyone who works for the family business should actually work, not just get a paycheck. Even the teenagers.
3. Put it in writing. For example, your brother-in-law wants to end every workday at 2 p.m. to go surfing? If everyone agrees to it, that might be fine. Should he make as much money as you do, working 10-hour days, shouldering more of the burden of running the family small business? It depends. Perhaps he provided all the start-up money, brings in the biggest customers, has to travel 70% of the time. Whatever agreements you come to, make sure you put them in writing to reduce misunderstandings and conflict.
4. Decide how you’ll make decisions. Having a clear and fair decision-making process avoids lots of fights and bad feelings among family members. As the owner, you may want to retain all critically important decisions yourself — just be clear about what types of decisions others can make, and then let them make them.
5. Conduct performance reviews. Be objective and constructive about it. Leave anything that happened outside of the office out of performance reviews.
6. Keep family dynamics out of the workplace. Keep it professional when you walk through the office door. Try not to bring negative old patterns of family interaction into the workplace. 
7. Work toward the best but plan for the worst.  Your business may fail, you may have to fire your sister, you may decide you’d enjoy working on your own, or you may divorce your business partner, who happens to be your husband. If you have a plan, you won’t be scrambling if a worse-case scenario comes to pass.
8. Come up with a succession plan. You may want your company to bear your name 100 years from now, but does the rest of your family? They might not want to continue running the business, they may not be capable of doing so, or on the flip side, some of them may fight over who gets control. Come up with a plan now.

It’s not all bad, as Entrepreneur points out: Trust is the foundation of any successful business relationship. When you combine the power of your different skills and channel your love for each other into your business, you’re setting up your company to win.

Besides the tips above, if you are currently in or are considering getting into a family-owned business, we highly recommend you seek the counsel of your CPA and attorney early in the process. Professional advice is more effective if obtained prior to something going amiss.

It’s frequently said that if you don’t plan for the future then you must be planning to fail. Hence, it’s fair to say that a business plan is widely regarded as a very important--essential, even--management tool.

A business plan is a written document that describes where you want your business to be in the future along with the resources you anticipate needing to achieve your goals for the business. These resources can take the form of financial funding (loans etc.), headcount, capital asset acquisitions, etc.

In short, a business plan describes what you want to do and how you plan to do it.

In addition, a business plan conveys:

• your business goals
• the strategies you'll use to meet them
• potential problems that may confront your business
• ways to solve those problems
• the organizational structure of your business (including titles and responsibilities)
• the amount of capital required to finance your venture and keep it going until it breaks even

As explained by Entrepreneur, without a business plan it’s fair to say that you will be taking pot-shots in the dark without having anything to aim at.

A business plan is a living and breathing document in the sense that conditions can arise necessitating an update to the plan. The business plan is not something that is cast in stone. Updates may be required for reasons such as the following:

1. A new financial period is about to begin. You may update your plan annually, quarterly or even monthly if your industry is a fast-changing one.
2. You need financing. Lenders and other financiers need an updated plan to help them make financing decisions.
3. There's been a significant market change. Shifting client tastes, consolidation trends among customers and altered regulatory climates can trigger a need for plan updates.
4. Your firm develops or is about to develop a new product. If your business has changed a lot since you wrote your plan the first time around, it's time for an update.
5. You have had a change in management. New managers should get fresh information about your business and your goals.
6. Your old plan doesn't seem to reflect reality any more. But if your plan seems irrelevant, redo it.

Is a Business Plan Essential? The Statistics Say Yes

The following two examples provide a more practical, detailed glimpse into why business plans are so essential and why the statistics show how game-changing a good plan can be:

Example 1 (from QuickBooks.com):

A few years ago, a software company surveyed its users to determine how helpful a business plan was to success. The results were reviewed by the University of Oregon for validation, and seem to point to the improved outcomes for those with business plans:

• Of those who created plans, 64 percent grew their businesses, compared to 43 percent of companies that hadn’t yet finished a plan.

• Those who created plans were more likely to secure a loan or investment capital.

A Babson College study discovered a written business plan wasn’t all that important — unless you were trying to raise money. In cases involving raising capital or getting a loan, businesses with plans were more likely to get the funding they needed.

Example 2 (from BPlans.com):

Palo Alto Software asked thousands of Business Plan Pro users a couple of dozen questions about their businesses, goals, type of business, years in existence, and business planning. Almost 3,000 people responded. Those who finished their business plans were about twice as likely to successfully grow their business, get investment, or land a loan than those who didn’t. 

Key Elements To A Business Plan

An analysis by Mary-Ellen Tribby, CEO and Founder of WorkingMomsOnly.com, as published by The Huffington Post, made these pertinent observations:

1. Executive Summary: Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what you want. Clearly state what you’re asking for in the summary. The statement should be kept short and businesslike. Within the space of the Executive Summary, you’ll need to provide a synopsis of your entire business plan. 
2. Market Analysis: This section should illustrate your knowledge about the particular industry your business is in.

A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to collect its share of sales. A market analysis also enables the entrepreneur to establish pricing, distribution and marketing strategies that will allow the company to become profitable within a competitive environment.

1. Company Description: Include a high level look at how all of the different elements of your business fit together.
2. Organization and Management: This section includes your company’s organizational structure, details about the ownership of your company, descriptions of your management team and qualifications of your panel of experts or board of directors.
3. Marketing and Sales Strategies: Marketing creates customers and customers generate sales. In this section, define your marketing strategies. Start with strategies, tactics and channels that you have used to create your greatest successes.
4. Service and/or Product Line: In this section describe your service and product. What is it that you are actually selling? Establish your unique selling proposition.
5. Funding Requirements: In this section state the amount of funding you will need to start or expand your business. Include best and worst case scenarios.
6. Financials: Develop the financials AFTER you have analyzed the market and set clear objectives. You should include three to five years of historical data.

In conclusion, it’s fair to say that creating a business plan can be a significant undertaking. But there is plenty of evidence that the effort will reap dividends, so to speak, in terms of growth, profitability, and overall success.