A lot of my clients don’t know that I actually received my Bachelor’s degree in Economics. While my passion, and my livelihood, has been in Accounting for years, my inner Economics geek peeks out every now and then! One of my favorite topics from Economics class was the idea of opportunity cost, which states that the cost of any activity is based upon the value of the next best alternative that you did not choose. Read on to learn how real this concept can be for your small business.
Is your revenue stagnating or decreasing every year? There are many factors that can cause your revenue to slide, and one of them I’d like to introduce is your opportunity number.
Your opportunity number is the smallest amount of business you’re willing to take on when you take on a new client. Here’s an example: if you have a ten-hour minimum per client engagement and your hourly rate is $300, then your opportunity number is $3,000.00. 
Going after a business opportunity that is too small could actually cause your company to earn less. Since our limited resource is time, we can either spend our time going after small fish or big fish. If we want our business to grow, we need to let go of the small fish and spend our time bringing in the big fish instead. In our example above, it’s not worth it to you to sign up a new client for less than $3,000 because of the opportunity cost … taking time away from landing the big fish … is too high.
Define your own opportunity number
The first action item is to set your opportunity number if you don’t already have one. Take a look at your average annual revenue per client for last year or the last twelve months. Continuing our example, let’s say it’s $10,000. You always want to be striving to increase your average annual revenue per client year after year, in most cases.
Your opportunity number and your revenue per client are related in an important way. If your opportunity number is too low, it can drag down your revenue per client average. That means it’s going in the wrong direction.
Evaluate your opportunity number
If your opportunity number is too high, you may be walking away from business that could be profitable after a period of time. It’s possible once you build trust after doing a small engagement that the client will come back for more. So it’s important to factor in the potential.
If you have a sales team, you may have a different opportunity number for each sales person and yourself. They may have more time to pursue a larger number of smaller deals. If you have lots of leads and less time, then you want to find a way to work on the largest opportunities by qualifying those leads, estimating the potential revenue, and comparing that to your opportunity number.
Once you implement your opportunity number, you might free up quite a bit of time. You’ll have more time to go after the larger opportunities while giving yourself permission to “throw the small fish back in the pond.”
Seizing the opportunity
There’s nothing wrong with taking your opportunity number a step further and proactively seeking power clients and deals that will net far more than your opportunity number.
What’s your number? Let me know if we can help you calculate yours.
If your accounts receivable balances are edging up and getting older and older each month, then it might be a good time to bring out the aging reports. But what if we looked earlier in the cycle to see what we could do to collect the sales even sooner? Let’s take a look at five potential changes you can consider making that will speed up your cash flow, reduce aging receivables, and possibly reduce lending costs in your business.
1. Get paid in advance.
Getting paid in advance manifests itself in a number of ways:
- Prepaid gift cards
- Deposits
- Prepayment plans
- Monthly or project retainers
If it’s common to get paid in advance in your industry, then all you need to do is focus on doing more of it. If it’s not common in your industry, I encourage you to see how you might apply one of these ideas to your industry. You may be able to invent an entirely new way of doing business within your industry.
2. Increase your cash-equivalent payment choices.
If you’re not already able to take the following forms of payment, then it’s time to sign up for:
- Credit cards, especially MasterCard, Visa, Discover, and American Express
- PayPal
- Wire transfers
- Cloud-based bill payment systems
If you have overseas clients, being able to easily accept wire transfers keeps it simple if the client does not maintain a bank account in your country’s currency. And although most wire transfers still need to be handled manually, you can systematize and automate the process as much as you can by having written procedures for your clients.
Offering a cloud-based billing solution such as Bill.com eliminates the physical writing of checks, and you can approve and send payments from anywhere, even if you are on an airplane. The efficiency cannot be beat.
It’s surprising how many business-to-business payments come through PayPal, so if you don’t have this one as an option, you might want to consider it.
3. Streamline your time and billing system.
If you can bill faster, you can collect faster. Take a look at your processes and identify the bottlenecks in your billing system. Is it the partner who keeps the invoices on their desk for days before they are approved to be mailed? Is it an antiquated time system that is not real-time? Is it duplicate data entry that can be streamlined? Once you’ve determined your bottlenecks, you can take action to eliminate them.
4. Implement eCommerce.
An online shopping cart can help clients serve themselves and cut way down on your customer service. Today’s online shopping carts can handle one-time payments, recurring payments, and variable bills. The best of them offer a portal for clients to update their own credit card expiration dates, respond to declined card messages, and basically serve themselves. It’s quite fun to come into the office each morning and find loads of cash sales already in your cart from the night before, without any help from you or your staff.
5. Card on file.
For long-time clients, it makes sense to set up automatic approval on a monthly basis by having their card on file. Most busy and successful clients will appreciate the time savings when using this method, and you will have more control and be able to get paid faster. You can also use a hybrid of this method – semi-automatic approval – where a simple email exchange approves the current month’s amount.
Try one or more of these five tips to speed up your cash flow, simplify collections, and lower the amount you need to borrow from the bank to finance your business.
I’ve been experimenting with an expense-tracking app for my iPhone that might just make my paper mileage log obsolete. While it’s slick as anything and almost makes mileage tracking painless, it’s got me wondering. The mileage that I’m tracking in 2011 will be open to audit until April 15, 2015, assuming I don’t file for an extension. Unlike my trusty paper logs, my app leaves my mileage information trapped in my iPhone until I remember to export it. Even then, I’ll probably print the results and save them with my other tax documents. I don’t want to assume that I’ll be able to find that spreadsheet file three years from now, considering how many computer problems I seem to have!
So, first I had to review the available apps to see what their exported data looked like and how easy it was to export. Then it occurred to me that an iPhone could be easily lost, and my mileage data could be lost with it! So then I narrowed my selections down to those apps that had a built-in back-up feature. I eventually selected BizXpenseTracker and am still playing around with all its features. So far so good!
Are you using an app for tracking mileage? How is it working for you? Will its data be enough for an audit? Will you be able to find it three years from now?
It’s that time again … time to send your estimated taxes in to Uncle Sam.
So what are estimated taxes and why would you have to pay them? When you bring home a paycheck, your employer has withheld income taxes from your paycheck. But when you’re self-employed, a landlord, or even an investor, you are earning income that has never had taxes withheld. Rather than settling up all at once on April 15th, the government wants you to turn over 25% of your estimated tax liability at four points throughout the year. In fact, you will have to pay an “estimated tax penalty” if you fail to do so and owe Uncle Sam $1,000 or more when you do your taxes in April. So, start making those quarterly estimated tax payments and save yourself from all those nasty penalties!
Need help remembering those due dates? Sign up for my quarterly newsletter here. It comes out just four times a year, just in time to help you remember those quarterly due dates!
Summer is a great time for new projects to revitalize your business. One of these projects could be just the thing to spice up your business and help you rejuvenate yourself and your team.
Here are five ideas to help you heat things up at work and reap the rewards that result:
- Move from reactive to proactive. Work on fine-tuning one small area of your business where you’re constantly experiencing fires. How can you anticipate and prevent these fires? It might be putting some procedures in place, training staff, getting help from a vendor, or perhaps even firing a client that is too demanding. When you take the first step toward prevention, even if it’s a baby one, you’ve made a tremendous amount of progress toward controlling the situation rather than if you just remained in reactive mode. One great step would be to stay on top of your 1099 vendors. Don’t wait until year-end when you’re facing the January 31st deadline. Review your vendor payments now and make sure that you have a tax ID and valid address for each of the vendors who will be receiving a 1099 next January. If you’re still missing any information, you’ll have five months to track it down!
- Systematize something that’s worked in the past and repeat it. No need to reinvent the wheel if you’ve found the magic formula. Do the magic formula over and over again, perhaps more often, and you’ll increase your results. For example, if you’re good at working with people on the phone, then write down the process you’re using so that you’re discovering what you say that customers like. Then do it intentionally 100% of the time as part of your newly systematized process. Do you have a great letter that nudged a client into paying their overdue invoice? Start sending that to every client when their invoice hits the 30-day mark! You’ll be surprised at how easily you can improve your cash flow with just a short note.
- Listen to your clients and roll out a new service offering that they are asking for. A huge part of the battle for getting new clients is getting people to trust you. Why not leverage the people who already trust you – your current clients – and serve them in a new way. Increasing your revenue per client is a great way to help your clients even more and to boost you bottom line at the same time.
- Hone your skill. We spend a lot of time working on our core competency – the service we deliver to clients – and getting better at it. Why not get better at an accounting skill? This could include understanding reports better, learning how to job cost or product cost so that you understand your margins better, learning how to review accounts, and a host of other skills that will help you become more effective at analyzing your business’s financial data. Sometimes we forget accounting is a skill we can learn just like we know our core business – especially those of us who are reluctant about numbers.
- Measure. How do you know something is working unless you measure it? Add procedures to measure the results that are important to you; then you can begin to see where you need improvements. These include numbers such as revenue, expenses, cash flow, and profits down to the unit you want to measure them. When you do this you’ll naturally be able to improve your financial results in your business.
Which one of these projects speaks to you the most? Mark your summer calendar right now to take one step toward working this project into your summer plans so you can heat up your business.
Did you know that the IRS can now require you to produce your QuickBooks file if your business is being audited? Yikes! This started happening in late 2010 and the practice is only going to grow. How to protect yourself in the event of an audit?
- Review your own books! It only makes sense to go through your own books first and see if there are any red flags. Checks to the dog walker? Credit card charges for the day spa? Believe it or not, I’ve seen these and more on the books of businesses. Better for you to go ahead and re-categorize these transactions as “Owner’s Draw” or “Advance to Shareholder” now, rather than waiting for an auditor to find them.
- Back up your QB file at the end of each year so that each year is in its own QB Backup file. Previous years should be “condensed” first so that the only data the auditor can see is the year under audit. This prevents any “fishing expeditions” by your friendly IRS auditor!
Starting July 1st, 2011, your business miles are going to be a lot more valuable. For every mile you drive, the IRS will let you write off 55.5 cents, up from 51 cents for January 1st through June 30th. What does this mean for you?
- Capture every deductible mile! Yes, that means keeping a mileage log and using it regularly, but think about all those trips that you might be missing. Running deposits in to the bank, dropping off mail at the post office, even making an office supply run. Track all these trips in your mileage log and you’ll be adding $55.50 of deductible business expenses to your books for every 100 miles you drive.
- Speaking of mileage logs, be very careful to track mileage for January 1st through June 30th separately from mileage for July 1st and beyond. The bump in the deductible mileage rate is only applicable to miles driven on July 1st and later.
- While you’re tracking your mileage, be sure to capture miles driven for charitable purposes. These might include miles driven to PTA meetings or other nonprofit groups, miles driven to donate used household goods, or even miles driven to volunteer for a benefit walk or a Habitat for Humanity event. For example, if you drive to your church to provide volunteer office work once every week, you can deduct the round-trip mileage at the “Charitable Contribution” rate of 14 cents per mile.
The IRS stated that the increased mileage rate was a direct result of the increased gas prices that we’ve experience this spring and summer.
Too hip for a paper mileage log? The App Store on iTunes lists several mileage apps, including MileBug, MileTracker and Trip Cubby, all for less than $5.
Could your small biz use a bookkeeper? It sure could, if :
- You are frequently paying late fees for missing the due dates on your credit cards.
- You have independent contractors and aren’t sure how to track their payments for 1099 reporting at year-end.
- You have to check with the bank to see how much money is in your account.
- You check caller ID when the phone rings to see if it’s another collection call.
- You’re not entirely sure who owes you money.
- Your year-end tax bill was bigger than you expected.
- You have to pay a CPA to prepare financial statements so you can get a new bank loan.
- You would rather be selling or consulting or doing-what-you-do than crunching numbers!
If you’re ready to hand-off the stress and strain of your bookkeeping, give us a call! We’d love to help!
On April 14, 2011, President Obama signed the long-awaited repeal of the new 1099 reporting requirements. A minor provision in the new healthcare law, the new requirements would have included corporations and vendors of both services and tangible goods in the 1099 reporting net. While it was intended to be a major revenue-raiser for Washington, the requirements would have meant an unmanageable avalanche of paperwork for the nation’s small business owners.
It’s a Tax Day miracle! Both sides of the aisle managed to cooperate long enough to accomplish something for small business … finally!
UPDATE: New 1099 Requirements Repealed!
Have those silly new 1099 reporting requirements been changed yet?!?!? In a word, no.
The House of Representatives voted 314 to 112 to repeal the expanded 1099 reporting, paying for the changes by requiring repayment of tax credits by people who had received tax credits to pay for health insurance and later had their income rise.
The Senate had previously repealed the new reporting requirements using a different strategy to offset the revenue that had been expected to result from the new requirements.
Now we get to wait for a meeting of the minds as the differences in the bills are hashed out. Chances are good, though, that we will see a full repeal before the anticipated implementation. Phew!
