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?

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:

1. 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!
2. 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.
3. 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.
4. 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.
5. 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.

Closing out the Books? Follow This Checklist

As you’re cleaning up your books for year-end, there’s some steps you can take now to make tax-time easier and start the New Year off right:

• Verify that you have W-9 forms for each of your independent contractors or at least have their Tax Identification Number on file.  You will need this information in order to prepare 1099 forms in January. Going forward, it’s a good practice to obtain a completed W-9 form from each new vendor before you pay them.
• Review your Accounts Receivable.  Are all of them collectible?  If you have any bona fide bad debts on your hands, it’s time to write them off before year-end. You should also review your receivables to reconcile them against your customer accounts, confirming the balance of each.
• Review your Accounts Payable. Wherever possible, you should reconcile your vendor accounts against a statement from that vendor.
• Reconcile all of your bank accounts using the year-end bank statements. Did you know that you can reconcile any asset or liability account in QuickBooks?  Take this opportunity to reconcile all of your credit card accounts, lines of credit and outstanding loans. When reconciling your bank account, be careful to review any “Uncleared” transactions, as they may be duplicate entries, checks that were lost in the mail, or simply entries that should have been deleted.
• If you carry inventory, it’s time to do a physical count of your inventory and reconcile it against the inventory reported on your balance sheet. Take this opportunity to adjust your inventory for shrinkage, spoilage, or obsolescence.
• Make a list of all new equipment and other fixed assets acquired during the year, including the purchase date, amount and description.  Your tax preparer will hug you for it! If you’ve disposed of any old equipment, whether by selling it or by putting it in the dumpster out back, make a note of that, too.
• Review your payroll liability balances and adjust if necessary. Also double-check that all payroll tax forms have been filed as necessary.
• Similarly, review your sales tax liability balance and confirm that your sales tax filings are up-to-date.
• For paper records, prepare to archive any records that you need to retain. For any records considered vital, make a copy that can be kept off-site.
• Finally, make a backup of your QuickBooks file, also to be kept off-site, if possible.

 Following these steps will help you start the New Year off right and will reduce your workload when getting ready for tax time!

Most entrepreneurs start out doing everything themselves, earning their “Chief Cook & Bottlewasher” title by generating all the income, handling all the office paperwork and emptying the trash cans, too. At some point, you’ll realize that one person can only do so much. Particularly if your background wasn’t in business accounting, one of the first functions you should consider outsourcing is your bookkeeping.

Does this sound like you?

• You frequently feel overwhelmed by your bookkeeping, invoicing or tracking vendor payments.
• You’ve begun to get “love letters” from the bank, such as late fees, bounced check notices or even tax penalties.
• You’ve lost touch with where your money is going and whether you could trim expenses.
• Cash flow? What cash flow? I just keep my fingers crossed that a payment will come in!

It’s hard to let go and trust someone else with your books.  And you shouldn’t divorce yourself from the process completely, either.  But by letting someone else stay on top of bill due dates, invoicing and collecting client payments, you can focus on your billable hours, business development and the client relationships that made you a successful entrepreneur to begin with!

Every year I run into a couple brand-new business owners who really, truly don’t understand the importance of recordkeeping and retaining documentation of business deductions.  Quick as I can, I straighten them out and teach them the basics of what they can deduct, what receipts to keep and so forth.

Much more surprising, however, is the number of small business owners that I meet that think they’re keeping great records, but aren’t.  See if this scenario sounds familiar:

A self-employed business owner deducted his expenses on Schedule C (of the Form 1040). His proof for many of the write-offs was his American Express credit card statements, which listed the payee, date and amount of the transaction. The IRS denied many of his expenses for lack of documentation.

The U.S. Tax Court ruled in favor of the IRS, leaving the business owner with a significant tax due bill. They held that the credit card statement is not proof of the business purpose of an expense.  The business owner should have had receipts or other evidence to prove the exact items purchased. Just showing that a payee is an office supply store like Staples is not enough. [Fessey v. Commissioner, T.C. Memo. 2010-191]

Sound familiar?  I’ve had clients who thought a PayPal statement was adequate documentation.  Other clients swear that the Visa statement proves that the money was spent at Staples, so it has to be business-related.  Not according to the IRS!

Each business expense deduction should be backed up by a receipt or other documentation that shows the payee, date, amount and details of the items or services purchased.

Worried about all the space those receipts are going to take up?  Check out my earlier post on digital receipts.

It never ceases to amaze me how many small business owners are unclear on the rules regarding independent contractors. Just this past month, I discovered two of my new clients are paying “assistants” as independent contractors and another client was planning on hiring one! Sure, freelancers are great because they save you the cost and hassle of employees. You can add them as your business activity demands it and cut back when necessary. But if you are treating freelancers too much like employees, watch out for the IRS to penalize you for “worker misclassification.”

Just this past February, the IRS announced a new initiative targeting worker misclassification in small businesses. For the first three years, they’ve already randomly selected 6,000 businesses for audits! These National Research Program (NRP) audits will stretch across all industries and company sizes. The Treasury Department is anticipating additional employer tax revenues of $14 billion annually. President Obama is also anticipating additional revenues from this effort, as his 2011 budget proposal includes additional funding for 100 new Department of Labor employees to chase down cases of employee misclassification.

What happens if your “freelancer” is deemed to be a misclassified employee? The IRS will go after all of the employer taxes that you should have been paying, including Social Security, Medicare and Unemployment Insurance. These retroactive changes can go back several years and include significant penalties and interest. Once the IRS raises the red flag, the Department of Labor can jump in and assess minimum wage penalties and determine if you complied with overtime rules.

The audits are likely to focus on those industries most likely to engage in misclassification, including restaurants, construction, trucking, business services, child care services, landscaping and janitorial businesses. But if your business submits a large number of 1099 forms each year, you could well be on that audit list.

Are your freelancers really employees? The IRS has some standard guidelines on the subject on their Web site. The basic determining factor, though, is control:

• Do you tell your worker where, when and how to do their work?  Do you provide training for your worker? Do you require them to use your tools or computers?  These are all behavioral guidelines that identify a worker as an employee.  An independent contractor will generally supply their own tools and equipment, manage their own training, and do the work in the manner that they see fit.
• Do your contractors have an investment in their freelance business?  Do they advertise for other customers and make their services available to the public?  An independent contractor will have a profit motive in accepting work from you and will be able to make a profit — or lose money — on the job they perform.
• Do you have a contract with your contractor?  Do they work at your place of business or off-site?  If your worker is performing routine work in your business, at your business location, and expects an ongoing relationship, then you have an employee on your hands, not an independent contractor.

Are you unsure whether your worker is an employee or an independent contractor?  First visit the IRS web site and review their information; it really does explain the issue quite well. To help tip the balance towards an independent contractor classification, be sure your freelancer:

• Invoices you, instead of turning in a time card.
• Has other customers or is actively pursuing other customers.
• Has invested in their freelance business by buying business cards, advertising their business, buying liability insurance or paying for their own training.
• If possible, works off-site and is paid by the project rather than by the hour. You may not dictate work schedules, though requesting reports on project milestones are appropriate. The independent contractor is to determine how the work will be accomplished.
• Signs a written agreement. The agreement should include the tasks to be performed and the expected results, consistently identify the worker as an independent contractor, and specify the project’s duration without an automatic rollover.

If you realize that your worker best fits the “employee” description, then it is in your best interest to find a new freelancer who truly operates as an independent contractor or put your existing worker on payroll … pronto!

Online invoicing can be a fantastic time saver for small business owners. I personally use several services and have come to rely heavily upon them to send out monthly invoices without any effort or intervention on my part. Most of the online invoicing services provide a free trial or even a limited version of the service that is free on an ongoing basis. Depending upon your needs, the free options may fit the bill or you may find that the paid versions provide just the bells and whistles that you need. Why not try a free trial of one of the following services to see if they can help you run your business smarter?

FreshBooks — In my mind, this is the premier online invoicing service, offering many features that you won’t find with the free services. They have a free version that is limited to 3 clients per month while the Solo package allows you to have 25 clients for $19.95 per month.

Free services generally limit the number of clients you can have in the system or the number of invoices you can send per month. A few of the free versions have “branded” invoices showing the name of the service. Completely free services include (in alphabetical order):
Billing Boss
BillingOnClick – free version limited to 1 user
CannyBill – free version limited to 3 active clients
CurdBee – free version has CurdBee branding on the invoices
Intuit Billing Manager
InvoiceJournal
InvoiceMachine – free version limited to 3 invoices per month
InvoiceMore – free version limited to 3 clients
InvoicePlace – free version limited to 5 invoices per month
Invoicera – free version limited to 3 clients
LiteAccounting – free version limited to 5 invoices per month
Nett30 – free version limited to 5 clients
Ronin – free version limited to 2 clients
SimplyBill – free version limited to 3 invoices per month
SimplyInvoices – free version has SimplyInvoices branding on the invoices
WinkBill – free version limited to 3 invoices per month
WorkingPoint – free version limited to 5 clients
ZohoInvoice – free version limited to 5 invoices per month

Paid services, each with their own bells & whistles, include (in alphabetical order):
AcceptPay
Ballpark
BillingOrchard
Blinksale
Cashboard
Invoices Made Easy
Invotrak
PaySimple
SimplifyThis

Of course prices may change at any time. I encourage you to try out some of these services, especially if you have recurring invoices such as retainers or monthly fees. I personally use and can recommend FreshBooks, ZohoInvoice and Intuit BillingManager. I’d be interested in what you try and how you like it!

So you’re ready to clock out of the corporate world and hang out your shingle as a solo-professional. You’ve figured out how much you can reasonably expect to earn and estimated your expenses for marketing, computer equipment, training and so on. You’re ready to go, right?

Don’t forget to include the extra tax burden that the self-employed businessperson faces each year, the self-employment tax. Back when you were on a company’s payroll, you had 7.65% of your wages withheld for Social Security and Medicare while your employer kicked in a matching amount. Now that you’re self-employed, you’ll be responsible for the entire 15.3% of your net business income … in addition to income taxes!

Not only are you going to be responsible for those self-employment taxes and income taxes, but Uncle Sam is now going to be expecting you to send in those taxes on a quarterly basis as “estimated tax” payments. Gone are the days when your employer withheld your taxes; you never saw the money and never had to worry about it. Now you need to set aside a little bit of your profit from every job or project and send in those taxes on your own.

Of course, the key to calculating your net profit each month, and your corresponding tax liability, is to have a reliable accounting system. If you’re not comfortable with bookkeeping or just don’t have the time to devote to it, consider hiring a virtual accounting consultant! Every day, we set up accounting systems and maintain accounting systems for clients just like you!