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Author: Jeri Ann

Why Profit Margins and Bank Balances Don’t Always Match Up

Posted on by Jeri Ann

 

 

My net profit on my monthly income statement looked great, but my checking account balance is a LOT lower.  How did that happen?

 

In an earlier post, I explained why “checkbook bookkeeping” is a less-than-optimal method of tracking your business’s financial health.  You might think you have more money to spend because you haven’t considered future withdrawals.

 

However, the same checkbook balance that creates a false sense of having lots of cash available can also create a false sense of having cash problems.

 

That’s because these transactions actually aren’t part of the income statement.  They might be money flowing in and out of your business, but instead of creating revenue and expenses, they actually reside on the balance sheet as assets, liabilities or equity:

 

  1. Inventory Purchases – Inventory that you purchase to resell to customers at a profit is considered an asset, not an expense.
  2. Paying Last Month’s Bills – If your service vendors allow you time to pay bills (usually 15 or 30 days), then the bill you are paying this month might technically have been part of last month’s income statement, but are part of this month’s balance sheet.
  3. Paying Out Tips to Employees or Taxes Collected for Payroll or Sales – Money you collect for employee tips,payroll and sales tax isn’t considered income, which means the money you pay isn’t considered an expense.
  4. Paying Yourself via Owner’s Draw – If your business structure requires an owner’s draw to pay yourself, that withdrawal is taken from the equity you have in the company instead of as a salary expense.

 

It’s essential that you, as the business owner, know how different transactions affect your business.  In addition to your “cash in the bank”, the profit margin and the equity are both important to understanding your business’s financial health.

 

Questions or comments?  Let us know below!

Two Ways to Spot a Bad Bookkeeper

Posted on by Jeri Ann

Warning sign

This is not a comfortable post topic, because I’m writing about the worst-case scenarios for my own profession.

 

Most bookkeepers are honest, knowledgeable, and hard-working.  But as in any industry, there are always the few proverbial “bad apples” out there.

 

If you decide to work with a bookkeeper, whether you hire an employee for bookkeeping or work with an outsourced bookkeeping firm, here are two statements that serve as glaring warning signs:

 

“I’ll need your login and passwords for the financial accounts.”

 

You should NEVER (and yes, that word requires all caps in bold and italics) share your personal access information for any financial or business accounts with anyone, including a bookkeeper.

 

You can authorize a separate user access for the bank accounts if the bookkeeper is responsible for paying bills.  If more than one person uses the same login and password, it will be difficult to determine responsibility if there’s any suspicious activity during a login session.

 

If the bookkeeper’s duties do not require access to business funds, then don’t provide it.  Instead, you can authorize the bank to set up a read-only access for the bookkeeper.  Read-only access allows the bookkeeper to view the online information and run specific reports without allowing access to the funds.

 

“You don’t need to access the accounting software – I’ll send you what you need when you ask for it.”

 

This is YOUR business, and you have a right to the financial information at any time.

 

You can avoid this problem by purchasing the accounting software or subscription and designating yourself as the master administrator, then creating a separate user account for the bookkeeper.  If you hire with an outsourced firm, you can provide the firm with an “Accountant Access” login.

 

However, if the outsourced firm pays for and manages the accounting software or subscription, you should require the firm to provide you with a full-access user account.

 

In short, prospective bookkeepers who utter either of these two statements should be avoided.  Run, don’t walk, away!

 

Questions or comments?  Let us know!

Your Cell Phone – The Unsung Hero of Financial Organization

Posted on by Jeri Ann

 

You already rely on your cell phone for things like messaging, e-mail, marketing and, of course, posting videos of your puppy finally learning how to roll over (so cute!).

 

But did you know that your cell phone can also help you organize your business’s finances?

 

Now, you might be thinking, “Oh, great … now I have to put ANOTHER app on my phone!”

 

Actually, you can start right now with something that’s already installed:

 

The camera.

 

Your cell phone’s camera can capture an image of the paperwork that you can’t easily get electronically, such as all those quick trips to the office supply store or the service person who still uses a spiral notebook with carbon paper.

 

Just follow these steps the next time you are handed a piece of paper for a business transaction:

 

  1. Write explanatory notes on the receipt (especially if the purpose is not clear – a trip to the grocery store could be for office supplies, janitorial supplies, or a “thank you” gift for an employee)
  2. Open the camera app on your phone and take a photo of the annotated receipt.
  3. At least once a week, transfer the receipt photos to a dedicated electronic storage folder (cloud-based is the most efficient, but you could also use a PC’s internal hard drive or an external storage device such as a USB).

 

(IMPORTANT CYBER-SECURITY NOTES: ALWAYS research the security procedures and protocols of any cloud-based storage service, software, or app before signing up and ALWAYS back up your phone, hard drives and storage devices on a regular basis.)

 

That’s it!  No more crumpled receipts crowding your wallet or the bottom of your purse!  All the records are in one place for you or your bookkeeper to review and use to keep your business finances up to date.

 

Just a few minutes of time using a tool you already carry with you can help get you on the road to better financial organization.

 

Questions or comments?  Let us know below or contact us here!

Why “Checkbook Bookkeeping” Isn’t a Great Idea

Posted on by Jeri Ann

 

“So, I’ve been checking my bank account balance online to see how much money my business has to spend.  I even subtract out the checks I recently wrote and debit card transactions from the day, so that should be fine, right?”

Many business owners run what some bookkeepers call “checkbook bookkeeping”.  That is, they check their business financial health mainly by reviewing their bank account balance online to determine how much they can spend.

The ability to know your bank balance up to the day, sometimes even up to the hour, with a button click or a phone call is certainly a great tool.  But it is not a great way to manage your business finances.  Because even if you take into account the transactions that haven’t cleared yet, you’re still not getting a full picture of your business’s finances.

Here’s how checkbook bookkeeping can create problems:

  • Outstanding and upcoming bills – Sure, you’ve subtracted out the checks and debit card transactions that haven’t cleared. But what about the upcoming utility bills?  How many vendor bills are outstanding?  And wait, is the annual insurance bill due soon?   You need to look at what you’ll need to pay over the next few weeks in comparison to your expected income, not just you how much have in the bank today.
  • Sales tax – Most likely, you’re collecting sales tax in some, if not all, of your transactions. And while that money does go into your bank account, that money is NOT your income.  It’s money that you’re temporarily holding on behalf of the tax agency (possibly more than one, depending on location) to be paid at a later date.  Depending on the revenue your business brings in, the sales tax due to the tax agency could add up to thousands of dollars.  Not filing and paying the sales tax by the deadline will result in fines and interest charges.
  • Payroll tax – If you have employees, you have payroll tax. Payroll involves a relatively complicated set of transactions, so I won’t delve too deeply into it here.  But in a nutshell, as the employer, you’re required to withhold a certain amount from each employee’s paycheck to send over to the federal and state tax agencies on behalf of the employee.  So, similarly to sales tax, you are temporarily holding on to these taxes for a while.  At filing time, you are required to send that withheld money, as well as the taxes your business is responsible for, to the appropriate tax agencies.  And if you think the consequences for delayed sales tax filings are stiff, they’re less than the consequences for delayed payroll tax filings (especially since you’re dealing with federal AND state at the minimum).
  • Tips – Unless your customer pays a tip in cash directly to your employee, the tip is included in a check or credit card payment. When you deposit the check or receive the payment from your credit card processor, the tips are included in the total balance of your checkbook.  Once again, however, these tips are money intended for a third party – in this case, the employee who earned it.

Knowing how much your business has in the bank is certainly a vital piece of financial information.  However, it’s only one piece.

As a business owner, you should always know what your business owes so you can make informed decision about how much you can spend or invest.  Reviewing your balance sheet on a regular basis will give you a more accurate picture of your business’s spending ability.

Comments or questions?  Let us know!

Even more on the Paycheck Protection Program

Posted on by Jeri Ann

A few changes and clarifications have emerged to the Paycheck Protection Program, or PPP, since we penned our blog post. Here’s a link to an up to date article from Forbes.

A few key points:

  • To be clear: sole proprietorships, independent contractors, gig-economy workers and the self-employed are eligible.
  • Payroll costs for the independent contractor or sole proprietorship includes wages, commission, income or net earnings.
  • Collateral and personal guarantees are not required.
  • Interest rate is capped at 1% per annum (Yay!).
  • Maturity is two years (Boo! Call your legislators).
  • Not really a change, but our fears have been confirmed: dealing lending banks under this program has proven confusing and difficult in the early days to many. Some of this is down to how quick this program was rolled out and resulting confusion on procedures and policies, but some of it appears to be down to the traditional motivations of lenders to be conservative. Approach them with your records in order, shop around, and be relentless!

Let us know if you have any questions.  Please keep in mind that clarifications are appearing quickly for both the EIDL and PPP programs and there is talk of another round of legislative aid – we’re monitoring developments and will post updates as we see them.

More on the EIDL program and the Paycheck Protection Program

Posted on by Jeri Ann

Let’s cut to the chase and start parsing through the somewhat confusing bundle of aid offered to small business and non-profits as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (by the way, a good start to simplifying these things would be to stop working so hard for a soundbite friendly acronym).

On top of the already existing Economic Injury Disaster Loans (EIDL) we spoke of before, you now have other options and a modification of the EIDL program to consider. Below are highlights of these programs; a good place to look for further detail is here: US Senate Comittee of Small Business & Entrepreneurship Guide to the CARES Act .

The Paycheck Protection Program (PPP)

  • Purpose: Provide cash-flow assistance though fully federally guaranteed loans to employers who maintain their payroll through the crisis.
  • Who’s eligible? Small businesses and nonprofits in operation as of 15 February 2020 with fewer than 500 employees.
  • Maximum size:
    • 250% of average monthly payroll costs for the 1-year period prior to the origination of the loan. (There is an exception for seasonal employers, but this must be agreed with the lender.)
    • If you have taken an EIDL out in the period of 15 February to 30 June 2020, you can refinance that loan into a PPP and add on the above payroll amounts
  • Payroll is defined broadly to include: compensation, vacation, sick leave, health care benefits, retirement benefits and state or local payroll taxes. There is a limit at $100,000 per person on compensation. Other limits apply.
  • What are allowable uses of the loan? Payroll, continuation of heath and leave benefits, mortgage interest, rent, utilities, interest on pre-existing debt.
  • Terms? Maximum maturity of 10 years, 4% interest rate cap, no loan or prepayment fees. Application fees to be capped.
  • Forgiveness?(!): You will be able to apply for forgiveness through your lender and will need to document the maintenance of employees and pay rates through June 2020 and other uses of the proceeds.
    • Forgiveness limit is equal to the sum of payroll costs + mortgage interest + rent + utility cost for the 8 weeks following the loan is granted.
  • PPP and other SBA loans: You can apply for PPP loans and other SBA loans such as the EIDL, but the PPP loan and the EIDL can NOT be for the same purpose. For example, you can not use the EIDL to cover payroll for the same 8 weeks as the PPP covers.
  • SPECIAL NOTE: You must apply for the PPP through an approved SBA lender. All current SBA 7(a) lenders are eligible and others may be appointed. The EIDL is granted and funded directly by the SBA.

Emergency Economic Injury Grants

  • The CARES Act modified the EIDL process to provide for a emergency advance of up to $10,000 within 3-days of application for an EIDL.
  • You MUST first apply for the EIDL and THEN request the advance. The advance does not need to be repaid under any circumstance even if your EIDL is denied[1].
  • Use: The grant may be used to maintain payroll, pay for sick leave, and meet obligations necessary to stay in business such as debt, rent, mortgages, and increased production costs.
  • Eligibility: Same eligibility as EIDL and have been in operation since 31 January 2020

Modification to the EIDL: The credit elsewhere test is waived, so even if you have other sources of borrowing, you may still qualify for the EIDL.

Small Business Debt Relief Program: This program will provide immediate relief to small businesses with non-disaster SBA loans, in particular 7(a), 504, and microloans. Under it, SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the Act becoming law.

Assistance: Things have moved fast and you may need assistance to navigate these matters. A good place to start is here: https://www.sba.gov/local-assistance/find/

Need help getting your finances organized to apply for funding?  Send us a message and we’ll be in touch!

 

[1] https://www.schatz.senate.gov/coronavirus/small-businesses/sba-economic-injury-disaster-loan-and-emergency-grant

A Primer on the Economic Injury Disaster Loan Program

Posted on by Jeri Ann

My revenues are lower now due to measures to prevent the spread of COVID-19.  Is there any kind of financial assistance to help my business stay afloat? 

All fifty states have been declared disaster areas in light of the COVID-19 pandemic. This declaration allows the United States Small Business Administration (SBA) to offer funding through its Economic Injury Disaster Loan program (EIDL) to small businesses, small agricultural cooperatives, and most private nonprofit organizations if those entities have suffered substantial economic injury. Substantial economic injury is defined as the inability of a business to meet its obligations or pay ordinary and necessary operating expenses due to the disaster; the SBA loan is meant to provide working capital to allow the business to survive until normal times return.

Unlike other SBA programs, the EIDL funds are lent directly by the SBA rather than through a funding partner like a local bank; in theory, this should speed the application process and disbursements. The maximum loan amount is US$2 million with the amount determined on a case-by-case basis according to the economic injury your business has suffered and your ability to repay.

Key things to know about the EIDL:

  • These are loans, not grants. You’ll have to pay it back!
  • Your business is only eligible if there is no access to other credit.
  • The loans have a maximum maturity of 30-years, though the actual maturity and repayment plan will be determined on a case-base basis according to ability to repay.
  • The borrower must have a credit history acceptable to the SBA.
  • The SBA requires collateral for the EIDL program for loans over $25,000 and will take real estate when it can. It may seek collateral from a business’s principals.
  • The maximum annual interest rate for small businesses is 3.75% and 2.75% for nonprofits.
  • You may be required to take out credit insurance for the SBA.

The US Congress is considering further economic support, but the form at the time of this writing is uncertain. It may make sense to apply for an EIDL from the SBA now as applications will take time. You can always decide to decline it if better options become available.

Here’s a couple of links for learning more:

SBA to Provide Disaster Assistance Loans for Small Businesses Impacted by Coronavirus (COVID-19)

Coronavirus (COVID-19): Small Business Guidance & Loan Resources

As a last thought, in tough times, cash is king. Maintaining liquidity is always a sound strategy. If you have excess cash available to you or can find funding at decent terms (like the EIDL) and must meet obligations (i.e., payments to suppliers and landlords) it may make sense to negotiate for discounts or better future terms in exchange for immediate payment. If you don’t ask, you don’t get.

Are you overwhelmed with getting your finances together for these applications?  Send us a message to find out if Sunstone Bookkeeping can help you get started!

New Product Offering – Daily Sales Forms

Posted on by Jeri Ann

We have some very exciting news:  Sunstone Bookkeeping now sells PDFs of business finance forms!

 

We know that it can be stressful for a business owner to know how to start to get the finances organized.  That’s why we offer business forms to take small steps to getting a handle on how the money flows in and out of company.  We currently offer two sets of forms:

 

 

Both sets include a Daily Sales Receipt, Drawer Expense Form, and Deposit Record.  The Daily Sales Forms WITH TIPS set includes a section to record the tips from customers each day so you know how much you owe your employees.

 

Let us know what you think and if you have any questions!

 

Personal and Business Funds – Keep Them Separated

Posted on by Jeri Ann

“I need to buy a gift for my kid’s birthday.  Is it okay to write a check from my company’s bank account to pay the toy shop?”

Short answer:  No.

Long answer:  Technically, maybe, but you should only consider it after you’ve consulted with your tax accountant to make sure, if it is a possibility, that it’s handled correctly.

Yes, you started the business with money that you contributed, either from your own pocket or via a business loan.   And yes, you are the boss, so you are the ultimate decision maker on the business that helps you earn a living.

However, from an accounting perspective, you and your business are two separate entities.  This separation is known as the Economic Entity Assumption or Economic Entity Principle, as outlined in Generally Accepted Accounting Principles (commonly referred to as GAAP … here is a link with a quick summary).

This separation means it’s a bad practice to make a personal purchase from the business bank account.  This practice is referred to as commingling, and it can create major problems for you if the IRS comes at you for an audit.

You’ll have to defend all deductions on your return, including the personal expenses.  If you can’t defend them to the IRS standards, then you’ll probably be faced with a recalculated tax return along with the interest and penalties that go along with the new tax liability.

And depending on your business structure, your personal return might have to be recalculated, which means another set of interest and penalties.

If you find yourself in a situation where you need to take money from the business for personal reasons outside of your normal business wages or draws, talk to your accountant first to work out the best way to do so from a tax perspective based on your business’s legal setup.  Then make sure you alert your bookkeeper so these transactions can be recorded properly for reporting and tax preparation.

As a general rule, though:  Don’t use your business accounts as your personal piggy bank.  Keeping your personal and business finances separated makes your bookkeeping easier and reduces your stress levels at tax time.

 

 

Think of Your Life as Your “Core Business”

Posted on by Jeri Ann

One of the founders of Sunstone Bookkeeping spent over two decades negotiating debt restructurings for medium-and large-sized companies.  Over time, it became clear that regardless of industry or location, the same factors tended to lead to the companies’ financial woes.

  1. The company ownership had incurred debt that it didn’t need for a venture that detracted from the core business, and
  2. The company ownership had depleted cash reserves on extravagances (the second corporate jet or vanity offices, for example).

Then, when the company faced a crisis, it was too vulnerable as a result of the poor financial decisions made by company ownership, and they had to seek outside help to avoid bankruptcy.

How does this relate to you and your family?  Think of your life as your “core business”.  Without a clear vision on what is important to your life, these same two factors can lead to your own financial woes:

  1. Going into unnecessary debt by spending on things that detract from your life’s vision, and
  2. Depleting your cash reserves on extravagances (expensive cars or lavish vacations, for example).

So how can you avoid these problems?  Take some time to create a clear vision for your core business, then create a plan to use your finances to bring that vision into reality.  Focusing on that vision will help you to avoid spending on things that don’t meet your true needs and desires.  And yes, it’s important to include little splurges in your plans – as long as you keep your focus on your vision.

Want to learn more about how we can guide you in creating the best vision and plans for your “core business”?  Contact us today!