As a small business owner, the ability to read financial statements will give you a better idea of how your business is doing. There are many different financial statements but I've narrowed it down to three to focus on. If you dedicate your time to learning these three statements inside and out it will give you a great idea of the financial position of your small business. This will be a three-part blog series starting with an in-depth look at balance sheets how they are structured and how to use them to your advantage when evaluating your business.
Your Balance Sheet will list out all your assets and expenses. The key to this statement though is that it must balance, hence the name. Your assets must be equal to the amount of liabilities plus shareholders’ equity. If you accounted correctly these should be equal. Now there are different types of liabilities and expenses that you should know. There are fixed and current assets. Fixed assets are things you are not planning on selling or that cannot be sold easily within a year. This would include things like your physical building, equipment you use, etc. Current assets are things you are planning on converting into cash in the near future. This would include your accounts receivable, inventory, or prepaid expenses. The two types of liability are short term and long term. These are much more self-explanatory; the short term are things that must be paid within the next 12 months of the date of the balance sheet i.e. taxes or loans. While long term would be things that must be paid outside of a year from the balance sheet. These are typically things like long-term rent, bonds payable, or pensions. So, what are you looking for exactly in your balance sheet? The shareholder's equity is a rough estimate of the company's net worth. Since the shareholder's equity is the initial amount of money invested in the company. The company can, after taxes, choose to move retained earnings into the shareholder's equity account. Important information can be gained by analyzing ratios. The ratio of debt to equity is where your balance sheet becomes extremely helpful. You want to take your outstanding debt and divide it by your equity. This gives you a ratio, it is important to evaluate your ratio over three years to identify a trend. Each industry differs in what debt-equity ratio is acceptable, be sure to do this research if you are undertaking this task yourself.
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No matter the size of your business keeping up with large amounts of receipts can be frustrating. Now you do not have to spend hours sorting through stacks and stacks of crumpled up receipts and waste valuable time. With Wave Accounting’s new app, keeping track of your expense receipts is much easier. All you have to do is take a picture of your receipts throughout the year as you spend. Then the app connects to your Wave account where you can track and review all your expenses. Both the app and the account with Wave is completely free. Making this service a good alternative if a small business or entrepreneur cannot afford the subscription to a full-service software like QuickBooks or pay a professional accountant. Their business model is to tailor to this group, while their software does not have the same list of features as QuickBooks but is a good free option if you need to gain some control over you pile of receipts.
In today's market, online reviews play a vital part in acquiring new clients. According to annual BrightLocal Consumer Review Survey in 2016 84% of people trust online reviews as much as personal recommendations. The majority of people will visit the website after they read positive reviews. The most common thing I hear after informing business owners of the importance of reviews is this, "I know they are important but no one ever leaves us a review." The most important thing you can do as a business owner is ask. 7 out of 10 consumers will leave a review if they are asked so do not be afraid of asking your patrons for a review. Obviously good reviews of your business are a plus, you do not need me to tell you that, but let's talk about some of the advantages that are less obvious.
Google is, and has been, the way that people search for things online. The more reviews your business accrues over several different review sites the more Google will like your website. The trick to search result visibility is building rapport with Google. They are constantly working on their ability to give consumers relevant and accurate information. Having a healthy amount of reviews will help boost your visibility on searches. Having your customers leave reviews will also let you know what customers think about your practice. This could potentially turn you on to a problem that you were not aware was occurring. Maybe someone or something fell through the cracks. Tending to these problems will also help your client retention rate. Putting client testimonials on your website is a good way to check multiple boxes in one swoop. The more content on your site the more relevant and authoritative your website will look to Google. It can also build trust with your future possible clients. Marketing has changed since social media has risen to prominence. Word of mouth has always been one of the most effective marketing strategies. Since we, as consumers, ask those we trust about buying advice for products. This is how word of mouth has become the superior marketing strategy if you as a business owner can tap into this resource. What if we could use a powerful tool like social media to accomplish the same goals as word of mouth? Today, large companies use social media influencers to market their products. Getting people with large social media presence to promote their product. Many people build a large social media following and market products to their followers as a living. This is called influencer marketing, and it is a very effective strategy in today’s market that is proven to work. Though as a small business you likely do not have the capital to pay for online celebrities to market your product, that is okay and here’s why. It is okay for your small business to partner with a person with a much smaller following, this is the micro part of micro-influencer marketing. The reason is, the number of followers has an inverse relationship with the amount of engagement. In simple terms, the more followers someone has the less percentage of their followers interact directly with their content. For example, let’s say an Instagram blogger with one million followers writes blogs about cooking and takes pictures of food. You want them to market your new cooking knife. They do a sponsored ad for you with a link back to your website; less of their total followers will engage with that link than if that same person had one hundred followers. They will also have a more focused target market of followers. Meaning all of their followers would likely be interested in the new knife. What does this mean for your small business? Finding people with a smaller social media presence that are willing to work with you and genuinely like your product can be a strong and cost-effective marketing tool. This allows you to interact closely with your target market, provided you find a good fit with an influencer. This also increases your reach to customers that you would not have been able to be reached otherwise. Followers on social media take the advice of their favorite people they follow strongly. This kind of modern marketing strategy utilizes the free tools that you have to grow your small business. There is no harm in asking to partner with someone, the worst they can say is no. Likely they will be thrilled for the exposure to possible help grow their following as well. One of the many perks of being a large corporation is that you are eligible for larger tax breaks. They can write off things that normal small businesses just do not have the means to do so. For instance, large corporations can write off research and experimentation. It does not make sense for a small business to spend money on research just to receive a tax break because they have much less revenue. There are many more breaks that large corporations can get like deferral of income from controlled foreign corporations, exclusion of interest on local and state bonds, and deduction of domestic manufacturing just to name a few. Of course, these are far outside the reach of small business owners’ ability to take advantage. Meaning even though large corporations will pay a larger amount of money in taxes they do not take the same tole as taxes on smaller businesses. This is about to change. Annette Nellen, the Executive Committee chair, testified before the Senate’s Small Business and Entrepreneurship Committee in favor of lowering taxes for small businesses as much as corporations. In her testimony Nellen says, “Congress should continue to encourage, or at least not discourage, the formation of sole proprietorship and pass-through entities. If Congress decides to lower corporate income tax rates, small businesses should receive a lower tax rate as well.” Hopefully, the future will hold an easier time for small business tax rates. The whole committee agreed that without tax accounting software small businesses will have an extremely difficult time optimizing and filing their taxes. Having a one stop place, for small business owners, to receive small business advice and have a certified professional file their taxes, in a way that will benefit them the most, is still of great importance. As the tax laws change, small business owners that can save money on their taxes will be ahead of the game and have more capital to invest in their business to promote growth. Great businesses are the most efficient. The great entrepreneurs know how to work efficiently and grow their brand. They know when additional resources are needed and when technology can impact their business for the better. Setting SMART goals and knowing how to use technology to your advantage will increase your business’s efficiency. One of the greatest pieces of advice that most people often forget is the KISS approach. Keep it simple silly is such good advice, when put into practice can save a lot of headaches in the future. One of the greatest tools you have today, to assist you in running your business efficiently, is your phone. I know that the phones today can seem overwhelming, but the advantages are there. There are many programs, QuickBooks, Expensify, and more, that have mobile apps for your phone. These can help your stay connected to the office even when you’re out. They also have the added benefit of being a cloud backup for your data. Another way to keep your business efficient and on track is to set up SMART goals. If this is your first time reading about SMART goals, it is an acronym for how to set a goal that is Specific, Measurable, Achievable, Relevant, and Time-Bound. If you want to read more in detail about SMART goals this link provides a deeper understanding. Remember, after setting these goals you should revisit them often, and do not be afraid to failure. Set a goal that you believe you can achieve but will challenge you and your business. Failure is a learning opportunity that will teach you a valuable lesson, that you hopefully will not make again. If you receive a letter from the IRS remember that this does not mean they are automatically going to audit you. They could be looking for clarification or additional information. Once you receive a formal audit figure out what part of your returns is being audited. Only provide the specific information that the IRS requests to prevent broadening the audit. Make sure you are polite and quick to respond. With that being said, here are 10 red flags for the IRS that are in no particular order.
When you start your own business, it is common to make mistakes especially when it comes to accounting. Skipping small accounting tasks seems like it would save time, but it ends up costing time and sometimes even money in the future. It is better to get into a habit of taking care of accounting tasks early so they become less of an ordeal towards the end of the fiscal year. The focus should be clean, clear, and accurate accounting that will make your life easier. So, here are a few tips to help with your small business accounting. Separate your business funds from your personal funds. Even if your business consists of only you. Create a separate account for the business and the business only. This not only allows you to make your reconciliations and end of the year deductions easier, it also lets you keep close accounting of your cash flow. Many accounting professionals that work with small business owners will tell you that often they see the business owner not applying payments to open receivable accounts. It seems almost too simple to point out but it is easy to forget. Leaving receivable accounts open can cause major headaches down the road. Reconcile all your accounts as soon as the statement is available. This process will be much easier now since the rest of your records should be accurate. Not reconciling accounts can reduce the amount of deductions you will receive. Understand the tools and functions of your accounting software. Whether you are using QuickBooks or another software, understanding exactly what it can do and its limitations are important to making good use of your time. Read the entirety of Terms of Credit agreements. Reading long terms can be monotonous at first but It can save you money in interest and other fees. When first starting out it is easy to keep track of the small books you will be keeping. It is important to set up in a way that you can grow and scale without exponentially raising the amount of work you must put in to maintaining your books. You can set up automation in some online cloud based accounting that will allow your business to scale without you having to maintain all the accounting records by hand. Use this tips for your benefit to learn from the mistakes that others have made in the past. Professionals are always ready to help with high level expert advice for small business owners. Business owners make mistakes, both large and small. Poor cash flow management is one of the most frequent reasons why small businesses will fail. Here are some ways to improve your cash flow management. It is important to know at any given time the financial health of your business. Keeping good records and tracking cash flow make this a much easier task. If the stress of doing it all yourself becomes too much you can outsource to the professionals. Many small businesses will have accounting firms help because of the demand and time required. Plan for the worst. Since we do not live in a perfect world, your sales cycle will probably see cash leaving before it comes in. Having a cash buffer for times where you need cash but the money has not come in yet will allow you to have access to capital. Try to keep a handle on your spending decisions. Whenever cash leaves there should be a good reason and a clear purpose. Having capital tied up in unneeded expenses at the wrong time could prove fatal for a small business. As always it is important to use your cash to grow your business and monitor your bottom line. Are you a new business owner and need help planning? We can help you with your questions about licenses, registrations, and more in our upcoming training on the 25th! Visit our Key Elements page for more information on other topics that will be focused on and reserve your spot today!
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AuthorThe Pathways Team Archives
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