If goals are being met and revenue is where you want it to be, you may not need to use any measuring devices. But if there is a problem, the following ratios, if applicable to your particular business, may help you pinpoint the problem, analyze it, and take action.

The ratios can be applied to your entire business, to a division or department, or to one employee. Progress can be measured by comparing numbers from one month to the next.

Ratio 1: Total sales compensation/gross sales = direct selling costs (%).

Ratio 2: Gross sales/total hours worked by salespeople = sales dollars per hour.

Ratio 3: Number of sales/number of full-time-equivalent salespeople = number of sales per salesperson.

Ratio 4: Gross sales/number of full-time-equivalent salespeople = sales dollars per salesperson.

Ratio 5: Gross sales/number of sales transactions = average sales dollars per transaction.

 

There are numerous ways to do this, but you might consider adopting the concept of best practices (if you haven’t already). Most industries have them, primarily larger businesses. Best practices are a set of operational guidelines that are expected to produce a favorable outcome. Run your business using these techniques or methods, and you’re likely to be more successful.

Accounting has best practices. While they’re not carved in stone, sticking with some tried-and-true, common-sense procedures will likely lead to increased efficiency. Perhaps adopting some or all of them will make a difference in your business. QuickBooks can help.

The Three I’s

Let’s look at the three stages you’ll encounter when you decide to apply best practices to your company.

Identify

What problems are you trying to solve? Where are your bottlenecks? Are collections a problem? Cash flow? Timely, accurate payroll? Have you seen a reduction in your customer base? Are your bills being paid late? Having trouble keeping up with inventory?

Bring your employees in on this process. They’re on the front lines, and will have insight into where your systems are breaking down. They’ll be pleased to be asked, and they may have ideas that will evolve into best practices.

Figure 1. When you’re formulating ideas that could evolve into best practices, use your best resource: your employees.

Implement

Turn your ideas into policies, and formalize them. Make a big deal out of introducing them to all staff related to accounting, and explain the rationale behind them. They’re intended to improve your company’s financial bottom line, which should translate into a positive outcome for everyone. Don’t turn your presentation into a critique of past performance; emphasize the constructive nature of the changes. Put it in writing, too.

Here are some examples of best practices that other businesses have implemented.

• Invoice at the time of service/shipment, instead of once or twice monthly.
• Set a specific time interval to deal with collections, like once a week. If you’re running QuickBooks 2011, you can use the Collections Center. Previous versions have numerous helpful reports, like A/R Aging Detail, Open Invoices, and Collections Report.

Figure 2. QuickBooks 2011 features the automated Collections Center.

• Estimate your income tax obligation monthly, not just quarterly. When payments come due, there won’t be any major surprises.
• Make sure everyone who works with accounting has a backup person who can fill in. Consider having us do the training.
• If you don’t have a merchant account – which QuickBooks supports – get one, and encourage customers to pay in this fashion. Pay your bills the same way wherever possible. Use all of the technology that makes sense for you.
• When it’s logistically possible, have employees who incur billable time use a timer. A few minutes lost here and there adds up. QuickBooks has a built-in timer; remote employees can use Time Tracker.

Figure 3. Have employees time billable activities whenever possible.

• When was the last time you looked at your pricing structure? Are you building in enough profit? Evaluate your selling ratios on a schedule. Run inventory reports regularly.

See? It’s not rocket science. It’s a matter of emulating the practices of the most successful businesses. You might network with other companies to see how they handle this formalizing of processes. Talk to us, too.

Insure

Don’t leave it at that. Evaluate the effectiveness of the new best practices by scheduling follow-up meetings with employees. What’s working, and what isn’t? Do you need to tweak your methods?

This step is absolutely critical. You might want to appoint a compliance officer who follows up with individual employees and departments. If your business is small and informal, you could bring in lunch one day a month for follow-up – and for the development of new best practices.

Not just for mega-companies

You may already know something about best practices, but have always assumed that the concept was designed for big business. While it may be more of an imperative for large companies, even a sole proprietor with a bookkeeper can benefit. It’s really just a matter of putting the most effective work processes into place and maintaining them. Implementing best practices can be a good first step towards a more successful 2011. Call us if you have any questions.

 

1. There are many flavors of 1099
   There’s a 1099-DIV for dividends; 1099-INT for interest; 1099-G for state and local tax refunds and unemployment benefits; 1099-R for pensions and payouts from your individual retirement accounts; 1099-B for broker transactions and barter exchanges; 1099-S for real estate transactions, etc. There are many categories, but the Form 1099-MISC (for miscellaneous) seems to prompt the most questions and covers the biggest territory.
2. There are penalties for not sending them
   This time of year they’re inevitable. Generally, businesses must issue the forms to any payee (other than a corporation) who receives $600 or more during the year. And that’s just the basic threshold rule; there are many, many exceptions. That’s why you probably get a Form 1099 for every bank account you have, even if you earned only $10 of interest income. There are penalties for filing late or not at all. In cases of intentional non-filing there is a loss of the deduction for payment.
3. Timing is crucial
   Normally, businesses must send out Forms 1099 on or before Jan. 31 of each year for the prior calendar year. Don’t assume you’re off the hook for reporting income if you don’t receive a Form 1099 by February or even March. There are penalties on companies who issue 1099s late, but I’ve seen some arrive as late as April or May.
4. Recipients, beware of changed addresses
   Whether or not the payer has your correct address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number. That means you have an interest in making sure payers have your correct address. Update your address directly with payers, as well as putting a forwarding order in with the Post Office. You’ll want to see any forms the IRS sees.Whether or not the payer has your correct address, the information will be reported to the IRS (and your state tax authority) based on your Social Security number. That means you have an interest in making sure payers have your correct address. Update your address directly with payers, as well as putting a forwarding order in with the Post Office. You’ll want to see any forms the IRS sees
5. Senders, make sure it matches your W-9
   As a business, you are required to have the payee complete form W-9 in which they list their Name, Address and Tax ID number. This should the source of that info on the 1099. The IRS matches name and Tax ID number and sends you a letter for any mis-matches. There are penalties for mis-matches, but if you used the W-9 correctly, you can avoid the penalty. If you did not receive a W-9 by the time you pay over the the threshold for sending the 1099, you should withhold 31% backup withholding tax. Failure to do so could shift the burden to you.
6. The IRS receives them, too
   Any Form 1099 sent to you goes to the IRS too–often a little later. The normal deadline is Jan. 31 for mailing 1099s to taxpayers, but the payer has until the end of February to mail all its 1099s to the IRS or March 31 to e-file them. Some payers do send them simultaneously to taxpayers and the IRS. Most payers mail taxpayer copies by Jan. 31, and then wait a few weeks to collect all of the IRS copies, summarize them and transmit them to the IRS, usually electronically. That’s important knowledge, as you have time to correct any errors.
7. Those darn boxes
   Pay close attention to what boxes the amounts are reported on. Form 1099-misc has different boxes “classifications” for different types of income. For example there are boxes for Rent, Non-Employee Compensation, Other Income, etc. The box the income is reported on is where on your return the IRS will look for that income and there is different tax treatment for different income.
8. Report errors immediately
   The time delay means you may have a chance to correct obvious errors. So don’t just put arriving 1099s in a pile; open them immediately. Suppose you get a 1099-MISC on Jan. 31 reporting $9,000 of pay, when you know you received only $900 from the company that issued the form? Tell the payer immediately. There may be time for the payer to correct it before sending it to the IRS. That’s clearly better for you. If the payer has already dispatched the incorrect form to the IRS, ask the payer to send in a corrected form. There’s a special box on the form to show it is correcting a prior 1099–so the IRS doesn’t just add the amounts together!
9. Report every 1099
   The key to Forms 1099 is the IRS’ computerized matching. Every Form 1099 includes the payer’s employer identification number and the payee’s Social Security (or taxpayer identification) number. The IRS matches nearly every Form 1099 with the payee’s tax return. If you disagree with the information on the form but you can’t convince the payer you’re right, explain it on your tax return.It is ok to report more income than the total of 1099s you receive, just don’t report less. There’s no perfect solution, but one thing is clear: If you receive a Form 1099, you can’t just ignore it, because the IRS won’t.
10. IRS notices
    No one likes a tax audit, and there are numerous tales about what will provoke one. But this much is clear: If you forget to report the $200 of interest you earned on a bank account, the IRS will send you a computer-generated letter billing you for the tax on that interest. If it’s correct, just pay it.
11. States receive them too
    Most states have an income tax, and they will receive all the same information the IRS does. So if you missed a 1099 on your federal return and receive a notice from the IRS be aware that your state will probably catch up with it, too.
12. Don’t ask, don’t tell
    Keeping payers advised of your current address is a good idea, as is reporting errors to payers. But that’s where I’d stop. In other words, if you don’t receive a Form 1099 that you expect, don’t ask for it. You do not have to attach 1099s to your return like you do with W-2s. If you are expecting a Form 1099, you no doubt know about the income, so just report that amount honestly on your tax return. The IRS computers have no problem with that. In my experience, if you call or write the payer and raise the issue, you may be buying trouble. The payer may issue the 1099 incorrectly. Or you may end up with two of them, one issued in the ordinary course (even if it never got to you) and one issued because you called. The IRS computer might end up thinking you had twice the income you really did.

Forms 1099 are a vital part of the IRS’s computer matching program, and nearly all of us receive payments reported in this way. Take these forms seriously. I assure you the IRS does

 

This seems counter logical and most people have a hard time understanding how this is possible.

Usually a client wants to deduct the value of their donated time or services. I tell them you can’t because you have no tax basis in your time. Meaning since you have not paid tax on that time, you don’t have tax basis to deduct. If you are an individual and donate cash to a non-profit, you are using after-tax money. You have already paid tax on this money and you have tax basis.

Often the client is dubious since they have a receipt in hand from the charitable organization acknowledging the value of the time or services donated. But the only way to claim this deduction is to also record the value of the donated time or service as income. Then you have tax basis.

However, at best, the net result is no additional tax benefit on your return since you are increasing taxable income (value of donated services) equal to the charitable deduction (amount of service donated). You are adding income equal to the deduction. At best, they cancel each other out.

I can think of three situations where you will actually pay more by trying to claim the donation of time or service.

1) Partners and Shareholders in S-Corps and Partnerships and Sole Proprietorships have to segregate charitable contributions and report them separately on their personal tax returns, not netted against business income. The charitable contribution is reported below the line (Adjusted Gross Income) and the income is reported above the line. Depending on the income, this may cause come of your other deductions to be phased out since you are increasing AGI, the starting point for phaseouts.

2) The net income for Partnerships and Sole Proprietorships is subject to self-employment tax. In this method, you are increasing the income that is subject to SE tax. Charitable contributions do not lower SE income.

3) If you are taking the standard deduction, you will not benefit by the charitable portion but will be paying tax on the income portion.

My advice is, you are better to book just the amount will receive as income.

 

Here are some things you to know about self-employment:

• Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
• If you are self-employed you generally have to pay Self-employment Tax. Self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You figure SE tax yourself using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
• If you are self-employed you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly payments you may be penalized for underpayment at the end of the tax year.
• You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
• To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. 
• For more information see IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at http://www.irs.gov

 

But before you scrap your traditional marketing strategy and plug into the social media craze, consider the following three questions:

• Why am I doing this? As with any successful marketing plan, your strategy for using social media sites should be linked to specific objectives. In other words, take time to consider how this new venue can further the goals of your business. For example, you might use social media sites to get feedback more quickly, enabling you to adjust your products and services to meet customer needs more effectively. If you want to establish a widely recognized brand, consider how posting a business profile or interacting with customers via a company blog might further that goal. Social media marketing shouldn’t operate in a vacuum.

• What should I contribute? In social media marketing, as in more traditional forms of advertising, the needs of the customer must take priority. If you’re setting up a blog to share information and updates about your business, most of your content should provide information that’s useful and timely without being overly promotional. In America, the average person is bombarded with advertisements and pleas for money all day long. Give potential customers a break. Provide a clever or unique insight that furthers their goals, and they just might visit you again.

• How much time do I have? Interacting with customers and updating website content takes time. So it’s best to start small and dedicate a portion of each day to keeping current. Imagine your brick-and-mortar store suddenly filling with customers and your staff scrambling to address their varied needs. Your business network can be overwhelmed too. That’s why it’s important to proceed slowly, monitor your time and results, and build your network with care.

 

That’s the bad news. On the flip side, some businesses — even small businesses — actually thrive during tough economic times. What sets such companies apart?

• They focus on core products and services. If your firm has diversified far outside your core competencies, it may be time to pull back. Of course, if a sideline product has become a cash cow, you might want to morph into an entirely new business. On the other hand, sticking to the stuff you know best is generally a wise course to follow.

• They engage in prudent cost cutting. When recession hits, some firms panic. They slash inventory, lay off workers, cut prices to the bone. But when customers can’t get help because your firm has too few workers, or can’t get goods because your shelves are empty, they may conclude that your business is on the ropes. Cutting costs and reducing prices should result from a well-designed plan that fits into a long term strategy.

• They seek opportunities. When businesses fold, new markets often open up. Five auto shops have to share the wealth; when only two shops are left, yours may gain new customers. Also, some of those newly laid off mechanics just might come to you — with a little wooing.

• They pamper loyal customers. When money is tight, it’s vital to retain your customer base. That may mean offering discounts, gift cards, or loyalty rewards. A recession is also a good time to focus on your best customers. Let your loyal clients help build your business.

• They stay visible. Letting people know that your company is still operating is crucial during the down times. Keep attending chamber of commerce meetings, promote your firm on the local radio or television station, or write an article about your products for the newspaper.

Business success depends on many factors, some of which are outside your control. But following the proven habits of prosperous companies can help your firm thrive as well.

 

Not quite. You can’t let your business run on autopilot and expect good results. Any business owner knows you need to make numerous adjustments along the way – decisions about pricing, hiring, investments, and so on.

So, how do you handle the array of questions facing you?

One way is through cost accounting.

Cost Accounting Helps You Make Informed Decisions

Cost accounting reports and determines the various costs associated with running your business. With cost accounting, you track the cost of all your business functions – raw materials, labor, inventory, and overhead, among others.

Note: Cost accounting differs from financial accounting because it’s only used internally, for decision making. Because financial accounting is employed to produce financial statements for external stakeholders, such as stockholders and the media, it must comply with generally accepted accounting principles (GAAP). Cost accounting does not.

Cost accounting allows you to understand the following:

 
1. Cost behavior. For example, will the costs increase or stay the same if production of your product goes up?

 

2. Appropriate prices for your goods or services. Once you understand cost behavior, you can tweak your pricing based on the current market.

 

3. Budgeting. You can’t create an effective budget if you don’t know the real costs of the line items.

 

Is It Hard?

To monitor your company’s costs with this method, you need to pay attention to the two types of costs in any business: fixed and variable.

Fixed costs don’t fluctuate with changes in production or sales. They include:

• rent
• insurance
• dues and subscriptions
• equipment leases
• payments on loans
• management salaries
• advertising

Variable costs DO change with variations in production and sales. Variable costs include:

• raw materials
• hourly wages and commissions
• utilities
• inventory
• office supplies
• packaging, mailing, and shipping costs

Tip: Cost accounting is easier for smaller, less complicated businesses. The more complex your business model, the harder it becomes to assign proper values to all the facets of your company’s functioning.

We Can Help

If you’d like to better understand the ins and outs of your business and create sound guidance for internal decision making, you might consider cost accounting.

And we can help. Allow us to evaluate your business from top to bottom and determine the real cost of each component. With that as a foundation, we can help you draft budgets, adjust pricing, keep an appropriate level of inventory, and much more. Give us a call today.

 

The following suggestions can help your business tighten up its credit and collections policies and improve its cash flow. Although some of the tips discussed here may not be suitable for every business, they can serve as general guidelines to help give your company more financial stability.

Define Your Policy. Define and stick to concrete credit guidelines. Your sales force should not sell to customers who are not credit-worthy, or who have become delinquent. You should also clearly delineate what leeway sales people have to vary from these guidelines in attempting to attract customers.

Tip: You should have a system of controls for checking out a potential customer’s credit, and it should be used before an order is shipped. Further, there should be clear communication between the accounting department and the sales department as to current customers who become delinquent.

Clearly Explain Your Payment Policy. Invoices should contain clear written information about how much time customers have to pay, and what will happen if they exceed those limits.

Tip: Make sure invoices include a telephone number and website address so customers can contact you with billing questions. Also include a pre-addressed envelope.

Tip: The faster invoices are sent, the faster you receive payment. For most businesses, it’s best to send an invoice with a shipment, rather than afterward in a separate mailing.

Follow Through on Your Stated Terms. If your policy stipulates that late payers will go into collection after 60 days, then you must stick to that policy. A member of your staff – but not a salesperson – should call all late payers and ask for payment. Accounts of those who exceed your payment deadlines should be penalized and/or sent into collection, if that is your stated policy.

Train Staff Appropriately. The person you designate to make calls to delinquent customers must be apprised of the seriousness and professionalism required for the task. Here is a suggested routine for calls to delinquent payers:

• Become familiar with the account’s history and any past and present invoices.
• Call the customer and ask to speak with whoever has the authority to make the payment.
• Demand payment in plain, non-apologetic terms.
• If the customer offers payment, ask for specific dates and terms. If no payment is offered, tell the customer what the consequences will be to him.
• Take notes on the conversation.
• Make a follow-up call if no payment is received, and refer to the notes taken as to any promised payments.

 

Needless to say, times have changed. No longer considered a luxury item, cell phones and other mobile communication devices are now part of daily business practices at all levels, and the deduction limitations and documentation requirements no longer make sense. Today, cell phones are more akin to a land line phone which for years an employee may have occasionally used to make a personal call without tax consequence. Detailed documentation is not required for use by an employee of his office phone, and there is no reason that cell phones should be subject to stricter substantiation requirements. You may have read in the news that the IRS Commissioner and Treasury Secretary joined in a statement urging Congress to repeal the law. “The passage of time, advances in technology and the nature of communication in the modern workplace,” the Commissioner said, “have rendered this law obsolete. [We] ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers.”

And lo and behold, that is precisely what Congress has done. The new legislation removes cell phones and similar telecommunications equipment (including PDAs and Blackberry devices) from the “listed property” rules. This makes it easier for employers that provide cell phones to employees, as well as for employee who use their own cell phones. As with other business property, taxpayers must still be able to demonstrate the business use of the cell phone.