• Ten Questions to Ask Your Financial Team When Starting Up

    11 January 2017
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    Starting your own business or service can be an exciting, yet confusing time. To make it easier, we recommend working with us, as well as a financial planning team, to get off to a good start. We also recommend asking these ten questions to a professional:

    #1: What should be in a basic business plan?

    A business plan should outline each detail of your company including who will run it, how much you’ll charge, and what you expect to earn. Putting time into creating a thorough business plan is important. Work with your team to ensure your plan is accurate and represents your business well.

    #2: Who will you need to pay taxes to?

    Your local jurisdiction and state have specific taxation requirements. You’ll likely have to pay taxes on sales, but also costs associated with payroll. Ensure your accountant not only talks to you about who you need to pay, but payment deadlines as well.

    #3: What is a projected cash flow for the business?

    How much cash does your company need to keep on hand? The key here is to be able to anticipate how much it will cost you to operate your business. Most companies should not expect to have positive cash flow for at least a year, often longer. Your professionals can help you decide what your cash flow projections are.

    #4: How much of an investment do you need to put into your company right now?

    Your financial team can help you project the cost of setting up your new business. This will include costs related to establishing the physical business and paying for supplies. Your initial investment generally will be the highest amount put into the company by the founder, but it changes significantly from one company to the next.

    #5: What is your break-even analysis?

    This may be an important question to ask early on. How much do you need to make to break even? You’ll want to talk to your financial team about the timeline for this and what can be done to help ensure you break even as soon as possible.

    #6: What liability insurance do you need?

    While most tax professionals don’t offer recommendations here, having adequate policies to cover potential loss is important. Work with your team to ensure you have comprehensive protection to minimize risks against your company’s financial health.

    #7: What will interest cost you?

    Interest on loans is not something to overlook. You’ll want to ensure you have an accurate representation of how much you are paying in interest so you can make adjustments to pay off any borrowed debt sooner, make better decisions about borrowing, or factor in the cost.

    #8: How will you manage payroll?

    This is a very big component of starting up since it can be troublesome for most startups to actually know how to pay employees and meet all federal and state requirements. Working with a payroll provider is often the easiest option (and most financially secure since paying an employee to do this work tends to be more expensive).

    #9: How can you reduce your taxes?

    Tax professionals will work with you to determine if there are any routes to reducing taxation on your business including local incentives that may be available. You’ll also want to talk about projects taxes, investments that could reduce taxes, and having all possible deductions in place.

    #10: What’s the right profit margin?

    Working with a financial team often comes down to this question. How much should you charge to make the best profit possible while still ensuring your company can grow? It’s not a simple question, but having the right team by your side ensures it will be clarified as much as possible.

    Make an appointment with Dagley & Co. to get your business off to the right start. We are here for you for any tax, payroll or accounting questions or issues you may have for your new business.

     

     

     

     

     

     

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  • New Form 1099 Filing Date

    9 January 2017
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    Did your business utilize an independent contractor in 2016? Did you pay him/her $600 or more during the calendar year? If so, you are required to issue him/her a Form 1099-MISC. The purpose of this form is to avoid penalties and the possibility of losing the deduction for his/her labor and expenses in an audit. Different from last year, the IRS moved up the filing due date to January 31, 2017.

    In addition to being used to report payments to independent contractors, Form 1099-MISC is also used to report payments made by a business for rents and royalties and to attorneys for legal services, among others. If there are no independent contractor payments to report, the 2016 1099-MISC issued for other payments continues to be due to the IRS by the normal due date of February 28, 2017. However, where both independent contractor and other payments are being reported, the January 31 due date should be observed so that late filing penalties are avoided regarding the independent contractor payments.

    It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual that you need to file the 1099-MISCs for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward.

    IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required to file 1099s for your vendors. It also provides you with verification that you have complied with the law in case the vendor gives you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 before you engage in business with them. The W-9 is for your use only and is not submitted to the IRS.

    The penalty for failure to file the required informational returns is substantial and is $260 per informational return. The penalty is reduced to $50 if a correct but late information return is filed not later than the 30th day after the January 31, 2017, required filing date, or it is reduced to $100 for returns filed after the 30th day but no later than August 1, 2017. If you are required to file 250 or more information returns, you must file them electronically.

    Please note: To avoid penalties, all forms must be sent to the IRS by January 31, 2017.

    Dagley & Co. is here to prepare your 1099 for submission. We recommend using this 1099 worksheet  to provide us with the information needed to prepare your 1099.

     

     

     

     

     

     

     

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  • Standard Mileage Rates for 2017 Announced

    7 January 2017
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    The Internal Revenue Service announced the adjusted optional standard mileage rates for 2017. These rates are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. For those who do not know, the change in rates year-over-year is due to inflation.

    Standard mileage rates for the use of a car (or a van, pickup or panel truck) are:

    • 53.5 cents per mile for business miles driven (including a 25-cent-per-mile allocation for depreciation). This is down from 54.0 cents in 2016;
    • 17 cents per mile driven for medical or moving purposes. This is down from 19 cents in 2016; and
    • 14 cents per mile driven in service of charitable organizations.

    The standard mileage rate for a business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by congressional action) and has been 14 cents for over 15 years.

    Important Consideration: The 2017 rates are based on 2016 fuel costs, which were at a historic low. On top of that, OPEC has decided to cut production in an effort to drive up fuel costs. The Automobile Club has predicted an increase in fuel prices in the near future. Based on the potential for substantially higher gas prices in 2017, it may be appropriate to consider switching to the actual expense method for 2017, or at least keeping track of the actual expenses, including fuel costs, repairs, maintenance, etc., so that option is available for 2017.

    Taxpayers always have the option of calculating the actual costs of using their vehicle for business rather than using the standard mileage rates. In addition to the potential for higher fuel prices, the extension of the bonus depreciation though 2019 may make using the actual expense method a worthwhile consideration in the first year the vehicle is placed in service. The bonus depreciation allowance adds an additional $8,000 to the maximum first-year depreciation deduction of passenger vehicles and light trucks that have an unloaded gross vehicle weight of 6,000 pounds or less.

    However, the standard mileage rates cannot be used if the actual method (using Sec. 179, bonus depreciation and/or MACRS depreciation) has been used in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously.

    Employer reimbursement – Where employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of employment-connected business travel.

    Employees whose actual employment-related business mileage expenses exceed the employer’s reimbursement can deduct the difference on their income tax return as a miscellaneous itemized deduction subject to the 2%-of-AGI floor. However, an employee who leases an auto and is reimbursed using the mileage allowance method can’t claim a deduction based on actual expenses unless he does so consistently beginning with the first business use of the auto.

    Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the luxury auto depreciation limit rules; taxpayers with these vehicles can utilize both the Section 179 expense deduction (up to a maximum of $25,000) and the bonus depreciation (the Section 179 deduction must be applied first and then the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class life property. If the taxpayer subsequently disposes of the vehicle early, before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to income (SE income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered.

    If you have questions related to your vehicle or the documentation required, please give Dagley & Co. a call. We are located in Washington, D.C. but our clients are around the world.

     

     

     

     

     

     

     

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  • 10 Insane (But True) Ways to Grow Small Business Profits

    27 November 2016
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    Run your own business but things aren’t working out the way you pictured? Thankfully, many proven methods exist to help small businesses increase revenues, cut costs and improve overall. If you’re ready to take your company to a new level of success, consider implementing one or more of the following Dagley & Co. insane (but true) ways to grow small business profits:

    Eliminate Low-Margin Clients, Products or Services

    To boost your small business profits, ask yourself the following questions:

    What clients, products or services generate the most money and offer the greatest growth potential right now?

    What clients, products or services generate the least profit and provide the least growth potential currently?

    After analyzing your findings, eliminate low-margin clients, products and services. With the saved time and money, focus on the higher-producing areas of your business. Purging clients, products or services from your company might be painful at first. However, this practice will likely slash stress and pay dividends in the long run.

    Embrace Technology

    Embrace technology, automate and go paperless. Besides helping the environment, you’ll probably save a ton of money. In addition to cutting costs on paper, you’ll also spend less money on printer maintenance and toner as well as file cabinets and binders.

    Increase Conversion Rates Through A/B Testing

    Regardless of what type of small business you have, turning more shoppers into buyers will improve your bottom line. To increase conversion rates, consider implementing A/B testing. Also referred to as split testing, A/B testing utilizes two distinct sales pages in order to ascertain which page converts more effectively. Depending on the nature of your business, converting might equate to a customer buying a product or a client purchasing a service.

    Experiment With Pricing

    Raising prices while adding value can perhaps be the simplest way to improve small business profits. However, you risk losing bargain-oriented customers. Fortunately, for many people, price isn’t the most important factor when purchasing products and services. Lowering prices with the express intent of selling more products or services can also be a winning strategy.

    Increase Average Lifetime Value of Each Client

    Repeat customers can help your small business survive during stagnant economic times. Besides searching for effective ways to attract new customers, focus on increasing the average lifetime value of each client. You can accomplish this important task by:

    • Offering loyal customers a product or service upgrade
    • Providing customers with something your competitors don’t offer them
    • Being more convenient than your competitors
    • Looking for ways to solve problems for your customers
    • Providing stellar customer service
    • Reduce Churn Rates

    Churn refers to when a client ends his or her relationship with a business. A high churn rate will negatively impact your ability to grow your small business profits. To reduce churn rates:

    • Establish customer expectations and strive to meet or exceed them
    • Make your first impression a great one
    • Listen to your clientele
    • Closely monitor external environment changes
    • Speed Up Product or Service Delivery

    Speeding up the delivery of your products and services is another ingenious way to improve profits. Fast deliveries make customers happy and encourage repeat business. Decreasing the amount of time projects sit in limbo will also save money.

    Bundle Products or Services

    Do you offer products or services that naturally fit together? Providing customers with product or service bundles is a great way to increase both your revenues and your bottom line. For example, an accounting firm might bundle bookkeeping, tax preparation and consulting services.

    Expand to a New Geographic Market

    If you’ve saturated your current geographic market, consider expanding to a new one. Obviously, the costs of such an undertaking must be analyzed. But the long-term benefits of tapping into new geographic markets might make the venture worthwhile.

    Provide Maintenance Contracts

    Do you want to generate a steady income stream for an extended period of time? Think about charging customers an ongoing fee in exchange for maintenance contracts. You can even offer discounts to customers who sign longer contractual agreements. When developing maintenance contacts, clearly list the products or services customers can expect to receive.

    Growing small business profits may seem impossible to most. Dealing with saturated markets and a sluggish economy can dampen your overall outlook. Struggling to improve the bottom line of your small business? consider adhering to one or more of these strategies above by Dagley & Co., or give us a call at 202-417-6640 for guidance.

     

     

     

     

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  • Accounting 101: How to Read an Income Statement

    3 November 2016
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    An income statement is a very important document that your company produces. This statement can be challenging to prepare if you are new to the business, or if you are not familiar. We have gathered some good tips and tricks to make it easier for you to read and prepare you income statement accurately.

    What is an Income Statement?

    An income statement, which may also be referred to as a “profit and loss statement,” is an important financial report that communicates your business’s ability to earn a profit. This statement includes information about the money that came into your company during a given period, the expenses your company incurred during that period, and the total amount of profit you earned after all expenses were paid. If your expenses during this time exceeded the amount of income you earned, your income statement will show a loss for the period.

    Sections of an Income Statement

    In most cases, your income statement will be divided into various sections, including Revenue, Operating Expenses and Taxes. Within each section, smaller subsections exist to provide more detailed information. The final line on the statement provides your net profit or loss, which is calculated as the difference between your revenue and all of the expenses paid to earn that revenue.

    Not every income statement includes the same information. However, most statements will include the following lines:

    • Heading– At the top of the statement, you will find a heading that provides the name of your company and the period of time the statement covers.
    • Revenue– The “Revenue” subheading begins the section of the statement that provides details about revenue earned during the period.
    • Gross Sales– This line of the statement tells you the value of all sales made during the period before any deductions for expenses.
    • Returns and Allowances– Returns and Allowances include the cost of any goods returned by customers or discounted by your company.
    • Net Sales– Net Sales is calculated by subtracting the value of Returns and Allowances from your Gross Sales.
    • Cost of Goods Sold– This line lists the total wholesale cost of all of the goods you sold during the period.
    • Gross Profit– Gross Profit is calculated by deducting the Cost of Goods Sold from Net Sales.
    • Operating Expenses– The Operating Expenses subheading begins the section of the income statement that includes all of the expenses your company paid to operate during the period in question.
    • Sales and Marketing– Beneath the Operating Expenses subheading, you will find a smaller subheading labeled “Sales and Marketing.” In this section, you will find a list of all of the expenses your company incurred in relation to marketing. Examples include advertising, commissions and direct marketing. At the bottom of this section, you will find a total of these expenses.
    • General Administrative– This section of the document includes all of the administrative expenses paid during the period, including office supplies, utilities and more. At the end of this section, all general administrative expenses are totaled.
    • Depreciation and Amortization– Under this heading, any expensive assets your business is currently depreciating will be listed, along with the total amount of depreciation for the period.
    • Total Operating Expenses– This section of the income statement provides the total of your operating expenses for the period, including depreciation, administrative expenses and advertising expenses.
    • Operating Income– Your Operating Income is the amount of income left over after all of your operating expenses are deducted from your gross profit.
    • Non-operating Income– This section includes all of the income you earned outside of your standard operations, such as by the sale of assets or investments.
    • Non-operating Expenses– Non-operating expenses include expenses you paid that were not related to the operations of your business. These expenses may be related to earning non-operating income.
    • Income before Taxes– The value on this line is calculated by adding your Operating Income and Non-operating Income and then subtracting your Non-operating Expenses.
    • Taxes– This section includes all of the taxes your business paid during the period, including prepaid income tax and payroll taxes.
    • Total Net Income– The final line on your income statement is your total net income. It is calculated by subtracting your total Taxes from Income before Taxes. If your expenses for the period exceeded your income, this value will be negative, representing an overall loss.

    Getting Professional Help

    Preparing an income statement is no easy task, and interpreting it can also be difficult for many business owners. Dagley & Co. will not only ensure that your income statement is accurate, but we will also be able to help you gain important insight from these statements that can be used to boost your business’s profitability in the future. Give us a call today at (202) 417-6640.

     

     

     

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  • November 2016 Individual Due Dates

    28 October 2016
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    November 10 – Report Tips to Employer

    If you are an employee who works for tips and received more than $20 in tips during October, you are required to report them to your employer on IRS Form 4070 no later than November 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

    November 2016 Business Due Dates

    November 10 – Social Security, Medicare and Withheld Income Tax

    File Form 941 for the third quarter of 2016. This due date applies only if you deposited the tax for the quarter in full and on time.

    November 15 – Social Security, Medicare and Withheld Income Tax

    If the monthly deposit rule applies, deposit the tax for payments in October.

    November 15 – Non-Payroll Withholding

    If the monthly deposit rule applies, deposit the tax for payments in October.

     

     

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  • Little-Known Tactic Increases Child Care Credit

    24 October 2016
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    When two married people are jointly involved in the operation of an unincorporated business, it is very common, yet incorrect, for all of that business’s income to be reported as just one spouse’s income, even when/if they both work in the business.

    In such cases, the spouse not taking credit for his or her portion of the earned income loses out on the chance to accumulate his or her own eligibility for Social Security benefits. In addition, to claim a child care credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the spouse not including a portion of the income from the joint business has another source of earned income, the couple will not be allowed a child care credit.

    There are ways to remedy this situation, however. One option is to file a partnership return for the activity, in which case each spouse will receive a K-1 that reports his or her share of the net profit. An approach that avoids the necessity of filing a partnership return, and that is probably less complicated, is a qualified joint-venture election, in which each spouse elects to file a separate Schedule C for his or her respective share of the business. This gives them both self-employed income for the purposes of the self-employment tax and for claiming the child care credit.

    A qualified joint venture refers to any joint venture involving the conduct of a trade or business if:

    (1) The only members of the joint venture are husband and wife,

    (2) Both spouses materially participate in the trade or business, and

    (3) Both spouses elect to apply this rule.

    Generally, to meet the material participation requirement, each spouse will have to participate in the activity for 500 hours or more during the tax year.

    If the net income from the business exceeds the annual cap on income subject to the Social Security tax, the combined self-employment tax for the spouses with split Schedule Cs will exceed what a single spouse would have paid if he or she had filed a single Schedule C.

    An additional benefit when filing split Schedule Cs is the opportunity for both spouses to participate in IRAs and self-employed retirement plans.

    If you have questions about how splitting the business income between spouses might apply to your specific situation, please contact Dagley & Co. today.

     

     

     

     

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  • Thinking of Converting Your Home to a Rental? Better Read this First

    13 October 2016
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    Considering converting your home to a rental? Then, there are a number of tax issues you need to consider before making your final decision.

    One of the first issues to consider is that by converting your main home to a rental, you may be giving up an opportunity to realize tax-free income. Currently, taxpayers are allowed to exclude $250,000 ($500,000 for married taxpayers filing jointly) of home gain when they sell a home if they owned and occupied the home as a primary residence two of the five years prior to the sale. Once converted, the property is no longer your primary residence, and if you sell it more than three years after the conversion, any gain would no longer qualify for the home gain exclusion and would be fully taxable.

    Not all homes will have appreciated in value, and in some cases, as we’ve seen over the last few years, some homes may have declined in value from the time they were purchased. If a primary residence is sold at a loss, that loss is not deductible for tax purposes because losses are never allowed for personal use property.

    Some homeowners have the mistaken belief that if they convert their home that has declined in value to rental use, they can then deduct a loss when they sell the property, which is not the case.

    When a residence or other nonbusiness property is converted from personal use to business use, such as a rental, it needs to be appraised by a certified real estate appraiser, and that appraised value is the value (basis) from which a loss is determined when the property is subsequently sold. In other words, any loss attributable to the period it was a personal use property is not allowed.

    However, for purposes of computing gain, the value (basis) from which gain is measured is the original cost of the home plus improvements less any depreciation claimed.

    If your decision is to convert the home to a rental, the rental period begins when you actually make the home available for rent, which is generally the date you advertise the property for rent. From this point on the depreciation, mortgage interest, property taxes, other taxes, utilities, repairs, advertising and other expenses are reported along with rental income on Schedule E of the 1040.

    Rentals are considered passive activities, and generally losses from passive activities can only offset gains from passive activities. However, there is a special rule that allows up to $25,000 of losses from rental real estate activities to be deductible annually. However, that special loss allowance phases out ratably for taxpayers with AGIs between $100,000 and $150,000, and once the top of the phaseout range is reached, no loss is allowed. However, in this case, the loss that can’t be deducted can be carried over to future years. That carryover may not do much good year by year for someone whose AGI is consistently over the top of the phaseout range, until the year the property is sold and the suspended losses are released and can be deducted.

    For more details related to converting your home to rental use and applying the rules to your specific situation, please give Dagley & Co. a call.

     

     

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  • 9 Finance Tips All Business Owners Should Follow

    22 September 2016
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    With the right tools, resources, and a professional by your side, you can enhance the way you do business, reduce your spend, and increase your profit margins. To get started, you need some basic information on finance. Below are 9 finance tips all business owners should follow.

    #1: Recognize the Importance of Your Books

    Invoices, bank statements, and even some accounting work is commonly done through software programs today. However, it’s more than just accounting for your revenue and losses that’s important. In other words, you need to turn this data into usable information. Your figures can help you know how to grow profits even further if you know how to read them properly.

    #2: Stop Putting It Off

    It is much harder to manage that stack of papers at the end of the month than it is to spend a few minutes each day entering details. Having a pro to do this for you makes it even easier. If you are procrastinating, though, you’re hurting your short-term and long-term financial goals.

    #3: Know Your Risks

    A Headway Capital study found that 57% of business owners planned to grow this year. Most companies set out to grow for the year, but they often lack attention spent on minimizing risks. What’s the worst-case scenario? What’s your break-even point? Addressing risks as a part of your financial strategy really can streamline your finances should the year not go as you planned.

    #4: You Really Didn’t Budget, Did You?

    Some small to medium businesses lack the time it takes to budget. It’s understandable, but that doesn’t make it okay. Budgeting helps address those risks, but it also helps you to make better buying decisions. And, when you have tools in place to help you monitor inventory, expenses, and other unforeseen costs, you can create better budgets that allow you to do more with your profits.

    #5: Tax Mistakes Are Common

    Small to medium businesses suffer from some of the most complicated taxes. Without having a professional to monitor and guide your taxes throughout the year, your business could suffer significantly. The IRS says that, in 2014, $1.2 billion in civil penalties were placed against small business income tax filers. Most small businesses need reliable support to ensure tax filing and reporting isn’t a secondary importance.

    #6: Build from Your Strengths

    You don’t have to build your business on new products or start from scratch each time. It’s best to simply build onto what you have. For example, you’ll want to pinpoint where your biggest profit margins come from. Once you understand who your moneymakers are, target them within your business. By identifying and focusing on these areas, you can build your revenue and profits faster, therefore giving you the room to expand in other areas later.

    #7: Building a Business Is More Than Hours Worked

    It’s very common for business owners to spend a lot of time and hard work building their business on their own. Are you putting in 80 hours a week? If so, you may be limiting your growth potential. Instead, empower professionals and employees to help you with delegated tasks. This can give you more time to spend on what’s really making you money and help you to sleep at night.

    #8: Focus on Lean Practices

    Less really is more. As a business owner, you’ll want to incorporate the lean philosophy of keeping less on hand so you reduce your overhead. You create more value for your customers with less.

    #9: Access Capital When You Can, Not When You Need To

    Having a steady stream of income on hand is important. Instead of waiting until you are desperate for funding, and having to show your investors that you are in that place, focus on planning ahead and minimizing the risk of a negative situation.

    As a business owner, making wise financial decisions for your company is an ongoing process. But, you don’t have to do it alone. Allow Dagley and Co. to help you along the way to better manage your money and you could see it grow faster than you thought possible.

     

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  • Avoid These 4 Common Small Business Accounting Mistakes

    8 September 2016
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    When you decided to open for business, you have a vision. You identified a need and came up with a solution you could provide and sell, and you invested your time, your money, your knowledge, and your drive to make it into a reality. The only problem is, if you’re like a lot of small business owners,  you did not anticipate having to handle your business’s accounting needs. Many highly intelligent, responsible business operators get caught making common small-business accounting mistakes that can trip them up and cost them in the long run. If you are afraid this might happen to you — or if it already has — the best way to avoid these costly errors, before time starts ticking and the money starts to pile up, is to learn the top four small-business accounting mistakes and how to prevent them.

    The Top 4 Accounting Mistakes Made by Small Businesses

     The truth is that these four mistakes are relatively easy to address. The best way to avoid them is to set aside time every week for the specific purpose of taking care of basic accounting tasks. Once you get into the habit of doing them regularly and the right way, you’ll be able to avoid the hassle of having to go back and correct these mistakes in the future.

     Reporting Employees as Independent Contractors

    If you hire people to work for you, it’s important for you to understand the difference between employees and contractors, and to classify them correctly. There are very specific ways that you must account for each type of worker, and if you don’t get it right you will likely have to make corrections — and possibly pay penalties — in the future. If somebody is your employee, then you have control over when they work, how they get paid, and how they do their job. You are also responsible for withholding payroll tax on their behalf. By contrast, when you bring somebody in to do work for you as an independent contractor, they have more control over their own schedule, the work that they do, and how they get paid by you. They are responsible for their own taxes.

     Not Reconciling Bank Accounts Regularly

    Just as there are certain tasks that need to be done to keep your business running smoothly, there are certain accounting tasks that need to be addressed on a regular basis. Reconciling your bank accounts is one of those things. You need to make sure that every expense and every deposit is recorded in your books, and the best way to do that is to compare what you’ve written down to the statement that the bank provides. When you do this regularly, you are able to more immediately identify and address items that don’t match up so that you can correct any mistakes and take full advantage of available deductions. Far too often small business owners assume that this task is a waste of time and wait until the end of the year to do it. Not only is this much more time consuming, but it is harder to catch all mistakes and figure out what is missing when you have a full year’s worth of information to go through.

     Forgetting to Record Payments Against Open Invoices

    You receive a check in the mail or make a deposit into your bank account for an open invoice. If you don’t go back and check off the box showing that receivable as paid, your accounting data will be incorrect and incomplete. Get into the habit of immediately linking payments to their open invoices in order to avoid problems in the future.

     Not Understanding the Differences Between Cash Flow and Profit

    The money that comes in from your customers and the money that goes out as you make expenditures to operate your business represents cash flow. It’s important to have a positive cash flow, as that is a good indication that your company is healthy. It also means that you can pay your bills. But cash flow is not the same thing as profit. Profitability is a measure of whether you are making more from the sale of your service or product than you spend in bringing it to market. You may be profitable, but if the cash isn’t in hand then you can still have a negative cash flow. And people can pay you quickly so that you have cash on hand but you still may not be making a profit.

    The single best and easiest way to avoid these mistakes it is by taking advantage of all of the tools and functions that your accounting software package offers. Most accounting programs include powerful tools and how-to guides, but in many cases small business owners just invest in the packages without taking the time to learn all that they can do — or to learn it well. By taking a little time on the front end to go through the available tutorials, you’ll find that you’ll save yourself both time and trouble on the back end. Our best advice is to set aside time one day of the week, first to learn the software and then, going forward, to go through that week’s records. Set aside the same time slot each week as if it is a meeting or appointment. It’s a good habit to get into.

    If you are struggling to learn your software, don’t hesitate to give us a call at Dagley and Co. at (202) 417-6640 for tips and training. Once you learn what you’re doing, make sure that you include backing up your files!

     

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