Nick Magone, CPA, CGMA, CFP®

Why Preserving a Healthy Cash Flow is Key to Your Company’s Survival

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Cash flow is the lifeblood of a business. It’s what keeps the lights on and the doors open. And lack of it is one of the biggest reasons businesses fail. In fact, 82% of small businesses fold due to cash flow mismanagement.

If you’re spending more on bills, payroll, inventory and interest than your company is bringing in, you have negative cash flow — a key indicator that your business’s financial health is suffering. In that case, it’s time to make some serious changes, as the future of your business depends on it.

Having just enough won’t cut it

Not only do you need adequate funds for day-to-day business expenses, but you need enough cash to pay suppliers, creditors and your employees before you actually generate a profit. Understanding how cash flows in and out of your business gives you the power to plan strategically for the future, improve vendor relationships and increase the likelihood that you never run out of cash.

The sooner you learn how to manage your cash flow, the better your chances of success. Here are some tried and true strategies for improvement:

  • Control inventory. Holding too much inventory ties up cash, but not having enough can lead to a loss in sales and unhappy customers. Through consistent analysis, you can ensure that you’re on top of your needs.
  • Collect receivables. Establish a formal collections schedule and follow up on non-payers. Consider charging interest to penalize late payers or end unprofitable relationships entirely.
  • Control access to bank accounts. Keep the number of people who can access your accounts to a minimum, and be sure to update passwords as needed.
  • Outsource when it’s cost-effective. For certain areas of your business — like accounting, marketing, payroll and HR — it might make more financial sense to subcontract to a firm that specializes in those functions.
  • Consider leasing vs. buying — or vice versa. If you’ve been leasing, your costs are likely predictable. But purchasing equipment can substantially alter your cash flow. Reevaluate your costs and your needs to see what works best.
  • Run monthly cash flow reports. Whether you use Excel (not recommended!) or software such as enterprise cloud versions depending on your needs (Great Plains, NetSuite or Intaact), take time for a weekly overview of cash received and cash paid out to show your business’s cash position.

Understanding the financial environment of your business

According to Inc., “If you haven’t considered cash management an important issue, then you’re probably undermining your business’s short-term stability and its long-term survival.”

There are few things more important to your business than cash flow — especially if you’re striving for growth. That’s why Magone & Company offers business advisory services that look ahead in real time rather than relying on typical rear-facing accounting services.

Reach out to see how we can help get your cash flow on track for the long term.

Lucky Day at the Casino? Don’t Forget About the IRS

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Whether you’re a regular at the racetrack, an online sports betting enthusiast or spending your first time at the slots, hitting a jackpot can be exciting. But keep in mind, as you celebrate your big win, the IRS will be waiting with its hand out.

Even winners can be losers if they don’t pay their taxes. Consider the consequences of your good fortune and follow the tips below:

  • Ask about a W-2G. Any money you win gambling may be considered taxable income and should be reported on a W-2G form. If you try to fudge the numbers or not report the win, you’ll quickly find yourself on the wrong end of a tax bill. If you win a substantial amount, ask the casino how and when tax forms will be issued.
  • Understand withholding. According to the IRS, you must withhold federal income tax from the winnings if they (minus your wager) exceed $5,000. So before you spend it all, you might want to hold some in reserve. If you’re concerned about having the money to pay taxes due, see if the casino will do the withholding for you. Not all casinos offer this, but it never hurts to inquire.
  • Track your losses. You may be able to write off some of the money you lost in pursuit of a jackpot — but only if you can back up those numbers with hard data. If you carry a casino loyalty card, request a report showing how much you spent and how much you won, while your card was in use. It’s not the perfect solution, but it can be a good first step if you plan to write off your losses in hopes of reducing your final tax bill.
  • Research your state laws. In addition to federal taxes, you may also owe state taxes on your winnings. Each state has its own rules and formulas — some charging a flat percentage, while others basing tax on the total amount won. Knowing what your state requires can help you better plan for tax time.

As always, consult your financial professional if you find yourself on the winning side of a wager. This information is provided for educational purposes only and should not be considered tax or financial advice.

When Uncertainty’s the Norm, Plan for the What ifs

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Uncontrollable factors can have a profound effect on business operations. Circumstances can change overnight, directly impacting your employees, your customers and your business decisions. When unforeseeable events occur — COVID-19, anyone? — what can you do to keep your business afloat financially and practically?

Risk or uncertainty: What’s the difference?
Business risk is when the odds of future events can be measured and factored into your plans. When you don’t know the probability that something may happen, you’re dealing with business uncertainty.

Unlike calculated risk, business uncertainly cannot be controlled, making it even harder to prepare for. For example, if a competitor sets up shop a few blocks away, do you have a strategy in place to retain your sales? If there’s another mass shutdown, can your business model adapt and carry on?

An astounding three out of every 10 U.S. small businesses report they likely won’t survive 2021 without additional government assistance — that’s nine million small businesses at risk of closing for good as a result of the pandemic. The past year has demonstrated the need for a flexible business plan that confronts all the what ifs. Forward-thinking businesses have a greater chance of growing and thriving in even the most uncertain environments.

What causes uncertainty — and what can you do about it?
Business disruptions can arise from anywhere, but they’re commonly attributed to the following:

  • Whether it’s the stomach bug making its rounds around the office or a global pandemic shutting the entire office down, unexpected illness can shake up your workforce productivity, deadlines, inventory and more.
  • Economic conditions. Sudden shifts in economic activity (good or bad) can have a huge effect on your sales, inventory and cash flow.
  • Consumer behavior. Anything that changes a customer’s needs or how they go about filling those needs can alter the way you do business.
  • From taxes to minimum wage to employee rights, the government can play a key role in who you hire, who you fire and everything in between.

While you can’t plan for everything, you can take steps to safeguard your business:

  • Strategize for various possibilities. Acknowledge the unknowns and be flexible. Think about how your business model would adapt if XYZ were to happen.
  • Develop worst-case scenarios. Face your biggest fears. How would your business work through them to come out on the other side?
  • Educate yourself on the state of the economy. The more you know about how your business can be adversely affected, the better you can brainstorm the potential risks and solutions.
  • Reevaluate your resources. Are you confident in your team, vendors and suppliers? Can your cash reserves carry you through an emergency? Build a strong defense before you actually need one.
  • Remain guided by your vision. Remember why you went into business in the first place. Ensure that your whole team’s goals and efforts are aligned to bring your organization success.

Start planning for tomorrow, today
Uncertainty affects businesses of all types and sizes. That’s why you need solid contingency plans to adapt to the changing variables. NJ CPA firm Magone & Company’s advisory services can help position your business ahead of the challenges to come. Contact us today at (973) 301-2300 to learn more.

Self-employed? Showing Proof of Income is Easier Than You Think

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You’ve found the home of your dreams. Your credit is excellent, and you’ve saved enough for a generous down payment. But when the loan application asks for proof of income, you start to panic. Fortunately, qualifying for a mortgage doesn’t require a nine to five or a weekly paycheck.

For the 57 million freelance workers in the United States, proving an income can be challenging. But with some extra effort and preparation, you’ll be able to demonstrate a stable financial history — and get that mortgage, apartment lease or car loan approval even without a W-2 form or biweekly pay statements. These strategies can help:

  • Use an online payment service. To document income, an online payment service like com records and tracks who pays you, how much money is disbursed and where the money is coming from, so the information is easily accessible when you need it.
  • Ask your bank for an ACH report. An Automated Clearing House (ACH) report can serve the same purpose as a ledger from an online payment service. The ACH report will show when payments were made, along with the amount of each payment for easy tracking.
  • Hold on to your past tax returns. Once your taxes have been filed, keep copies of your returns for at least three years (preferably 7-10). This will help ensure that your income is reported accurately year in and year out.
  • Save your 1099 forms. You may have dozens of clients over the course of a year. To make your life easier, set up a filing system for all those 1099 forms. Take it a step further and scan each form as it’s received, keeping electronic versions on file as well.
  • Average your monthly income. It’s not uncommon for freelancers to have peaks and valleys in income. Over time, you may detect an earning pattern despite the variations. If you hope to qualify for a loan, track your monthly income carefully, averaging out the numbers to reflect your true annual earnings.

Freelance work offers a unique freedom and flexibility, while still affording you the opportunity to make a comfortable living. And if you check all the boxes of meeting a loan’s requirements, proving your self-employment income doesn’t have to be a daunting process. The expert CPAs at Magone & Company assist self-employed workers with our extensive tax and business knowledge. Contact us today (973) 301-2300 for more information.

 

Tax Return Errors — And How to Fix Them Before it’s Too Late

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Mistakes happen — even when it comes to tax returns. But very often, errors aren’t caught until after your return is submitted to the IRS.

To avoid raising any red flags, it’s important to know what to look for and how to right any wrongs.

What not to do
Here are the three most common mistakes that taxpayers make:

  1. Not reporting all your income. No matter how much or little you make, report it all. Unless you run a strictly cash business (which may also raise suspicion), the IRS knows exactly what you’re bringing in. Copies of every W2, 1099 or other forms you receive are sent to the IRS to ensure that your numbers match theirs.
  2. Overstating business expenses. If you’re a business owner, you’ll most likely have legitimate deductions. But don’t try to claim deductions that are way outside the norm. Consult with your tax professional and stay current with tax laws, so you’re not padding your tax return with write-offs that are shaky at best.
  3. Bad math. If things don’t add up — even an honest mistake inputting numbers — the IRS will catch it. Make sure to double check your returns and have a qualified tax professional assist you. A math error won’t necessarily get you an audit, but it might get you some unwanted attention.

Filing an amended return
Luckily, the IRS routinely processes a significant number of amended returns each year.

Individual income tax returns may be amended up to three years after the due date of the original return by filing an IRS Form 1040X. Even if you always e-file, a 1040X must be filed physically as a paper form. Keep in mind:

  • A separate 1040X is required for every year that you’re correcting. Be sure to mail each form in its own envelope.
  • On the back of the form, explain the changes you’ve made and reasons for making them.
  • Schedules, forms or any other documentation that’s affected by your changes should also be mailed in.
  • If the corrections made to your federal form affect your state taxes, send in a corrected return for that as well.

Save yourself the trouble, literally
The longer you wait to fix a mistake, the more it will potentially cost you. One small misstep could leave you on the hook for significant interest and penalties. The CPAs at NJ accounting firm Magone & Company can help keep you in good standing with the IRS. To schedule a no-obligation confidential consultation, give us a call today at (973) 301-2300.

Does the Competition Hold the Key to Your Success?

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Sometimes even the obvious is worth re-stating: The better you understand your competitors, the better chance you have of beating them — especially in business.

In order to know what your competitors are doing, you have to study them. A competitive analysis is a system of researching and collecting data on a rival business to help your business grow and gain an edge in the marketplace. If you’re not routinely performing a competitive analysis, you’re missing out on a goldmine of information that you can use to your business’s advantage.

Know who you’re up against
Understanding the competition starts with identifying them. Who are your biggest rivals?

Direct competitors sell products or services that are very similar or identical to yours. Indirect competitors offer different, but related products and services that target the same groups of customers to satisfy the same needs. For example, two coffee shops downtown are in direct competition with one another. But they’re also indirectly competing with the diner on the same street.

Think about why a customer may choose a direct or indirect competitor over your business. Maybe they value price points, and the competing business offers a better deal. Or perhaps the other business has more convenient hours or locations. See which geographic or service areas your competitors are focusing on and identify the gaps that your business can fill. Maybe their ecommerce shopping site is top notch, but their brick-and-mortar service experience leaves a lot to be desired. This could be an avenue where you can grow your customer base among those who prefer to shop in person.

Whether it’s in-house or outsourced, utilize available resources to gather pertinent data about the competition, so you can stay a step ahead.

The power of competitive analysis
How does the competition use social media? What does their branding look like? How do they engage with their customers?

The more information you collect, the more advantages your business will gain:

  • Know where you stand. How are your price points, your conversion rates and your online sales? How do they compare to others? Identify what makes your business unique, so it can stand out in the crowd. Consider investing in benchmarking data to see how you stack up across various metrics.
  • Enhance your marketing. If more customers are choosing a competitor’s brand, pinpoint what they’re doing differently to win business, and how you can do a better job. Consider all the possible ways your customers’ needs can be satisfied.
  • Think big picture. Don’t be afraid to develop ideas based on your rivals’ successes and failures. Learn from their mistakes to avoid making the same in your business.
  • Discover where your business can shine. Are there potential areas that the competition doesn’t serve? New markets for your brand? Look for opportunities to branch out and win new customers.

Solidify your position as the industry leader
Without a clear picture of the marketplace, businesses can fail to adapt. If you have a vision of where you want to take your business, NJ CPA firm Magone & Company can help. Contact us today at (973) 301-2300 to learn more.