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Small Business

Can Client Accounting Services lead to increased efficiencies?

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 From increased visibility to enhanced financial controls, Magone & Company’s Client Accounting Services (CAS) were created to streamline your company’s accounting and finance functions and help you operate more efficiently.

But don’t take our word for it! Respondents to Bill.com’s 2018 Client Accounting Services Report say that CAS delivers measurable benefits.
 


What’s more, these benefits lead to hard-dollar CAS outcomes, such as increased profit (28%) and improved revenue (23%). 

Your financial needs are a moving target. So why lock into a hire who may not be able to keep pace? Our CAS team has the expertise to handle finance-related tasks at every level — for less than the cost of hiring a full-charge bookkeeper or staff accountant. 

With four levels of service — from bookkeeping and accounting to more strategic controller and CFO-level tasks — Magone & Company’s CAS services provide the financial skills, services and systems you need, without having to invest in expensive staff and technology infrastructure.

Is CAS right for you? Learn more or  call (973) 301-2300 for details.

Choosing the right entity for your small business

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If you’re thinking of starting a business, kudos to you! Starting a business can be an overwhelming experience in the beginning, but well worth it in the end.

Of all the decisions you’re going to make, one of the most important decisions that should not be taken lightly, will be the type of legal structure you will choose for your company, whether it may be a sole proprietorship, partnership, or corporate entity. This decision will definitely have an impact on your tax obligations, it will affect the amount of paperwork your business will be required to complete and process. It also has ramifications for your personal liability.

Before we get into the various business types, there are some considerations which lead to one business form over another regardless of tax advantages. For example, do you have foreign partners or investors, will you operate in various states, will you seek venture capital (if so, how soon)? These are but a handful of considerations that need to be considered. Let’s now look at the various business forms.

Types of business entities

Sole proprietorship is the most common form of business organization and easiest to operate. It is very simple to form often requiring only registering a Doing Business As (DBA) with the county courthouse. A mistake many owners make since this form of business is so easy to form and operate is they are lax in maintaining adequate books and records and frequently commingle business and personal expenses in the checkbook.

Tip – Open a separate checking account and pay yourself a draw. Pay business expenses from the business account and personal expenses from your personal checkbook.

Another consideration is this type of entity makes the owner personally liable for any and all financial obligations pertaining to the business. Think bankruptcy or liability from acts of your employees, such as an auto accident. I’m not referring to professional liability such as doctors, professionals are always held personally liable. Thought must be given to the nature of your business and potential for liability before selecting this form of entity.

Finally, adequate and accurate books and records are required, but the owner does not take a salary. The owner takes a draw and pays the federal, social security and state taxes assuming no employees via quarterly estimated tax payments. Keep in mind your draw is your “gross” pay check. This means you’ll need to estimate a reserve for income and social security taxes from each draw, no different than you would withhold taxes for an employee.

Tip –Establish a separate bank account for your tax liability and transfer the estimated amount for taxes to this account to establish a delineation between funds available for operations versus those earmarked for taxes.

A partnership consists of two or more people who agree to share in the profits and losses of a business. Similar to a sole proprietor, partners do not take salaries, but rather take guaranteed payments. The guaranteed payments are deducted from the net income, but included as partner’s compensation and subject to income and social security taxes.

Depending on whether a partner is a general partner or a limited partner, they may be held personally liable for the financial obligations of the business, absent personal guarantees. Many individuals form partnerships to avoid double taxation such as is the case with C-Corporations. Partnership tax law is one of the most complex areas of the tax code due to the flow-through nature of income, expenses, gains and losses. However, it’s useful when partners want flexibility in partner sharing percentages for income and losses.

Tip –Make sure you have a partnership agreement in place from the start. This can help you avoid heartache and expensive litigation if the partnership ever goes sour.

A corporation is a legal entity incorporated within a state. Many corporations are formed in Delaware, since most attorneys are trained in Delaware law and the law of their home state. The corporation is a separate entity, subject to federal and state taxation. Like a person, the corporation can be taxed and can be held legally liable for its actions.

Most venture capitalists require a corporate structure to facilitate investment and eventual sale, or public offering. In addition, there is the possibility certain officer fringe benefits and those of other shareholders will not be subject to tax as is the case with partnerships or S-corporations.

Tip –The key benefit of corporate status is the avoidance of personal liability, so long as the corporate veil is not pierced. Bes sure to work with a knowledgeable advisor to make sure you have the right documents and processes in place to take full advantage of corporate status.

The primary disadvantage is the cost to form a corporation and the extensive record-keeping (minutes, resolutions, etc). While double taxation is sometimes mentioned as a drawback to incorporation, the S corporation (or Subchapter S-corporation, a popular variation of the regular C-corporation) avoids this situation by allowing income or losses to be passed through on individual tax returns, similar to a partnership. Similar to the partnership tax laws, those applying to the Subchapter S-corporation are often quite complicated due to the flow-through nature of the income and expenses.

A hybrid form of partnership, the limited liability company (LLC), is very popular among new business owners and the legal community. LLCs offer personal liability protection for the owners, but for income tax purposes they are treated as a sole proprietorship if there is one owner or a partnership if more than one.

Tip –An LLC can elect to be treated as a corporation, but this is seldom done unless there are extenuating circumstances, for example foreign owners.

The foregoing is meant to provide a broad overview of the types of business entities a new business owner may choose. Each choice carries with it its own advantages and disadvantages based on your goals, so be sure to consult your CPA or other  trusted business advisor before making any decisions.

Need help talking through your options? Magone & Co. CPAs can help you make the decision that’s right for your needs and goals.

Thinking of expanding? Not so fast

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The driving force in many expansion plans is to generate higher sales, with the hope that profits, too, will rise.

But before making moves to buy new equipment, expand your plant or implement a new business idea, you need to grasp the profit angle.

In some cases, an expansion plan boosts sales but not profits. You wind up working longer and harder for nothing. You may think, “If we lose a little bit on each deal, we can make it up on volume.” That sounds good in theory, but may prove difficult in reality. To prevent problems, here’s a step-by-step guide.

  1. Fixed and variable costs. Break down your costs as either fixed or variable. Fixed costs don’t change over any reasonable time period while variable costs are related to sales. (The more sales, the more variable costs.)
  2. Contribution margin. This is what remains from sales after you deduct the variable costs. So if your product sells for $10 and your variable costs run $8, your contribution margin is $2. From that margin, you cover fixed costs and add to your profits.
  3. Breakeven. This is the amount of dollars and time it takes the contribution margin to match fixed costs. To calculate it, divide fixed costs by contribution margin. You don’t realize a profit until the contribution margin exceeds fixed costs. Until then, you’re in the red.

Once you calculate these factors, you’re ready to analyze the impact of expansion. Let’s say your company makes Belgian chocolates and sells them in quarter-pound boxes at $10 a piece. Your variable costs are $8, giving you a contribution margin of $2 on each box to cover fixed costs and provide a profit. Your fixed costs are $100,000, so you need to sell 50,000 boxes to break even.

If you expand, and fixed costs rise to $125,000, your contribution margin stays the same. Using the breakeven formula (fixed costs divided by contribution margin), you now have to sell 12,500 more boxes, or 62,500 total.

Have your numbers calculated? It’s a good idea to talk to your accountant about how cash flow, liquidity and profitability could change, depending on business conditions. But fundamentally, a solid grasp on these factors is critical to deciding whether you’re better off keeping the status quo or charging ahead with an expansion.

Why your business absolutely needs a budget

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Most business owners view a budget with utter disdain. They’ll use any excuse to not prepare a budget. Some of the excuses I have heard over my career:

“Who has time for that?”

“Our annual earnings don’t really change from year to year.”

“Sales are flat, why bother?”

Most business owners run their business based on the business’ history and the owner’s experience. Sometimes this works well, other times not so much. Remember the credit crisis of 2008? Our business clients who weathered the storm were the ones who had transparency into their business via a budget. They could model the effect it would have on their profitability and cash flow using their existing budget and adjusting their expenses or payroll accordingly.

So, why prepare a budget? As previously discussed, transparency into the effects business conditions have on cash flow and profitability. Another reason is to plan for growth, organic or merger. Growth creates its own challenges such as the need for financing. A merger needs to be modeled to attract possible financing. Yet another reason to create a budget is to see how pricing changes affect profitability.

What is a budget?

A budget is simply your estimated income and expenses for your business year, a pro forma document, meaning you’re using your knowledge to estimate the how you will see the year.  A budget typically reflects how your company expects to spend money in the future.

Let me say it again, it is your spend, meaning you have built into the budget hiring for growth, a new or larger facility, etc.  It will change as you move through the year and must be updated. I like to update each month of the budget with actual results, so trends can be spotted and profit and cash flow projections more accurate with the known adjustments. This is especially useful when communicating with a bank or investors.

How do I prepare one?

Depending on the size of the business the budget process can begin as early as August or September. If your business has a sales team, it is imperative you start with them. Have each sales person develop their sales budget by month and by customer. Do not just accept the numbers provided challenge them based on your expectation of reality, against their previous sales and the current economic environment. This will form the foundation of the entire budget.

Next, review your historical gross margin, listen to your sales team as to pricing pressures and project the gross margin. Finally, estimate your general and administrative expenses such as administrative salaries (accounting, HR, executives) insurance, utilities, rent, travel and entertainment.

Here again, you’ll reference history and change in operations and possible hiring patterns to estimate the expenses by month.  This becomes your plan for the year and if sales are not being obtained, or margin is lower than obtained, then changes will need to be made in personnel or expenses.

Of course, if you are satisfied with the ultimate operating margin, maybe nothing needs to be changed. The important thing to remember is this will hold your employees accountable to the plan, if you hold yourself accountable to developing, monitoring and taking action against it.

Where to start? Your accountant is a great place. Don’t have one? Fix that now and call Magone & Company at (973) 301-2300.

Employee non-compete agreements: Enforceable or not?

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No employer wants to find themselves competing with a former employee. Nor do you want valuable inside information, strategic plans or trade secrets shared with a rival company. So, how do you craft a non-compete agreement that’s both effective and enforceable?

It’s all about the word “reasonable”
Courts have long attempted to balance the interests of employers and departing employees in deciding whether a non-compete agreement should be upheld. There are commonly three factors a court will examine when hearing a non-compete case:

1) Time. You obviously can’t restrict a former employee from competing forever. The period considered reasonable typically ranges from one to three years, depending on the industry. For example, in high-tech businesses where information changes so quickly, the length of a non-compete contract is often on the shorter side.

Also consider how long the worker was employed by your organization. According to attorney Barry Kozyra of Kozyra & Hartz in Livingston, NJ, “It’s unreasonable to take somebody out of the workplace for one or two years if they only worked at your business for a month. You would have to demonstrate that you have very fragile intellectual property or confidential information that could be stolen.”

2) Geography. You can make restrictions where your company does business, but probably not nationwide or worldwide. One exception is internet or software companies that operate internationally, where courts have found broader geographical restrictions to be reasonable.

Explains Kozyra, “We routinely see situations where an employer wants to restrict someone from working anywhere on the planet because the company has such wide-ranging reach. While it’s not commonplace, it can hold up in a court if the company has very unusual intellectual property, or information that can be disseminated without recourse to another country or continent.”

3) Scope. No non-compete agreement can strip an employee of the right to earn a living. An agreement can restrict certain core functions, but it can’t prevent an employee from using skills they’ve acquired over the course of their career.
Restrictions must normally be limited to the job the employee performed for the employer. For example, a software engineer for one automaker can’t be restricted from taking a sales job at another manufacturer’s showroom.

Interestingly, non-competes are enforceable in NJ against all employees except attorneys. Adds Kozyra, “Some states also don’t allow non-competes for doctors, because there’s a shortage in many areas of the country, and the need for medical care and specialists can have a huge impact on public health and safety.”

Know your state’s requirements
Non-compete agreements are subject to the laws of the state in which they’re written. Some states don’t recognize them at all. Others stipulate timing, for example that employees must enter into an agreement upon hiring rather than after they give notice to quit a job.

If you’re a multi-state entity, be sure to choose your terms wisely and put them in writing, Kozyra advises. “If you do business in more than one state, you’re able to designate the law of one state and the jurisdiction of one court to apply to the contract.” Most organizations, he says, will choose the state with terms that favor the employer over the employee.

Remember — employees will come and go. But you can take steps now to prevent your valuable intellectual property or your clients from walking out the door with them. The information above should not be considered legal advice, so be sure to consult with your legal advisor for assistance in drafting a non-compete agreement, or if you feel a former employee’s conduct is in violation of your current agreement.

Accepting checks? Proceed with caution

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Check fraud costs individuals, businesses and financial institutions as much as $50 billion annually, according to one estimate.

Forged checks have always been a problem, but with inexpensive laser printers and easily accessible paper, check fraud is more prevalent than ever before. Victims include financial institutions, businesses that accept and issue checks, and of course consumers. In most cases, these crimes begin with the theft of a financial document — stealing a blank check from your business, home or vehicle during a burglary, searching for a canceled or old check in the trash, or removing a check from your mailbox.

If your business accepts checks, a little knowledge of the payment system and a good eye can help you distinguish bad from good.

Look for alterations

Checks contain a nine-digit routing number in the bottom left-hand corner. The first two digits indicate the Federal Reserve Bank that will handle the check. A favorite trick of forgers is to change the routing number.

By knowing the routing number of your closest Federal Reserve Bank, you can quickly tell if there’s a problem with the number on a “local” check. If the routing number appears to be altered, there’s a good chance the check is bad. A quick scan can also spot discoloration, which is an indication of check alteration.

Another sign of a potentially fraudulent check: No perforated edge on one side. Checks made on a home printer are typically smooth on all edges.

Sometimes the checks themselves are legitimate, but the person trying to use them isn’t. Payroll and other checks are routinely stolen. That’s one reason why the federal government started electronically depositing Social Security checks.

Inspect signatures

If you’re a retail-type business, consider implementing a policy of matching the check’s signature to a piece of ID like a driver’s license. Instruct employees to not to pay attention to the appearance of the check writer, but rather the appearance of the check itself.

Consider “checks and balances”

Companies issuing checks are at risk, as well. Company executives should examine check stock and account balances regularly to look for discrepancies. The right financial controls can also help deter internal fraud. For example, make sure the same person doesn’t write checks and reconcile bank accounts. Limiting the number of people authorized to write corporate checks reduces the chances of fraud.

Get professional help

An experienced accounting firm can perform an internal control study and recommend ways to minimize employee fraud and theft. In addition, your financial institution may offer fraud deterrent methods like watermarked check stock. Payroll cards, on which the company loads electronic payments, are also gaining in popularity.

Remember that the best defense against the danger of check fraud is a proactive approach that prevents — rather than detects — the crime.