How much did I really make?  Learn the secret of calculating your business’s net income!

Everyone wants more income, but way too many business owners and managers don’t really fully understand the concept of net income and what it means to their business.  Learn the simple trick to fully understanding and preparing your income statement.

Money Makin' Inc.

Other Names:

The Income Statement is also often called a Profit and Loss Statement, and, less commonly, a Statement of Operations, an Earnings Statement, or an Operating Statement, depending upon the industry or geographic area that you operate in.  For our purposes, they are all one and the same.

What It Is

“C’mon Tyler, this is a waste of time; everyone knows what an income statement is!”  I can hear your argument now.  Well, knowing what it is and understanding are two different things, so have a little patience.  Let’s start by looking at Wikipedia’s definition of the income statement as

“a company’s financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the “top line”) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the “bottom line”). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g.,depreciation and amortization of various assets) and taxes.”

Clear as mud?  Here is another way to look at it.  If you remember from our lesson on the balance sheet and on retained earnings, the balance sheet represents, at one given moment in time, a company’s assets (everything it owns that has value) less its liabilities (everything it owes or that will cost it money in the future) to get at its equity (the net value of the company).  What the income statement does, together with the statement of owner’s equity, is to tell the story of the change in a balance sheet over a period of time.
Let’s boil this down to the simplest level, and ignore everyone out there who is screaming out exceptions that really don’t apply to most of you as entrepreneurs and owners of small businesses.  Your Net Income (the bottom line of your income statement) must be equal to the increase (or minus the decrease) in your assets over the year minus the increase (or plus the decrease) in your liabilities plus any cash paid out to the owner.

Now think about this, increased assets make you feel happy, right?  After all, they represent items that have value to the business and that should, in the future, bring you money.  Increased liabilities should make you a little uneasy.  Your liabilities are money that you will have to pay out someday, which will make you unhappy.  I hate paying money, but I sure love getting it!  Maybe that’s why my wife calls me a cheap sonofabitch.  Now, your distributions are money that you have already taken out; and so they gave you happiness at some point in the past.  So really, net income is your overall increase in future happiness, less the increase in future unhappiness and plus the amount you have already taken out in past happiness!

Why important

The income statement is the single most important vital sign of the health of your business.  If income is good, then more assets can be put to use for the business and more money can be distributed to the owners.  The flip side is that when income is negative, which means that you have a loss, then you will have less money to take out of your business as distributions and you will have to support your operations by either selling off assets or by increasing liabilities.

What It Looks Like

If you have accounting software, like QuickBooks, then you will get a basic presentation as part of the package.  In virtually all businesses, the income statement starts with sales and ends with expenses.  If your enterprise is either manufacturing or retail related, then the basic presentation is Sales – Cost of Sales (also called Cost of Goods Sold) = Gross Income – Sales Expense, Operating Expense, and all other expenses + income not from ordinary operations (such as the gains on the sales of assets besides inventory or interest income) – expenses not from ordinary operations (including taxes, although I would consider taxes pretty ordinary) = Net Income.

Oh my God!  I’ve just totally turned geeky-accountant super-nerd on you guys!   Look, presentations vary wildly from industry to industry and from one set of accounting standards to the next.  If you need to present the statements to others then you’ll probably end up getting an accountant to put them together, anyway.  So just put them together in the way that makes sense for you and helps you find the information that you need.

What is Revenue

Now that we know what the net income must be, let’s take a peek under the hood to see some of the gory details.  The basic income statement is divided between items that have made you money or will make you money in the future, income or revenue, and items which have cost you money or will cost you money, expenses.  As you may imagine, we want to keep close tabs on those warm, fuzzy revenues so that we can nurture them and make them grow and thrive.  Therefore, we group the revenues together and lump them at the top of the page.  Your revenues can further be divided by important products or divisions to provide the readers of the income statement with more information.  Finally, some items are always segregated from the general revenue items due to their unusual nature, including unrealized gain or loss on assets, realized gains or losses on assets, interest income, and other items.

What is an Expense

Expenses are the Devil, prying money from your pockets either now or in the future.  Every business has to deal with the Devil in order to operate, but we want to keep track of these deals so that we know how much of our soul we still have left!  As you may imagine, we further segregate expenses into sub-categories.  Cost of Goods Sold (also called Cost of Sales) is the money you spend to purchase or make the product that you sell.  General and Administrative Expenses are more peripheral items that pop up in the course of running a business.  Your accounting software, wages paid to the janitor or the secretary, Internet service for the office, basically anything that can’t be directly attributed to the purchase or manufacture of your product.

How to Prepare Your First Income Statement

If you are using QuickBooks or another accounting program then it is seemingly easy to put the income statement together.  The problem with most of those programs is that they can’t tell you when you put garbage in them.  So you will want test your income statement by following the steps below.
Step One: Make sure your balance sheet is up-to-date and accurate.
At the end of the year I go down my balance sheet line by line and make sure every amount makes sense to me.  In fact, that is the first step of an auditor if you get your statements audited.  I like looking at at least two periods side by side, since inconsistencies are more apparent that way.  Make any adjustments that you need and move on to Step Two.
Step Two:  Calculate Your Retained Earnings
I’ve already written about this in detail in another article, but basically your retained earnings are the bridge between your balance sheets for the current and prior periods.  Any change must be reflected in retained earnings, which is in return the product of your income plus any contributions in capital and less any distributions of capital.  So if you can get the correct number for any capital that you took out (other than wages, which will go onto the income statement and for which you will pay payroll taxes) or put into the business then you can isolate the effect of net income.  Can you figure those out?  Good, then any remaining change in net assets must be due to net income.  Now you have your net income and, if you are using an accounting software, you should check your number for net income with the number that you just calculated.  If they don’t match, well, you’re screwed and I can’t help you anymore.  No, just kidding, you’ll have to adjust your income on the income statement to match.
Step Three: Fill In the Blanks
Now plug the number that number into the bottom line of your income statement and start filling in the details.  When you have everything in but it doesn’t total up then just plug the difference, if it is minor enough, into some sort of Miscellaneous Expense or Miscellaneous Income account.  Don’t worry your accountant does that all the time!

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler Wells, C.P.A.

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It didn't have to come to this

If I am filing bankruptcy, can I also discharge any taxes I owe? I get this question way too much these days and it is never pleasant. Neither, unfortunately, is the answer, “maybe.” Like anything that has to do with our government, the rules and limitations for discharging your tax debt through bankruptcy are complicated and are most likely to benefit you if you carefully examine your options, plan ahead, and hire some professional help.

Income Tax Rule

In order to eliminate your tax liability through bankruptcy, it has to clear the following hurdles:
Be more than three years old – the three year clock starts ticking on the date the tax return for the year in question was due; so April 15, 2010 for 2009 taxes. Note that this is the minimum time in which you can include taxes in your bankruptcy and that certain circumstances could extend this even further.

• Be filed at least two years ago – the date that you file the bankruptcy petition must be at least two years after the date that the tax return was filed. This is relevant if you filed an extension, were late to file, or just plain failed to file a return. The motivation here is plain, get those damn things filed! Even if you don’t have enough money to pay the taxes due it is almost always better to file without paying then not file at all.
• Have not received an assessment from audit adjustments or amended returns in at least 240 days. This could be extended by an Offer in Compromise (see below). Basically, this means that your return was amended, either by yourself or by the IRS, and additional tax was assessed because the original return was incorrect.
• No fraud or evasion – as you may have guessed, your rich Uncle Sam gets pissed off when people try to deceive him, and so fraudulent returns or tax evasion can mean that your debt is not dischargeable in bankruptcy.

Two Bankruptcy Options

Chapter 7 – “The Full Monty,” and what people usually mean when they say
bankruptcy, Chapter 7 is when everything except certain exempt assets are sold and then the money is divided up between your creditors.
Chapter 13 (11 for businesses) – or “reorganization,” is when a plan is made for you to repay your debts under court supervision. Essentially, Chapter 13 allows you to put together a plan with all debtors and then set up a system of repayment. As part of the bankruptcy some of the amounts due can be reduced or new terms can be established.

Limitations of Bankruptcy

Taxpayer Beware: the above rules only pertain to federal income tax due. State
taxes are a whole different ballgame and will have to be resolved on a state by state basis. In addition, the following taxes cannot be eliminated in a bankruptcy:

• Self-Employment Taxes – this one can be particularly tricky because so many
• entrepreneurs just get their self-employment taxes lumped in with the rest on their 1040s and don’t really think about them. However, you’ll have to separate these if you are considering filing bankruptcy to see how much of your tax is really potentially dischargeable.
• Payroll Tax Withholding - Like self-employment taxes, you can’t discharge your payroll tax withholding in a bankruptcy.
• State Sales Taxes – ditto
• Various Other Taxes That I Have Forgotten to Include – No, those are not dischargeable either.

Options to Bankruptcy

Most taxpayers who owe federal taxes will at least consider the alternatives
to bankruptcy, if only because there is no way in Hell the IRS will let you get by three years before assessing you for taxes due.

• Installment Agreement - like any other creditor, the IRS can, at its discretion, put taxpayers on payment plans to help them settle their debts. Note, however, that interest and penalties will still apply and so it is in your best interest to pay the amount due as quickly as possible.
• Collection Due Process - a CDP can be filed with the IRS to protect your right to go to court and is filed after you have received a Federal Tax Lein or an Intent to Levy. Basically, with a CDP you are signaling your intent to dispute the assessment. File to protect your right to go to court.
• Offer In Compromise – Make a deal with the Devil and ask the IRS to reduce your burden by accepting partial payment. The IRS may decide to accept an Offer in Compromise if there is some doubt about the legitimacy of the amount you are purported to owe, if there is no doubt as to the legitimacy of the payment but there is no way you have the ability to cover the payment, or if you have the assets to cover the payment but there are some remarkable extenuating circumstances that convince the IRS to have mercy on your soul, like you’re abducted by aliens and have to pay the ransom.

What does this mean if I am behind on my taxes and I owe the IRS money?

In theory, people in economic trouble shouldn’t really owe taxes because they don’t have much income. However, as with just about everything in life, there are 5,001 potential outcomes that could result in your owing taxes and not having the cash to come up with the payment.

1. Step One: File all returns. Remember that you will have to have filed at least two years before filing for bankruptcy if you hope to have your taxes discharged, so make sure that you are up to date.
2. Step Two: Protect your spouse. If the tax burden, and accompanying inability to pay, is the result of the activities of one spouse then consider filing married filing separate to protect the other spouse.  This usually happens when one spouse is an aspiring Donald Trump or Oprah Winfrey while the other is a mild-mannered librarian.
3. Step Three: Is the inability to pay due to a permanent or temporary change in fortune? If your business was wiped out and folded sometime between the beginning of the year and when your taxes are due then you are a prime candidate for some sort of deal with the IRS. On the other hand, if you can’t pay your tax bill because you already spent the money without budgeting enough for taxes then you are most likely a candidate to get on some sort of payment plan.
4. Step Four: Pull the trigger. Either way, don’t duck the issue and hope that it will go away. Take the bull by the horns, get your returns filed, and then seek some professional council on how you can get the situation resolved.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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Purpose of a Balance Sheet

The balance sheet boldly declares where a business stands at a given moment in time.  From the balance sheet, a financially sophisticated reader can learn an immense amount of valuable information about a business and its viability.  That is why potential investors and lenders will almost always ask you for a copy of your financial statements, including the balance sheet, income statement, statement of retained earnings, and statement of cash flows.  This is also why you, as a savvy entrepreneur, need to understand the information presented on them.

Why It Is Important

The principal reason your business’s balance sheet is so important to you and to any potential investors or lenders is that it is like a photograph of your business.  It tells how the business is put together, what its principal resources are and where any potential dangers lie.  Like any portrait it is incomplete, in that it only shows one fleeting moment in time, and therefore is most useful in conjunction with the income statement and by comparing several balance sheets over a period of time.  Ahh, this is where the real story begins to unfold!  The clever entrepreneur becomes the Sherlock Holmes of the balance sheet and astutely looks for trends over time and checks ratios and balances to see which direction the company is headed in and to look for any potential to cut costs or perform more efficiently.

Why Small Businesses Are Different

If you are a small business owner or entrepreneur then you need to be able to read and understand your balance sheet because, first, it is through your financial statements and other numerical data that you collect that you really get to know your business.  Michael Gerber, the best selling author of the E-Myth Revisited, says it much better than I ever could as “because without the numbers you can’t possibly know where you are, let alone where you’re going. With the numbers, your business will take on a totally new meaning. It will come alive with possibility.”  The very first step you will ever take down that road to really knowing your business is through examining and understanding your own balance sheet.

Second, your balance sheet is how anyone that you will ever want to do business with will understand your business.  Think about getting a loan, the first thing your banker wants to see are your financial statements and the first page of your financial statements is your balance sheet.  Why is it first?  Perhaps because it is the most important.  Now think about your situation; you’re applying for a loan or a grant or you want to do business with the federal government or an investor is thinking about either coming on board or buying you out and you present your financial statements to them.  They open them up, turn to page one, and there is your company laid bare, open to them.  And they ask you questions; “why is this line a negative number, how did you arrive at the valuation of that line, what are the terms of this liability.”  Don’t you want to be able to confidently look them in the eye and answer those questions?

What Makes Up a Balance Sheet

Hopefully, you have been exposed to some basic accounting and understand the concepts that some numbers in accounting are recorded as debits and some numbers as credits.  These numbers are often represented as positive and negative numbers and the balance sheet, as its name suggests, must balance, i.e. the negative and the positive numbers must total zero.  In addition, the basic formula for accounting is Assets = Liabilities + Equity, and any US balance sheet will be organized into exactly three sections with at least two subtotals, for assets and for liabilities and equity.  Using the basic algebra that we learned in Ms. Arithmatic’s 6th grade class, we can shrewdly deduce that the two subtotals must be exactly equal.  So far no problem, because if your balance sheet doesn’t balance then you have much bigger problems then simply worrying about understanding your financial records.

How Assets Are Valued

Great! you’re thinking, let’s start with the assets!  Well, I love an enthusiastic learner and so I will oblige.  To put it very briefly, assets are the total of everything your business has that has some sort of value to the business.  This could be cash or real estate or stocks and bonds or machinery and equipment or accounts receivable or other moneys due to you.  It could also include inventory, which is product that you have produced but not yet sold.  So to summarize assets are usually either cash, something that you have bought, something that you have made and that you expect to sell, or something that is owed to you.

Clearly then, if you want to make your balance sheet you must have a list of your assets and how much each is worth.  The rub lies in the worth, or valuation of the assets.  “Hmm, you think, I bought this asset ten years ago at 10 grand, I added 5 grand in improvements to it, it would cost me 20 grand to replace it and I could get about 18 grand on the open market for it, so what value should I put down for it?”  Clever question, my dear reader!  Well, as you may have assumed, we accountants have put a great deal of thought into these issues and we continue to think about and tweak the ways we value things to this very day.  If you want the exact answer to just about every accounting question then it is there for you, for free but in techno-accountant babble, at http://asc.fasb.org/.  However, most of you don’t want to do all that work, you want a quick and easy rule of thumb that works 90% of the time without you having to leave this article, and that is exactly what you will get.  The key here is conservatism, we are much more worried about overvaluing an asset then we are at undervaluing.  Therefore, the rule of thumb is that assets are valued at the lessor of cost (what you paid for it) or fair market value (what you could get if you sold it right now).  Now, there are additional considerations, like depreciation for buildings, machinery, and equipment, and the value of receivables and other moneys owed to you, but that is the general rule.

How Liabilities Are Valued

The next step is to make a list of items that your business owes or obligations that it has.  This could be money that you owe to your suppliers for products and services or money that you owe to your employees for services performed or money that you owe to the government for taxes or or money that you owe to the bank or another lender.  It could even be money that the business owes to you, as an owner.
Remember what I said before about conservatism?  Well, this counts for liabilities as well, only in this case the concern is that liabilities are undervalued or, even worse, unrecognized and unrecorded.  The general rule of liabilities is that they are included at amortized cost which should be equal to the amount owed on them at that moment in time.  This usually presents less of a challenge than the valuation of assets because most long term assets, like loans, have explicit terms that spell out exactly how much you owe on them at any given moment in time.

How Equity Is Valued

Depending upon the type on entity (Corporation, S-Corp, LLC. etc.) that you use the equity portion of the balance sheet can use different terms, but really there are two kinds of equity: capital that you put into the company (stock, contributed capital, etc.) and the earnings of the company (retained earnings).  The capital that you contribute is usually pretty straightforward.  If you contributed something other than cash, such as real estate, machinery, or your interest in another business then use the rules for the valuation of assets, the lessor of cost or fair market value.

Retained earnings is a whole different ball game.  Remember what I said back in the beginning about the formula for the balance sheet?  That Assets = Liabilites + Equity?  Well, if you’ve filled everything else out you only have retained earnings left, and, using a little bit of algebra and adding some detail to the preceding formula, retained earnings absolutely must equal Assets – Liabilities – Contributed Capital.

Now, it’s fine to do the math and plug the number to get started, but as you go forward your retained earnings will develop a new relationship, with the income statement (also commonly called the profit and loss statement).  Basically, the relationship is net income + any contributions to capital – any distributions of capital (dividends) = the change in retained earnings for the period.  So retained earnings becomes the bridge between the balance sheet over two consecutive time periods (usually a year).  For more information on calculating retained earnings see the link to my blog post on retained earnings.

What the CPA or Auditor Does

You’ve done a fantastic job getting your balance sheet set up and keeping it going, but at some point you’re going to show it to someone, a banker, a supplier, a potential business partner, and they are going to take one look at the work that you have so proudly and lovingly put your heart into and they will say, “what the Hell is this crap?”  Don’t take it personally (you need their money, after all) just understand that there are standard ways to present present financial statements and set rules to follow.  In order to make your statements comply with these rules and to give them an air of authority you will have to hire a Certified Public Accountant, or C.P.A., and have them compile, review, or audit your financial statements.  What this means is that the C.P.A. takes your statements and then makes some cosmetic changes in order to present them in the form proscribed by US Generally Accepted Accounting Principles or, if appropriate, one of a number of alternate forms, and then issues an opinion on them.  The opinion will vary depending upon the type of engagement you hired them to do.  The standard opinion for a compilation is “we took this pile of crap and made it pretty, but we’re not saying that it makes any sense” while the standard opinion for an audit is “sure, we took a look and everything seems OK, but please don’t sue us if we’re wrong!” while a review falls between the two.

Shenanigans

If you’ve watched the news at all over the past five years then you are aware that not all balance sheets are what they are painted to be.  Enron and WorldCom are the biggest examples of out-and-out fraud, but more recently the big Wall Street firms, like Lehman Brothers, have come under fire for inadequate or questionable accounting practices.  How does this all happen?  Well, let’s go back and revisit the assets and liabilities sections of this article and rethink what I said about conservatism.  If assets are valued at higher than they should be, or liabilities lower, the difference must come through retained earnings in the form of income.  So, most accounting frauds are a resulting of overstating assets, usually inventory for industrial firms or investments for banking and Wall Street firms, or by not including certain liabilities on the balance sheet.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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An insufficient return on investment is your canary in the coal mine, it tells you when your business is failing and, with proper examination, why.  Better still, it does this before all the money is spent and Tony Soprano is knocking at your door, calling in his loan.

Time to Count Some Beans

What is Return on Investment for a Small Business?

If you have experience as an investor then your are familiar with return on investment as being the amount you earn on your investment over the amount that you paid for it.  So when you shop around online to get a half a percentage higher interest rate on your savings account you are looking for a higher return on investment.

How Do I Calculate It?

For your small business, the concept is the same, return on investment is a measure of what you get out of your business divided by what you have invested in it .

The key word here is measure, the return on investment formula is a tool to help you measure how efficient your business is at generating profits.

Why Is It So Important?

Your assets are the resources that you have put into your business, your investment.  When you calculate return on investment you are concerned with two things: first, the opportunity cost of your resources, and second, the trend of your business’s return on investment over time.

Opportunity Cost

The opportunity cost of your resources basically answers the question; “would I be better off putting these assets to a different use.”  Think back to the example of a savings account, if the return on investment from your business isn’t beating the interest you would get if you sold your assets and deposited the money in a savings account, then you’re pretty much screwed.  Either you have to take drastic action to improve the ROI or you should find a more effective use for your assets.

Change Over Time

The trend of your ROI over time is the canary in the coal mine; a steady and increasing ROI means a strong and healthy business while a negative or decreasing ROI is usually a precursor to a long, slow, and painful death for your business.

“Hidden” Assets

When you start your business you are often a one-man band, you are not only the Chief Executive, Sales, and Financial Officer but also the delivery boy, the maintenance man, and the head of productions.   As such, you get a huge amount of time wrapped up into your business and this creates what Steve Wilkinghoff, in his amazing book for business owners Found Money, calls “hidden inventory.”  It is hidden because it is not captured by traditional accounting but it is crucial to achieving success in a small business.  If you are a lawyer and a client hires you to handle a certain legal issue and you go to work at it but then, after putting say 20 hours into the project, get called aside to do a second project and leave the first on hold then you have hidden inventory.  The time that you invested in that project should be billable to the client but you can’t bill them until you’re done.  So there you have hidden inventory, it is the work in process that can’t be collected upon until the job is done.  The danger for the small business owner, who often is a one-man (or woman) show, is that they build up this hidden inventory, and work like crazy to do so, but are too slow at bringing it to the point of billing and thereby run into the trap of too much work and not enough money.  Estimate how much hidden inventory you have and add this hidden inventory to your assets when you calculate return on investment.

What is an adequate return

As we already discussed, if you have another investment immediately available to you (like a certificate of deposit or a savings account) and it offers a higher return on investment than your small business then you should feel really, really, uncomfortable.  I will tell you that so many times I have seen businesses borrow money with a higher interest rate than their return on investment and I just to take them gently and tell them to go spend that cash at the casino, because it is about that bad of an investment.  Your small business should generate for you several times the ROI of just about any investment you can readily find.  Why, because it is very risky investment.  1 million and one things could go wrong and you will find yourself back to square one, only this time you will owe tons of money.   So, the higher the risk the higher the required return you should require.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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You’ve worked incredibly hard to build up your business and, when the time comes to move on, you want to get the absolute best price for it. However, the market for a small business is extremely illiquid, that is, it is very difficult to unite potential buyers with the business. You must be proactive and reach out to the potential buyers and have the information they will want in order to make their decision. Be prepared to work as hard to sell your business as you did to build it and go into the process with the same sense of adventure and enterprise.

Big Dollars For My Biz

Take the Initiative

The fact that you have a valuable business for sale, something millions dream about but never get around to doing, means that you are the type of person that takes charge and gets things done. So don’t stop now, merely hanging a “For Sale” sign on your door, or even hiring a broker, and then sitting back and waiting for things to happen isn’t going to cut it when it comes to selling your precious asset, you will have to go out there and make this happen. Start by thinking of who you’re potential buyer will be. A-list blogger and online entrepreneur Yaro Starak sold his first web business to some of his best customers, who loved his business so much that they didn’t want to risk it falling into less friendly hands. Think about your competitors, about business owners in the same industry who may wish to expand into your industry, and businesses in parallel industries that could find useful synergies with your own. For example, if you have a camping supply store then a synergy might be someone selling adventure travel and vacations; the two have a significant overlap in customers and could try to cross-sell their customers. Don’t forget to market to trade and professional organizations, if they’re appropriate to your business. I know that the AICPA (Bean Counters of America Association) has a special area on the web site for CPA practices for sale. In case you’re wondering, I’m going to build my own up to the eight figure neighborhood before I put it up for sale.

Importance of Financial Records and Other Information

When you sell a pound of alpaca wool or a barrel of North Sea Brent Crude the exchange is pretty easy; the buyer knows what she is getting and what the current price for it is. Your business, however, is not something that you can drop on your foot, but rather a process or a system that (hopefully) generates cash and profits for its owner. To show prospective buyers what the value of the business is you will need a narrative, which is a one page summary of what your business does to make money, and some supporting numbers, usually in the form of financial statements and tax returns. If you have traditional financial statements then that’s great but you also want to put together a summary of several years statements (if indeed you’ve been in business that long) in a tabular format so that any prospective buyer can easily see what the trend for your business is. Also, in many industries, such as with a website or online store, you will have important non-financial numbers to compile and include in your summary. For example, if your web site is an important element of your business then a number of metrics, such as unique visitors, become important to the businesses potential value to a buyer. Remember that many potential buyers will already be in your business and will by looking for synergies with their own businesses that may increase the value of what you have to offer, so don’t make them have to hunt for this information, tailor your approach to your potential buyer. SCORE has an excellent check list on what you’ll have to prepare before you sell.

Brokers, Accountants, and Lawyers

Your accountant absolutely must be informed of your intent to sell, the earlier in the process the better, and be kept up-to-date at all times. The timing and structuring of the sale can have enormous tax consequences. Remember, due to taxes a $50,000 sale isn’t really worth 50 grand to you; sometimes it’s worth much, much less. Your lawyer needs to be brought in once you have an interested buyer and before you begin to discuss terms. Your lawyer’s job is to structure the sale so as to protect you as much as possible from fraud, default, and negligence from your buyer and to limit your liability during any interim period.  The use of a broker will vary depending on the industry and the expected price of the sale.  Whether you use a broker or not, don’t expect to be able to just hand the job off to them and then forget about it.  From my experience and from what I have been told the majority of businesses get sold through good luck, good timing, or the owner’s hard work.

Online Marketplaces

In the new global age you can buy or sell almost anything online, including your small business and a number of sites have come up to help you connect to a buyer. The online option isn’t just for online businesses, according to the general manager of one of the largest online marketplaces, bizbuysell.com, restaurants were actually the single largest category of business that they sell. Other larger players are imergeadvisors.com and bizquest.com. The market is still relatively young and fragmented, so you might peruse all three to get an idea of their individual strengths and specializations. Also, it is great fun and enormously beneficial to see what the owners of similar businesses are asking and what information they are providing.

Ebay also has a section for selling businesses and websites and, as of today, it had 17 thousand businesses listed, although 12 thousand of those were web sites. My suspicion is that Ebay’s format would be inadequate to sell a more complex business, in which communication between the owners, the sellers, and their supporting professionals is essential, but it does make for some interesting comparisons. Plus it is really fun to look at some of the remarkable stuff that people are trying to sell.

Be Prepared to Negotiate

The old saw in business negotiations is “I’ll let you name your price if you let me name my terms.” What this means is that the structure of the sale is as important as the price of the sale. If you are only interested in cash up front then be very clear and firm on this to potential buyers. When one of my first and best clients, my Dad, passed away he had a number of valuable assets that my mother was not able to or interested in running. I was living in a foreign country at the time but managed to come back for a month and half to help settle things and helped my mother sell off some of these assets, mostly real estate related at a time when real estate was still very hot. It was fascinating and eye opening to listen to the pitches of some of the potential buyers and creativity of some of the terms that they offered. One of the most popular propositions was that one of the assets be put into a partnership owned by my mother and the buyer and then the “buyer” (Mom’s new partner) would contribute their labor and expertise to convert the asset into a more lucrative form (i.e. subdivide or build a building for lease, what Dad had already planned to do with it) and then would share the profits with Mom. The chances are that you are going to get offers that are a combination of cash and credit and in some cases may require your continued involvement. Don’t hesitate to bump up the price if the terms aren’t to your convenience and do not hesitate to walk (run) away from any deal that might put you into business with someone of questionable moral character.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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Health Insurance

Being self employed is fantastic!  There is no one to tell you what time you need to be at work or what you have to wear or to pay for your health insurance and for half your payroll taxes.  What?  Gotcha!  Many new entrepreneurs overlook the need for health insurance and just how much it will cost them when they strike out on their own.

You MUST Have It!

Right after I got out of college I shook the dust of Indiana off my feet and headed down to someplace really fun, Miami.  I had a fantastic time working odd jobs and trying new things out for a year until, one visit home my father gave me one of those fatherly lectures; not about finding a career but about finding health care!  “What if something happens to you, what do you think your mother and I would do, just let you die or suffer?  You know we would spend our every last dollar trying to save you, is that something you want on your conscience?”  Grief stricken at the thought of my parents staring at my lifeless body in a casket, contemplating their future with no son and no money, I went to grad school for finance, ended up in accounting, and the rest is history.
“So what?” you shrug.  Well, no one ever thinks it is going to happen to them but it always happens to someone!  So, if you don’t get health insurance for your sake, do it for your mom, she’s worried sick!

Mom & Dad

“Alright,” you grumble, “but where do I get health insurance that won’t cost too much?”  Try starting with dear old Mom and Dad.  You see, with the new Obama-care health insurers are mandated to offer health insurance to all children up to age 26, irregardless of whether they are in school or not.  In fact, most of the big insurers, including United Health Care, WellPoint, CIGNA, and Blue Cross & Blue Shield are already in the process of implementing this.  Also, a few states already require that insurance be available for children up to age 26, or even older.

Spouse’s Job

Hey, this is one of the reasons so many self employed are married to school teachers; they can still get the good benefits that way!  An obvious resource but one that shouldn’t be overlooked.

Day Job

So what if the significant other doesn’t have a job or their current job doesn’t offer health benefits?  Well, head over to your nearest Starbucks, Whole Foods Markets, or local government branch and pick them up an application!  There are some employers who still have a reputation of providing quality health benefits at an affordable price for their employees .  Better yet, pick up two applications because you may want to consider getting a day job yourself until your business takes off.  Check out employers with flexible or alternative hours that will leave you time to work on your business after hours.  Hey, once I even worked as a parking lot attendant and could have worked on my business even as I got paid (and insured) on my regular job.  Of course, I squandered that time studying.

Trade organizations

If you’re too old (or an orphan), not married, and don’t think that a second job would work for you than the next step is to look toward any trade organizations that you might be a member off that might have a health insurance package.  Also try your local chamber of commerce, AARP if you’re over 50, and the Small Business Services Bureau.  A fabulous resource is Health Insurance Info Net by the Georgetown University Health Policy Institute that gives up to date information on a state-by-state basis; including sections for small business and the self employed.

Insurance broker

It is the insurance broker’s job to help you find the right insurance package for your needs and the option shouldn’t be overlooked.  Just do remember that, as with any broker, your interests and those of the broker are not always in alignment and therefore shop around first to get an idea of what your other options are.  Comparing health plans is tricky, because there are so many variables all of which will be important to different people.

COBRA

If you’re leaving a job to go out on your own, don’t forget to get signed up for COBRA before you go.  COBRA basically gives you the chance to continue your current insurance, under your now ex-employer, for up to 18 months after you leave that employer.  This buys you time and allows you the chance to shop around some.  With COBRA, however, you pay 100% of the cost of your coverage, so no employer subsidy.  Do not let your insurance lapse!  When you eventually pick up a new insurer you don’t want the to say whatever you need taken care of was a pre-existing condition.

What’s your experience with health care?  Did you find it a difficult part of the transition from being employed to becoming an entrepreneur?

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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Getting it online

What most entrepreneurs love most about their business is thinking up new solutions and creating new resources.  They like taking initiative and getting things done.  Oh yeah, and even though they try to say that it’s not for the money they really do enjoy the paycheck.  What they like least about their business is the paperwork, and even worse the accounting paperwork.  Reconciling your checkbook, billing, and paying the bills are just not what get most entrepreneurs excited.  Plus, many new entrepreneurs really struggle when it comes to reading their financial records and extracting from them the essential information used to make vital decisions so that the business prospers.  Recently, a number of Accounting Outsourcing services have sprung up to help business owners take care of their finances in an effective and cost-efficient way.

What Accounting Outsourcing Does

To make the distinction absolutely crystal clear there are two main accounting related services, both that can be outsourced.  Bookkeeping is what you do to keep all your financial records correct and up-to-date; entering bills, reconciling the checkbook, and issuing invoices are all the examples of bookkeeping responsibilities.  Accounting or financial management is taking these bookkeeping records and then applying the information to create reports for filing taxes, for preparing financial statements, and for providing the essential information to improve the management and profitability of the business .  Most business owners don’t have the time or expertise to do their own accounting or bookkeeping and usually hire someone else to do it or outsource it to an accounting firm, like my own.  When you outsource your bookkeeping or accounting function you are simply hiring someone else on a contract basis to manage those functions for you.  By the way, you don’t even need to use the same firm to provide bookkeeping and accounting services, most of the major accounting software packages, like QuickBooks, will offer your accountant access through the internet to your records.  The accountant checks it out, makes changes through journal entries, and then checks it back in leaving you free to accept or decline their entries.

How It Works

Basically, you scan in your financial documents to PDF and then email them to your virtual bookkeeper.  He logs everything in to an accounting software program and then kicks it over to an accountant, who will review his work and make up the reports that you need and, when required, can take care of any tax compliance or financial statement preparation that might be necessary.  Easy!  Depending on the level of service the firm that you hire offers, you could also use your virtual accountant to handle some of the more unpleasant tasks of accounting, like calling customers to collect amounts receivable or preparing your company’s payroll.  Also, they can remind you when bills are due, send invoices to your customers, reconcile your bank accounts and even set up your accounting software.

Better Controls

Besides potentially saving you the money and the hassle of hiring a full time bookkeeper or accountant, a virtual accounting firm can also improve the controls that you have over cash and minimize the possibility of embezzlement by an employee through creating a separation of duties that would be difficult for a small business to replicate.  You see, if you hire Brenda the Bookkeeper as your full time employee to handle the finances she gets to know an awful lot about the business and how the finances work.  Usually the only person overseeing Brenda is Oscar the Owner (No one else understands what she does or really cares) and he is far to busy meeting with potential clients and thinking up new products in order to pay his boat bill to really supervise what Brenda does.  As a result, Brenda often has access to both the financial records and to cash or other assets with no one really looking over her shoulder to see what she is up to.  The results can be disastrous.  One of the first controls experts recommend that you put in place to prevent fraud and embezzlement is a separation of duties.  Since many smaller firms just don’t have enough qualified people to separate duties they may consider going to a virtual accountant or bookkeeper to protect themselves from potential fraud.

What You Want

When you finally get to rest your head upon your pillow at night you want to do so knowing that the bills have been paid, the money that you are owed is being collected, that all tax an regulatory requirements have been complied with, and that all cash and other financial records are in order.  Most importantly of all, you want to know that you and your team have accurate and up-to-date information that you and your managers can use to make better business decisions and increase profitability.  Quality financial records are knowledge, and knowledge is power, or profits.  If you don’t yet have the ability to use your financial information for decision making in house then you need to consider using a virtual accountant for that, as well.  A quality professional should not only be able to put the necessary numbers together, but also explain their significance and help you decide upon a plan of action as the basis of this information  .

Where to Get Started

90% of the time people find their virtual accountant through asking their CPA for referrals.  Chances are your own CPA can do the work for you, if that is what you want.  Increasingly, people are turning to the internet for solutions and one finding online specialists in handling their accounting needs.  Peak Virtual Accounting specializes in working online and offers a number of services from basic bookkeeping all the way up through a virtual Chief Financial Officer.  Virtual Expansion specializes in higher level professional services.  You could also try finding one through Elance or Odesk, I’ve noticed a number of Indian firms working on Elance but the quantity of business seems pretty small so far.  Finally, ask your fellow entrepreneurs who they use to get some ideas.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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So you’ve got a fantastic, game-changing idea for a business but no cash?  Well, you absolutely have to have accounting and financial records (really, it’s the law) but you can keep it affordable by taking advantage of an amazing number of free and almost free online programs.  The catch is finding credible providers who won’t just lure you in with free enticements and then, a few months down the road, hold your records hostage until you pay a fee for this or that service.  To help you find your way through that minefield I have done some investigating and I have below some of the most highly thought of free software for entrepreneurs on the web.

Getting it online

Bookkeeping and Accounting

QuickBooks is by far and away the most popular accounting software program for small business in American and is rapidly growing its reach around the world.  Its ubiquity means that your accountant probably knows it and is familiar working with it and that you can easily find resources for using it.  QuickBooks Online is the most economical way of getting started, you get a free trial for up to a month, and then it costs $10 a month and up thereafter.  The beauty of Quicken is that it can be upgraded to become almost as sophisticated as you could want, which will be nice down the road when your business really makes the big time, and due to its popularity it has a large number of third party add-ons that can enhance and niche QuickBooks to tailor it to your needs.

No, Really Free

“Dude”, you say, “10 bucks a month is like four burritos, I need that money for food!” Well, I am feeling your pain and bootstrapping my business along to greatness just like you are with yours.  So, for those who risk malnutrition and maybe scurvy if they have to part with the $10 bucks, there are some absolutely free options out there!  Ah, I know what you are thinking.  Why on earth would anyone offer for free something as complicated and difficult to produce as accounting software?  My guess is that, as your business grows, you are going to need some more advanced services that will not come free with the basic package and your “free” provider will gladly offer them.

The Google Apps Options

Google Apps is just a mind-blowing offering of resources for small business and many of them are absolutely free!  Plus, they synchronize and work with another fantastic free resource, Google Docs, and so you can layer free on top of free!  God I love that word, “free!“  Two of the more popular accounting and bookkeeping options are below.

• Rhino Accounting maintains that it is 100% free forever for basic use.
• myERP.com is free for up to two users, which should be all a small business needs.

The Open Source Options

Another branch of the free software road leads you to open source software, which generally means software that can be worked upon and modified by any programmer.  I am going to take a wild guess here and bet that you don’t program your own code and that what you really want is a finished product that can handle your accounting needs.  Two of the best that fit that bill are below.

• Turbo Cash is probably the single most popular free accounting program in existence.  It has been around for seven years now and has a pretty nice website with training resources and a forum to help users solve their accounting issues.
• osFinancials also has a pretty nice looking website and a user friendly set up.  It’s Dutch run (Hup, Holland) but don’t be put off by the Dutch that you will see when you first connect to the site as it also offers full service in English.

Spreadsheets, Word Processors, Office

Web Finance isn’t just about accounting software; you’ll also need programs to keep databases of your customers and vendors, spreadsheets to calculate the payment on your loans and a word processor to write letters pleading for more time from bill collectors.  If your not willing or able to spring for the bucks to get a Microsoft package then you can consider a couple of free online options.

• Google Docs is what I use to write this blog and it is adequate for wordprocessing needs, and can do very basic spreadsheets.  It also has a really cool Forms app that you can use to communicate to your customers online.
• Open Office is absolutely amazing and I can’t believe that I had never even heard of it a few weeks ago!  In fact, this article took way longer to write than it should have because I had so much fun playing around with Open Office.  In addition to the spreadsheet, word processor, and database technologies they also offer a graphics program and a presentation program.  But wait, there’s more!  To ice the whole cake off you can download all your documents to a PDF format!  I always thought the ridiculously expensive Adobe software was my only option for that.

Tax

Preparing your taxes is always painful but it at least can be made a little more affordable with some of the free reporting options available.

• The IRS, go figure, has absolutely loads of free information to help you prepare your taxes.  Here is a dirty little secret of the trade that you must promise never to divulge, we CPA’s go to the IRS reference materials all the time when we prepare your taxes!  Crazy, I know!  I mean, they’re the enemy!
  • File for free online on the IRS’s website if you meet certain criteria
  • Absolutely free resources.  As I mentioned in Self-Employed Tax Deductions, the IRS offers  the tax calendar, and all the forms you might need, along with their instructions, are available on the IRS website.
• Turbo Tax has a free option for people filing online who have basic tax returns.
• H&R Block offers the same

Payroll & Other Special Programs
The list of possible software needs for a young business can be virtually endless, and so I have included a list of other resources you can turn to should the need arise.

Please leave your questions or offer your solutions below. As the WebCPA and the author of WebBizFinance.com, my job is to help you grow your business and solve your business finance and accounting problems!

Tyler

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More Time/More Money

Since reading “Found Money, Simple Strategies to Uncover the Hidden Profit and Cash Flow in Your Business” I have developed an enormous man crush on Steve Wilkinghoff.  Really, if I had a poster of him I’d put it up right between the ones of Michael Bradley and Voltaire.  I cannot preach too much that, in my experience, there is an overwhelming correlation (I would maintain causation!) between businesses that take accounting and financial management seriously and businesses that make their owners rich.  Now Steve comes along and gives the world’s productive class new tools to make themselves more money and give themselves more time to enjoy it with.

Found Money is the type of book that elevates accounting out of some crap that the IRS requires and into one of the sharpest tools in the entrepreneurs tool chest.  Steve’s Found Money Method not only tells entrepreneurs what the important influences on their business’s profitability are, it gives them the tools to maximize that profit potential and do what every good business must do, put money in its owner’s pockets!  Some of the nuggets of wisdom from Found Money include:

• Why “Getting More Customers” is often the most ineffective method of growing your business.
• Why it isn’t enough that your business is profitable, it must also be cash plow positive and provide a sufficient return on investment.
• Why the worst method of marketing is often the first used.
• Why some of your customers are most likely taking money out of your pockets and how to find them and fire them!
• How to find out which of your products is really making you the most money and what products you want to sell more of.
• Why most businesspeople actually under-price their products and how to find the best price for your products.

How much would that information be worth to you; perhaps thousands, maybe even millions of dollars?  Steve’s book set me back about $15 including shipping when I bought it online.  Only I had to buy it twice because I lost the first copy after reading just enough to get me really hungry for more.  Big Business spends gigantic sums each year poring over their accounting records and using them to make the important decisions that are often life or death for a company.  Now Steve puts this ability in your hands and adds the Chief Financial Officers cap to the Chief Executive Officer’s and Chief Operating Officer’s caps that you already wear.

As the WebCPA and the author of WebBizFinance.com, my job is to help you have more time and more money!

Tyler

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Finding a great accountant who can help you grow your small business can be as tough as finding talent on American Idol; too many accountants are so focused on crunching numbers that they do nothing to explain why those numbers are so important to your business. Fortunately, Steve at MyWifeQuiteHerJob.com has invited to do a post explaining how you should go about finding a fantastic CPA that can help you manage your business. So take a look and tell us what you think!
As the WebCPA and the author of WebBizFinance.com, my job is to help you have more time and more money!

Tyler

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