Thursday, February 27, 2014

Accounting May Be Boring, But It's Critical

Accountant getting frustrated.
Don't frustrate your accountant by waiting until the last minute!
As a business owner and former CFO, I think finance is exciting. However, I find accounting very, very boring. When I previously served as an interim CFO, companies would contact me to fill the role of a controller-type CFO. I always declined. Can you say Boring with a capital B? Obviously, accounting types find accounting exciting, but I'm a financing type. The two are strongly related. But my focus is on analyzing past accounting data to identify trends, project future financials and help make strategic and operational decisions. Just gathering data and compiling it? No! I understand accounting and can do much of what's required but the sheer repetitiveness makes me want to scream.

I say all this because I can understand how most small business owners find accounting boring. Okay, I'll admit that most small business owners find accounting AND finance boring. In addition, most small business owners don't understand what's involved and see the whole discussion as somewhat of an endless pit they could never understand. But this thinking not only does you a disservice, it can kill your business. That which you ignore can cause you to engage in unproductive behaviors and make decisions which put your business at risk. Therefore, it's critical that you develop at least a rudimentary understanding of small business accounting basics. One great resource to do this is the Accounting Coach.

Numbers drive any and all businesses, including your business. The amount of revenue you generate, the number of employees you hire, the expenses you incur, the profit you make and the cash you need are all numbers. The value of the assets your company owns and the liabilities it has are all numbers. You must understand these numbers, their source and how they work together to effectively run your business and establish and meet your goals. So if you have NO understanding, I recommend you take a class at a local four year or community college, find an online course, or get an accountant to provide you with a tutorial. You don't need to be an expert but knowing the accounting basics will really help.

For example, if you don't track your numbers, you may not realize that the amount unpaid by customers has increased significantly over the last several months. Or you may not realize that one major customer went from 20% of sales to 40% of sales. Or you may not realize that missed an installment payment on a quarterly payment arrangement. All of these could lead to serious problems for your business.

For another perspective on small business accounting, refer to the New York Times article, Basics of Accounting Are Vital for Entrepreneurs.
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Tuesday, February 25, 2014

Entrepreneur Life Lessons

Entrepreneur dictionary reference
Entrepreurs are risk takers.
When I was just getting started in an entrepreneurial endeavor, I often had people ask me how could I do this or that and go without a steady source of income? Wasn't I afraid of the risk. I would reply that it's less risk to be an entrepreneur because you have multiple sources of income from different customers. And an employee could lose his or her job.

But there is some validity to that question. How you handle that risk or your assessment of that risk helps to determine your level of success. Not just in your business but in your life overall. You can worry and stress about your business all the time and still be successful, but you'll likely be a true workaholic who avoids time with family and friends to work on and in your business. This could lead to divorce, estrangement of your children and the loss of friendships. I'm not joking. I've seen this happen. Or you could end up with serious health problems. Your business may be a shining success but the rest of your life is in shambles. Not good.

So how do you become more comfortable with risk?

You must get more comfortable with being uncomfortable. To do this, you must step -- no, leap -- outside your comfort zone. What did it for me was traveling around Asia and not reading or speaking any of the languages. (Ok. I could read and write some Chinese / Japanese based on my Japanese language skills.) Since the pain of sitting in my hotel room with nothing to me was greater than the pain of reaching out to people to learn the cultures and have fun, I chose the latter. Over time, I became more adept at it. After several trips, I even stopped booking hotel rooms in advance!

Do something that scares you. And do it repeatedly. Then try something else. You'll learn that you get better with experience or practice and that the fear decreases over time. In other words, you become more comfortable with the uncomfortable. The funny thing is that this feeling broadens to include other areas of your life, not just the area your experiencing. For me, I realized that if I could travel around Asia all by my lonesome, then I could certainly start or buy a company and take it to millions in revenue, good cash flow and profitability.

If you need suggestions on some one-off activities to engage in to help you blow out your comfort zone, check out the examples in The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich (Expanded and Updated).

Maintain Balance

The key to success
Everyone's key to success is different. Define yours.
Entrepreneurship and the drive to build a successful business can be all consuming. Don't go there. One of the best ways to maintain balance is to write out your vision for your life, then break that vision into achievable goals. If one aspect of your vision is having and maintaining close friendships, then carve out time to spend with your friends, even if it's only lunch once a month or, if they live far away, a phone call once or twice a month and a long weekend visit once a year. You can also build new friendships by joining entrepreneur or small business-focused organizations and cultivating relationships there.

If your health is important, eat healthy and head to the gym or go for a run or swim three to five times a week. If you do this from the beginning, you won't have to make drastic adjustments later on. You can have everything you want in life, you just may not be able to have everything to the same extent at the same time.

Keep the Faith

Maintaining your commitment to entrepreneurship and business ownership is critical. If your company is not doing well, seek outside assistance. Help comes in the form of mentors, friends who are business owners or who specialize in your area of need, consultants, interim or part-time senior management, online webinars and courses, small business classes...  If your business is just a dog, then shut it down and put what you've learned into practice by opening or purchasing another business. But do not give it.

To keep the faith, you can listen to pastors like Joel Osteen if you're religious (or even if you're not!), recordings by those that espouse the Law of Attraction or listen to recordings by other successful business owners who have gone before you. You can chant affirmations, meditate, pray, do yoga,...whatever works to help you stay in a positive frame of mind regarding your business. Successful business owners are often not the smartest guys in the room. But they almost always are the ones that persevered until they found the way to success that worked best for their company.
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Thursday, February 20, 2014

Free Marketing Online Marketing Classes for Start-ups

Here's Information taken from an email I received from American Express OPEN Forum
Open Forum Beta

American Express OPEN Forum joined forces with an education startup -- General Assembly -- to bring the Forum community online courses for free that help you get started as a new business owner. The courses are basic. They're targeted at beginners, those who recently launched a start-up and do not have a marketing background. At the end of the online course the people at General Assembly will allow you to ask questions through a live chat. 

See the descriptions below and click on the links to go directly to the registration page. Remember, all the classes are online and free!

Introduction to Email Marketing
February 20th, 5 PM EST
Designed for absolute beginners to email marketing, we’ll cover selecting an email service provider, setting up and designing your first email templates, and the basics of analyzing email campaign performance.
Register on

Introduction to Social Media Marketing
February 27th, 5 PM EST
Participants will leave with a basic understanding of both the current social media landscape and how to evaluate which tools or social platforms are the best fit for their organization’s strategic goals.
Register on

Creating a Mobile Strategy
March 4th, 5 PM EST
We will cover a range of topics from responsive design and mobile first to mobile sites and native apps. By the end of the session, you may come up with the appropriate mobile strategy for your business.
Register on

Basic Excel Hacks for Business
March 11th, 5 PM EST
Learn how utilizing Excel effectively can improve your accuracy and efficiency. Find out how to make your sessions more productive by organizing data into functional tables and learning shortcuts.
Register on
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Tuesday, February 18, 2014

Two Common Small Business Accounting Mistakes

Woman using a calculator with pencil
Using bookkeepers and accountants can help prevent accounting mistakes.
Small business owners often do not engage an accountant to regularly handle their small business accounting needs. They often put the task off indefinitely...or until tax time, whichever comes sooner. This practice can wreak havoc. I am a huge advocate of preparing and reviewing financial statements - income statement, cash flow statement and balance sheet - on a monthly basis. How can you track what your company is doing, identify trends and make adjustments if you only look at your financial statements on a semi-annual or annual basis? The answer: You can't!

So here are some insights on common accounting mistakes from a former Chief Operating Officer (CFO) and a fellow business owner. (Yes, that's me!)

1. The profits you make on your sales are not cash! Cash and its sister, cash flow, is king! An unprofitable company can limp along for years but one that has no cash  or insufficient business cash flow can go bust in a matter of weeks. (One caveat: If you use cash based accounting, you recognize revenue when the cash comes in and expenses when the cash goes out. Therefore, in cash based accounting, you don't need a cash flow statement to track operational cash flow as your income and resulting cash from operations are the same.)

In accrual accounting, which is what most small business owners use, revenues are recognized when earned, meaning you recognize revenues when you bill the customer NOT when the customer orders the product or service. You recognize expenses when you receive and log the bill into your accounting system (even if it's an Excel spreadsheet), NOT when you actually pay the bill. So you can see how this revenue and expense recognition can distort your perception of your company's cash flow if you do not track cash flow separately!

On paper, you have a profit. But in your bank account, your close to zero. The timing of when your customers pay their bills and when you pay your bills, in addition to the relative size of each, determine whether your business' cash flow is positive or negative.

2. Your company makes a large purchase with inadequate planning. The IRS typically considers a large purchase a capital expenditure and does not allow you to deduct the entire cost in the year purchased. Instead, you must depreciate the cost of a capital expenditure over the item's useful life. So you may spend $50,000 on a computer hardware and software package and think it will reduce your net income by $50,000 but that's not so. It will only reduce your company's net income by the amount allowed by the depreciation method you use. In this case your taxes will be higher than anticipated. If your company has revenues of $1 million or less, the unexpected tax impact will be significant.

In addition, with inadequate planning, your business may run into cash flow problems. You may need to finance the purchase / capital expenditure outright or bring on an investor to pay for it. But if you did not consider this need or option in advance, you'll have to scramble to come up with the cash to pay for ongoing operations because you used that cash to make your big purchase.

Both small business accounting mistakes impact both income and cash flow, the income statement and the cash flow statement. Know and understand the difference. Hire a bookkeeper to help you prepare monthly statements and an accountant to compile or review those statements quarterly (strongly preferred) or semi-annually. One great resource with additional articles on financing is my Cash for Impact blog. Another great resource for articles on small business accounting is the Accounting Coach.
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Saturday, February 15, 2014

Business Competition: Win a piece of $300,000

Miller Lite Tap the Future business plan contest
Inc. magazine ad for the Miller Lite Tap the Future contest
The Miller Lite Tap the Future small business contest is back!! It's earlier in the year this year. The folks over at Miller Lite completely revamped the contest and now offer awards totaling $300,000. The application submission is simpler than in previous years which makes submission even easier and more straightforward. Essentially, you no longer need a full blown business plan, just an impactful, hard-hitting abbreviated executive summary will do. This revamp was rolled out in 2013 and continues for 2014.

The applications for the small business competition opened on February 6, 2014. All applications must be received by April 6, 2014. So the Miller Lite Tap the Future business plan competition gives you a whole two (2) months to get your applications submitted! Start-ups and existing small businesses both are welcome to compete.

In addition to the potential for funding, you have the potential to get exposure to other investors.  Who knows. One of the panel of business experts or other attendees  may express interest in your business later even if you don't win. You also have the potential for free publicity. With the publicity prospective investors reading about the business plan contest may contact you and potentially become an investor. I personally know individuals (angel investors) who contacted companies or company founders after reading about them in a newspaper article or press release and inquired about investing.

Business competition summary: 
What: Miller Lite Tap the Future small business competition
When: Applications available from 2/6 - 4/6/14. Deadline for submission is 4/6/14. Contest officially ends on or around 8/10/14.

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Monday, February 10, 2014

4 Articles on Accounting for Small Businesses

Here are four articles I've written for other publications over the past year to 1.5 years that deal with small business accounting issues, concerns and questions. These answer some of the questions I periodically receive from entrepreneurs and small business owners.

Cash vs. GAAP

Accountant punching adding machine.
Yes, some accountants still use adding machines on occasion!
Do you currently use cash accounting but want to switch to GAAP (generally accepted accounting principles)? Or do you not know the difference and use a combination of the two? Well, you need to pick one and follow it. This article provides you with a comparison between cash-based accounting and accounting under GAAP.

Projected Profit and Loss Statement

Managers looking at financial statements
Preparation and analysis of financial statements is critical to business success.
A proforma income statement or, in other terms, a projected profit and loss statement, can be a highly valuable tool to assist you in the planning of your business and determination of your cash and financing needs.

How to Certify a Profit and Loss Statement
Owners often scramble to give their bookkeepers or accountants the information needed to prepare financial statements and tax returns. This happens most often with those owners who have no system in place, no regularly scheduled bookkeeper.  Bills, receipts, loan documents are often not fully organized and filed.

 Shareholder's Equity vs. Retained Earnings

Investor on top of wealth
Owners and investors reap wealth from retained earnings.
Companies operate to generate wealth and income for their owners. Business and individuals buy shares in profitable companies, thus acting as investors, to reap the benefits of this increase in wealth.
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Friday, February 7, 2014

Operating as a Sole Proprietorship - 1099s and Risk

Sole proprietors typically pay book keepers as independent contractors.
I often get questions on the subject of independent contractors vs. employees. Here is an article where I discuss the question in detail: Independent Contractors  or 1099 Employees - The Risks. The title is a bit ironic since you use a W-2 with employees and a 1099-MISC with independent contractors. When you operate your business as a sole proprietor, you typically bring on staff to work for you as an independent contractor. But be aware that just because you don't want to pay them as employees and go through the hassle of setting up payroll accounts to pay state and federal employment-related taxes, doesn't mean that whom you hire automatically qualifies as independent contractors.

If you, as a sole proprietor, have people who work for you but under their own supervision and work direction, then this "staff" may qualify as independent contractors. You pay independent contractors directly from the money you take in from clients. (If your clients split payment between you and someone else, you essentially operate under a partnership agreement, not a subcontractor or independent contractor arrangement.)

Your business' independent contractors make their own schedule (they choose whether or not to work or when to work), supervise their work product (although they must meet the minimum standards of your business) and pay their own taxes. For more detailed information on what arrangements constitutes an independent contractor arrangement, check out Can You Give Bonuses to Independent Contractors?

I never recommend operating as a sole proprietorship. Instead, I strongly recommend you formally structure your business as an entity separate from yourself. For most, the formation of an limited liability company is easiest if your state allows you to form a one-person / single member LLC. Not all states do. An LLC (or corporation) will protect your personal assets from liability if something happens. Get an EIN -- an employee identification number -- and run all your business activities under the LLC's name and EIN.

Example: A doll maker sold handmade dolls at flea markets in her area. One of the button eyes popped off and hit the toddler of one of her buyer's in the eye, causing loss of vision for the little girl  in that eye. The buyer sued the doll maker and the doll maker lost. Because the doll maker was operated as a sole proprietorship she was personally liable for all the debts and judgements against her business. She almost lost her home trying to comply with the $150,000 judgment against her and had to file for bankruptcy.

The motto of this story: You never know what could happen. You need to protect yourself and your business accordingly.

For tax information on 1099s, check out the special report: Business Owners, 1099s and W-9s: Answers to the 10 Most Pressing  Questions.
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Wednesday, February 5, 2014

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