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Mentoring the Next Generation to Take Over the Family Business

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Three Businesspeople Having Meeting In Outdoor RestaurantMany owners of small businesses would love to see a family member take over their business. If you have children, grandchildren, nieces, or nephews that you think might be interested in running the business in the future, you can help lay the groundwork for that potential transfer of ownership in several ways. Use the following strategies and tips to encourage the next generation to become part of the family business.

See Who Is Interested

One or more of your children may already have shown some interest in the family business and asked about its operations. It’s important to encourage that interest. Talk about the company’s history and your vision for its future. Share the excitement you experience as a business owner.

Over time, you can teach an interested child more about the business’s operations. Consider putting the child to work doing various tasks around the business on weekends and over school holidays.

Education Is Key

Over the years, the child’s interest in the business may wane or it may become more intense. If the child (or children) continue to express an interest in working for the family business, you might want to bring up future education plans. You can suggest that the child should consider obtaining a degree that would be beneficial in running all or part of the family business. For example, a degree in engineering could be a huge asset if the family business is involved in property development, construction, or design/build. A degree in accounting or finance can be helpful for businesses of all types. In addition, a degree in a related field would give your family member credibility when it comes to interacting with clients, bankers, and employees.

Insist on Outside Experience

Promoting a family member to a leadership position within the family business when that person has little experience can be a recipe for trouble. It can cause discord among employees, especially those who have worked hard with the expectation that they could move up in the ranks. Additionally, it can undermine the family member’s credibility in the eyes of clients and other business owners.

It often makes more sense and can be hugely helpful to have the family member obtain a post-college job outside the family business. Working in a different company in a similar industry to yours can give your family member a level of experience, confidence, and credibility that would not be obtainable by simply transitioning to the family firm. The skill set established through working elsewhere may help propel your family business in a new, more growth-oriented direction. Family business experts suggest that a child expected to take the reins of a family business should spend at least five years working elsewhere before joining the family firm.

When Multiple Children Are Involved

What happens when more than one family member is interested in becoming part of the business? Encourage them to follow the areas of the business that interest them most. With the appropriate education and experience working for other firms, they may be ready to run their own areas of the business when they rejoin the family firm. This is when their talents can develop and shine.

Bring in Outside Experts

The input of outside professionals who are skilled in different business areas, such as operations, finance, manufacturing, logistics, or marketing can be invaluable to the upcoming generation of family members joining the business. Mentors can guide and serve as a sounding board for the ideas of the child or children working for the family business.

Consider Staying on as an Advisor

You could consider making yourself available as an advisor to the incoming new generation of family members. Whether the arrangement is formal or informal, it should not be open-ended. Determine how long you will offer your services. The goal is to ensure that the new generation of leaders in the family business will be able to run the business independently.

Successfully transitioning a family business to the next generation takes time and planning. For planning assistance, consult an experienced financial professional.

How to Overcome Accounting Challenges Most Small Businesses Face

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Business colleagues in meetingPerhaps the number one action you can take to support the financial health of your small business is to stay on top of accounting. Make sure you’re aware of most small businesses’ accounting challenges and learn how to overcome them. We’ll tell you how here!

Banking

You’ve been banking for years, and you know how to manage the task. However, when you own a business, banking isn’t like managing personal checking and savings accounts. Unfortunately, many small business owners use their personal funds to pay for business expenses, especially when first starting out. Even small costs add up over time. This “cross contamination” of spending between personal and business accounts can lead to costly mistakes, not to mention headaches for your accounting team. Keep personal expenses, and business expenses separate all the time. Have dedicated bank accounts and credit cards only used for one or the other. If you need to track down an expenditure, you only need to look in one place.

Budget

When bank accounts are separated, budgeting becomes exponentially easier. You can even use an accounting software program to help you keep up with money coming and going to and from your business. However, recognize that simply entering information into a software program is not the end of the work when balancing a budget. Thinking that is true ends up being the downfall of many small businesses. Budgeting for a business means forecasting to ensure that unexpected expenses can be covered, managing inventory, taxes, and more. A shift in any direction can throw off any budget. That’s why many small businesses opt to outsource their accounting. The known upfront expense of doing so can far offset costly budgeting errors down the road.

Unexpected expenses

As mentioned above, you must consider the unexpected as part of your budget. Additional (new) taxes, payment delays from customers, rising costs of materials and supplies, new employee training, etc., are all possibilities. A qualified accountant is aware of these unexpected expenses and others that your business could face and knows how to prepare you for them. Awareness of what could financially happen in business is crucial to long-term profitability.

Payroll

While unexpected expenses are likely the most daunting for a small business, payroll is almost always the most significant. Payroll entails more than what you pay employees. New employee classification, if incorrect, could cost you a bundle in penalties. Other payroll-related accounting challenges are pay accuracy, proper tax filing, compliance, and paid time off tracking.

Unless you’re an HR professional, and chances are you’re not if you’re the business owner, consider recruiting a qualified accountant to help you manage payroll. It will save you headaches in the short term and money in the long term.

Taxes

A conversation about accounting and small business isn’t complete without discussing taxes. The tax struggle can be daunting, from filing to making sure you pay enough but that you don’t overpay. A significant challenge regarding taxes is merely keeping up with the ever-changing tax laws. A qualified accountant or CPA will be up-to-date on new regulations and guidelines so that you don’t have to be.

Overcoming accounting challenges like these is easy with a qualified accounting team on your side. Consider outsourcing your accounting needs so that your focus remains where it should – on running your business your way.

Contact our accounting professionals now for help managing your small business finances.

4 Tips on How Small Businesses Can Reduce Taxes

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Female florist using laptop in flower shopAs a small business owner, tax liability is the money you owe the government when your business generates income. With changing laws and gray areas regarding deductions, exemptions, and credits, it’s no wonder small business owners rank taxes at the top of the list of the most stress-inducing aspect of business ownership. To reduce that stress, taxes shouldn’t be something to focus on only at year’s end. Use these tips on reducing your business tax year-round and see your taxes and stress level decrease!

1. Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

  • Sole proprietorships have one owner who takes all profits as personal income. The owner is personally liable for any business debts.
  • Partnerships are structured like sole proprietorships but can have an unlimited number of owners.
  • C corporations have unlimited shareholders who each own part of the company. Profits are distributed as dividends between them. Owners are not personally liable for business debts.
  • S corporations are structured like C corporations, but the number of shareholders is capped at 100.

In addition to affecting how a business operates, business structure impacts how much a company pays in taxes. The U.S. tax code is complex and includes four main tax categories:

  • Income tax – paid on profits
  • Employment tax – employee Social Security and Medicare contributions
  • Self-employment tax – Social Security and Medicare contributions for self-employed individuals
  • Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

IA sole proprietorship or partnership is a good idea for businesses wanting tax simplicity. For those with less than 100 owners, an S corporation might be the right fit and best tax option. Again, business structure and tax laws are complex and are best determined by a qualified, experienced accountant.

2. Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received directly by an individual, before any withholding, deductions, or taxes), and allowable expenses are deducted to arrive at net income. How this figure is calculated is dependent upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

3. Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. The (IRS allows a variety of options for tax sheltering. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Sole proprietorships are not required to pay Social Security and Medicare taxes on a child’s wages. They can also avoid Federal Unemployment Tax Act (FUTA) tax. Consult a trusted accounting professional for details about the benefits of hiring your children or even your spouse.

4. Retirement contributions

Employee retirement plans benefit employees, but they can also be good for your small business. Employer contributions to an employee retirement plan are tax-deductible. They can also carry an employer tax credit for setting up an employee retirement plan. Again, this is a task an accountant can handle for you. They can guide you on retirement plan choices based on your business’s situation, employees, and other factors.

As a small business owner, you can deduct contributions to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s). Sole proprietors, members of a partnership, or LLC members can deduct from their personal income contributions to their retirement account.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

Contact our tax professionals to learn more about how you can control tax exposure for your small business.

Start 2022 Off Right: Clean Up QuickBooks

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Is Your QuickBooks company file ready for 2022? Three things you can do to put things in order.

Don’t forget about QuickBooks while you’re catching up on 2021 and looking ahead to 2022. You probably don’t want to put one more item on your to-do list, but any steps you take now to ready the software for the new year will pay off. Once you start entering transactions and placing orders and welcoming new customers, it will help tremendously to have a clean slate.

Here are some suggestions for completing as much of the work you started in 2021 as you can.

Run four critical reports

Bills can slip through without being paid in December because there’s so much going on. This applies to both you and your customers. You need to catch up on what’s owed to you and what you owe. So generate these four reports in QuickBooks:

  • A/R Aging Detail. Which of your customers are in arrears with their payments to you? How much do they owe you, and when should the money have come in?
  • Open Invoices. Which invoices have not yet been paid? There will be some duplication with A/R Aging Detail, but this report isolates only unpaid transactions.
  • A/P Aging Detail. Are you caught up with the money you owe other individuals and companies? This report will tell you.
  • Unpaid Bill Details. Like Open Invoices, this report sets apart only the bills that have unpaid balances.

Create statements for past-due customers

You’ll have to decide how hard you want to lean on customers who are late paying your bills when it’s so early in the year. Certainly, if some customers are more than 60 days late (30 days if they have sizable balances), you may want to make a phone call or at least send a personalized email asking them to fulfill their obligations.

But you can also send statements. These documents provide details of financial activity between you and your customers for a given period of time. Open the Customers menu and click Create Statements. Look over all of the options in the window that opens and indicate your preferences. If customers don’t respond to your statements within 10 days, then it may be time for a phone call.

Take a hard look at your inventory

It may have been a while since you did this, but it’s really important to do it regularly – especially if you had a busy holiday season. The best way to start on this is to open the Vendors menu, scroll down and hover over Vendor Activities, and click Inventory Center.

If you don’t have a lot of inventory, you could just highlight each entry under Active Inventory, Assembly over to the left. The window that opens on the right side of the screen holds an enormous amount of detail about each item. But if you sell a lot of different kinds of items, that will take too much time. In that case, you might run one or more of the reports linked from this screen. Even the QuickReport can be helpful.

 

Tip: If you need to adjust the quantity you have on hand, click the down arrow next to Manage Transactions in the lower left and select Adjust Quantity/Value on Hand. You might consult with us if you’re running into this problem, and we can go over inventory issues with you.

Set Up Online Financial Connections

January is also a good time to be thinking about how you can better use QuickBooks in 2022. We tend to learn how to use the tools we need and not explore any further when we’re using any kind of software. QuickBooks is such a massive program that that’s understandable.

But there are two tools that can have tremendous impact on your daily workflow, your ability to get paid faster by customers, and your understanding of where you stand financially every day. They are:

  • Online Banking. Did you know that you can connect QuickBooks to many financial institutions and import your cleared transactions every day? That’s what the Bank Feeds Center is all about. If you sign up for this service, you won’t have to wait until your monthly statement comes to see what transactions have gone through.
  • Online Payments. If you’re only accepting checks as payment from your customers, you’re probably getting paid more slowly than you might. Sign up for QuickBooks Desktop Payments, and you’ll be able to process credit cards, eChecks, and ACH payments.

Cash Flow Strategies for Cash-Strapped Businesses

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money in the handsCash is critical to the functioning of every business. Maintaining a healthy cash flow not only allows a company to meet its financial obligations but also gives it the flexibility to take advantage of emerging opportunities.

All too often, however, small businesses find themselves in a cash crunch, struggling to pay the bills and stay afloat. The good news is that businesses can take various measures to manage cash flow more effectively.

Controlling Expenses

A good place to start is by reviewing expenses to determine if there are areas where you can shave costs by contracting with another vendor or renegotiating existing contracts. Costs for ongoing goods and services, such as utilities, shipping, and telecommunications, should be reviewed frequently to see if expenses can be reduced. And when paying suppliers, consider whether it makes financial sense to take advantage of any early payment incentives that may be offered.

Keeping Debt in Check

Debt can be a useful tool if used properly, so be sure to keep it at a manageable level. Before your business takes on a new loan, reach out to multiple lenders and compare the terms they offer. When acquiring equipment, consider whether leasing may be a better option than borrowing money to finance its purchase. For short-term financing needs, a line of credit is a helpful tool. The lender will base interest charges only on the amount your business draws from the credit line.

Managing Inventory

Maintaining excessive inventory can tie up cash unnecessarily. If your business carries inventory, avoid overstocking. Your inventory management system should be able to indicate the minimum quantities that you need to keep on hand in order to meet your customers’ needs.

Simplifying Billing and Collections

Employees who handle billing and collections should have specific, clear guidelines. By standardizing the process, you help ensure your business will be paid promptly. You can speed up payments by offering discounts for early payment or by encouraging your customers to pay using electronic funds transfer. To help minimize the problem of unpaid accounts, consider making follow-up calls or sending email or text message reminders within a set period after you have provided goods or services or when a bill’s due date passes. Minimizing Taxes When Possible

Deductions and credits can help your business limit its tax burden and boost its cash flow. A knowledgeable tax professional can keep you informed of any special tax breaks that may be of value to your business, such as the energy credit for the acquisition of various types of alternative energy property.

Make Planning a Priority

Identifying the causes of reduced cash flow and taking steps to rectify a cash flow crunch is critical to the ongoing success of your business. Proper cash flow planning can help you make better use of budgets and employ financing and capital more effectively to increase revenues as well as boost profits. If erratic cash flow is a recurring issue for your business, it can be helpful to gain the insights and the input from an experienced financial professional.

Starting a Side Gig in 2022? Your New Tax Obligations

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It’s not just self-employed individuals who must pay estimated taxes. Here’s what you need to know.

W-2 income tax withholding isn’t perfect. You’ve probably had years when you owed more than you expected to on April 15. Or you were pleasantly surprised to receive a sizable refund. The idea, of course, is to try to come out as even as possible. You can usually do this by adjusting your withholding when you experience a life change like taking on a mortgage or having a baby.

Income taxes are also pay-as-you-go for self-employed individuals – or at least they should be. If you’re striking out on your own by starting your own small business in 2022 or you’re simply taking on a side gig to improve your finances, your tax obligation will change dramatically. Your income will not be subject to employer withholding every week or two. In most cases, you’ll get it all. But the IRS expects you to pay estimated taxes on that income four times a year.

Who Else Must Pay?

There are other situations where you’ll be expected to make quarterly payments. In fact, the only individuals who aren’t required to pay estimated taxes (besides W-2 employees whose withholding is on target) are those who meet all three of these conditions:

  • You owed no taxes the previous tax year (line 24 on your 2021 1040—total tax—is zero, or you weren’t required to file a return).
  • You were a resident alien or U.S. citizen for all of 2021.
  • Your 2021 tax year covered a 12-month period.

There are numerous situations where individuals who have payroll taxes regularly withheld on their income may still be required to submit quarterly estimated taxes. For example, did you receive income from rents or royalties? Dividends or interest? Income from selling an asset? Gambling?

If you have an employer who withholds taxes, but you don’t think you’ll be paying enough given the deductions and credits you might receive, you need to plan for estimated taxes. Self-employed individuals are almost always required to submit them.

Special Rules for Some

As with all things IRS, there are many exceptions to the rules regarding estimated taxes. For example, there are special rules for:

  • Fishermen and farmers.
  • Some household employers.
  • Certain high-income taxpayers.
  • Nonresident aliens.

How Do You Estimate Your Quarterly Taxes?

That’s the hard part, especially if you’re new to the world of estimated taxes. There is no magic formula, no way to calculate to the penny what you’ll owe. You’re basically making an educated guess. Since you won’t know for sure what changes to the tax code will be put in place until the end of the year, you can’t be absolutely certain that you might get a particular credit or deduction.

But you know roughly what your income will be for a given quarter once you’re nearing the end of it. Do you have a lot of business-related expenses? Keeping track of those is critical, as they’ll offset your income. If you don’t, you’ll have to budget for a heftier quarterly payment. And you must keep in mind that you’ll be paying self-employment tax – that portion of your income taxes that your employer used to pay.

Once you’ve been self-employed for a full tax year and have seen what your tax obligation was, it will be easier to estimate in subsequent years. But you may have a difficult time your first year.

How Do You Pay Estimated Taxes?

 

If you’re self-employed and you anticipate owing $1,000 or more in taxes on your 2022 income, you’ll need to file quarterlies using IRS Form 1040-ES vouchers (available on the IRS website) along with a check or money order. There are also ways to pay online using a credit or debit card or direct bank withdrawal. Corporations would file the Form 1120-W if they expect to owe $500 or more.

Estimated taxes for the 2022 tax year are due:

April 18, 2022 (January 1-March 31, 2022)

June 15, 2022 (April 1-May 31, 2022)

September 15, 2022 (June 1- August 31, 2022)

January 16, 2023 (September 1-December 31, 2022)

A Challenging Task

Estimated taxes are not precise. And it may be difficult to set aside money for them if your income is not where you’d like it to be. But as you might expect, the IRS will levy penalties on you if you don’t.

Year-round tax planning can help you in this critical area. We’ll be happy to set aside time to consult with you about estimated taxes. We’re also available to do tax preparation and to look at how your taxes fit into your overall financial situation. Contact us soon to get a jump on the 2022 tax season — or to finish up 2021.