Can a business grow too fast?

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Most businesses hope to grow. They consider themselves successful if growth is taking place, and the faster the growth the better. Can too much business growth be bad for a company? It can be if the growth is not adequately planned.

For example, an established company that doubles its sales volume in a year may find itself strapped for cash, for working space, and for trained personnel.

For most established companies, a 12% to 15% annual growth rate would probably be manageable. The ideal growth rate for your company depends on the unique circumstances in your firm and industry.

A new company (starting with zero sales) must obviously grow more rapidly than an established one. Some new businesses may double their sales each year for the first five years or so before reaching the level where a 15% annual rate is healthy.

Rapid growth often requires more inventory and more space. And it may require money to fund additional work-in-process or accounts receivable. Who will fund the growth? A 15% growth rate can probably be funded by retained earnings. A more rapid rate may require an injection of outside capital. If the owners can’t provide the money, will it be the suppliers (increasing the accounts payable) or a banker (new short-term debt)?

Every business should have a written business plan with its growth projections clearly identified. The plan should include provisions for the finances, space, equipment, and personnel that such growth will require.

Your company’s growth should be both workable and profitable. Please contact us for assistance with your business planning.

March 2015 – Quick Updates

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March 16 is the deadline for calendar-year corporations to file 2014 income tax returns.

March 16 is the deadline for calendar-year corporations to elect S corporation status for 2015.

March 31 is the deadline for electronic filing of 2014 information returns with the IRS.

March 31 is the deadline for employers to electronically file 2014 W-2s with the Social Security Administration.

The IRS will waive some penalties related to advance payments of the premium tax credit for health insurance purchased under the ACA.

The IRS says taxpayers held $5.3 trillion in IRAs in 2012 – $4.6 trillion in traditional IRAs and $403 billion in Roth IRAs.

According to the IRS, 3.7 million taxpayers contributed to traditional IRAs in 2012; 5.5 million contributed to Roth IRAs.

The Treasury estimates that 2% to 4% of taxpayers will be subject to tax penalties under the Affordable Care Act.

Among the ten basic taxpayer rights listed by the IRS is the right to clear explanations of the tax laws and of IRS procedures.

The FTC reports that tax-related identity theft was the most common form of identity theft reported in 2014.

If you turned 70 ½ last year and didn’t take your first required distribution from your IRA, you must take it by April 2, 2015.

If you own foreign investments, you may have to file Form 8938 as part of your individual tax return this year.

Before choosing direct deposit for your tax refund, verify that your bank accepts such deposits, and verify account and routing numbers.

Elect S corporation status by March 16

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If you own a small business, you have until March 16, 2015, to choose S corporation status for this year. In order to become an S corporation, you’ll need the unanimous approval of all shareholders.

The principal advantage of an S corporation is that you avoid paying double taxes. In a traditional C corporation, profits are taxed at the corporate level, and they’re taxed again when paid to individual shareholders as dividends. In an S corporation, there are no taxes on earnings at the corporate level. Instead, profits or losses flow directly through to the shareholders. They pay taxes only once, when they report their share of earnings on their individual tax returns.

Another advantage: Doing business as an S corporation can be attractive in the early, unprofitable years of a start-up business. That’s because operating losses flow through your personal tax return, perhaps offsetting other taxable income. Losses are available to the extent of your basis in your stock plus loans directly from you to your corporation.

There are some trade-offs for these tax benefits, though. If you’re an owner-employee and own more than two percent of the company, you’ll receive less favorable tax treatment of some fringe benefits. There are also ownership limitations. The company can have only one class of stock, there can’t be more than 100 shareholders, and all of the shareholders must be U.S. citizens or residents.

Despite these drawbacks, doing business as an S corporation can still offer some tax planning advantages. If you can meet the ownership requirements, it might be well worth considering an S corporation election. Contact our office for an in-depth analysis of the pros and cons for your company.

Every new business needs a record system

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Many small start-up businesses are off and running before any record system has been set up. There is money deposited into the new business checking account, some from invested funds and some from sales. Money has been paid out for equipment and supplies, some by check and some by cash out of pocket or from sales receipts.

This informal method of cash receipts and disbursements needs to be formalized. The bookkeeping system does not need to be complicated. In most cases, you can continue to operate much as you have. You just need to do it in a way that leaves a few more tracks.

For example, make all purchases by check. The small miscellaneous cash paid-outs from your pocket (or the petty cash box) are reimbursed by a check with a listing of the expense codes. All your cash receipts are deposited into the bank. No more taking cash from the till for lunches, supplies, etc.

If all the money received by the business is deposited into the bank and all expenses are paid by a company check, the proper journal entries are easy to create from the bank statement.

If you are starting a new business, don’t wait until the end of the year and surprise your accountant with a box of miscellaneous receipts. That is the most expensive and least effective use of your accounting information. In addition to setting up the proper record system, your accountant will provide you with guidance on other business, tax, and financial matters.

Avoid these six mistakes in selling your business

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Most entrepreneurs eventually think about selling their businesses, whether as a prelude to retirement or to pursue other activities. In doing so, they often underestimate the effort required for a satisfactory outcome and overestimate the value and salability of their enterprises. If you’re contemplating selling, here are some common mistakes to avoid.

1. Overestimating the value of your business.

Your price should be based on the fair market value of the business in its current form. Buyers won’t care about the work you’ve put into building your business or your unique vision for its future.

2. Failing to account for the nature and make-up of your business.

The values of most businesses proceed from a mixture of variables. If your business includes significant equipment, real estate, intellectual property, or other such assets, their values should be separately established before being factored into the overall price. If you’re selling a service or professional firm, much of its value may depend on the experience and skills of your managers and employees. In such a case, the price may vary according to the expected retention of key individuals.

3. Failing to base your sale price upon independent appraisals.

Even if you think you know the value of your business, you should obtain two or more outside appraisals from professionals familiar with your industry. If the appraisals conflict with your opinion, they’ll provide a much-needed reality check. If they confirm your opinion, they’ll become a useful sales tool.

4. Not hiring a professional business broker to handle the sale.

Owners are often too personally invested (and/or eager to sell) to effectively negotiate sales of their businesses. A broker familiar with your type of business will know what issues are important to buyers and what characteristics to emphasize or de-emphasize, without becoming emotionally involved.

5. Neglecting to work with the buyer to ensure a smooth transition.

Nobody likes being thrust into unfamiliar circumstances without preparation. Notifying your managers, employees, and customers in advance and doing all you can to allay their concerns will serve your own best interests, as well as being the honorable thing to do. Discontent on the part of any of the affected parties could result in conflicts, reduced revenue for the buyer, withheld sale payments, and litigation.

6. Being unwilling to help finance the sale.

If you’re unwilling to take back a note, your sale price is limited to the buyer’s cash and ability to obtain outside financing. At best this could limit the number of potential buyers, and at worst it could limit your sale proceeds. (Conversely, if you finance too much of the sale price, you’ll increase the risk of default.)

Selling your business is too important to attempt without professional help. If you’re considering selling, call us for an appointment to help formulate your plan.

Use the 80-20 rule to increase your business profits

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How well do you know your customers? Which ones are the most profitable? Which ones take most of your time? It’s worth taking the time to find out. If your business is like most, the 80-20 rule applies. That is, 80% of your profits come from 20% of your customers.

If you can identify that top 20%, you can work hard to make sure this group remains satisfied customers. Sometimes all it takes is an appreciative phone call or a little special attention. Also, by understanding what makes this group profitable, you can work to bring other customers into that category.

Keep in mind that it’s not always profits alone that make a good customer. Other factors, such as frequency of orders, reliability of the business, speed of payment, and joy to deal with are important too. Ask your accounting staff and your sales staff. You’ll soon come up with a list of top customers.

There’s another way in which the 80-20 rule applies to your business. Very likely, 80% of your problems and complaints come from 20% or fewer of your customers. If you identify those problem customers, you can change the way you do business with them to reduce the problems. Consider changing your pricing for those customers so that at least you’re being paid for the extra time and effort they require. Sometimes the only solution is to tell these customers that you no longer wish to do business with them.

The bottom line is that understanding your customers better can only help your business. Contact us if you need help analyzing your customer profitability.

IRS posts “Taxpayer Bill of Rights

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The IRS has just issued a “Taxpayer Bill of Rights” that you should be aware of.

The Rights are divided into ten main categories. According to this “cornerstone” document you have The Right:

* to be informed

* to quality service

* to pay no more than the correct amount of tax

* to challenge the IRS’s position and be heard

* to appeal an IRS decision in an independent forum

* to finality

* to privacy

* to confidentiality

* to retain representation

* to a fair and just tax system

Hiring family in the family business can cut taxes

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As the summertime school vacation season approaches, young family members may be looking for a job – and having a hard time finding one. Hire them in your family business, and you get a double benefit: helping the kids gain valuable experience and garnering tax breaks for your company.

Here’s what you need to know.

Whether your sole proprietorship business operates around the kitchen table or in the fields of your farm, wages you pay your under-age-18 children are not subject to social security, Medicare, or federal unemployment taxes. Note: You’ll have to pay social security and Medicare taxes when your children are age 18 or older. They’re exempt from federal unemployment taxes until they reach age 21.

Wages you pay your children are deductible from your business income, meaning potential savings for the business on self-employment tax and federal and state income tax.

The wages must be paid for legitimate work at a reasonable rate. Be aware of nontax issues too, such as your state’s youth employment rules, which can be more stringent than federal labor laws. If your business is a family farm, keep apprised of newly proposed regulations that may limit the parental exemption for employing young farm workers.

Wages do not impact “kiddie tax” calculations. In addition, your child can earn up to $6,200 of income during 2014 before owing federal income tax.

The payroll tax exemption is different from the self-employment rules, and applies to wages you report on Form W-2 at year-end. Income earned as contract labor, which is generally reported on Form 1099-MISC, is subject to self-employment tax.

Call us if you have questions about the tax consequences of employing family members.

Is your business dependent on too few?

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Many small business owners share one problem, especially in their early days. It’s being over-reliant on a single customer or supplier for much of their business. If you’re in that position, your business is operating with higher risk. Just as with investments, you don’t want all your eggs in one basket. Your goal should be a well-diversified portfolio of customers and suppliers.

That’s in an ideal world. In the real world you may have to live with the situation, at least short-term. But there are steps you can take to understand your risk and, over time, to change it.

Measure the problem. Work with your managers and accountant to quantify how your sales break out by customer. You only need do this for the top five or ten customers to see whether you have an over-reliance problem. If you’re a manufacturer or retailer, take a similar look at your principal suppliers. Quantify how dependent you are on the top few.

Understand the risks. List the factors that could jeopardize your business with your chief customer or supplier. These will vary with your specific circumstances. They might include a natural disaster that interrupts your customer’s business or that prevents you from shipping or receiving goods. It could be a change in the marketplace or a new technology that cuts demand for your product. It could be actions by your competitors. It might even be problems in your own operation, such as a drop in quality, delays in shipping, or poor inventory control. The list may be daunting, but until you understand the risks, you can’t develop solutions.

Look for ways to minimize your risks. Brainstorm with your managers on long-term steps to reduce each risk. It might be to enter new markets or to tweak your product design. Think through contingency plans to address possible disasters or find alternative suppliers. Discuss how you would respond to changes in the marketplace. Try to set measurable goals for change and clearly assign responsibility. Changing the situation won’t be simple, and it may take a long time. But that’s what strategic business management is all about.

For assistance with this issue or with any of your business concerns, give us a call.

Nonprofit organizations may have tax obligations

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If you’re an officer or on the board of a community organization, you may wonder about the tax requirements that apply to your group. Generally, an organization will not owe taxes if two things are true:

* It has registered as an exempt nonprofit organization with the IRS, and

* It has no business income from activities unrelated to its exempt purpose.

Registration is quite straightforward. The IRS grants exempt status to groups organized for charitable or mutual benefit purposes. You must submit your application within the first 15 months of the group’s existence. The package consists of an application form, a copy of your Articles of Incorporation or similar document, and a user fee. Some groups, such as churches or those with annual receipts of less than $5,000, don’t even have to register to be considered exempt.

More questions arise on the definition of unrelated business income. Generally, you will owe tax on income from any trade or business that is not substantially related to the organization’s exempt purpose. Fortunately, the definitions are quite favorable in this area. The business really has to be quite distinct from the primary purpose of the organization before income becomes taxable. For example, a charity doesn’t pay tax if it runs a thrift shop and uses the proceeds for its charitable work. Generally, rents from leasing out real property, interest income, and dividends are not subject to tax.

Once it’s registered, an exempt organization will have to file an annual information return on Form 990 or 990-EZ unless its yearly gross receipts do not exceed $50,000. Those exempt organizations with receipts of $50,000 or less must still file an annual return electronically on Form 990-N. Just as with a tax return, there are penalties for filing Form 990 or 990-EZ late or failing to file. There is no penalty on an organization that is required to file Form 990-N but fails to do so; however, if an organizations fails to file an annual return for three consecutive years, its exempt status is revoked.

Generally, the filing deadline is the 15th day of the fifth month after the organization’s year-end. For 2013 returns, the deadline for calendar-year organizations is May 15, 2014. For assistance with this or any of your tax filings, contact our office.