4 Key Metrics to Fortify Your Business

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Even the best, well-prepared business plans can unravel quickly without a process in place to evaluate performance. Creating a scorecard with quality metrics can give you the daily insight you need to successfully run a business without drowning in the details.

Create a scorecard that works

An effective scorecard gives you a holistic view of the state of your business in one report. The report consists of key financial and non-financial metrics to provide a daily look at the health of your business. To be useful, your measures should be concise, available on-demand, and include properly targeted data to help you quickly spot trends and react appropriately.

Effective business metrics to consider right now
  1. Quick Ratio (financial)
    Add up your total cash, short-term investments and accounts receivable. Then divide that total by your current liabilities. This is your quick ratio. It’s a simple way to see if you have enough funds on hand to pay your immediate bills. A value of 1.0 or more means your liquid assets are sufficient to cover your short-term debts. A value less than 1.0 may mean you’re relying too heavily on debt to fund your operations or pay expenses.
  2. Retention Percentage (customers)
    First, create a list of customers who made purchases this year and a list of customers who made purchases last year. Then, remove all new customers gained in the current year. Divide the total number of customers from last year by the remaining number of customers for this year. This is your customer retention percentage. Measure this over time to see if your business is retaining or losing core customers. If you have a condensed sales cycle, you can shrink the period down further. For example, by looking at this calculation each month, you can see how it builds over the year.
  3. Asset Turnover Ratio (internal process)
    Divide your total sales by average total assets from your company balance sheet. (beginning assets plus ending assets, divided by two) for the same time period. The end result tells you the amount of sales generated for each dollar committed to your assets. The number may not reveal much by itself, but when reviewed over time, you’ll have a better understanding of whether the assets used to run your business are becoming more or less effective.
  4. Net Income Per Employee (growth)
    Divide your net income by your total number of employees for a given time period. In theory, as your workforce develops, it should generate more income per employee. Remember to account for part-time employees prior to making your calculation (e.g., a part-time employee working 20 hours per week is 1/2 an employee for purposes of this calculation). If the income per employee is getting lower over time, figure out why. Perhaps you have high employee turnover, or there is an area of your company that can benefit from training.

While each ratio may help you analyze different aspects of your business, they don’t tell you the whole story. Finding the right mix of metrics for your scorecard can take some time, but the end result is a valuable tool that can take your business to the next level.

7 Tax-Free Ideas to Bolster Your Business Benefits Package

Happy employees

The benefits package offered by your business is extremely important to your employees. How important? A survey performed by the Society of Human Resource Management (SHRM) found that benefits are directly tied to overall job satisfaction for 92 percent of employees. Even more importantly, 29 percent of employees cited the overall benefits package at their current employer as the top reason to look for new employment in the next 12 months.

Here are some tax-free benefit ideas to help beef up your benefits package and retain your employees:

  1. Health benefits. According to SHRM, health insurance still remains one of the most important employee benefits. Health insurance benefits come in all shapes and sizes, so you will need to constantly evaluate plans and costs. From a tax standpoint, employers can deduct this expense, and your employees do not report health insurance premiums or employer contributions to health savings accounts (HSAs) as additional income. This includes premiums paid for the employee and qualified family members. Even better, the employee portion of premiums can still be paid in pre-tax dollars.
  2. Dependent care benefits. Employers are able to provide employees with up to $5,000 per year in tax-free dependent care assistance under a qualified plan. There are a few ways to provide this benefit, but a common method is to set up a flexible spending account (FSA) that both the employer and employee can use to make contributions. The employer portion is tax-free and the employee portion reduces taxable income as long as the total benefit is $5,000 or less.
  3. Employee tuition reimbursement. By offering tuition reimbursement, you can add another quality benefit to your package while investing in your employee’s career. Up to $5,250 of tuition expenses can be reimbursed tax-free to your employee each year.
  4. Credit card points. This is a good benefit for outside sales and employees that travel frequently. If you have a corporate credit card program, consider passing the points on to the employee. If you reimburse employee expenses under an accountable plan, estimate the value of points your employee earns on reimbursed business purchases and include it in your annual benefits presentation. Generally the IRS considers credit card points as rebates and not taxable income.
  5. Group term life insurance. You can generally exclude the cost of up to $50,000 of group term life insurance from your employee’s wages.
  6. Other fringe benefits. Some examples of other nontaxable fringe benefits are employee wellness programs, onsite fitness gyms, adoption assistance, retirement planning services and employee discounts.
  7. Small gifts. The IRS calls these “de minimis” benefits. Small-valued benefits are not included in income and can include things like the use of the company copy machine, occasional meals, small gifts and tickets to a sporting event.

With historically low unemployment levels, employees have more options than normal to look around if they aren’t satisfied. Your business’s benefits package is an important tool to help you keep your valued employees. While each is an additional expense to the employer, the perceived benefit by employees may far outweigh these costs.

The IRS Loves Your Business … and That is NOT Good

  • Bulletin board with small business notesThe IRS continues to focus their audit activities in key small business areas. The wise business owner is well advised to be able to defend the following five areas to keep the IRS at a comfortable distance:
  • Business or hobby? Be ready to provide proof your business is truly a business and not a hobby. Those who fail in the eyes of the IRS can have their expense deductions severely limited, while still required to report the income. Make sure you can answer and provide documentation for these four questions:
    1. What is your profit motive?
    2. Are you an active participant in the business?
    3. Are you conducting the activity in a business-like manner?
    4. What expertise do you have in the service or products your business provides?
  • Reasonable shareholder salary. S corporations are in the unique situation where some compensation is excluded from payroll taxes. Many businesses take this too far. The IRS is looking closely at businesses who avoid paying a reasonable salary in order to lower their Social Security and Medicare bills. When determining salaries for shareholders, consider their experience, duties, responsibilities and time devoted to the business. Once you have a picture of their ongoing contributions to the business, research comparable positions and salary ranges to pinpoint a fair salary. Save your findings and calculations as backup to provide in the event of an audit.
  • Contractors or employees? Make sure consultants and other suppliers are not employees in disguise. The IRS looks at how much control you have over the work being done – the more control you exert the higher likelihood you may have an employee versus a contractor. Penalties can be very steep if the IRS decides your consultant is really your employee. If in doubt, ask for a review.
  • Expenses for meals and entertainment. The IRS is now disallowing any entertainment deductions, even if there is business conducted before or after the event. That means business meal documentation is now more important than ever and should include receipts, who attended the meal, and the business purpose of the meal. Bringing food in for business lunches rather than going out is a safe way to show business intent. If you have an event with both entertainment and food included, get two receipts – one for the entertainment and one for the food.
  • File your Forms W-2 and Forms 1099. Don’t forget to file all required 1099s and W-2s. Most of them are due on or before Jan. 31. The IRS is penalty crazy in this area with up to $270 per missing or incorrect form.

Knowing what the IRS is looking for helps you prepare should it turn its focus to your business.

Six Ideas to Help Your Business Survive AND Thrive

Light bulb and notesIf you are like millions of taxpayers trying to make a living running a small business, you know it is tough out there. Here are six ideas to help your business survive and thrive.

  1. Understand your cash flow. One of the biggest causes of business failure is lack of positive cash flow. At the end of the day, you need enough cash to pay your vendors and your employees. If you run a seasonal business you understand this challenge. The high season sales harvest needs to be ample enough to support you during the slow non-seasonal periods.

    Recommendation: Create a 12-month rolling forecast of revenue and expenses to help understand your cash needs each month.

  2. Know your pressure points. When looking at your business, there are a few categories that drive your business success. Do you know the top four drivers of your financial success or failure? By focusing on the key financial drivers of your business, success will be easier to accomplish.

    Recommendation: Look at last year’s tax return and identify the key financial drivers of your business. Do the same thing with your day-to-day operations and staffing.

  3. Prioritize your inventory. If your business sells physical product, you need a good inventory management system. This system does not have to be complex, it just needs to help you keep control of your inventory. Cash turned into inventory that becomes stuck as inventory can create a cash flow problem.

    Recommendation: Develop an inventory system with periodic counts (cycle counting) to help identify when you need to take action to liquidate old inventory or research any discrepancies.

  4. Know your customers. Who are your current customers? Are there enough of them? Where can you get more of them? How loyal are they? Are they happy? A few large customers can drive a business or create tremendous risk should they go to a competitor.

    Recommendation: Know who your target audience is and then cater your business toward them and what they are looking for in your offerings.

  5. Learn your point of difference. Once you know who your customer is (your target audience), understand why they buy your product or service. What makes you different from others selling a similar item?

    Recommendation: If you don’t know what makes your business better than others, ask your key customers. They will tell you. Then take advantage of this information to generate new customers.

  6. Create a great support team. Successful small business owners know they cannot do it all themselves. Do you have a good group of support professionals helping you? You will need accounting, tax, legal, insurance, and employment help along with your traditional suppliers.

    Recommendation: Conduct an annual review of your resources, be prepared to review your suppliers and make improvements where necessary.

While libraries are filled with small business advisory books, sometimes focusing on a few basic ideas can help improve your business’ outlook. Please call if you wish to discuss your situation.

Understanding Tax Terms: Pass-through Entities What are they? Why should you care?

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Small business owners have a number of options on how to organize their business for tax purposes. Many small, single owner, businesses are not incorporated, and are deemed “sole proprietors”, in the eyes of the IRS. Other business entities, like C corporations, are taxed as a separate entity with distributions to owners taxed a second time as dividends. Still others are deemed “pass-through” entities like S corporations, Partnerships and Limited Liability Companies (LLC).

Pass-through entities

Pass-through entities do not pay taxes at the company level. Instead, the business tax return reports the net income to the IRS, but then distributes the taxable income to their respective owners via a K-1 tax form. Each individual owner then reports their share of the K-1 net income on their individual tax return and pays the tax on this and any other personal income.

Generally, business owners like pass-through entities because:

  • The business income is taxed once instead of twice as in the case of C corporations.
  • The business format provides owners a level of legal protection that is not available by doing business as a sole proprietor.

What you should know

  • Individual tax rates. Changes in individual tax rates have an impact on the amount of tax paid by all small businesses that are organized as pass-through entities.
  • New 20 percent deduction. Starting in 2018, a new 20 percent qualified business income deduction is available for pass-through entities and sole proprietorships. There are limitations and other complexities involved, but the bottom line is many small business owners will see a tax break.
  • Can you pay the tax? Small pass-through businesses must pay income tax on all their business profits. However, the business entity is NOT required to distribute cash from the company to help pay the tax. So pass-through owners could see a tax bill without money to pay the tax.
  • Minority shareholder caution. Minority shareholders in pass-through entities are doubly cursed. They not only may not receive distributions to pay taxes due, but they are often precluded from selling their shares, and they do not have enough ownership to require distribution of funds through shareholder voting.
  • Very popular business entity type. According to the IRS the S corporation formation is a popular business entity type with 4.6 million S corporations in 2014 – roughly twice the amount of C coporations. LLCs are quickly becoming the new entity of choice with growth from 120,000 in 1995 entities to over 1 million entities today.

 

Hedging Against a Trade War

US and Chinese shipping containers

As a small business owner, the words “trade war” and “tariff” can be unsettling. When cost uncertainty is on the horizon, you will want to be prepared as much as possible. Here are some ideas to help you navigate your business through a possible trade war.

 

Tariffs defined

A tariff is a tax on imports imposed by a governing authority. The tax can be on specific goods and services, countries of origin, or both. The current tariff conversation appears to be centered around reducing the U.S. trade deficit with China and other trading partners. When a tariff is placed, often times the affected country will impose retaliatory tariffs to protect its own businesses and reset the balance of trade to their favor.

Ideas to prepare your business

Item Identify at-risk areas. Remember, suppliers impacted by tariffs are sourcing some or all of your purchases from countries outside the U.S. So pay attention to which suppliers AND items are most vulnerable to tariffs. Currently this includes steel, aluminum, and imports from China. But don’t overreact; the average tariff on all U.S. imports is still less than 2 percent with over half of the imported items having no tariffs. On the other hand, things like clothing and shoes could be subject to ever-increasing tariffs.
Item Seek out additional suppliers. Once you have identified possible items that could be vulnerable to tariffs, determine the source of the item with your key suppliers. If the items in question are an important component to your business, research additional suppliers who obtain their merchandise from a non-tariff source. Create new relationships now to increase your chances of minimizing your added expenditures later.
Item Know your breakeven point. The breakeven point for your business is where your total revenue equals your total costs. Knowing this point is helpful in forecasting breakeven sales and your ability to absorb price increases from key suppliers. This will help you identify if, when and how much you will need to raise prices.
Item Identify areas with potential to cut costs. Do an assessment of all your costs now and classify them as essential or non-essential. If a tariff is going to impact your margins, you may be able to salvage your overall profitability by cutting some of your non-essential operating costs.
Item Tweak your supply chain timing. There might be potential to manage your inventory to create a buffer to absorb a tariff, if you think the trade war will be short-lived. Consider creating a working capital account to allow yourself purchase flexibility to make your costs more predictable during your key selling season. You might even be able to negotiate a staggered delivery schedule with your supplier to manage storage concerns.

For now, try to stay current with tariff news. You may be able to hedge some of the risk that comes with a trade war.

Elements of a Good Business Partnership

Two gears meshing
Like a bundle of sticks, good business partners support each other and are less likely to crack under strain together than on their own. In fact, companies with multiple owners have a stronger chance of surviving their first five years than sole proprietorships, according to U.S. Small Business Administration data.

Yet sole proprietorships are more common than partnerships, making up more than 70 percent of all businesses. That’s because while good partnerships are strong, they can be hard to make. Here are some elements that good business partnerships require:

1 A shared vision
Business partnerships need a shared vision. If there are differences in vision, make an honest effort to find compromise. If you want to start a restaurant and your partner envisions a fine dining experience with French cuisine, while you want an American bistro, you are going to be disagreeing over everything from pricing and marketing to hiring and décor.
2 Compatible strengths
Different people bring different skills and personalities to a business. There is no stronger glue to hold a business partnership together than when partners need and rely on each other’s abilities. Suppose one person is great at accounting and inventory management, and another is a natural at sales and marketing. Each is free to focus on what they are good at and can appreciate that their partner will pick up the slack in the areas where they are weak.
3 Defined roles and limitations
Before going into business, outline who will have what responsibilities. Agree which things need consensus and which do not. Having this understanding upfront will help resolve future disagreements. Outlining the limits of each person’s role not only avoids conflict, it also identifies where you need to hire outside expertise to fulfill a skill gap in your partnership.
4 A conflict resolution strategy
Conflict is bound to arise even if the fundamentals of your partnership are strong. Set up a routine for resolving conflicts. Start with a schedule for frequent communication between partners. Allow each person to discuss issues without judgment. If compromise is still difficult after discussion, it helps to have someone who can be a neutral arbiter, such as a trusted employee or consultant.
5 A goal-setting system
Create a system to set individual goals as well as business goals. Regularly meet together and set your goals, the steps needed to achieve them, who needs to take the next action, and the expected date of completion.
6 An exit strategy
It’s often easier to get into business with a partner than to exit when it isn’t working out. Create a buy-sell agreement at the start of your business relationship. This should outline how you exit the business and create a fair valuation system to pay the exiting owner. Neither the selling partner nor the buying partner want to feel taken advantage of during an ownership transition.

Overlooked Business Metrics

Business metricsRevenue, gross margin, net profit — these are the basic metrics every small business owner watches closely. But there are also some often-overlooked metrics that can deepen your insight into your business and inform your decision-making. Here are a few:

Check Customer acquisition cost. Divide the total amount of money you’ve spent on marketing over a set period by the number of new customers you’ve gained. The result is your cost per new customer, also known as your customer acquisition cost. To get an even better read, divide your marketing costs into two buckets; one you spend on current customers and one for money spent to acquire new ones. Now your calculation of customer acquisition costs is even more accurate. Compare this figure against prior years to see if you are becoming more efficient.To go a step further, look at how much each new customer spends on average compared with how much it cost to acquire them. Knowing your rate of return for each new customer can help you revise your marketing strategy.
Check Lead-to-client conversion rate. For many businesses, generating leads is an integral part of the selling process. If this is true for your business, clearly define each step of the sales funnel from lead to purchase. You can judge how successful your sales efforts are over time by calculating how many qualified leads are converted to sales. Remember to use these measures to refine and improve your selling process. Even a tried-and-true conversion process can get tired, but if you are not measuring it you may not know until it is too late.
Check Website traffic. Use tools such as Google Analytics to find out who is visiting your website, from where, and what they spend the most time on while they’re there. You can learn a lot about your potential customers and your market by keeping notes on how your website traffic changes over time and how it reacts to new content.
Check Seasonality. Understanding and keeping track of the seasonal trends in your business is crucial to managing cash flow and making the most of both busy and slow periods. Examining year-to-date metrics for sales and web traffic can help you prepare inventory and staffing for the busy season. It will also help you time the scheduling of technical upgrades and equipment repairs for expected down periods.
Check Cash burn rate. Keeping a close watch on your cash flow statement as well as your income and balance sheet is the key to keeping your business afloat. Not managing cash flow well is one of the most common reasons for new small businesses to fail. Simply subtract how much cash you have at the start of the month from what you have at the end of the month. You can then divide your reserves by your cash burn rate to see how many months you can sustain that rate.

The key to this measurement is maintaining a forward-looking financial forecast for the next 12 months. This will help you take timely actions to avoid a cash crunch, such as cutting costs, improving sales or collecting accounts receivable.

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