Let’s face it, keeping on top of your business finances is a JOB of its own! Cash flow, budgets, retirement, best investment strategies…you get it, a lot to keep track of. And if you get lucky enough to have a good Financial Adviser and a good Tax Accountant, you can have the best advice that both sides can offer.
Two is Better Than One
But why do we even need to have “two sides”? Why can’t we just find one professional that can offer the tax strategies to proactively reduce tax AND a financial advisor to advise you on investments?
The answer is simple, but yet not so simple. There’s a new breed of accountants that are emerging. An accountant that not only files taxes but advises you along the way with your taxes, finances, cash flow and budgets. When you get an accountant that practices that type of forward facing service you bridge that gap between taxes and investments. This is called Advisory.
But you still need a licensed financial advisor to sell you investment products. So while you may be able get the whole enchilada from one place, you won’t get really great advise. So you do need a Tax Advisor and Financial Advisor.
The Perfect Accountant 👌🏽
Let me paint a picture of how a perfect accountant relationship works.
- Your accountant creates a formal Tax Plan for you that takes into consideration all aspects of your finances
- Each month, they’re reviewing your budget and goals with you and advising you on how to stay on track
- Each quarter they’re reviewing the tax plan strategies and making sure they’re still working in your favor
- Each quarter you’re reviewing your retirement strategies to make sure you’re on track
- The accountant can actually talk to and work with your financial advisor
- Each quarter your estimated tax payments are adjusted to only pay what you need to
- End of the year your tax returns are filed
- Your bookkeeping and financial reports are also taken care of for you throughout the year
Sound like the perfect relationship? We think it’s pretty close…
Tax Planning Explained
In case you’re wondering what “Tax Planning” is I’ll give it to you in a nutshell:
Tax Planning is the process of applying specific tax strategies to legally reduce tax. It’s a formal process that starts with diagnosis and then delivers an actual report with a plan. While everything starts with an initial tax plan, tax planning really takes place throughout the year.
Get Introduced to Tax Planning
I mean come on, why isn’t this industry standard already? And where can you, a Business Owner, find something like this?
I’m here to tell you that you CAN get it 😉. And you’re looking at the company that can deliver this type of relationship to you. Reach out and we’ll chat to see if we can help!
p.s. I wrote this entire blog post from my phone while sitting at the pool! Isn’t technology great?!Read More
Whether you’re an independent personal trainer, manage a team, own a studio or a franchise, cash is king! Let’s face it, if clients or members aren’t coming in the door, your doors wouldn’t be open. We love the fitness industry because we’re fitness nuts ourselves. On our days off you can find us in the gym or outside hiking or cycling. So naturally thought we would pair one of our passions with another here at iAccounting Solutions; help businesses plan and better manage their taxes and finances.
Income & Expenses
This may be a no brainer but we’ve met so many business owners that don’t do track their income and expenses. Here’s a little test: Can you tell me, within a few mouse clicks, what your net income was last month? If not, then you may want to consider upping your “tracking game” and here’s why.
Tracking your income and expenses is a major part of your cash in’s and out’s. Knowing what expenses are higher than normal, or if your revenue is on track, or not, can mean you’re working for nothing! You also get what I call “the magic number”, or Net Income. Net Income tells you how much profit your business is making and is a gauge for knowing how much tax you’re going to pay. For example, you “think” you’re making money because you have cash in the bank, but your Net Income is less than you think. Conversely, you may think you’re not going to pay tax on much at all but your Net Income could give you a higher bill.
Additionally, using software connected to your bank can make this process of tracking much easier. And if it’s easy, you’re more likely to do it! Revenue is not the only thing to be aware of. Expenses play a large role in whether or not your business is profitable. Having a report where you can look at all the revenue and expenses with a critical eye can be invaluable when you’re figuring out if you’re meeting your goals. This should be your first step in managing your cash flow.
Lastly, keep in mind that any loan payments do NOT affect Net Income. Instead, those payments are tracked on a different report called the Balance Sheet. More on loans later.
If you’re tracking income and expenses then you can figure a very important thing: how hard you’re working for your money! Looking at your net income and cost of sales as a percentage are referred to as your “profit margins”. This is good measurement of how efficient your business is using its resources or charging for products and services. For example, a Cafe may have a 9% profit margin, which is really good for the industry. However, if you run a personal training business that number should be closer to 15%-20%. If you’re lower than what you should be then that means something isn’t right. It may mean you’re not charging enough, or it may mean you’re expenses in proportion to your income is too high. But if you know the number then you can start analyzing and drilling into the problem areas.
If you don’t have one, you should map out a “Profitability Formula” for your business.
If you don’t have one, you should map out a “Profitability Formula” for your business. That sounds complex but it’s really not. All it is is planning how much you’re going to charge vs. your costs to make sure your business is going to turn a profit.
Keeping your debts under control and knowing how much you owe is paramount to keep your business thriving. Not only cash flow wise but mentally. If you feel like you’re on a sinking ship and there’s no way out then you’re not going to be able to manage your cash effectively to “dig your self out”. One of the best ways that I’ve advised clients to get themselves out of debt it to do what I call “Skim the gross”. Skim the Gross means that you’re choosing one debt to focus on and you’re taking a certain percentage from your Gross Revenue and paying it towards your debt. You do this as soon as it enters your bank account. The idea is that if you take it off the top that you won’t miss it. It’s kind of like taxes being taken out of your paycheck, you don’t see them so you never miss them!
One of the best ways that I’ve advised clients to use to get themselves out of debt it to do what I call “Skim the gross”
Perhaps one of the largest expenses we have as businesses is your Labor costs. It’s a no brainer that labor should always produce more than they require in cash but how do you measure and know if you’re getting enough out of your staff? One way is to figure out how much your staff costs are in relation to your revenue. This is often called Labor vs. Revenue ratio and is simply calculated by dividing your staff costs by your revenue and getting a percentage. That percentage should be in the 30% to 40% range for a healthy gym or personal training studio.
For example, let’s say your business’s Gross Revenue is $30,000 in one month. Your staff costs are $10,000, which works out to be 33%(10k/30k)–you’re within range. Let’s say the same example but your staff costs are $15,000. That’s 50%–that’s too high.
If you’re too high you need to focus on getting that number down to a reasonable range of 30%-40%. A few things to look at are your pricing for services, your staff pay rates, and also the market or neighborhood you’re in. All those come into play when determining if this is a healthy cost for your business.
Unless you like working for free (I don’t know how does!) then you have to figure out how to pay your self for your blood, sweat, and tears that you’re putting into your business. Now the “how-to” of paying your self has a lot to do with what type of entity your business is–that’s a whole nother topic for a future blog post. However, when all is said and done you need to plan and budget your compensation into your profitability formula for your business. Whether it’s a salary, commission on sales, or hourly rate, plan and do it! If not, then it’s like you’re working for free and will most likely burn out and lose interest. If that happens, “adios” to your business!
We all love taxes right?! I don’t know anyone that loves having the conversation at the end of the year where they learn they owe tax! A good way to manage this, and also sometimes required by the IRS, is to pay Estimated Taxes. In short, this is basically prepaying your tax liability for the upcoming year. This is a great way to manage your tax liability and not have a huge bill at the end of the year. Plus, when you attack your taxes proactively your whole mindset changes and something you used to fear goes away and you can devote more mental energy to positive things in your life.
There are different ways to do this but the simplest approach I’ve found is to again use the “Skim the Gross” method that I explained earlier. Skim some off the top of your Gross revenue and transfer into a savings account that is hard to access. That way you won’t be tempted to dip into it and you’ll have funds ready to make your quarterly payments.
when you attack your taxes proactively your whole mindset changes and something you used to fear goes away and you can devote more of your mental energy to positive things in your life.
Be Open to Change
While these all may sound great, it takes some planning and structure to succeed at mastering your cash flow. If you need a system, give us a shout. We’ve help clients with this all the time and have it down to an art and can help you make it easy.
Lastly, Be open to change so you can “roll with the punches”. Because the punches will come and you’re going to feel like giving up before you become successful–100% guaranteed! But don’t give up, make changes in your business to make it profitable, try new services, re-write your business plan after a year or two, you get the idea. Do-what-it-takes to get your business where you want it and throw some elbow grease into the mix. Everyone I’ve seen do this have met their goals and is getting what they want out of their business, which is Financial Freedom!
Every business owner goes through the process of deciding how to hire someone when they get to the point where they’ve outgrown their current situation or just need a bit of extra help. You’ve found the right candidate and now you need to decide whether or not to hire a contractor or employee…this is where you need to be very careful!
Watch out for the pitfalls
While your first inclination is to hire contractors to save paying FICA and Workers Comp, you should be aware of the rules that the IRS and state can nail you on. Yes, there may be two sets of rules that you have to abide by! We’ll explain each one, and since we live in California, the rules here as well.
What the IRS Looks For
The IRS is mainly looking at two factors; Control & Relationship. Control is what it sounds like, do you have control over how your worker does their work and when they do it? Do you determine how much you pay the worker? If the answer is yes, then you most likely have an employee, not a contractor.
Under the Relationship test, does your relationship with your worker resemble an employee or contractor? Are there written agreements, do you pay for benefits, do you reimburse your worker for expenses? If it walks like a duck, quacks like a duck, then you most likely have an employee.
Under the Control test, you give up when and how the worker perfoms the work. For example, you take your car to the mechanic for some work. You walk in and the mechanic tells you how much it’s going to cost and how long it’s going to take to do it. Now you’re hoping it’s fast because you need to pick up the kids, but you can see what I’m getting at here. You really don’t have any control over the mechanic in how and when they do their work. In this case, we’re describing a contractor relationship.
In California, we take it to another level! Oh, how we love the Golden State! New legislation for 2019 enacted more rules for determining contractor status. (Even if you’re not in California you might as well take heed as I’m sure states will soon follow California’s lead)
California gives you the “ABC” test to help you determine whether or not you have a contractor or employee relationship:
A – Control
This refers to whether or not the worker is free from the control of your business in connection with their performance of the work. Thus, if you are telling the worker when and how to do their job then you are probably going to fail this test.
B – Business
Additionally, the worker should be performing work that is outside the normal course of your business.
C – Customarily Engaged
In connection with A & B, the workers must be engaged in an established trade or business of the same nature as the work performed.
Summing up California
As you’re now most likely thinking about what this means for your business, these new rules rule out a lot of what has gone unchecked for many years–hiring just anyone to get around payroll taxes and workers comp insurance. To illustrate, here are a few examples:
Example 1: You run a personal training studio and hire other personal trainers to come in and run training sessions. That’s an employee.
Example 2: You’re a physician in private practice and you hire office staff. This is an employee because they will most likely fall under the “Control” test.
Example 3: You’re a church and you hire a consultant to help you with leadership and other efficiencies. That’s a contractor.
Example 4: You’re a real estate agent and hire a transaction coordinator to help you move all your listing and sales through the administrative pipeline. But they work from home and you don’t dictate their schedule. You can most likely get away with hiring them as a contractor.
These rules can be tricky…no matter what state you live in
The worst thing for you to do is to guess at these rules. Feel free to reach out or comment if you find yourself stuck and caught in the web of employee vs. contractor rules!Read More