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Financial Analysis for Your Small Business

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Comparing a business’s key financial ratios with industry standards and with its own past results can highlight trends and identify strengths and weaknesses in the business.

Financial statement information is most useful if owners and managers can use it to improve their company’s profitability, cash flow, and value. Getting the most mileage from financial statement data requires some analysis.

Ratio analysis looks at the relationships between key numbers on a company’s financial statements. After the ratios are calculated, they can be compared to industry standards — and the company’s past results, projections, and goals — to highlight trends and identify strengths and weaknesses.

The hypothetical situations that follow illustrate how ratio analysis can give company decision-makers valuable feedback.

Rising Sales, Rising Profits?

The recent increases in Company A’s sales figures have been impressive. But the owners aren’t certain that the additional revenues are being translated into profits. Net profit margin measures the proportion of each sales dollar that represents a profit after taking into account all expenses. If Company A’s margins aren’t holding up during growth periods, a hard look at overhead expenses may be in order.

Getting Paid

Company B extends credit to the majority of its customers. The firm keeps a close watch on outstanding accounts so that slow payers can be contacted. From a broader perspective, knowing the company’s average collection period would be useful. In general, the faster Company B can collect money from its customers, the better its cash flow will be. But Company B’s management should also be aware that if credit and collection policies are too restrictive, potential customers may decide to take their business elsewhere.

Inventory Management

Company C has several product lines. Inventory turnover measures the speed at which inventories are sold. A slow turnover ratio relative to industry standards may indicate that stock levels are excessive. The excess money tied up in inventories could be used for other purposes. Or it could be that inventories simply aren’t moving, and that could lead to cash problems. In contrast, a high turnover ratio is usually a good sign — unless quantities aren’t sufficient to fulfill customer orders in a timely way.

These are just examples of ratios that may be meaningful. Once key ratios are identified, they can be tracked on a regular basis.

Small Business Taxes: Who Pays What?

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Working together on laptopThere are various federal taxes that may apply to your small business. The type and form of business you operate determines what taxes you must pay and how you pay them. At the federal level, several different taxes may apply.

Excise Taxes

The IRS defines an excise tax as a tax imposed on the sale of specific goods or services, or on certain uses. Federal excise tax is typically imposed on the sale of items such as tobacco, fuel, alcohol, tires, heavy trucks and highway tractors, and airline tickets. Many excise taxes are placed in trust funds for projects related to the taxed product or service, such as highway or airport improvements.

An excise tax may be imposed at the time of import, sale by the manufacturer, sale by the retailer, or use by the manufacturer or consumer. Some excise taxes are collected by a third party, which then must remit the taxes to the IRS in a timely manner. An example of a third-party collector of an excise tax is a commercial airline, which collects the excise taxes on airline tickets that are paid by airline passengers. Businesses that are subject to federal excise taxes must generally file Form 720, Quarterly Federal Excise Tax Return. Certain excise taxes, such as those owed to the Alcohol and Tobacco Tax and Trade Bureau, are reported on different forms.

Income Taxes

Income taxes must be paid on business profits. How that tax is paid depends on how the business is structured. Most small businesses are pass-through entities, which means that the business’s profits or losses are passed through to the owners and reported on their personal income tax returns.

Partnerships and multi-member limited liability companies (LLCs) generally file a partnership business tax return for informational purposes only. The individual partners and LLC members pay income taxes for their share of the income of the business. Note, however, that some LLCs elect to be treated as a corporation for tax purposes.

An S corporation files an S corporation income tax return for the business. Like a partnership, an S corporation’s net income is divided among the owners, who pay tax on their share of that income individually.

A sole proprietor reports business profit or loss on a separate schedule filed with the sole proprietor’s individual income tax return. Unless an election to be treated as a corporation has been made, the owner of a single-member LLC also reports the company’s profit or loss directly on the owner’s return.

Social Security and Medicare Taxes

Employers must generally withhold Social Security and Medicare taxes from their employees’ wages and must pay a matching amount. Employers must also withhold the 0.9% additional Medicare tax on employee wages and compensation that exceeds a threshold amount.

Self-Employment Taxes

Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes paid for other workers.

Federal Unemployment Tax

Employers are required to report and pay the Federal Unemployment Tax Act (FUTA) tax separately from federal income taxes and Social Security and Medicare taxes. FUTA tax is not withheld from wages; employers are responsible for paying the tax.

Business owners should exercise extreme care when it comes to paying taxes since any mistakes on their part could result in significant penalties. For assistance, consult a tax professional.

Cash Flow Strategies for Cash-Strapped Businesses

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Businessman with cash dollars - business concept,computer and finance,investment,save.Cash 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.

M. Jeff Martin, CPA, LLC, is a Best of Georgia® Winner

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The votes have been counted and the results are in! Jeff Martin, CPA, LLC, is a 2021 Best of Georgia® winner in Georgia Business Journal’s annual readers’ poll.

Georgia Business Journal readers and editors have weighed in on the best of everything in Georgia, honoring thousands of businesses and organizations in more than 25 broad business and community sectors.

The process starts with a nomination on the Best of Georgia website. Voting remains open throughout the year, with tens of thousands of votes ultimately received. The process culminates with the publishing of the annual Best of Georgia Keepsake Annual along with a statewide publicity campaign.

Best of Georgia winners and nominees are chosen by a combination of readers’ votes and editors’ input, and are vetted through several ranking sites, Better Business Bureau complaint reports, and voting pattern analysis reports.

Winners are named in hundreds of individual categories, providing Georgia Business Journal readers with a go-to-guide for the best of everything in Georgia. Georgia Business Journal recognizes three levels of winners: The Best of Georgia, Best of Georgia Regional Winners and Honorable Mentions. Within each category, there are multiple honorees named in each tier, depending on the size of the market sector.

You can view the full list of Best of Georgia winners at BESTofGEORGIA.com/winners

How Do You Connect to Your Banks in QuickBooks?

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Importing your bank transactions into QuickBooks saves time, improves accuracy, and makes you a better money manager.

It’s been a long time since your only options for learning about your bank balances and cleared transactions involved your telephone and your monthly statement. These days, accounting software and websites allow you to set up online connections to your financial institutions and download cleared transactions.

If you’re new to QuickBooks or you haven’t set up online banking yet, you may not realize how simple it can be (depending on your financial institution), or how safe it is. You can connect to one of your banks and import months of transactions in less than 10 minutes, depending on how active your accounts are, and again, your banks. And QuickBooks uses data protection that is similar to what banks themselves use. As long as you’re following personal security protocols on your own computer, you’re very unlikely to encounter problems.

Online banking saves an enormous amount of time. It provides daily updates on your accounts, and if you entered the original transactions correctly, accuracy is assured. This real-time view of your finances can help you avoid money problems, make better business decisions, and plan for your company’s future.

Here’s how it works.

The Bank Feeds Center

QuickBooks provides the tools required to set up and maintain online banking in the Bank Feeds Center. To get there, open the Banking menu and select Bank Feeds, then Bank Feed Center. Click Add account in the upper right. QuickBooks will display a message saying it needs to close all open windows. Click Yes. In the Bank Feed Setup window that opens, select your bank from the list or enter its name in the search box if it’s not there.

Not every financial institution provides a direct connection to QuickBooks, but many of the major ones do. If yours does, you’ll see a window like this:

Enter the user ID and password that you use to sign on to your bank’s website, then click Connect. You may be told that your financial institution needs more information. If that occurs, just follow the instructions. In our example, Discover Card wanted to send a temporary identification code as an email or text. Select your preference from the drop-down list and click Connect. Once you’ve retrieved your code and entered it, click Connect again. QuickBooks will open a window that displays your account(s) at the institution.

Now you have to tell QuickBooks where to download the transactions. Click the down arrow in the field under QuickBooks Accounts. You can select an existing account or create a new one. We want to create a new one here, so you’d click  Create New Account. You may recognize the Add New Account window if you’ve done this before. QuickBooks already knew that this was a credit card account, so it pre-selected that option in the Account Type field. If you’re connecting a checking account, for example, you would probably want to select Bank. Enter an Account Name. If you want to make it a Subaccount of another account, check that box and select the parent account from the drop-down list (or add a new one).

The rest of the fields here are optional. You can fill in the description and account number if you’d like, but don’t assign Tax-Line Mapping or Opening Balance without talking to us. Just leave them for now. When you’re done, click Save & Close. Click Connect in the window that opens after you’ve made sure your new account is showing in the field below QuickBooks Accounts.

If all has gone well, you’ll get a message saying that your account has been added to QuickBooks. Click Close. Go to Banking | Bank Feeds | Banks Feeds Center again. In the field next to Bank and Credit cards, click the down arrow to see a list if your new account isn’t already showing and select it. Click the rotating circle in the blue card below to download your first set of transactions (or anytime you want to refresh the feed). This will typically bring in 90 days of transactions, depending on your financial institution.

There are many ways financial institutions interact with QuickBooks’ bank feeds. This was the simplest one. You might have to contact your financial institution to get QuickBooks Direct Connect set up (fees may apply) or you may have to go to your bank’s website and select the statement or transactions you want to move into QuickBooks.

Next month, we’ll talk about managing the transactions you’ve downloaded into QuickBooks. In the meantime, we’re happy to help you troubleshoot your bank downloads if you need help.

Why Business Structure Matters

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When you start a business, there are endless decisions to make. Among the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable. Here’s an overview of the various structures.

Sole Proprietorship

This is a popular structure for single-owner businesses. No separate business entity is formed, although the business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased.

You report your business income and expenses on Schedule C, an attachment to your personal income tax return (Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.

Limited Liability Company

If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called “members”). Usually, income is taxed to the owners individually, and earnings are subject to self-employment taxes.

Note: It’s not unusual for lenders to require a small LLC’s owners to personally guarantee any business loans.

Corporation

A corporation is a separate legal entity that can transact business in its own name and files corporate income tax returns. Like an LLC, a corporation can have one or more owners (shareholders). Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed.

If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This structure generally avoids federal income taxes at the corporate level.

Partnership

In certain respects, a partnership is similar to an LLC or an S corporation. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.