Archive for August, 2006

Watch for these important tax deadlines coming up September 15th:

• Last day to file 2005 corporate returns. Applies to calendar year corporations, both S and C types.
• Third estimated tax payments are due. Applies to both indivduals and C Corporations.

Summary calendar

“C” Corporations (whose FYE = 12/31*)
#1: April 15
#2: June 15
#3: September 15
#4: December 15

Individuals
#1: April 15
#2: June 15
#3: September 15
#4: January 15

From the IRS tax calendar - Third quarter:

Individuals. Make a payment of your 2006 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the third installment date for estimated tax in 2006. For more information, see Publication 505.

Corporations. File a 2005 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension. Otherwise, see March 15.

S corporations. File a 2005 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you timely requested an automatic 6-month extension. Otherwise, see March 15. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.

Corporations. Deposit the third installment of estimated income tax for 2006. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

If you do not know how much to pay

Ask your CPA if you don’t know how much you’re supposed to pay. Typically this information is part of the semi-annual tax planning process.

How to pay

Most corporations pay by mailing in coupons or through electronic funds transfer, the latter of which is required once the company’s tax payments reach a certain size.

Individuals can make payments through coupons or through their W-2 paychecks. Please see “Paycheck as a Financial Tool” for more information about this.

An online tax deadline calendar: IRS General Tax Calendar.

Many CPAs subscribe to tax deadline calendars that are a little more readable. Here’s one example: Tax Due Dates.

*These are dates for federal estimated tax payments for calendar year (FYE 12/31) corporations. Your company’s payment schedule might differ if it’s not on the calendar year or your state’s schedule doesn’t conform to the federal schedule.

Many business owners don’t realize that there’s a free way to put an extra $1K, $10K, even $100K in the bank: get customers to pay more quickly. At least a dozen strategies exist to do this, but the simplest one is to invoice customers promptly – within 1-5 days of earning the revenue. This might sound obvious, but it’s amazing how many businesses don’t make it a priority to get their invoices out on time.

Most customers will pay you only after they receive an invoice, and the sooner they get an invoice, the sooner they’ll pay you. And when they do, your bank balance goes up accordingly. Multiply that by many customers and you’ll find that on average, you’ll have more cash to run the business.

To calculate how much more, divide your annual sales by 365 to get your average daily sales. That’s how much more money you’ll have in the bank for each day you can shave off the time it takes customers to pay you. For example, for a $365K company, that’s $1K in the bank. For a $3.65M company, that’s $10K in the bank. All for getting paid one day sooner. Every day counts.

Invoicing promptly also helps remove another obstacle to payment: customer concerns – and “concerns” almost always mean a delay in payment. If your customers aren’t happy about your product, they often won’t tell you until after they receive a request to pay. You want to know ASAP if they have concerns so you can resolve the situation to their satisfaction, which has obvious long-term benefits, but also the short-term benefit of getting paid more quickly.

Re-engineer your billing process. Start with the customer receiving the invoice and work backwards to how you do the work, track time, and even make the sale in the first place. Tell your accounting department that you want invoices to be sent within X days of earning the revenue, and ask them what it’ll take to make that happen.

It’s seldom a “big bang” solution; usually, as with most of business, it’s the cumulative effect of many small, unglamorous changes that result in high impact.

Distilling your business strategy into one page of numbers is a challenge, but that’s exactly what a well-conceived budget does, and in the annual cycle of the think-ahead CFO, now’s the time to start on next year’s budget.

A budget is a creative process, and the creative process takes time. It can take several months to finish a budget.

If you’re groaning already, we feel your pain, and below we give you an easy first step to creating next year’s budget. Many entrepreneurs think of budgeting as pure drudgery, so they avoid it. But if you start now, you’re more likely to be done by year-end (for 12/31 FYE firms), and then this critical financial tool will guide your decision-making for all 365 days of next year.

The first step is easy: start your wish list.

Talk with your staff and key vendors about what’s coming up between now and the end of next year. What would you like to see happen differently in areas such as these:

• Staffing – add/reduce staff, compensation changes, benefits
• IT – hardware/software purchases, on-demand software subscriptions, upgrades, outside support
• CapEx i.e. capital expenditures – investments in vehicles, furnishings, equipment, buildings
• Occupancy – expand/contract your facilities, upgrades
• Production process improvements – service, retail, wholesale and manufacturing firms can always improve quality and reduce costs
• R&D – resources to research and develop new products and services, or improve existing ones
• Sales and marketing – new markets, new campaigns, customer service initiatives

As you do step #1 for creating a budget start your wish list - don’t limit yourself. If an item is “status quo,” just note that and move on. Focus on what’s going to change…and have big dollar consequences.

Right now your job is to expand the company’s strategic horizons. So go ahead and open the doors – wide open.

In future posts at this blog we’ll walk you through a five step process – one per month – so that before the holidays you end up with a financially fit budget in your QuickBooks file. Then next year you can track over/under with a few mouse clicks, and you can update your budget throughout the year for more accurate forecasting.

Further reading: Business Owner’s Toolkit, http://www.toolkit.cch.com/advice/budgets.asp

Part of effective financial management is managing the accounting system according to a fixed schedule. Below we’re repeating information from last month’s post to help entrepreneurs and their bookkeepers/accounting managers get into a calendar rhythm, to remind them of what needs to be done throughout the year.

Perhaps the most important activity: the monthly close.

If you start now, you’ve still got a week left to close the 7/31 books.

Sound unreasonable? We work with a $2 billion public company whose business units close within six business days. Smaller, entrepreneurial companies should be able to close, then, by the 15th of each month.

This month’s close has the added difficulty of it being summer, when staff and vendor vacations can interfere, and also it’s a little more difficult to stay focused on the less glamorous aspects of business when you’ve got vacation or holidays on your mind.

Monthly Close Essentials

The monthly close process results in a set of financial statements that tell a story about the financial performance and condition of your business.

Generate these financial statements – P&L, Balance Sheet, Cash Flow, A/R and A/P – by the 15th of each month to meet three primary needs:

• Management needs information to make decisions about how to run the company
• Money people like bankers and investors use the data to evaluate your business
• Government entities confirm your company is in regulatory compliance.

A typical monthly close checklist can range from 20 to over 100 items, but the process can be organized into five parts:

1. Complete data entry. Important items here:
• Bank, credit card, loan, and line of credit transactions all entered and accounts reconciled
• Customer invoices/sales all entered and dated in the correct month
• Vendor bills/checks all entered and dated in the correct month
• Payroll entries current including wages, payroll tax, worker’s compensation, PTO, and retirement plan deferrals and liabilities
• Other key accruals entered such as general liability insurance
2. Open items
• Last month’s open items addressed.
• Suspense account is actively managed; items aren’t stuck in there and left for dead until tax time
• An open items list outside of the books is maintained. A bookkeeping system is constantly changing to meet the business goals of its owners and keep up with new compliance tasks. There will always be open items such as instituting job costing, converting to a new payroll system, aligning the chart of accounts to make for better forecasting, memorizing management reports, etc.
3. Backup system. In place, working (recently tested), daily backups being made including offsite copies of data file.
4. Line by line review of financial statements
• P&L
• Balance Sheet
• Support schedules
• General ledger detail
5. Management reports. Report package delivered on time to Management with “known issues” identified that might affect Management’s interpretation of the numbers and decision-making process.

The key to the monthly close is a commitment to the process. It’s guaranteed: you’ll never have “more time” to catch up later. But if you ever get audited, run into a cash flow crisis, work on government contracts, take on partners or try to sell your business, you will be thankful you had the foresight to close the books promptly month in and month out.

Just a reminder that California’s sales tax rates changed on July 1, 2006. You can get current city and county sales tax rates at the Board of Equalization’s (BOE) website: http://www.boe.ca.gov/cgi-bin/rates.cgi.

Before we get into specifics, here are some resources that may be helpful:

Sales tax classes offered by the BOE.
Online tutorial about BOE sales tax.

You gotta do it, but complying with California’s sales tax rules can be maddeningly expensive:

• The rates change not infrequently
• They vary by city and county
• The rules are nuanced at best, arcane at worst
• It’s difficult to find modestly priced CA sales tax consultant-experts
• The BOE representatives sometimes give contradictory and even incorrect interpretations of their department’s own rules and regulations

Nevertheless, if your business has to collect and remit CA sales tax, here are a few things you can do to minimize the damage:

1. If you’re using QuickBooks to track sales tax, make sure it’s set up right from the beginning and don’t let it become inaccurate. Cleaning up sales tax problems after the fact is a lot more expensive than doing it right in the first place.
2. Don’t fudge how you record revenues to make a sale that should be subject to sales tax look like it’s not. It’s not worth the audit risk.
3. Similarly, don’t fudge the invoice date to defer paying sales tax. In California you pay sales tax on an accrual basis, regardless of whether your customer has paid you yet. So be smart about collections and customer terms, get prepayment up front where possible, but don’t push back the date of an invoice to defer the sales tax payment until another period. This will cause more trouble than it’s worth: revenues and expenses won’t match to the same period so your management data will be off, and if you’re audited by the IRS or in a buy/sell transaction, you’ll have a lot of explaining to do.
4. The bigger the dollars are, the more it’s worth investing to make sure you’re in full compliance.
5. The first few times you call the BOE about your particular situation, consider calling anonymously.
6. When you sign up for a California reseller’s permit to initiate your account, know that all other things being equal, the higher you tell them your sales are likely to be, the more frequently they’ll make you report and pay sales tax. So when getting your permit, it’s better to estimate at the low end of reasonableness.
7. Request a written determination by the BOE if you’re concerned about a high dollar, particularly ambiguous type of treatment.
8. If at some point during a sales tax problem reconciliation in the books you just have to say, “Good enough” and move on, err on the side of the BOE, and leave a decent paper trail so if you have to pick up your work in a few years during an audit, it’s easier to do so.