How To Create A Budget For Your Business

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How To Create A Budget For Your Business

Budgets are critical for all businesses. Whether your company is new or established, large or small, product or service based, you need a budget to keep afloat. Essentially, budgets provide you with a roadmap for your business by setting the targets that the business strives to achieve.

Creating your budget also helps answer the question, “How much do we spend?” You must know how much you need to spend to grow, as well as identify the line where you begin spending too much. Aside from being your roadmap, budgets are typical requirements of many investors and board of directors.

While budgets are essential to your operation, they can be intimidating. Where do you start? How do you make a budget plan? What if the budget reveals bad news? If you’re having these thoughts, you’re not alone. These are common concerns that often (unfortunately) deter business owners from creating a formal budget. We’ve put together the fundamentals you need for creating your budget:

The Budget Process

The main goal of creating a budget is to set revenue projections, cost of goods sold, gross profit margin targets and operating expenses. Once you outline this information, you can use it to make informed strategic and financial decisions.

Setting Revenue Goals

The stage of your business impacts the best way to set your revenue goals. For an established business with an operating history, look at past performance to determine if you think you can grow into the future. For a new business, start by researching your target market to establish a baseline. When setting your revenue goals, keep in mind these key points:

budgeting tools

Setting Variable Costs

Variable costs are those that move with revenue and are necessary to earn revenue, such as employee labor for a services company, raw materials for a company making a product, or the cost of goods sold for a retail company.

Setting Semi-Variable Costs

Semi-variable costs are those that can be variable with certain sales volume thresholds. Think employee salaries, advertising or marketing.

Setting Fixed Costs

Fixed costs are those that must be paid and generally do not fluctuate with sales volumes, such as rent, utilities and insurance.

Using A Budget

Once you’ve set your budget, the most important thing is to measure your actual performance against the budget on a regular basis. We recommend doing this monthly. Measuring your budget against performance is critical to understanding if you are meeting, failing to meet or exceeding expectations, as well as determining your next steps. 

If the actual performance is not aligning with the budget, you’ll need to investigate each area to define where there are misalignments. After extensive analysis, you can determine if your budget is truly misaligned with the ability of the company to perform in the future.

You can, and should, make adjustments to your budget as necessary. Just like your business, budgets are not static. As things change in your organization, your budget may need to be updated to stay accurate.  However, if you are making adjustments, ensure you have a reason. Don’t make adjustments simply because expenses were higher than expected or revenues were lower than expected.

Share important aspects of your budget with key stakeholders in your organization—this is critical to ensure everyone’s priorities and expectations are aligned. Be sure to communicate how your budget impacts different areas of your company so that everyone can do their part to work within the budget. Set incentives to encourage everyone to stick to the budget.

Bottom line, to ensure your company is on (and stays on) the right track, you simply have to create a budget. Once you have your budget plan, there are a variety of budgeting tools and apps you can use to stay on track. You can also use your budget plan as a framework for more advanced budgeting and fundraising solutions. Happy Budgeting!

Contributed by:
Taylor Leslie
Finance Manager

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Use The Cloud to Increase Business Efficiency

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Use The Cloud to Increase Business Efficiency

It seems like everyone is using the cloud these days, and for good reason. Cloud systems provide scalable, pay-as-you-go solutions, increase collaboration, streamline processes and increase overall efficiency. Still not sure what the cloud is? Essentially, it’s a network of servers allowing you to store and access data at any time or place with an Internet connection, granting you the flexibility to safely store and access your data from anywhere, at any time. Here are a few of our favorite ways you can use the cloud to increase your business’ efficiency.

Automate Manual Processes (That You Hate)

The cloud grants you the opportunity to automate those tedious, manual bookkeeping functions that (probably) drive you crazy. You can use cloud software to match expenses, pay bills, manage inventory and more, saving you time and stress. If you’re doing your own accounting, you’ll save yourself the time and headache. If you have an accountant, automating these functions allows them to focus on your more complex accounting needs—such as cleaning up past financial data, providing monthly financials and delivering actionable financial insights—ultimately saving you time and money spent.

Minimize Data Entry Errors

Let’s face it, data entry is boring. Plus, when data is entered manually there’s a lot of room for human error. Duplicate and erroneous entries are typical occurrences in manual, non-cloud based systems. These errors are frustrating to find and fix, and if gone unnoticed will end up being more costly in the long run. Cloud accounting software minimizes room for human error by integrating with your bank and credit card accounts, utilizing the camera on your phone and integrating with other cloud software. Some systems even have built-in automation to identify duplicate entries. With automated bank feeds and built-in automation to identify duplicate entries, common errors can be avoided and you can rest assured that your financial data is accurate and up to date.

Convenient & Secure, 24/7

Perhaps one of the greatest attributes of cloud based systems is convenience. With the cloud, you can access your important financial data—securely—anytime, anywhere. Have an impromptu meeting with a potential investor? Take a look at your budget, accounts and cash flow on the spot. Working remote? You can access all your information from your current location. Plus, cloud based systems require less maintenance than desktop versions. Older, non-cloud based systems require manual updates and buying expensive new software each year to stay up to date with the latest developments. Cloud software is automatically updated, saving you the hassle (and cost) of upgrading your software each year.

Let’s talk security for a minute. There’s a common misconception that the cloud is less secure than on-site systems. In reality, cloud based systems are more secure. Cloud based systems make data security a top priority, storing all information in highly secured server farms. Non-cloud systems are forced to store data locally, where it is vulnerable to hackers and data thieves. Bottom line, when using cloud systems you can rest assured that your data is secure.

Convenience, security and data accuracy are just a few ways you can leverage the cloud to increase your business’ efficiency. Not sure where to start? Give us a shout—our experts can help you find and implement the perfect systems for your business. Already using cloud accounting? Connect your Xero or QBO account with ScaleFactor to access your free KPI dashboard!

Contributed by:
Jigar Patel
Senior Accountant

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Manage Your Business Expenses With These 5 Tips

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Manage Your Business Expenses With These 5 Tips

Tracking your business expenses (or budget tracking) is important, but can be a major headache if you don’t have the right processes and systems in place. Sorting through endless receipts from months gone by is no way to spend your valuable time. You need to get organized!

Here are five (easy) tips to help you track your business expenses.

Separate Business & Personal Accounts

Are you still using your own bank account for your business? It’s time to open a business account! Keeping separate business and personal accounts will save hours of work, unnecessary overlaps and mix-ups, and make it much easier to keep track of deductible expenses. It will also keep you from getting into trouble with the IRS if you get audited. A separate account could even entitle you to better rates on card processing fees, as some banks offer reduced fees to business account holders.

Make Time To Review Your Expenses Each Week

Setting aside something as small as 15 to 30 minutes each week will give you enough time to track down your receipts, invoices and payments and record them. An even better option, although not always possible, is to manage all your business’ receipts and invoices as soon as you get them. This helps reduce the risk of losing or forgetting about them.

Stay Organized With Software Programs

Whether you decide to deal with your expenses as you get them or set aside a particular time each week, you should have a safe and organized place to store all your expense documents so they can be easily accessed when required. 

There are a wide variety of handy software programs to choose from that make it easy for business owners to track expenses. A quality software program will not only help you better understand your business but also save you time by making it simple to create expense categories, upload receipts, match expenses and generate profit and loss reports. Some accounting programs even enable you to link expenses to line items on your tax forms, which will significantly reduce the time it takes to prepare your tax returns. 

Hire A Professional

Although it may be tempting to do your bookkeeping and accounting yourself, it usually isn’t worth it in the end when you consider the time, mistakes and stress involved. A professional will almost always find more deductions than you know exist while keeping you penalty free. Perhaps most importantly, hiring a professional will free up your valuable time so you can focus on other critical business activities. Running a business is hard enough. Get help from a professional and let them manage your bookkeeping and tax requirements.

Track Your Outstanding Invoices & Customer Payments

If you're not keeping track of the amount you're owed, it could be months before you realize you're collecting payments late or even missing them entirely. Create an A/R aging report which categorizes your business’ accounts receivable by the length of time an invoice has been outstanding. Once you have this handy, you will be able to review and quickly identify accounts that are current, past 15 days, 30 days, 60 days, 90 days and older. Regularly monitor you’re A/R aging report efficiently manage and collect on your accounts receivable.

Bottom line, tracking expenses is vital to understanding your business’ costs as it continues to grow. By neglecting these simple steps, you will have a harder time gaining the necessary visibility into the financial health of your organization. 

Contributed by:
Zach Miller
Senior Accountant

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4 Tips to Manage Your Accounts Receivable

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4 Tips to Manage Your Accounts Receivable

It can be difficult for small businesses to handle their accounts receivable (A/R), especially when dealing with larger companies. Some big retailers take as long as 90 or even 120 days to pay their vendors. Understandably, this can place small businesses in a precarious cash flow position.

Accounts receivable occurs when a client makes a purchase but does not immediately pay for it. The bad news is that for growing businesses, accounts receivable usually increase which often leads to even greater cash flow pressures. It’s vital to implement a process to monitor and collect your receivables as soon as possible. The effective management of your business’ A/R is critical to running a company and will go a long way to ensuring its long-term success.

With that in mind, here are four tips to help you manage your accounts receivable and get your business flowing with cash.

Establish A Days Sales Outstanding Goal

Days Sales Outstanding (DSO) is a widely used metric to help evaluate how effective a company is at collecting receivables. While each industry has different standard payment terms and requirements, you should set a collection period that fits in with your specific business needs. This number should be as low as possible, typically between 15 and 45 days, and should be set carefully as it will significantly impact your business' cash flow.

Track Payments Carefully & Move Quickly

Your business needs to create an A/R aging report which categorizes accounts receivable according to the length of time an invoice has been outstanding. Once you have this handy, you will be able to review and quickly identify accounts that are current, past 15 days, 30 days, 60 days, 90 days and older. Call or email clients the first day that payment is late. Start with a gentle reminder that payment is now past due. Every business has the right to be paid within terms, so don’t be afraid to ask for the money. As for the due date, a cadence for reminders (such as weekly emails) can help ensure that your invoice stays front of mind with your customers. If an account goes longer than 60-90 days past due, the likelihood of collecting significantly decreases. You should regularly monitor your A/R aging report to make sure you do not hold onto your accounts for so long that they become uncollectible.

Be Proactive & Clear

To encourage timely payments, proactively call or email soon after the invoice is sent out to make sure they received it and to ask when it will be paid. Follow up again a few days before the payment is due to make sure they have everything needed to make the payment so the due date does not slip. You should also make sure every invoice sent out is clear and has no missing information that might cause your customers to avoid or delay paying it.

Consider Offering An Early Payment Discount

It can be beneficial to offer your clients an incentive to pay their bills early. Although a discount for early payment will cost your business money, the cash flow stability it delivers can be well worth the price. When setting the discount, remember only to give what you can afford. Keep the discount marginal but enough to get your customers incentivized.


In conclusion, managing A/R and timely cash collection is vital to the success of your business. Managing your payment terms and establishing a process for monitoring your A/R aged receivables report will benefit and steady your cash flow cycle. Moreover, a cadence of friendly reminders for overdue invoices helps shorten your collection cycles. Ultimately, you’ve earned the revenue, and it is up to you to collect the cash!

Contributed by:
Derek Felderhoff
Operations Architect

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Cash vs. Accrual Accounting: What’s the Difference?

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Cash vs. Accrual Accounting: What’s the Difference?

There are two primary methods of accounting that your business can utilize to report income and expenses: cash basis accounting and accrual basis accounting. The good news is that understanding each method is reasonably straightforward.

The cash basis of accounting recognizes revenue when cash is received and expenses when cash is paid. In contrast, the accrual basis accounting records revenues and expenditures as they’re earned and incurred, regardless of when cash is received or expenses are paid. The significant difference between cash and accrual accounting is the timing of when revenue and expenses are recorded on your income statement.

Which Method Should Your Business Use?

Many small businesses opt to use cash basis accounting because it is the simplest method to use for recording transactions and cash flow. The cash method makes it easy to track how much cash your business has at any given time. There is also no need to track receivables or payables, and your business doesn’t have to pay income tax on any revenue until it’s deposited into your bank account.

The accrual accounting method is the focus of professional accounting because it prevents manipulation of income by matching the expenses incurred in a period to the income earned in that period. While cash accounting gives you an idea of the funds in your bank account and an immediate look at your business’ financial situation in terms of liquidity, accrual accounting accurately reflects the revenues that have been earned to the expenses that have been incurred during a given period, providing a more long-term view of the business. When compared to the cash basis method, accrual accounting tracks cash much more effectively by allocating cash flows to the appropriate period. It also provides a better outlook into the financial results of the company, allowing for smarter business decisions and future growth.

Despite the increased accuracy of the accrual method, one drawback is that it doesn’t account for cash flow or funds in your bank account. Therefore, accrual accounting requires careful bookkeeping practices as you may see a large amount of revenue on the books but have considerably less money in the bank, due to the revenue being earned but not realized.

Tax Implications

Businesses must figure their taxable income and file a yearly return. Choosing an accounting method will depend on the type of product or service you provide and the size of your business. If your company generates less than five million dollars in revenue, the IRS permits the use of cash basis accounting. Anything over this amount will require the accrual method. You will also have to use the accrual method if your business keeps an inventory of merchandise to sell to consumers.

The Accrual Method Is Better…In Most Cases

It is generally recommended to use the accrual accounting method because it will help your business better comply with IRS rules and more accurately reflect the actual financial situation of your business. While cash accounting may be easier to understand, accrual accounting is often more thorough and may even be a legal requirement for your business. If you choose to use the accrual accounting method, remember that it will affect your tax return as it can change which year you record certain incomes and expenses, and it can also dramatically change the appearance of your income statement.

Accurate and efficient reporting of income and expenses is critical to your business’ success. If you’re unsure of your legal requirements or which method best suits your business practice, speak to an accountant to ensure you’re on the right track. Make accounting practices a top priority from now on and ensure your bookkeeping is in order before it’s too late.

Contributed by:
Kate Faltin
Staff Accountant

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5 New Year Tips for Your Business

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5 New Year Tips for Your Business

It’s a new year and 2017 is officially in full swing. While the new calendar year may not be the beginning of a new fiscal year for your organization, January is a great time to evaluate your business plan, set new goals and get organized. Here are our top five tips for bringing in the new year for your business.

Review 2016: Expectations vs. Reality

Once you’ve collected your monthly financial information for December, review your goals for 2016. What goals did you meet, where did you exceed your target and where did you fall short? Use this time to review your financials as well as your software, management systems (people, inventory, etc.) and any other functions necessary to keep your business moving. What processes, systems and ideas worked and what didn’t? Reviewing your goals and expectations alongside where you landed will help you set your best business goals for 2017.

Set Your 2017 Goals

Setting goals for the year is a great way to ensure you meet all business needs to stay up and running as well as to maximize your growth potential, move towards any visions you have for the organization and provide measurable incentives to your team. Use the information you learn as you review 2016 to understand where you are as a business and outline areas of improvement or opportunity. This exercise is helpful to create attainable goals as well as to understand your growth potential. You may be off track from your vision and simply need to realign your goals for the new year, or, you may be doing better than you expect and can set larger goals!

Meet With A Financial Expert

Perhaps you’ve reviewed the last year and have set your goals for the new year, but you have no idea how to meet them. Maybe you’ve found an area where you fell short or have an opportunity, but you’re completely overwhelmed by the idea of addressing it. Save yourself time and stress by meeting with a financial expert. A financial expert will help you understand what is required to meet your business goals and can keep you from wasting time and money on an inefficient approach.

Invest In Technology

As you review what did and did not work for your business in 2016, you may realize some opportunities to increase efficiency. If you’ve uncovered a software that isn’t working for you, research alternatives. Still using desktop accounting software or Excel? Now’s the time to make the switch to cloud accounting! Cloud accounting software provides a secure way to manage your financials on the go, increasing efficiency. Additionally, their subscription based enrollment systems are affordable and scalable. Take this time to let go of the systems that aren’t working for your business and start the new year fresh!

Prepare For Tax Season

Tax season is here, whether you like it or not. To bypass the stress that can accompany taxes, use this time to review your tax requirements and deadlines. Looking at this information now and marking a few dates on your calendar can save you a lot of headache (and potential penalties) down the road. If you’re unsure about your tax requirements, check in with your CPA.

The new year is an excellent time for setting new goals, getting organized and preparing for a great year. Be sure to record your new year goals so you can easily repeat the process next year. Happy 2017!

Contributed by:
Mike Bryant
Senior Growth Associate

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Understanding Nexus & Your Business’ Tax Requirements

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Understanding Nexus & Your Business’ Tax Requirements

As a business owner, you may be familiar with the tax related term “nexus”. Nexus, or “sufficient physical presence,” is a legal term used to describe the connection a business has with a state.

In addition to submitting federal tax filings, your company may also be required to file a variety of taxes at the state level. Tax requirements aren’t limited to the state your business is registered or incorporated in. Your business' tax obligations generally depend on its relationship with the states it has sales, property, places of business, and/or employees in. When one of these conditions exist within a state’s boundaries, your business will more than likely be subject to some level of taxation. This is where understanding nexus becomes crucial.
Although rules differ from state to state, here's a quick summary of tax responsibilities:

Sales Tax

Does your business sell products or services in multiple states? If the answer is yes, you may be legally required to collect sales tax from your customers. If a business sells goods or services in a state where they have nexus, there is a requirement to register with the state’s tax office and remit taxes collected from customers. With many companies using fulfillment centers (e.g., Amazon), third-party co packers, and satellite offices across the US, states are increasing their requirements for nexus, consequently affecting many small businesses. Failing to collect sales taxes can result in substantial penalties, so take the time to understand your obligations. 

Income Tax

Things are a little less straightforward when it comes to corporate income tax. If a business has nexus for sales tax purposes, it does not necessarily mean nexus will exist for income tax. Public Law 86-272 allows non-resident companies to perform the following activities in a state without creating an income tax nexus:

  • Solicit sales of tangible personal property (directly or indirectly)
  • Provide services that are ancillary to the sales of property
  • Have samples for display in the state or other property used for sale (cars, computers, etc.)
  • Orders accepted and fulfilled outside of the state

Example activities that can create an income tax nexus include:

  • Having employees or providing services in the state 
  • Having inventory in the state
  • Accepting orders in the state
  • Selling certain property

Franchise Tax

A franchise tax is a government fee for the privilege of doing business in a state. Unfortunately, the vast majority of states require the payment of a franchise tax if a business has nexus there. Understanding whether your business needs to pay franchise tax requires a state-by-state assessment. Usually, payment of a franchise tax is based on the net worth of a business, but this is not always the case. If you're unsure, check with your CPA or relevant state authorities.

Gross Receipts Tax

Gross receipts tax, also known as a gross excise tax, is a tax on the gross revenues of a company. It applies to all the business sales made in a state and usually has few or no deductions. While gross receipts taxes may appear similar to sales taxes, they apply to the business (that’s you), not your customers. As of 2015, the only states that have a gross receipts tax are Alabama, Delaware, Florida, Illinois, New Mexico, Ohio and Pennsylvania. 

The Bottom Line

Location matters. Some states are more business-friendly than others, so before expanding across state lines, be aware of the tax implications and keep up-to-date with changes. If you own a multi-state business or operate online, remember there are a variety of state taxes that may apply to you!

Contributed by:
Andrew Millet
Director of Tax

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Congress Eliminates Harsh Health Care Penalty Against Small Businesses

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Congress Eliminates Harsh Health Care Penalty Against Small Businesses

On Wednesday, December 7, 2016, Congress passed important legislation removing a tax penalty placed on employers who reimburse their employees for health insurance premiums. Passed by both the Senate and the House, this legislation is a huge victory for small businesses across the country that wish to provide reimbursement health coverage to their employees. Small business owners who do not sponsor a company-wide health insurance plan no longer need to fear large IRS penalties for providing their employees support with rising health care costs.

The IRS began enforcing this penalty in July 2015, placing it upon employers providing individual monthly health care reimbursements as an alternative to sponsoring company-wide plans. The penalty, applied against before-tax and after-tax contributions, is not a provision of the Affordable Care Act, but was written by regulation writers at the IRS.

Severe Penalty for Small Businesses

The penalty was especially harsh on small businesses. Employers who violated the rule were fined up to $100 per day for each employee, or up to $36,500 a year per employee, which is 18 times greater than the penalty imposed on larger employers that don’t offer insurance to workers. This has created difficult situations for startups attempting to attract top talent to propel their organization that cannot afford to provide a company-wide plan.

This new legislation protects small business owners from large IRS fines, allowing them the necessary flexibility to provide employees with some form of support for health care. Limitations surrounding health benefits are a reality for startups and small businesses—many owners want to provide their employees with benefits, but simply cannot afford to at their company size and/or stage. Reimbursements allow companies to provide a level of support employees need at a cost the business can sustain.

21st Century Cures Act

This protection, provided under Section 18001 of the 21st Century Cures Act, will permit business owners to compensate employees for the cost of individual insurance premiums or medical visits. The 21st Century Cures Act passed the Senate with a 94 to 5 vote, the House with a 392 to 26 vote and is expected to be signed quickly by President Obama.

In addition to eliminating this IRS Penalty, the bill will boost funding for medical research, with $1.8 billion reserved for Vice President Biden’s “cancer moonshot” and $1.6 billion reserved for brain disease research, including Alzheimer’s, as well as improve the development and approval process of experimental treatments and reform federal policy on mental health care.

Contributed by:
Adam Sharrow
Senior Management Consultant

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Hiring a Financial Expert Can Be a Game Changer for your Business

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Hiring a Financial Expert Can Be a Game Changer for your Business

Small business owners use a vast and diverse arsenal of skills when running their business. But owners often struggle to get ahead when it comes to their business’ finances. With thousands of U.S. businesses going bankrupt every year, it's clear that many owners are missing important signposts to financial health. As a business owner, you’re constantly pulled in different directions. At the end of the day, there simply isn’t time to manage all your business operations well, so hiring a financial expert can be a game changer for your company. Here are some things to consider:

Business Owners Are Too Busy And Spread Thin

As a small business owner, you spend countless hours painstakingly working on every part of your business. But when you’re spread too thin, it’s easy to overlook the big picture and miss important signs of your company’s overall financial health. Your business needs a fresh set of expert eyes that can identify and fix problems that you can’t see, or don’t have the expertise to solve. Assessing your financial health can be confusing and time consuming, so why not get an expert to do it for you?

A Financial Expert Can Save You Money

You may think that your business can’t afford a financial consultant. Often the bigger question to consider is can your business afford not to hire one? Hiring a financial expert will cost you money, but the right person will save your business way more than they cost. Financial experts can identify huge cost-saving opportunities, make your business more efficient and help you better plan for a financially stable future.

Financial Consultants Are Objective and More Accurate

There are many tangible and intangible things to consider when assessing your company’s direction and value. It’s likely that your views are shrouded in personal feelings, emotions and bias that might lead you to overlook a potential financial problem. Think about it. Who wouldn’t believe their company is worth a lot of money when they consider all the blood, sweat and tears they have put into it? Or maybe it's just the opposite. Perhaps you have undervalued your business because you don't fully understand what’s involved in the valuation of your company. These mistakes can have a significant impact on your business goals and future. To avoid these pitfalls, get your business evaluated by a financial expert who can more accurately estimate your company's worth. Objectivity plus expertise is the key! 

Don’t Procrastinate: Hire An Expert Sooner Rather Than Later

It’s typically better to bring in an expert sooner rather than later. Not only will the addition of a financial expert help prevent your business from encountering potentially fatal and unseen financial problems, it will also give you a greater sense of control and confidence in your business’ financial health. How amazing would it be to know exactly where your business stands financially? Imagine how you would feel knowing that you're operating in an efficient and financially prudent way. A financial expert can help you make intelligent, sustainable and scalable business decisions that will benefit your business now and in the future.

Quick Tip: Before you run out and hire a financial consultant, it’s critical to understand why you are hiring someone in the first place. What are your financial questions and goals? There are many different types of financial experts out there. Your business will benefit most if you hire an expert that matches your needs. Aim to hire a professional who is knowledgeable in the area in which you require assistance (forecasting, valuation, inventory, tax, etc.) and seek out an expert who has particular experience helping clients in your industry.

Contributed by:
Bass Bauman
Senior Financial Analyst

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5 Keys to Understanding Form 1099

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5 Keys to Understanding Form 1099

If you’re running a business, you probably shudder at the thought of having to deal with another tax-related form that takes up your valuable time. The truth is, even if you find 1099s annoying and a drain on your time, your business will almost certainly make qualifying payments requiring 1099 filings with the IRS.

What Is Form 1099?

Form 1099 is designed by the IRS to stop taxpayers from under-reporting their income. 1099s provide the IRS with information about various types of income received that are not part of your regular salary from a job.

A W-9 Form is used by your company to collect required information from the person or unincorporated business you wish to pay. Best Practice: Request that this form be completed before the contractor performs any work for your business. You can request a completed W-9 from all vendors to be on the safe side. Just because they fill out the W-9, does not mean they qualify for a 1099-MISC.

Still not sure how this relates to your business? Here are five keys to understanding 1099s:

There Are Many Varieties Of 1099 (MISC, INT, DIV)

There are many different types of 1099 forms that you should be familiar with. Typically, as a small business owner you will need to complete a 1099 Miscellaneous. This form is for any business (that's you!) which makes certain types of payments to an individual or independent contractor who is a sole proprietor or member of a partnership or LLC. 1099 MISC is just one type of form in the rather large 1099 family. There is also Form 1099 INT, which is used to report interest payments made to you. A 1099 INT is prepared by a person or entity that makes the payments to you, usually a bank or government agency. Form 1099 DIV reports on the ordinary dividends, qualified dividends, capital gains, non-taxable distributions, federal income tax withheld and more. The 1099 DIV is completed by financial institutions and sent to investors. When you file your taxes, information from these forms and other 1099s that apply to your business must be included.

Timing Is Everything

Unfortunately, you can't report and send out 1099 forms whenever you feel like it. The deadline to have 1099s filed for 2016 is January 31, 2017. Although this is the primary deadline for most of the major 1099s, there can be slightly different due dates for other types. Late filing of 1099s can lead to penalties from as small as $30 to a maximum of $500,000 a year. If you are running late or are having some difficulties, speak to an accountant or contact the IRS. They can steer you in the right direction, issue a substitute form or enable you to apply for an extension.

Report Every 1099

Don't underestimate the importance of 1099 forms. They may seem like an insignificant burden, but they are critical to your tax returns. Each 1099 form is automatically matched to your social security number so the IRS can easily see if you fail to report one on your tax return. Failure to report every 1099, even if it's just an honest mistake, could lead to an audit on your business. While you might have recently scrubbed up on your business' requirements, the IRS is constantly changing and revising rules and regulations surrounding 1099 forms. It's important to stay up to date and understand your obligations.

If You Pay Someone $600+ During The Year, You Must Report

Your business needs to file a form 1099 MISC anytime you pay an individual or an independent contractor who is a sole proprietor or member of a partnership or LLC at least $600 over a calendar year. You don’t have to file a 1099 MISC for payments for non-business related services. This includes payments to independent contractors for personal services like housekeepers or gardeners. A 1099 MISC should only get filed and sent out when services are performed within your trade or business. For more detailed information about 1099 MISC filings, visit Scale1099.

It’s The Ubiquitous Tax Form Nearly All Businesses Must Send Out

Unless you run an incredibly small business, chances are you will have to report and send out several 1099s each year. According to the IRS website “If you made or received a payment during the calendar year as a small business or self-employed (individual), you are most likely required to file an information return to the IRS.”

As companies increasingly rely on small contractors and outsourcing to help save on costs, 1099s are a reality of modern business. It’s best to get used to it! Don’t let your 1099 requirements stress you out. If you're struggling to understand your business' responsibilities, seek advice from an accountant. Visit the IRS website for more detailed information about 1099 forms.

Contributed by:
Kristen Windes
Senior Accountant

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