Canadian Small Business Women

Connection, Synergy, Community

The Cash Flow Paradox

 

The number one concern most business owners have – especially in the beginning – is how to manage their cash flows. It’s not just about generating the sales – but getting those clients to pay. Pay on time. So you can pay your bills on time. And just because you aren’t getting paid doesn’t mean that your vendors will excuse your late payment. And so we find ourselves in this cash flow paradox of you need money to pay your bills, but what do you do when your clients just aren’t paying you?

The reality is cash flow ups and downs happen in any business and the excuse of your clients aren’t paying you does not bode well with most vendors. You need to be prepared for this and have a plan. The solution is a business line of credit.

For some reason most entrepreneurs do not want to get a business line of credit. Perhaps they’re afraid they’ll abuse the credit available or they need to personally guarantee it. But the fact of the matter is, you will inevitably need it at some point. Here are the two mistakes I see the most when it comes to borrowing money.

  1. Timing

Getting a line of credit can be a challenge for many business owners. If you’re a new business you don’t have enough credit established as a business and many banks will deny you unless you personally guarantee the loan. If you’re an established business, but have a lot of debts, you can also be denied the loan. Or If you’re an established business, the banks can question why you need a bank loan now when you’ve been in business for X years already. It can be a red flag to all of a sudden need to borrow money unless you have an expansion or specific tangible purpose.

Typically banks and creditors like to support clients in either the start-up phase or the expanding phase. So getting a line of credit established early on – even if you have to personally guarantee or put up some collateral – is advisable. You can support your business case by citing all the start-up costs that require immediate cash flow (website, advertising, space rental etc) and banks understand that in the beginning there will be more money out than in. Versus, needing money to just survive. The latter is a guaranteed loan denial. So ask for the line of credit application when you’re starting your business!  You don’t have to use it, but it’s easier to not use it when you have it, than be denied when you need it.

  1. Borrowing the wrong way.

Yes, there is a right and wrong way to borrow. The right way includes a nice tax write off! If you borrow money for business purposes, the interest you pay on that loan is TAX DEDUCTIBLE. Yay!

Often what I see happen is entrepreneurs put their SAVINGS in the business and then BORROW to fund their PERSONAL lives. Borrowing for personal purposes is NOT tax deductible. So only use your personal savings into the business if you have enough to cover your personal needs. Otherwise, see point 1 about getting a line of credit.

Note: even if you use your personal line of credit for business purposes the interest is still tax deductible. Either way, you need to be able to support the “business purpose” with a paper trail.

 

 

“Behind Every Great Business is a Great Accountant”

For more information on how to keep your business tax efficient, or to get a consultation on whether you are making all the right tax choices for your business, contact Dharna CPA. www.dharnacpa.ca. Info@dharnacpa.ca

Employee vs. Contractor

In most cases you hire someone to work for you and you put them on payroll. You pay their taxes, CPP, EI and it is a fairly straight forward process. But what if someone comes to you only part of the time, or they are hired for a specific purpose only, how do you handle those individuals?  Many of these part-timers or “occasional” workers are being treated as contractors which means they are not going on your payroll, you are not deducting CPP/EI/Income Taxes. Instead, they are invoicing you for their time, maybe even charging you HST (which you get to claim back!), and you treat them like an operating expense vs. salaries and payroll.

So what is the big deal? In the eyes of the CRA it is a huge deal. They lose out on CPP & EI contributions and receive less income taxes too!

So how can employers help make the right choices? Ask the following questions:

  • How much control does this individual have on their own activities? If you’re dictating what they have to do (i.e. giving them tasks and deliverables and reviewing their work)
  • Do you provide the tools and equipment (computer, phone, equipment)
  • Can that individual subcontract the work or hire their own assistants?
  • How much financial risk is the person taking?
  • How responsible is the worker for their deliverables?
  • Is there an opportunity for the worker to profit?
  • Other factors such as the written contract

All of these individually and combined, as well as the stated intention, is considered in the choice of employee vs contractor.

Let’s take a look at an example:

I need help with my marketing. Person X is great for the job.

Employee à Person X is going to work from my office 2 days a week from 9-3, on my computer, I am purchasing the marketing software, there is no fixed amount of work but they will be told on an on-going basis what we need (e.g. I am telling Person X to write me 5 blogs, 2 Facebook posts with content relating to ABC), I am reviewing that content. Person X is more likely than not an employee and I should put Person X on my payroll.

Contractor à If Person X can choose to work from home OR my office until the work is done, have their own laptop and software, and I am paying them for a package of 5 blogs and 2 Facebook posts, and I approve the final content. Person X could be considered a contractor.

Each scenario needs to be evaluated accordingly. If you are unsure take a look at how similar positions are being treated.

 

 

 

“Behind Every Great Business is a Great Accountant”

For more information on how to keep your business tax efficient, or to get a consultation on whether you are making all the right tax choices for your business, contact Dharna CPA. www.dharnacpa.ca. Info@dharnacpa.ca

Best Practice record keeping

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  1. What documents and information should a business provide to its accountant in order to file its business taxes, specifically payroll, HST and income tax?

 

  1. If you do your bookkeeping yourself, provide a softcopy of your records (eg., Quickbooks or Simply Accounting file)
  2. A copy of all your Bank statements for the year. Note: if you do your own bookkeeping, then ensure you provide a copy of your year-end bank reconciliation
  3. A copy of all your business credit card statements for the year. Note: if you do your own bookkeeping, then ensure you provide a copy of your year-end credit card statement bank reconciliation
  4. Cancelled cheques, cheque stubs and bank deposit book for the year
  5. Copies of all invoices issued
  6. List of Accounts Receivables
  7. List of Bad debts
  8. List of year-end inventory (including the cost)
  9. Invoices for capital assets purchased during the year (eg computers, furniture etc)
  10. Details of assets disposed of during the year (even if you got no money when the asset was disposed of)
  11. Copies of all expense receipts
  12. List of Accounts Payable
  13. Details of all bank loans
  14. List of all payroll payments during the year showing gross amount, withholdings and net amount paid. You should also indicate how paid (cheque, cash or direct deposit)
  15. Your accountant should have access to your CRA account data , so it will n ot be necessary to provide CRA correspondence, unless it is of a non-routine nature, and one which your accountant would not have access to
  16. Mileage log detailing business kilometers driven
  17. Record of any expenses you paid for the business (out of your personal funds)
  1. Tips on recordkeeping
  • It is very important to have a record keeping system in place from the first day of business operations. It is best practice to consult with your accountant on what records to maintain. The accountant should have readily available, a checklist of record required. This makes the first year of filing much easier, and you are less likely to make mistakes which have to be fixed in later years due to lack of knowledge
  • After your tax filing deadline, consider filing your income and expense receipts in “tax” folders, as opposed to putting them in categories. If you are audited, then all the data used in the tax return is in one place. You simply pick up the folder, and hand it to the auditor. You can use tabs to separate the docs in the categories on the tax return
  • Manual record keeping – this can be as simple as an accordion folder where you drop all invoices, expenses, bank statements and other required documents, in the separate sections. Then give this folder to the accountant to summarise and use to prepare taxes.
  • To reduce accounting bill, you can summarize the receipts for your accountant. This is most applicable to a Sole Proprietor, where the basis of the tax return is your income and expenses, as a full financial statement is not required. However, for a corporation, expense summarization doesn’t help too much, as the basis of your corporate tax return is your Bank statement.
  • Electronic recordkeeping is strongly suggested for a corporation. Simply because of the details required to be reported, as well, CRA requires a full financial statement – Income Statement and Balance Sheet (which is not required for Sole Proprietors)
  • Stay on top of your recordkeeping

Green Meikle & Smith Chartered Professional Accountants

Authorized to practice public accounting by the Chartered Professional Accountants of Ontario

1020 Matheson Blvd. E. Unit 10

Mississauga, ON L4W 4J9

905-919-3543 Ext 101

647-338-5306 (cell)

greenmeiklesmith.com

Choosing an accountant

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No matter the size of your business, or its cash flow position, a business owner should never be without an accountant.

Accountants ought to provide services beyond the scope of tax preparation. Business owners in our community deserve, and should expect more from their accounting and tax service providers. Your accountant should be

  1. Accessible and open all year round
  2. Someone whom you can trust to offer you sound business advice and guidance (a trusted business advisor)
  3. Someone who can interpret your financial results, and hold a meaningful discussion with you about what the numbers are saying about your business
  4. Someone with whom you have an active relationship with right throughout the year, advising you on how to structure your affairs in a tax efficient way. Not just at tax time, because at that point the relationship is reactive, not pro-active
  5. Someone who can advise you on whether or not the systems and internal controls you have implemented in your business are effective. If not, they should be able to help in the re-design and implementation of suitable controls
  6. Someone who can scrutinize the financial performance of a company that you would like to buy
  7. Able to accurately present your company’s financial performance if you would like to obtain financing or are planning to sell
  8. Able to provide or recommend you to an estate planner (for succession planning)
  9. Transparent in the pricing of their services. That is, you should know exactly (or very close to exactly) what your bill will be for the service being provided. There should be no surprises when you open up the bill from your accountant.
  10. A highly trained professional, preferably one who is licensed to deal with the public. If they are licensed, then they belong to a professional body that regulates them, and ensures that their skills and training are current.
  11. Knowledgeable and up to date on your industry and current accounting/tax issues and trends (up to date on current tax and accounting issues)
  12. Adding value with sound tax planning strategies
  13. Properly represent you with the CRA
  14. Ethical, and a right balance between conservative and aggressive, in respect of tax deductions

Note: When looking for an accountant, you should meet with about 2 or 3 accountants to determine what they have to offer, and if they will be a right fit for your company. While fees are very important, your choice should not be made based on fees, but based on what your accountant will save you I time and money, as well as whether they are a right fit.

If you find the right accountant, he or she should be a priceless resource for your business as it progresses through its various stages (start up to maturity).

Green Meikle & Smith Chartered Professional Accountants

Authorized to practice public accounting by the Chartered Professional Accountants of Ontario

 

1020 Matheson Blvd. E. Unit 10

Mississauga, ON L4W 4J9

905-919-3543 Ext 101

647-338-5306 (cell)

www.greenmeiklesmith.com

Know your Numbers!

Uchechi

Most people that know me well know that I love looking at numbers. I love creating budgets and expense tracking sheets to manage both my personal and business expenses. I love to look at how my business makes money and look at different opportunities to bring in additional sources of revenues into my business. However, I find most business owners do not do this.

How does your business make money? Yes, you may have a product or service that you sell, but there are so many different areas to consider in terms of how you make money. Who are your strongest consumers, and which outlets do you make the most money in? How profitable is your business? You’ve got to understand the financial health of your business.

It’s unfortunate, but finances tend to be where most small business owners tend to fall short. Entrepreneurs are highly creative, and there’s so much we have on the go, and sometimes the numbers part is what we tend to look at last. However, I’m a firm believer that you really need to look at your numbers and understand your numbers on a consistent basis. Understanding your finances allows you to make the right business decisions, know how healthy your business is, and will help you build a business with longevity.

Take time to sit down and add all the numbers. Do not be afraid of the numbers. When you’re afraid of the number, and ignore them, that’s when you get yourself into trouble. Set an annual (yearly) target and break it down into monthly and weekly targets. Depending on how big your business is, you may want to start with monthly, but I really love breaking it down into weekly.

When you do your budget, don’t forget to take account your own basic needs. Some business owners tend to budget solely on their business expenses. That’s great if you have a full-time job and you’re bridging your business. However, if you want your business to sustain you and you want to run it full-time, you really need to take your personal expenses into account.

You also need to also understand your break-even point. Your break-even point is the point where revenue actually starts to cover your expenses. The more money you make on top of that will go into your profitability.

Start tracking the return on all those activities you’re doing. So, if it’s Facebook marketing, your email newsletter– how are those converting? You need to know how much money you’re getting in return for all the money you’re spending to bring in sales.

Taxes are another great thing to consider. A lot of small business owners miss this completely, and I’ve been guilty of this too in the past. What tends to happen is we forget to set money aside for taxes. But once you do your taxes, especially when you start making more profit, you’ll have to pay taxes, and depending on how much profit you made, you may get a big tax bill. If you have not been setting any money aside for it, it will leave you scrambling to get money to pay for the taxes. Furthermore, it will cause you so much stress and energy. It will also take the focus from running your business to worrying about finances. Always set some money aside, especially if you’re making profit to pay for your taxes.

There’s so much I can write about this, and feel it’s so important to the success of your business that I dedicated a whole module in my 4-Week Business Success Bootcamp online program to ‘Know your Numbers’.

I like to say, ‘your numbers tells you a story’.  That story will show you how healthy your business is and areas you need to improve to make it more successful!

 

Uchechi Ezurike-Bosse is a Business & Lifestyle Strategist, Speaker and Writer, but most importantly, a proud Mother and Wife. Uchechi is Founder of My Empowered Living (http://www.myempoweredliving.com) a website aimed at helping women shift their mindset and live their passion! Whether it’s starting and building their dream business, or helping them create a lifestyle they crave, Uchechi is the modern woman’s secret to success! Visit Uchechi at www.myempoweredliving.com to get her FREE online video training series The 4 Keys to your Business Success! This free 4-day business training reveals her 4 key strategies needed to build a profitable and successful business, and how to put them to work in your business!