falling man

Facing Your Fears, at Your Pace

Entrepreneurs like to embrace an aura of fearlessness. However, humans possess the ability to fear because it is a useful emotion. Fear helped us avoid lightning, and sabretooth tigers, and that same instinct exists within us today, and can help us avoid modern dangers (like human predators).

The problem comes when the fear instinct attaches itself to something which cannot literally hurt us, but which may "only" carry the risk of psychological harm. (Even then, the harm is likely overstated in our minds.)

sad man with head in handsThe instinct may exhibit itself as a fear of public speaking, or firing an employee, or submitting a sales proposal. These are all things that, in general, entrepreneurs need to be able to do. We need to be able to talk to strangers, or rid ourselves of problem staff, or ask clients to hire us. These things are necessary for the well-being of our business. Our fear instinct is actively working against our financial survival.

Of course, being entrepreneurs and, by nature, often people of extremes, our subculture has encouraged us to take a disproportionate response. We are told to "live fearlessly" and to "step outside our comfort zone". The narrative envisions the wallflower inventor wiping off their sweaty palms, calming their shaking voice, and pitching in front of the "Shark Tank" investors for millions of dollars.

sad face drawingI believe that our comfort zone exists for a reason. Often, within our comfort zone is where we work best and most efficiently, and it should be where we spend the majority of our workday: doing what we do best, and what we're comfortable with. The comfort zone is only a problem when it is restricting.

My proposal then is that, instead of leaving our comfort zone, we expand it.

Visualize your comfort zone not as a chalk-lined circle which you can easily step out of via sheer will, but as a protective bubble. If you gently push the walls of that bubble, you can stretch it in any direction which you choose, while still remaining safely inside.

woman giving presentationFor practical purposes, this means, for example, starting with a Toastmasters Club visit before you agree to speak in front of a large auditorium. If you've never had the displeasure of leading a termination meeting with a non-performing staff member, start with leading employee performance reviews. Practice your sales proposal on a friend before you present it to a prospective client.

Don't feel pressured to be "fearless"; just start making yourself more comfortable with small steps. You'll still reach your goal, but will avoid the pain and risks which your fear exists to protect you from.


women look at notebooks

"How to Run Your Small Business Like a Large Company" by Dave Baldwin

We've all seen them, those entrepreneurs with the seeming ability to work magic. We’ve all heard the legends about the founders of multimillion-dollar empires who started with a $1,000 loan in a basement. These stories seem far removed from reality, especially for business owners who grind away at building their dreams, only to hit brick wall after brick wall years or decades into building a small business. We hear this question from time to time: how do the successful ones do it? What’s their secret? What is everyone else missing?

There’s good news and bad news. Bad news first: there is no silver bullet, no “big reveal” and no shortcut. In reality, successful startups are years in the making, and there’s no substitute for persistence and discipline. The good news: most small businesses are, indeed, missing a key ingredient, and when you add that ingredient, real success begins to feel achievable, often for the first time in the life of a fledgling business.

Here’s the big secret: build your company like you’re going to sell it.

If you don’t want to sell your business, that’s fine. Aside from the fact that you will have to retire at some point, there is an imperative and critical need to prepare every small business for the possibility of eventual sale, regardless of your exit strategy. There is a fundamental shift in the mindset and daily habits of an entrepreneur who is building a business to sell -- as contrasted with the business owner with the goal of surviving and paying the bills. This key distinction is the single difference between businesses that grow and businesses that stay small.

What if I don’t have the money?

Spending money you don’t have is not necessary to build and grow a healthy business. Some types of businesses require significant startup funding, such as real estate developers and technology companies, but a budding entrepreneur with no startup cash can bootstrap a new company from scratch. To set up your company for long-term success, three roles are needed from the outset: human resources, legal and accounting. You can think of these as “seats” to fill in your organization chart.

These are not “someday” considerations to start thinking about when a company is “‘big enough to afford that.” They are needed immediately - if you are serious about building a great company.

HR systemsHuman Resources

No small business can afford an HR director, but neither can a small business afford to hire the wrong people -- or hire the right people incorrectly. In the beginning, the owner wears all of the hats, but as soon as revenue starts to flow, a sense of being overwhelmed can quickly set in. This is the first area where small businesses miss the mark, by hiring whomever they can find quickly and cheaply. Maybe it’s the next-door neighbor’s kid, or a nephew who just graduated from college and is working a fast-food job. The results predictably range from “tolerable” to “disaster.” Outsourced human resources services are available for every stage of a growing business, and it’s never too early to start thinking about this.

Legal

You might be great at what you do, but if you can’t scale it, your business will never get off the ground.

IP development is the cornerstone of building a scalable business. Every big company became big because they built something proprietary. That begins with your processes and formulas, everything unique about the way your company does what it does. Without IP, a business isn’t a business. It’s a self-employed individual working a collection of part-time jobs. Every business needs an attorney to legally protect the lifeblood of their enterprise. Not to mention the number of legal risks that can put a small company out of business in one fell swoop if necessary legal protection is missing.

Business attorneys used to be cost-prohibitive for small businesses, but not any more. Over the last decade, legal services have sprung up, catering to the needs of startup businesses with lean budgets. And we’re not talking about Legal Zoom here. You need the expertise of an attorney to ask the questions you don’t know to ask.

growing money from dirtAccounting

At the risk of sounding shamelessly self-promoting, you can’t build a business without an accounting system, and there’s a lot more to it than buying a Quickbooks subscription and connecting your bank accounts. Businesses that stay small usually think about bookkeeping once a year, when taxes are due. But accounting is about much more than just taxes. It’s about having a clear picture of your current business reality. You can’t make good decisions based on vague data, feelings or guesswork. Sadly, that’s exactly what a lot of business owners do, whether they admit it or not.

There are three distinct types of accounting: tax accounting, financial accounting, and operational or managerial accounting.

Tax Accounting

Tax accounting is what most are familiar with: planning for taxes, minimizing tax liability, staying compliant with tax laws, and ensuring there are no ugly surprises at the end of the year. Financial accounting is reporting data to outside entities, such as prospective investors or lenders who need to gauge the viability of your business. Current investors typically require quarterly reports to keep a pulse on the health of a business. In these cases, you want to show a limited view of your financials. Operational or managerial accounting is critical for the day-to-day management of a business. It consists of many different components, and here is a bird’s eye view of a few areas common to every type of business.

Key Performance Indicators (KPIs), when they are designed correctly, provide an objective real-time view of how well a business is performing and can also serve as leading signals of trouble brewing. For instance, if sales increase by 20% from one quarter to the next, but payroll expenses by increase by 50% during that same period, that might indicate that efficiency has dropped or that the business has over-hired. But there’s a further complication: how does one measure sales revenue? That question is more complicated than it might seem, and it relates to an important concept called “revenue recognition.”

chartsRevenue Recognition

Revenue recognition is an important concept for a business owner to understand. A business is said to ”recognize” revenue at certain times. For instance, a business might “recognize” revenue when it makes a sale and sends the invoice (accrual accounting), or it might “recognize” revenue when it collects the actual payment (cash accounting). Taxes can be filed using either method, but a business has to pick one and stick with it. For management purposes, however, accounting software packages can produce reports using either method, and both views are useful for different types of decisions.

Further complicating matters, many businesses do not have useful ways of looking at their expenses. For instance, if you operate a service-based business, do you know how much it costs you to deliver a service? Is that cost broken down into labor and materials costs? If you purchase supplies that are shared between different jobs, do you have an accurate view of how much is used from one job to the next? (Hint: if your answer is “I have a good feel for it,” then we as accountants would take that as a “no.”) Expenses are “recognized” just like revenue. Cash- and accrual-basis reports are often both necessary to view a full picture of where your business is making money (or losing money).


We’ve really just scratched the surface here, but the basic idea is that you can (and MUST) learn all of these areas of management if you want to build a business that grows and thrives. If it sounds like a lot of work, that’s because it is! But the concepts in this article are examples of the areas where successful business owners educate themselves continually.

No matter how brilliant you are in your craft, no matter how delicious a cupcake you can bake, you cannot build an enduring business unless you become literate and competent in the core disciplines of business management. There is no substitute, no other option and no shortcut.

Sound like too much? It’s really not that bad; we promise. Give us a call if you’d like to hop on the phone and discuss what this means for your business (or business idea).


Dave Baldwin is an integral part of The Bookkeeper staff experienced in marketing and management consulting. His own entrepreneurial journey was spurred on by a desire to help introverted entrepreneurs succeed in business.


mother and father and two sons holding hands walking

When You’re too Small for FMLA

Per the US Department of Labor, “The Family and Medical Leave Act (FMLA) provides certain employees with up to 12 weeks of unpaid, job-protected leave per year. It also requires that their group health benefits be maintained during the leave…FMLA applies to all public agencies, all public and private elementary and secondary schools, and companies with 50 or more employees.”

Of course, most of us in the small business world, by definition, have less than 50 employees. However, we still have employees who get sick, or have kids, or have other reasons for which they need to take family and medical leave. And most employers (who are good employers), want to find a way to take care of their most valuable asset – their employees – even if it’s not strictly mandated by federal law.

So, business owners are left with a balancing act, to protect their staff and keep them happy, but to not cost too much in money and productivity. To assist, we have put together this list of FLMA alternatives which small businesses might utilize.

mother crouching to look at son with a smilePaid Time Off

This is the easiest, as it’s something many businesses already have in place. Instead of designating what time off might be used for, have a clear policy (in writing), that describes how PTO is earned, how much each employee receives, and how much notice is required (if possible) for it to be put into use. Some employers like to separate “sick leave”, “vacation leave”, “personal leave”, etc. However, requiring proof, such as a doctor’s note, that leave used was sick leave is tricky, and can get into privacy issues. Also, there might be other, very personal things, for which a person might need to use leave and would not want to provide a note (a court hearing for an adoption, or fertility treatments). Having a generous PTO policy is easier to track, and allows employees the freedom to use time off as they see fit.

alarm clockFlex Hours

Obviously, certain industries do not lend themselves well to flex time. (It would be hard to staff a restaurant or construction site where anyone could come and go as they please without notice.) However, in certain businesses, where the majority of the day is not customer-facing and communication typically occurs via email (i.e. programming), it can be helpful to let staff set their own schedule. This way, they can leave for appointments without as great a loss of productivity. However, it is important that team members still be considerate of each other and, for purposes of connecting and collaboration, keep each other apprised of when they will be in-office or available.

sitting on bed working on laptopWork-From-Home

Working from home temporarily or part-time can be a great way to keep an employee who needs time away for medical or family leave somewhat connected with the office. This way, they do not suffer the loss of income associated with a lengthy leave, and the business does not suffer the loss of productivity which comes with having a key person completely unavailable.

doctor writing on a clipboardFMLA Compliance

All FLMA really means is that you keep an employee’s position open while they are out on extended leave. Even if you are not large enough to be legally required to do so, it’s not a bad idea. The gap can be filled with temporary help and, in fact, using a temp-to-hire person can be a great way to fill in (in case your employee chooses not to come back from leave).

 

Having an employee need to take substantial time away from work can be stressful on everyone. However, flexibility and collaboration can ensure that your business needs are covered, and that your employees feel secure in their position with you. Whatever your plan, be sure to have it documented in writing, and reviewed by an employment attorney or HR specialist.


sparkler in front of american flag

Rebellion vs. Revolution

My favorite retelling of the Revolutionary War comes from the musical “Hamilton”. In it, the titular main character bravely fights for independence, but also muses about what freedom will mean for the colonies, and how they will structure their country and face their economic woes. After serving under General Washington, he goes on to become the first Secretary of the Treasury and to put into place systems and structures which are still integral parts of our government today.

I believe that this can parallel the experience many people go through when they leave employment to found their own companies. There are those who fight valiantly for independence, but fail to plan for a replacement system. There are others who are more cautious and plan so carefully that they never take that first step to leave the security of their current situation. (You could say they “throw away their shot”.) Success is found by those who can both dare to leave the harbor, but who also know where they’re sailing.

Rebellion vs. Revolution

american flagThe word “rebellion” brings to mind images of sullen teenagers, instinctively acting out against their status quo. For a disgruntled employee dreaming of business ownership, it can be chafing against inane workplace rules, or simply longing to leave the 9 to 5. However, it’s not enough to know you are displeased with your current situation; you have to have a vision of what you want to replace it with.

We’ve met plenty of people whom have a lofty dream of how they envision business ownership. (For some disastrous examples, see our article “Living a Lie: The Mistakes that Make Entrepreneurs Go Broke”.) We even had one would-be business owner tell us, “Oh, I don’t want to work. I’m going to hire other people to do the work, and then I’ll just travel or something.” Needless to say, that plan didn’t work out.

statue of libertyThe successful businesses are those whose owners have the spirit of revolution. It’s not just that they’re unhappy with their lot, but they clearly see how it, and their own small slice of their particular industry, could be better. These are the people who desire to “build a better mousetrap” with their company, and who aren’t afraid to put in the work to do so. We have successful clients who have invented new products or medical processes, but we also have those who have succeeded by coming up with ideas for local entertainment, or who have simply found a way to be the most effective attorney, or marketer, or even HVAC person in their field. And none of them are afraid of work; in fact, the most successful all embody attitudes of continuous improvement, both in themselves and in their companies.

If this 4th of July you find yourself pondering the plunge toward business ownership, examine where that desire is coming from. If you’re ready to start a revolution in your industry and in your life, build a plan for where you hope that path takes you, and a vision of what it looks like when you’ll get there.


graduation

I guess this is growing up.

I always find the end of May a bittersweet period, with its focus on graduations and plans for the fleeting summer. It's a time of celebrating the crossing of an arbitrary boundary we have created between "child" and "grown-up". And, with The Bookkeeper having just celebrated our sixth year in March, I've been thinking a lot about what growing up means for a company.

What I've found is that, much like how many adults will confess to still really not feeling like grown-ups, I think it's hard to pin down exactly what being "grown up" means for a company. However, there are a few things I keep coming back to.

1. You know who you are.

business woman shaking handsFor most teens, a major source of anxiety is whether or not people like them. Often they are either chasing popularity, or trying to conspicuously prove they don't want it. Many new business owners start the same way. In the interest of making connections and gaining customers, they try to be everything to everyone. But comfort and maturity comes with knowing the work you like doing, what you do well, and focusing on being the best you can at that.

 

 

2. You choose who you surround yourself with.

man and woman talking on sidewalkWhen you're younger, your friendships, though dear, form generally through default. Your best friends are the kids in your class or neighborhood, or with whom you play on a team or share some activity. When you first start a company and enter the social world of small business, you run into the same people over-and-over at networking functions, morning meetings, etc. Over time, you identify which of those people with whom you feel a real connection, and develop some great friendships. But at the beginning, you'll make a lot of coffee appointments with people who don't have your best interests at heart. Sometimes you'll even know that going into the meeting, but you'll feel too "new" to shoot anyone down. As you grow up, you learn to recognize the people with whom you want to spend your precious time, and you won't feel hesitant to prioritize your calendar accordingly.

 

3. You're unashamed to let your childish side show.

child with finger paint on handsYoung people go through a period where they are ashamed to play and then, at some point in adulthood (if they're lucky), they rediscover the joy in acting like a kid. In your business, it's important to keep that playful joy and remember why you love working for yourself. (We didn't escape corporate to create corporate.) This doesn't mean being reckless or irresponsible; it just means letting go enough to embrace the fun that comes with being a business owner. This can be something as simple as realizing it's a beautiful day and you've got no afternoon meetings, so you leave the office to hit a few miles of trail (me). Or, it can be something as big as taking your entire team and all their families to the beach for a weekend (Craig). The point is that, without falling into the trap of anything as contrived as "team-building", you find ways to enjoy the work, and the flexibility the work gives you.

Of course, just like a graduating high school senior who thinks they're grown, I might have no idea what I'm talking about. When The Bookkeeper is 10 years old, or 20 years old, or, should I live to see it, 50 years old, I might look back and laugh at my own youthful naivete. All I can do for now is look forward to what I'll know then.


handshake

Accounting Considerations for Attorneys

Attorneys are known for their attention to detail (and for being litigious), so they’re not someone whose books you want to mess up. Fortunately, we work with many attorneys, and have gained a lot of experience in identifying potential danger areas in their financials.

If you’re an attorney just starting out, keep the following items in mind.

Trust Accounting

lawyer taking a callThe bar requires you keep a record of your monthly three-way trust reconciliations, and a quarterly reconciliation report reviewed and signed by a lawyer. When a practice is small and the number of clients with trust balances is few, this can be a very simple process that can be done just on a standard form, using the bank statement and client records. However, as a firm grows, utilizing trust-specific software, such as Trustbooks or Clio, can greatly assist in ensuring accuracy of trust reconciliations and in decreasing the time involved each month.

Apart from the reconciliations themselves, it’s very important to ensure that you are following all regulations for maintaining client funds in trust. Like the majority of states, North Carolina requires that funds be held in an IOLTA account. It is the attorney’s responsibility to make sure that earned revenue is transferred from trust appropriately and that no commingling of funds is occurring. Additionally, even if a bank or financial institution offers an IOLTA and is on the list of approved institutions, the attorney is responsible for ensuring that bank fees and interest earned are being handled correctly by the bank. (We have actually seen instances where banks failed to separate interest out from IOLTA accounts.)

Be hyper-vigilant when you begin to receive client funds in trust, and ensure you have proper systems set up in advance.

Practice Management Software

pointing at laptop screenIf clients are not on retainer, billing and receiving payment can be a major challenge in a law firm. (Even if clients are on retainer, ensuring that hours do not exceed the retainer before it can be replenished can be an issue.) There are also the matters of tracking client costs, tracking billable time, and ensuring that any flat-rate services are not suffering from “scope-creep”. Again, early on, something like a spreadsheet may suffice. However, sooner rather than later, most attorneys benefit from utilizing a client management software with built-in features for time-tracking, billing, and managing client account balances.

Choosing the right software early on will save the headache of a conversion later. Something to consider is whether you want an all-encompassing accounting and practice management software (like PCLaw), or separate systems (like Xero for accounting and Clio for client management). If you have separate systems, it is also important to consider whether there is integration available between the softwares, and how that works. In some cases, integrations can actually cause more complications, and the systems are better kept separate.

Partner Compensation

dollar bills planted in soilAdditional points of tension can arise as you take on partners. The “eat what you kill” trend is growing among law firms, and can be a strong motivator for revenue generation, particularly in the short-term. However, long-term revenue can sometimes be lost in the pursuit of immediately billable fees, and the overall brand and health of the firm can suffer. Planning a revenue generation strategy that is motivational for all partners, but also supports the long-term goals of the firm, is a crucially-necessary early discussion.

As with any other business, early planning and careful construction of internal financial systems will increase a law firm’s chances of success. Fortunately, most attorneys possess the focus and attention to detail to make those early decisions, and put the right structures in place. And if they need assistance, professionals like us are always available to help.


Accounting Considerations for Realtors

I’ve been housebound for nearly a week with the flu. While no one enjoys the flu, being stuck at home alone, when I already don’t feel well, is torture for an extrovert like me.

Of course, unless you already know Craig and I, most people don’t think of accountants as extroverts. No, the most famous extroverts of the small business world would probably be realtors.

But although realtors are known for being outgoing, high-energy, good-looking charmers, there is actually far more organization of paperwork and attention to detail involved in their job than most people realize. And though their bookkeeping can generally be fairly straightforward, there are always certain issues which can pop up to cause unexpected complications.

Needless to say, given our location in one of the most rapidly-growing metropolitan areas in the country, we work with a ton of realtors. Over the years, we’ve identified a few areas of their accounting which require a close eye.

Tracking Expenses

graph expensesThe real estate market giveth, and the real estate market taketh away. Few people can make money as quickly as a realtor in a booming economy. However, when times are slow, that fountain can dry up completely. That makes having a great system of tracking expenses of crucial importance.

Now, there are varying schools of thought on how one should go about paying for things but the argument largely boils down to: paper or plastic.

Since marketing and networking are two of the primary expenses in real estate, it can be easy to overspend, particularly as lunches, coffees, and referral fees add up. Those who study the psychology of spending advocate paying in cash or writing checks, as it has been proven that you spend less money doing so (because you physically observe the money leaving). However, cash and checks are an accounting nightmare.

Cash requires that you keep and organize receipts, which are prone to get lost, torn, smudged, or, in a best-case scenario, dumped in a box for your beleaguered accountant to sort through later.

Checks are not much better. For starters, realtors are busy people, and their handwriting reflects that. (I say this as someone whose own handwriting resembles an EKG readout.) It can be difficult for a bookkeeper to interpret to whom a check is made out (though you eventually learn how to translate your clients’ handwriting over time). Furthermore, both cash and checks come with 1099 implications (should the vendor meet the other criteria).

On the plastic side, debit and credit cards offer the benefit of easily tracking expenses, and cutting down on time and manual entry for bookkeeping purposes (without having to save stacks of receipts). Also, you get the benefit of avoiding the 1099 dilemma. However, for an undisciplined spender, swiping the card can be a far too easy, frequent reflex.

In my opinion, the best solution is to make use of debit cards, but to keep a close eye on your financial reports, and to analyze trends from month-to-month, so overspending can be corrected.

Paying Yourself

toy house and coinsAs we mentioned, the real estate market can be unpredictable, making it hard to pay your #1 employee (you). Many agents, particularly if they work independently, opt to structure their business as a sole proprietorship (sometimes with an LLC), and pay themselves only with Owner’s Draw. This works very well for simplicity’s sake, but you still have to pay quarterly estimated self-employment taxes (to avoid a hefty tax bill at filing). And these can be very hard to measure because, again, of the “estimated” part. Pay too little, and you’ll have to pay more at the end of the year. Pay too much, and you may be cash-poor until you get that tax return several months later (particularly if the housing market experiences a downturn).

To protect against this, some realtors establish an S-Corp and pay themselves as employees. This has the benefit of allowing you to pay in withholdings all year whenever you’re paid, and allows your salary to be treated as an expense of the company (as opposed to solely balance sheet activity). However, it does necessitate a payroll service (we strongly discourage filing your own payroll, for time and liability’s sake), and there is a balancing act in finding the right amount to pay yourself in salary as opposed to distributions (and different tax implications with both). It also means that, instead of a simple Schedule C, you’ll need a corporate return filed in addition to your personal return.

Generally, when your business begins to net roughly $50K per year, it’s wise to look into an S-Corp conversion.

Branching out in Real Estate

realtor giving keysProbably because so much “go-getter” spirit is required to succeed, most of the established realtors I know are entrepreneurs at heart. And since real estate is already in their blood, many try their hand at other areas of it, such as investment properties, property management, and land development.

The problem, of course, is that all of those have much more complicated accounting.

In particular, property management can be dangerous, as it involves trust accounts, and the strict rules which surround them. Not only must careful accounting be done to show proper revenue recognition and relief of trust liabilities, but the physical money itself can’t be left in interest-bearing accounts, nor co-mingled with other funds. (If you were to compare a real estate commission audit to a home inspection report, commingling of funds would be along the level of black mold.)

Obviously, I don’t say this to imply you shouldn’t expand your portfolio of services. However, it’s very important to understand the financials of the business you’re building in advance of building it, so you can have everything set up ahead of time. That way, you can protect what you have already worked so hard to grow.


Some of the most caring, hard-working people I know are realtors, and, like all business owners, it’s so very important that their financials are managed well. If you know of a realtor who could use some of this advice, please feel free to share it with them. (After all, who doesn’t know at least ONE realtor?)


hard hats

Accounting Considerations for the Trades

The finances of trade services seem like they should be simple: You have a leaky faucet, you call a plumber, they fix it, you pay them. From the customer’s side, it appears an easy transaction. For small business owners in the trades, however it’s much more complicated.

As though ladder falls, electrical fires, and rusty nails weren’t enough to worry about, skilled tradespeople also face the dangers of Department of Revenue audits and high-volume aged receivables. So for our month of industry-focused accounting, we’re focusing week two on accounting considerations for those in the trades.

Concern #1: Getting paid.

construction workerPerforming a job, particularly if parts have to be purchased, can be a costly endeavor. If employees have to be paid for extra hours or extra help brought on, it can be even more expensive. So when customers don’t pay, you, the owner is severely put-out.

There are ways for business owners to protect themselves and prevent slow/no-payers. The first, most obvious step, is to take a deposit, at least enough to cover parts and materials that must be purchased. This way, even if the job is cancelled, you’re not stuck with the costs of materials you don’t need.

The second is to establish clear terms of invoicing and payment, and to make sure both sides understand and agree to them. This can be particularly important when doing commercial work, as businesses often have more rigid rules about how they are invoiced, how POs are issued, and how payments must be approved internally before being remitted.

The third is simply having a system in place by which you follow up on overdue invoices. We do accounts receivable work for some of our clients, and you would be amazed how much money can be collected by simply calling and reminding customers that a payment is overdue. Though there are exceptions, of course, most people do want to pay their bills in a timely matter, and are happy to make right on an overdue account.

Concern #2: Job-costing.

mechanicIn the prior entry, we referenced the costs associated with an individual job, such as labor and materials. However, there is also travel time to be considered, as well as overhead allocations (how you proportion out fixed costs to specific jobs). Though it can be a lot of work to set up an effective job-cost tracking system, the data it provides is invaluable for business planning and expansion purposes, and for determining profitability of different types of jobs, and for pricing strategy.

In particular, tracking mileage and other travel costs can help immensely in determining how jobs are scheduled efficiently. Fuel costs alone can be significantly reduced with more strategic scheduling, as well as labor costs associated with travel time. Even things such as travel to vendors with preferred pricing can be optimized. However, if that data is not being tracked, it can’t be studied nor put to use.

Concern #3: 1099s.

construction workersIt’s common in the trades, more than any other industry, to hire short-term help for only a single job or handful of jobs. Without proper preparation, this can be very dangerous for a business owner when it’s time to file 1099s. Essentially, the IRS requires that a 1099 be filed for every contract worker who received more than $600 in cash or check for services in a calendar year. (And there are steep penalties at both the state and federal level for failure to do so.)

To file a 1099, you have to have a W-9 from the worker. If you paid someone for a single job in February of the prior year, it can be hard to track that individual down several months later to get a W-9 (especially if they know it means you’re trying to report their income to the IRS). We strongly recommend collecting W-9s (and Certificates of Insurance, where applicable) from contractors prior to paying them.

Concern #4: Sales tax.

carpentryNorth Carolina Department of Revenue shook things up a few years ago in 2016 when they began requiring sales tax be collected on additional services. Under the change in law, sales tax is now charged on repair, maintenance, and installation of “tangible personal property”. This means that, for example, someone installing an HVAC unit would have to collect and remit sales tax on not only the unit, but on the installation service as well.

Where this becomes complicated is that the sales tax expansion does not apply to services on “real property” (i.e. homes or other buildings). However, to protect themselves, tradespeople performing services on real property should obtain Affidavits of Capital Improvement in order to confirm that sales tax is not applicable on each specific job. (This is particularly true for general contractors performing remodels, or their subcontractors.)


Because there is so much variability and “gray area” within financial accounting for the trades, we recommend you speak to your accounting professional regarding any questions you might have for your business’s unique situation. If you don’t have an accounting professional, we might be the right people for the job.

Contact us to schedule a free 1-hour consultation; we’re happy to answer your questions.


marketing typewriter

Accounting Considerations for Marketing Agencies

Over the last several months, I’ve had the honor of serving as the Treasurer of Triangle AdFed. It’s a volunteer position, and a lot of work at times, but it’s given me the joy of getting to hang out with some of my favorite people: marketers.

Despite the fact that I’m in a typically uncreative industry, I do love the enthusiasm and energy of professional creatives, and I greatly admire their work. A good number of The Bookkeeper’s clients are marketing agencies or professionals, and I consider many of them close friends outside of work.

I learn so much from my marketing friends, and the only advice I can offer in-turn is related to their financial management. So, to kick off our series, I thought it would be fun to write an article about the things marketers need to take into consideration when viewing their accounting systems.

Cash-Flow

wallet with hundred dollar billsFew industries can be as volatile and unpredictable as marketing. Trends change, Google adjusts algorithms, and marketing clients don’t always recognize the back-end work that goes into their return-on-investment. Add in high costs and challenging margins, and marketing agencies can face cash-flow problems from month-to-month.

However, there are a few strategies which can be put into place to mitigate these issues. Cash-flow is really comprised of two main components: Accounts Receivable and Accounts Payable.

On the Accounts Receivable side, there are steps marketing agencies can take to keep money coming in. The first is to have a plan in place to handle delinquent client accounts. A documented series of steps for contacting clients with overdue balances can help separate the emotions from collections practices, and can help overcome the fear of “not wanting to make a client mad”. And, particularly when clients are slow-to-pay, it is good to examine not just the on-paper profitability of the client, but the cash profitability of the client. That’s because, in marketing, a large part of Accounts Payable is tied to client activity.

On the Accounts Payable side, marketers will often have high bills (for ad spend, website design, etc.) tied directly to client projects. Ideally, you would have a client paying for these costs directly, or paying for them in advance, to improve A/P cash-flow. However, in situations where that might not be feasible, it can be wise to utilize credit for some of those large purchases, and pay the balance off in-full from cash each month. This way, in the event of a non-paying client or other emergency, there is a bit of a “cash cushion” to sustain the business for fixed expenses such as rent and payroll. There is also no shame in partnering with vendors to find a monthly payment schedule which works for the regular flow of your business; so long as they know when to expect their payment, most vendors will be happy to accommodate your preferred payment date each month.

Payroll

women at conference tablePayroll is so important because it is the one thing you can absolutely never be late on. If you have employees, they are the most valuable resource of your business. And marketing companies often walk a fine line in determining when to work with employees, and when to work with subcontractors.

Now, we know I can write an entire article on FLSA compliance, so I won’t bore you with reminders to pay employees as employees and vice-versa. However, for budgeting and expense-management purposes, choosing which type of worker to use can be a crucial part of a marketing agency’s growth.

Subcontractors typically come at a higher hourly rate, but can be used as often, or as sparingly, as is needed. Also, it’s easy to track client-specific costs when paying for work on a per-job basis.

Employees often come with a lower hourly rate, but they also come with employer tax liabilities, and might not be as motivated for high production efficiency if their hours are set. Also, if the market turns and sales drop, you can be put in the awkward position of having to cut hours and/or staff.

A good solution is to perform a break-even analysis of adding an additional employee vs. paying a subcontractor. You can use this to determine exactly how many hours of work necessitate additional part-time or full-time staff; you can also take into consideration such factors as production bonuses and/or commissions or profit-sharing for employees (to encourage strong work and efficiency).

Pricing

calculating invoiceMany industries struggle with pricing, but marketing has come unique concerns. Many clients contract marketing agencies for both project and ongoing retainer work, and tracking the associated costs for those clients (and billing accordingly) can be a major challenge.

The first step is to clearly define the parameters of retainer hours and service projects, and to monitor those closely to prevent “scope creep”. This will help you to keep costs down, and will also help prevent large, unexpected bills for clients. For clients who are paying a flat monthly fee, either have a provision in the agreement for going over hours, or regularly review client hours to see whether a retainer needs to be increased.

It is also important to have a clear definition of what clients you want to serve. There is a fine line to walk in pricing competitively and remaining profitable; recognizing that you can’t serve every client model and identifying your target market can help you walk that line.

Because marketing is such a large field, there are many other niche problems which can arise. (For example, 1099s for inf marketing, or currency conversion for international marketing.) So for marketers in particular, it’s important to work with finance professionals who understand your company and its unique needs fully. Don’t be shy about asking your bookkeeper, tax preparer, or CFO how they would address some of these issues.


company meeting table

Three Lessons From Last Year

The end of the year is a time for reflection.

However, if you’re in the accounting profession, there’s little time to reflect at the actual end of the year, as January is our busiest month. So, the end of January becomes your default time for reflection.

As we approach the company’s six-year anniversary, it’s easy to look back on the things we’ve done over the last few years. From a family business operating over the kitchen table, with only a handful of clients, we’ve grown to a team of eleven full-time staff serving over 170 clients. We’ve met a lot of people and helped a lot of businesses but, more than what we’ve done, I’ve been thinking about what we’ve learned.

I could (and someday might) write a book about what I’ve learned through small business ownership, but today I wanted to talk about three lessons that have stood out to me from the past year.

Celebrate wins, but keep training in the offseason.

celebrating office workersFinishing a big project, landing a big account, or getting kudos from a client is a great high. It’s a time to recognize staff, and give yourself a pat on the back. But it isn’t the time to stop what you’ve been doing.

When things are going well, it’s easy to get complacent. But it’s effort that breeds success, and that can’t be taken for granted. If you stop putting forth the effort, that success can depart just as easily as it came.

We’re about to complete the month of January, which is “1099 season”. It’s a very stressful period and, once we get through it, we’ll do something special to recognize the team.

But, we’re also already discussing what we can do to improve the process next year. Which brings me to my next lesson.

Never stop improving, but don’t change for the sake of change.

office people with hands togetherOver time, we’ve identified better ways to do things within the company. However, we have found that there are times when you have to accept that perfection is unattainable.

One area we have found this is particularly true is in the realm of project management automation. We’ve been able to put certain templates and systems into place to help cut down on both administrative and client hours. However, we found that we could only take that automation so far if we wanted to continue to offer highly-customized service. There might be a better solution out there that we have not found yet, but we can only dedicate so many hours to researching a better option (unless we want to limit the number of new clients we accept). Which leads me to my final point…

Everyone matters.

puzzle piecesIt’s always exciting to land a “big” new client, but some of my most-cherished client relationships are with those small, one or two-person companies. We have many clients who just come to us for a bit of training or help with their start-ups, and I’m the go-to person in the office to work with those, because I enjoy them so much.

Ironically, though this was never the intention, some of those small clients have led to big business. For example, I helped a local interior designer with cleaning up and training on her QuickBooks account. She connected me with a friend of hers in Charlotte, for whom I did some remote training. Those relationships led to referrals to other interior designers, until, suddenly, we found ourselves working with half a dozen new interior designer clients, a few of whom are very large and for whom we’re providing extensive services. And this all stemmed from helping someone who many other companies would not have given time to. (This makes me think of our first ever blog post, Nice Guys Finish First.)

Our little company is not so little anymore (and certainly not as little as when that first post was written). But we’re still learning, and still have so much to learn. I’m excited about what new lessons 2019 will bring.