2018 Tax Changes (Explained as Best as Humanly Possible)
To put it very (very) mildly, the new tax bill is not without its problems. In their newsletter attempting to explain the new bill's changes, the American Institute for Public Bookkeepers (AIPB) wrote, "Warning: You are encouraged to wait, where possible, for IRS guidance to confirm the details below. There are many technical errors in this tax law."
We have tried our best to explain how a few of these various changes might affect your business. In the interest of keeping this an article and not a book, we'll be summarizing many of the details, with links to articles where each piece can be expanded upon in greater depth.
To begin, here are a few of the easiest changes.
Mileage rates. The standard business mileage deduction has been raised from 53.5 cents per mile to 54.5 cents per mile.
Listed property. Computers and peripherals are no longer listed property, and therefore do not have to be held to the same proof of exclusive business-use standards as, for example, vehicles.
Meals & Entertainment. From 2018 through 2025, on-premise meals for employees will be reduced from 100% deductible to 50% deductible. As of 2026, they will no longer be deductible at all. Most entertainment expenses are no longer deductible.
Getting a bit more in-depth...
Income from pass-through entities. Anything other than a C-Corp is now considered a pass-through entity (including S-Corps). Pass-through deductions on individual returns are also significantly changed, particularly for those higher-income earners in the fields of law, accounting, medicine, consulting, athletics, financial services, and brokerage services. More details can be found here, Can You Win From the Pass-Through Deduction?, and more details on other lines of businesses to be affected will hopefully be explained by new IRS amendments and regulations.
C-Corp income. You may already be aware that taxes for C-Corps have been significantly reduced, to a flat 21%. However, the deduction for dividends received from other corporations has also been reduced from 70% to 50% for most dividends, and to 65% for those dividends which had been previously deducted at 80%.
Depreciation changes. This is another area that has received a lot of coverage, as the changes here are extensive. For starters, tangible personal property has been expanded to include property primarily used to furnish lodgings and improvements to nonresidential real estate. (If you're in the hotel business, this should be very exciting news for you.) Furthermore, Section 179 and bonus depreciation have been increased, with new rules not only applying to 2018, but also to property purchased in 4th quarter 2017, or purchased before 4th quarter 2017 but not put into use until 2018. Unfortunately, most of the bonuses expire in five years. Forbes has a great write-up of these changes, Tax Geek Tuesday: Changes To Depreciation In The New Tax Law.
Business interest expense and income. The business interest deduction is now capped at 30% of income (excluding depreciation) and can be carried forward for five years. Small businesses are exempt if they have less than $25 million in annual gross receipts, or are cash-basis. It also does not apply to "any taxpayer in the business of being an employee" (IRS clarifications hopefully coming soon), or to real property/real estate businesses. Business interest income also no longer includes interest from investments.
And the information we either don't have, or which is too long to list here.
FITW. For starters, federal income tax withholding tables are not yet available, but are scheduled for this month, to be used for employee wages as early as February. These could mean for some significant changes in employee take-home pay, but we won't know exact details until they are released by the IRS. This can be a bit of a headache for small businesses handling their own payroll; if you are not currently using a payroll service provider, now might be a good time to research those options.
Fringe benefits. Many fringe benefits which previously counted as deductions for employers will now no longer be deductible. Additionally, certain expenses are no longer deductible for employees, as well (in particular, un-reimbursed business expenses). See The New GOP Bill and What It Means for Employee Benefits in 2018 for a list of the eliminated benefits.
With all of the changes to tax law in 2018, it's dangerous to try and navigate on your own. Talk to your accounting professional about how these changes will affect your business.
Staying (Financially) Fit Over the Holidays
With Halloween only 12 days away, we are officially in the holiday season. This is my favorite time of year, and I understand the temptation to let work slide as I give into the distraction of Thanksgiving, Christmas, and vacation.
But holiday season coincides with year-end and, for businesses, this needs to be a time of focus. Just as it's easy to undo months of dedicated diet and exercise with the wild abandon of the holidays, it's easy to let your business financials slip at the time when you really need them at their peak.
Here are a few common bookkeeping issues we see in Q4 year after year, and how to avoid them.
Missing Deductible Expenses
The holidays are a great time to let loose and be more sociable with co-workers, clients, and referral partners. But just as you lose count of how many calories you're taking in, you can lose track of the money you're spending. Not only can this result in overspending, of course, but you can also be missing out on deductible expenses that will save you money in just a few months at tax time.
Perhaps you're planning an office Christmas party for your staff. Not only would those expenses be deductible, even food purchased for a potluck, but any staff appreciation gifts you'd like to hand out, as well. The same goes for client or vendor appreciation gifts. (If you have someone external doing your books, be sure they're asking about purchases for things like massage gift cards and fruit baskets, and recording them as business expenses, not draw activity.)
Many networking groups hold a special holiday party. Not only would any food and drink you purchase for that be deductible, but also mileage to the event. If you're having trouble keeping up with your mileage, something as simple as a mileage log (free to download here) in your vehicle or as sophisticated as an app can do wonders to help you track that.
Whatever you do, be sure you're keeping proper record of your business expenses, even while you party it up.
Falling Behind on Bookkeeping
Between parties, travel, and employees being out sick from all the germs they picked up partying and travelling, it's easy for certain tasks to get a bit behind in the later part of the year. However, bookkeeping is not like cleaning the house; you can't just plan to catch it all up at once. If I don't clean my house for a month, it's not that much more difficult, proportionately, than if it's not cleaned for a week. Bookkeeping doesn't work that way. If your bookkeeping takes four hours a month and you fall three months' behind, you now have twelve hours worth of bookkeeping to do. (And finding twelve hours for a task you like is difficult enough; imagine trying to find half an entire day to dedicate to a task you dislike.)
Many business owners who find themselves in the position of staring down months of untouched financials make the decision to get some outside help, just to catch things up. The problem is that they're in good company. Beginning in November, professional bookkeepers get very busy with new clients who are hoping to get their books cleaned up for year-end. Not only is there an influx of new clients, but existing clients continue to need service, and we're busy getting all of their year-end documents ready as well. Many of my friends who work solo or operate smaller firms do not take on any new work during this time of the year.
If you aren't certain that you'll be able to keep up with your financials on your own during the holiday season, begin seeking assistance now, before you get too busy.
Not Preparing for Next Year
(NOTE: If you are one of those people who files an extension out of habit, this is for you.)
You may not realize it, but there is a lot you can be doing right now to get ready for next year's tax season.
Just like you don't have to wait to make a New Year's resolution to start getting fit, you don't have to wait for January 1st to start getting your books in shape for tax season. For starters, you can be preparing for the January payroll reporting rush. In the chaos of year-end, many business owners forget that 1099s and W-2s are due at the end of January, and not in April. To prepare, you can be sure that you have W-9s, W-4s, and any required state tax documents on hand now, instead of trying to get them from workers later. (This is especially true of 1099 contractors, as they may work for you for a much shorter season and can be harder to track down later.)
If you have been using an outsourced payroll system, be checking now to ensure that the payroll reports in your financials match those provided by the vendor. Sometimes errors do occur, and you will need to alert the payroll company right away if their totals are incorrect. (Like bookkeepers, they are getting very busy this time of year, too.)
You want to check to make sure that your sub-ledger totals, such as your Accounts Receivable and Accounts Payable, match your General Ledger balances. You also want to be sure that you are up-to-date on any reconciliations.
Finally, it's a good idea to take some additional tax-sheltering steps. For example, if you had a good year and are cash-basis, consider making a large business purchase in December instead of January, to reduce your taxable income. Or maybe you have not been paying enough into your withholdings or your quarterly estimated self-employment taxes, and need to increase those in December. There are many options available to you, but you need to act now.
Fortunately, you still have some time to make the most of your holiday season. Stay on top of your books as you go, and you will have a restful and relaxing January (at least compared to everyone who didn't put in the work during December). If you need help, we are always available.
Why "Cheap & Easy" Online Bookkeeping Services are Neither
Online "full-service" bookkeeping companies have been on my mind a lot lately. Mostly, it's because we've recently had to do so much clean-up work for clients who have previously used these services to keep their books.
Over the past week alone, we've started working with three different clients who previously employed three different online accounting services. All three have told us, separately, how the solution that was supposed to save them money and make their life easier ended up costing them hundreds or thousands of dollars for incomplete, inaccurate financials.
So, if bookkeeping is really just a matter of putting the right numbers in the right spots, how is it that these companies are falling so short of the mark? Let's look at a comparison of how an internet bookkeeping company works versus how we work.
Utilizing technology vs. relying on technology.
I won't be a hypocrite; I love technology, and we use it at The Bookkeeper to make our work faster and more accurate. (We even have clients in other areas of the country, with whom we've never met in person.) However, trusting technology to make the correct judgment calls, without checking behind it, leads to errors. Online bookkeeping services enter transactions based on vendor defaults; for example, this can lead to a $10,000 bank transfer being labelled as a "bank service charge", because the bank is listed as the vendor in the downloaded transaction description, and that's where it defaults. An expert familiar with the account is going to be well aware that the $10,000 is not a service fee, and will assign the transaction appropriately. And speaking of experts...
Hiring the best people vs. hiring the most people.
One of the things I am most proud of in the growth of my company is the team we've assembled. We have some very experienced people, and everyone is focused on constant education and improvement. We offer better benefits than our direct competitors, and do a lot to ensure that our employees have a clear path to growth within the company.
When I first started seeing the product being put out by these online bookkeeping companies, I was curious about what it must be like to work there. I went to Glassdoor and read some reviews by current and former employees, which confirmed a lot of my suspicions. Even the positive reviews spoke of their company as a "great stepping stone" to employment in a more traditional firm. Several employees spoke of it being their first job after graduation. I'm glad that there are good employment opportunities for young bookkeepers, but I don't feel that I would want them to be the point person responsible for a client account.
Inclusive service vs. charging for "add-ons".
Possibly due to the fact that their employees have less experience, online bookkeeping services do not offer full bookkeeping to the degree that a traditional company would. Most do not allow for entering invoices, bills, line of credit, fixed assets, nor payroll; if they do offer these services, it is at steep surcharges. (One company offers payroll for up to only three employees for $100 a month!) We recognize that things like bill-pay, tracking receivables, filing sales, recording depreciation, etc. are all necessary for truly accurate financials, and should be included as a part of the original agreed-upon rate, without being snuck in as a costly "add-on". Speaking of pricing...
Charging for the work done, instead of how much you think the client can afford.
I am always suspicious of companies which offer pricing based on monthly expenses or revenues in dollar amounts. Here's a secret: larger companies aren't always more work. Imagine a client who is a business broker; this client might make $20,000 in one month, but it might be on only one sale! Now imagine a client who is a dry cleaner; the dry cleaner might make less than half of that, but it could be in hundreds of transactions. Which one do you think takes more time for the bookkeeper to enter? One transaction, or hundreds?
Businesses who charge based on amount of money passing through the client's account are often just trying to see how much they can get away with charging. They know that a client who only spends a few thousand dollars a month will not want to see a large proportion of their budget go to a $450/month online bookkeeping solution. Likewise, they know that a client spending $100,000 a month will not notice that amount to the same extent. It is, in my opinion, a deceptive marketing practice.
Proactive vs. reactive service.
Most online bookkeeping companies ask clients to submit bank statements at month-end, and then just download the transactions into the system at that time. As we've discussed before, we get into client accounts, at minimum, twice a week, to help monitor cash flows, identify potential problem areas, and review areas of improvement. This allows for timely and therefore relevant information, as well as allowing us to compile period-end financials much more quickly, since most of the work is already done by the time the month closes.
This is not to say that online bookkeeping services can't be helpful in select situations. If a client has a high number of very basic transactions, with no fixed assets nor liabilities, and no interest in tracking invoices nor bills, no payroll, and no sales tax, an online solution might be more cost-effective for them. However, I would highly encourage anyone else to get a second consult before signing an agreement with an online-only bookkeeping company.
Guest Post: "What Does Marketing Strategy Have to do with Bookkeeping?" by Haley Lynn Gray
I have run across more than a few small business owners - some doing okay for themselves, others not - who take the shotgun approach when it comes to marketing their business. The first key is when they tell me that they have “The Facebook”, and they’re doing “ads”, and they are doing a bit of this and a bit of that.
I know that they are likely trying everything they come across, with little regard for the strategy and overall marketing plan. It’s not that I don’t believe in being spontaneous, or even getting creative with part of your marketing. But the reality is that nearly every piece of your marketing should come together; it should all work together, sort of like an orchestra.
If you start running Facebook ads without a solid presence and good organic reach, the cost of your ads is going to be significantly higher, and the cost per client for acquisition is going to be dramatically higher. In some cases, I’ve seen the cost of a lead being 5-10 times the cost that it would be with a good organic strategy.
The same concept applies to Google Adwords. The lower your SEO ranking, and the less high quality content you have on your website, the higher your cost will be to advertise with Google Adwords.
I see people who toss up a landing page using Web.com, YP.com or others. Unfortunately, if you take this approach, you might be building links to a website that isn’t your own. It won’t help you get that organic reach for your website and you’re losing control of the process. You’ll also end up spending more money for fewer leads, and thus end up with fewer results.
It’s important to have a strategy with all the pieces coming together. Sometimes the tweaks can be tiny, like adding a clear call to action on every blog post, or making a point of collecting email addresses so that you can stay in touch with people via email campaigns. It takes strategy and planning to collect those email addresses and to execute a well thought-out marketing campaign. By thinking through how all of the pieces should work, and with help from a strategist if you need one, you can end up saving a lot of money.
Every business needs a strategy and a budget. So does a marketing plan. Everything should be measured, and data should be collected on how your system is performing so that it can be tweaked and improved. Do these steps for every aspect of your business and you will see savings and a healthier bottom line.
Haley Lynn Gray is CEO and Founder of Leadership Girl, a digital marketing agency, where she uses her skills as a sales and marketing strategist and social media expert to help small business owners grow their business.She combines her years of real-life and business experiences with her MBA from Duke’s Fuqua School of Business to benefit her clients. Haley works with them closely to set goals and put processes in place so they can achieve and exceed their goals.
Haley, along with her team, can also help with social media management, website updates, drip campaign management, and all aspects of business marketing.
In addition to running her business, Haley is a mom of four, a Girl Scout Leader and an author of two best-selling books. Haley is truly passionate about helping entrepreneurs achieve their potential, and empowers them to overcome obstacles in entrepreneurial ventures. www.leadershipgirl.com
Digging into Profitability
If you're paying even the tiniest bit of attention to your books, you are familiar with your Profit & Loss statement: namely, how much you are making or losing over a period of time (whether monthly, quarterly, annually, etc.). It's possible that you have broken out your income and expenses to great detail, but there is still additional information you could be missing out on.
There are methods by which you can measure the profitability of different segments of your business, depending on your industry and the composition of your company. That can allow you to focus on the most profitable aspects of your business, while identifying areas for growth. Here are some of the most common ways we dig deeper into profitability on behalf of our clients.
Job-Costing
Job-costing is great for businesses who tend to work with a small handful of clients at a time, where the projects are long-term and clients aren't necessarily repeat customers. Job-costing is typically associated with construction, but can also be applicable for service-based industries that work on projects, such as large-scale marketing or software integration firms. In job-costing, each expense and revenue deposit is connected to a specific job, and P&Ls can be run by job, in addition to being run for the company as a whole.
Location-Based
Sometimes a company's business occurs in more than one place. Obviously, there are businesses such as dental practices, who have multiple offices. If those are managed independently, it makes sense to want to know the profitability of not just the practice overall, but of each individual location.
Location-based profitability tracking also works very well in the retail and service sectors. Anywhere one business has more than one location, they should be tracking how much money is location is making (or losing) for them. Additional education or possibly replacement might be necessary for General Managers who are not pulling their weight.
Firms with Partners
Sometimes there are businesses in which multiple individuals work within one location, but functionally act as separate business entities. In some law firms, for example, partners operate within the same space cooperatively, but it is still valuable to see who is bringing in the most revenue for the firm, and where expenses are being allocated. There are also certain health clinics or spas where multiple partners may offer complimentary services, and it is vital to track the revenues from each avenue.
Class-Tracking
Some companies have what are really multiple businesses operating as one. For instance, a farm might sell directly to restaurants in one area, sell to grocers in another, and operate a produce stand from which the public may purchase directly. Assigning a class to each transaction (again, both revenue and expenses), can allow the farmer to see the profitability of each segment. Class-tracking is also great when selling both directly and for resale, as sales tax is only applicable on certain sales.
General Rules
If you decide to implement additional levels of profitability tracking within your business, it is vital that you follow a few basic rules.
1.) Be consistent. Have an assignation for every transaction, every time. Otherwise, your data is inaccurate, and therefore, meaningless. (And it's been a waste of your time to do the tracking you have done.)
2.) Have clarity. Know exactly what your system will be for assigning transactions and have it written out, for either yourself or your bookkeeper. Make sure everyone who touches your financials is on the same page with the system.
3.) Be timely. We are always proponents of keeping financials up-to-date. However, this gets even more crucial when you need the additional level of detail required for profitability break-outs.
If you are interested in what profitability tracking might look like for your company, contact us for a free consult. We are happy to go over your financials and suggest ideas for growth and improvement.
The 3 Most Common MLM Tax Myths
Multi-level marketing companies (MLMs) have exploded over the last decade. Tens of millions of Americans participate in MLMs or "network marketing". There have been countless articles written over both the potential risks and successes of these companies, so we're not going to dig into that debate. The fact of the matter is, like with any industry, some people make money in multi-level marketing, and some people don't.
What we are interested in, however, is the preponderance of tax myths we see bandied about when it comes to network marketing. New MLM participants are often encouraged to take advantage of myriad deductions that will open up when they start their own business, and are promised significant tax savings.
Unfortunately, it's our responsibility to set the record straight on that.
Here are the three (inaccurate) MLM tax beliefs we see most frequently...
If you put an advertisement on your car, all your vehicle expenses are deductible!
If this was true, every person should just file a d.b.a. and slap the name of their "company" on their vehicle, because the tax savings would absolutely be worth it. Unfortunately, it's not true. However, we still talk to many new clients who have heard this.
This myth is so pervasive, in fact, that the IRS put out a special note on it in their 2016 version of Publication 463 (which pertains to transportation deductions). A vehicle wrap is not a free pass for the government to pay for all of your fuel purchases for the year.
However, the cost of the car advertisement itself is fully deductible as a marketing expense. Also, your business mileage (excluding commute) is still deductible.
You can write off all your meals!
Don't go crazy on eating out, thinking you'll get it all back at the end of the year.
For one thing, business meals are limited to those which are not considered "lavish or extravagant". For another, except for under very specific conditions, meals are only 50% deductible. So you can still lose a lot in meal expenses if you aren't careful.
Also, don't try to classify every meal as a "business" meal. Meal deductions are frequently abused, and can show up as a "red flag" to the IRS.
It doesn't matter if you aren't making money...Just write off the loss!
Bad news: The IRS isn't dumb.
There was an actual case that came about due to a couple who were involved with Amway as a hobby. They threw extravagant parties for their friends, ostensibly for the purpose of selling Amway products, and claimed the losses on their taxes each year. That's when the IRS came in with hobby law.
Hobby law specifies the conditions under which your business can be reclassified as a "hobby". There are various criteria involved, but one major aspect is failure to turn a profit year after year. Regardless of the type of business, if your business is facing long-term failure, that is a problem.
If you have questions about how to handle your MLM business's accounting, don't take the word of your friends or upline. Talk to a professional, so you don't run into trouble.
Your Accountant's Weird Habits - Explained
If you have a pet in your family, maybe you've seen those articles purporting to explain why your dog spins in a circle before lying down, or why your cat would rather drink from the faucet than a water dish. To many people, there is a creature even more alien and perplexing than any animal: the finance professional.
Your bookkeeper or tax professional might say or do things that don't make a lot of sense to you. Some of their actions might seem flat-out contradictory. But, as with any exotic species, there is a reason behind all of it.
I want to break down a few of the most commonly complained-about behaviors, along with the explanations behind them (with the assistance of cat pictures).
First annoying habit: My accountant keeps nagging me to get organized.
Your bookkeeper wants you to have a system for tracking open customer balances, or wants you to keep all your expense reports in one place. It's frustrating, because the whole reason you're paying them is for them to "keep up with that stuff".
So why do they do it?
For starters, good bookkeeping relies on complete information. (A balance sheet showing $1M in the bank doesn't mean much if there's a $995K liability that got left off.) Unless you have an in-house accounting staff, your bookkeeper is relying on you to get that information to them. A good organizational system ensures that all of the information is getting to who needs it.
Furthermore, most accountants charge based on time expended, and though good accounting can be had at a good value, it's still not cheap. Paying your accounting service to dig through files and hunt down info is a waste of their time and your money.
Speaking of "time", my accountant freaks out if I don't get certain information to them right away. What's the rush?
Certain items, particularly related to tax filings, can incur massive penalties if late. Your accountant needs the information in advance of those deadlines, to record it and check for accuracy. (Inaccurate filings can also, of course, result in penalties.)
If your accountant is pestering you to get information to them quickly, it's because they are trying to keep you out of trouble and save you money.
Since we're already talking about taxes...Why does my accountant try to make me spend money I don't want to spend? For instance, why do I have to treat certain workers as W-2 employees, instead of paying them as contractors?
Because worker classification is a big deal. Not paying employees correctly can result in audits, fines, and even lawsuits. Your accountant is being a stickler about the rules because they don't want you to get sued.
Still talking taxes...Why does my accountant say I can't take this cool deduction I found? I saw online that I can expense my home office/car payment/pet kinkajou/etc.
Present blog excluded, internet advice is no substitute for real, professional guidance. Though you'll seeing many articles claiming that you can write off an entire car payment, or take a "home office" deduction, the actual guidelines surrounding those items have specific criteria which must be met. Unfortunately, small businesses, particularly those which are sole proprietorships, are frequent targets for audits. Taking excessive, unqualified deductions puts you at an even greater risk. If you trust your tax professional, trust that they will advise you of deductions for which you do qualify. (If you are not happy with your current tax professional, we can recommend some.)
So I have to spend extra on employees, but can't take any of the fun deductions. And now I'm being told that I need to watch my spending on meals, and look at ROI for things like advertising. Is my bookkeeper just a kill-joy?
No, they just don't want you to go broke. Going bankrupt isn't just bad for you; it also means you can't pay your vendors (like your bookkeeper). So they have a vested interest in keeping you solvent.
Because, no matter what your business, one thing we all have in common is that we like to get paid.
What does a bookkeeper do?
"So, what do you do?" It's one of the first questions we ask upon meeting someone. My usual answer is "bookkeeping and fractional CFO". The typical response to that is, "Okay...and what does that mean?"
Most people have a general understanding of bookkeeping is, but fractional CFO is a murkier concept. Essentially, we act as an "outsourced" CFO (Chief Financial Officer) for companies too small to have their own. Offering this service is one of the primary ways we distinguish ourselves from most bookkeepers.
However, there are several differences between what a standard bookkeeper does, and what we do.
A bookkeeper offers monthly reconciliations at an hourly rate. The process most bookkeepers use is to, at the end of the month, have their clients bring a stack of financial documents, such as bank statements, receipts, pay stubs, etc. The bookkeeper then uses that information to make entries and perform a reconciliation. This takes time, and their clients will usually receive that past month's financial statements about midway through the following month. Once the month's work is completed, the client receives an invoice for the hours worked. Depending on how busy that month was, this bill fluctuates.
The Bookkeeper offers bi-weekly reconciliations at a monthly rate. Instead of waiting until month-end, we enter information downloaded from the client's bank accounts every few days, so their financials stay more current. This prevents a long clean-up process at the end of the month, and allows us to complete the monthly financial statements more quickly. Furthermore, we offer our ongoing clients a monthly flat rate, so there are never any surprises on the bill (even when the month was a busy one).
A bookkeeper moves on and makes assumptions. Most bookkeepers focus on one specific aspect of their business, which is just getting transactions entered. If they have an expense and aren't sure what it's for, it gets stuck into "Uncategorized Expense" for the client to figure out later. If they're entering payroll and see that a contractor really should be paid as a W-2 employee, they're just going to make the entry as it's presented to them and move on. They might make a mention of it to the client when they see them again in a few weeks but, in most cases, likely not.
The Bookkeeper pauses and asks questions. Our clients hear from us frequently. If something looks "off", or if there are improvements to be made, we'll bring it to the client's attention immediately. In one account, we identified a case of credit card fraud before the bank and client did, and were able to alert them to it. We also warn clients about potential cash flow issues, or when certain bills are due, to help prevent overdraft fees and other penalties.
A bookkeeper does exactly what the client asks. That's not a bad thing, at all. But most bookkeepers do only what the client asks, and nothing else.
The Bookkeeper proactively seeks out ways to improve our clients' financials. On our own time (again, without charging the client a cent more), we've done things like developing a new pricing strategy to propose to a client having issues with their retailers. We've identified overdue Accounts Receivable to find clients money, and we've saved clients money by negotiating better vendor contracts. We've used our connections with merchant card processors to save clients thousands in credit card processing fees. And we have done all these things without the client ever asking us to.
Money, it is said, is a vehicle.
A bookkeeper is a mechanic. They do routine maintenance. If something breaks (and you notice it), you take it to them to get fixed. If something breaks and you don't notice it for a while, and the problems gets really big, when you take it to them to fix, you're going to end up with an expensive bill.
The Bookkeeper is a travel agent. We help you figure out where you want to go, and we get you there. Whether you drive, cruise, or fly, we are there for you at every step of the journey. And we work to help ensure that the trip is as enjoyable as the destination.
Of course, all of this is hard to sum up in a casual introduction. That is why we offer free 1-hour initial consultations, so we can get to know prospective clients and show them the differences we have to offer.
If you know someone whose business isn't going where they want it to go, before you send them to a bookkeeper, send them to The Bookkeeper.
Pricing Strategies: How do I know how much to charge?
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One of the hardest decisions a new business owner makes is how much to charge. In calculating the "right" price, there are a number of variables to consider.
For starters, let's re-visit Intro to Microeconomics and ask, is your product elastic, or inelastic? Elastic products are those goods or services in which demand is closely tied with price. In other words, demand on an elastic product will increase with a decrease in price, and vice versa. The demand for inelastic goods is steadier, and less dependent on price.
For example, a specific brand of chocolate chips is a highly elastic good. If the price increases too much, customers will just purchase a different brand of chocolate chip (or decide to bake a different type of cookies, or just buy the pre-made cookies outright). Though I might really like Ghirardelli brand chocolate chips, I don't really need them, and there are plenty of ready substitutes available.
A very inelastic product would be gasoline. The price tends to be relatively uniform within a geographic area, and most people are heavily reliant on it in their day-to-day lives. Even when the price surges, consumers still have to purchase a certain amount. Likewise, even when gasoline is very cheap, people don't necessarily start driving and purchasing significantly more.
If your product is elastic, you don't necessarily have to have one set price. You could employ "surge" pricing, a la Uber, and charge more when your goods or services are in greater demand. You can also try to generate increased demand through temporary price drops. (Perhaps some of you are old enough to remember "blue light specials".) If you want to keep steady prices, or if you're good is inelastic, there are other variables to consider.
To develop a pricing strategy, you should know your variable expenses, how to calculate profit margin, and have a general idea of market price (competitors' prices).
Maybe you have a surface familiarity with the terms "variable expenses" and "profit margin", but aren't 100% clear on how they're calculated. For your benefit, we'll have a quick accounting lesson.
Variable expenses are those expenses which are directly tied to the production of each unit of a product, and might include such expenses as raw materials, labor hours, and shipping costs. In other words, variable expenses increase (or vary) as production increases. Costs of Goods Sold (or COGS) are variable expenses.
To calculate your profit margins, divide your net profit (sales - COGS) by your sales. Playing with these formulas at different prices can help you determine a feasible price for your product.
As far as competitive pricing, it is good to be in a range with your market competitors, though you don't necessarily have to be the cheapest, or even on the lowest end. Trying to win customers on price alone can cause a big hit to your profit margins, and will not bring you long-term success. If you cannot safely price your competitors out, beat them with a distinguished product and superior customer service.
Finally, there are discounts to consider, particularly "friends and family" pricing. Special pricing is fine, as long as you can still maintain healthy margins. Never sell at a loss, even for those close to you. You do not want to have to raise prices on friends and family later, so set them at a level you can maintain indefinitely. If you price yourself out of business, you really aren't doing your loved ones any favors.
How You Use ROI Every Day
For those who don't know, ROI stands for "return on investment". Colloquially, you might think of it as "bang for your buck". Though it's frequently used to describe investment decisions, ROI is something you use in your daily life. You go to the gym because the payoff of improved health has greater value than the time you put into it. You're getting a good return on that time invested.
You might even use ROI to compare two options. Let's say your goal is to lose fat, and there are two classes open when you go to the gym. You could go to an hour-long spin class, or an hour-long yoga class. Doing your research, you find that spin class burns 50% more calories, so you choose to go to that one, as it offers a better ROI.
Looking at it from a financial perspective, there's a very simple formula to calculate ROI.
Return on Investment = (Gain from Investment - Cost of Investment) / Cost of Investment
Now, when it comes to ROI in small business, people tend to think of it primarily in terms of sales and marketing. Before you run an ad or hire a marketing firm, you should be looking at whether the income you're likely to gain outweighs the amount you're about to spend. (For a more in-depth look at mistakes owners make in their marketing budget, see our prior article, Living a Lie: The mistakes that make entrepreneurs go broke.) If you are paying a marketing firm $10,000 a year and your sales only increase by $3,000, you're not making a good return on your investment. Likewise, if you hire a salesperson at base $45K + commission, and he only makes $15,000 in sales, he's probably not in the right position at your company. These are the sorts of obvious examples people think of when it comes to ROI in their business.
However, any business decision really comes down to a matter of ROI, and that is true for hiring an accountant, as well. We're constantly fighting the stereotype of accounting as a necessary evil, and one way to do that is to look at all the benefits that come with good bookkeeping and CFO.
First, of course, are the tax savings. Accurate books not only help you avoid an audit and costly penalties, but also aid you in tracking and recording every deduction for which you're eligible.
Second is saving on expenses. A good CFO service should be locating areas of overspending and helping you restructure to lower or even eliminate certain costs. (Actually, we tend to recommend you eliminate those expenses which don't produce a good ROI. See? It really does all come back to that.)
Third, we like investigate means of increasing revenue. This could be by introducing a new product or service line, acquiring another business, re-examining current pricing strategies, or even by locating and collecting on aged receivables.
To look at how The Bookkeeper does this from an ROI perspective, we save or earn our average client enough in our first year with them to pay our fees for 23 months. That's an almost 100% return on investment.
Finally, there are the benefits which are harder to quantify, primarily opportunity costs. What do you save in energy and stress by hiring someone to take over certain tasks for you?
This week, I challenge you to take a close look at your business, find what's paying off, find what's not, and do something about it.