Category Archives: Accounting

Revenue is revenue, right?

by Kelly Dies, Soundpoint Consulting

A dollar is a dollar. That’s true. And, all revenue is equal. Right? Well no, not in an investor’s or potential buyer’s eye. So what makes some revenue good and other revenue better? 

Recurring

Recurring revenue is highly desirable because is it known and predictable. The best example of this is an auto-renewal fee or service charge periodically charged directly to a customer’s credit card. Once the initial sale is complete there are no more costs to acquire a customer. The revenue stream is much like an annuity. Continue to provide the goods or services as promised and the revenue keeps coming in. 

Great examples of this are insurance premiums and streaming fees. Once customers have decided to purchase the product – and assuming they remain content, they are happy to have their credit card billed automatically. 

In contrast, consulting and attorney fees are often one-time in nature. Revenue ceases when the project is complete and the engagement ends. 

High Switching Costs

Revenue generated from products or services that have high switching costs are more reliable than from those which do not. Switching costs can vary from technical reliance to data lock-up to high start-up costs with a new vendor.

A great example of high switching costs includes services which are outsourced, such as payroll processing. The cost to bring the work in-house is significant as you would have to hire and train a staff of people for this function.  Likewise, a bank account with automatic bill pay also has high switching costs, as unwinding those (recurring) transactions is a pain in the neck!

High switching costs in combination with recurring revenue results in some very high quality revenue. Take for example, my relationship with Constant Contact which reliably sends these monthly newsletters to you on my behalf. My credit card is billed monthly. And, it would be a quite an undertaking to transfer my email list to another email provider. Do you think

Constant Contact is at risk of losing my revenue? Absolutely not!

Loyal Customers

Revenue from a loyal customer base is extremely valuable. Not only does it guarantee repeat business but it potentially means additional business from referrals, thus significantly reducing the overall need for marketing and advertising spend.  

Good examples of this are a trusted relationship with your tax preparer or a favorite clothing store. Although switching costs may not be high, loyalty keeps you from looking elsewhere.   

Consider two comparable stores with the only difference being the loyalty of the customer base. The store with the more loyal customers has less customer churn and doesn’t have to work as hard for every dollar of revenue. Conversely, the store without the loyal customers has to work hard for every dollar earned. Not surprisingly, the investor/banker/ potential buyer will value the first store more. 

What are you doing to earn and keep the loyalty of your customers? 

High Margins

All businesses have revenue streams with different margins. Revenue that generates higher gross margins is more valuable than revenue which generates lower margins. Makes sense. You cannot generate much income from a revenue stream that is saddled with large variable costs.  

And, if a revenue stream costs more to produce than the dollars it generates, well that is not good. It’s like giving someone $1 in exchange for 85¢. Do this in too often and you will soon be out of business. 

The bottom line – know and manage your unit costs. Try to divert revenue from your lower margin products to those with higher margins. 

Diversified

Just like an investment portfolio, a diversified customer and supplier base is less risky than if you are highly dependent upon a handful of them. 

If one of your largest customers were to transfer business to a competitor, how quickly can your business recover? Or, if your largest suppliers were to run into financial difficulties, could you weather the storm? 

If your business model is highly dependent upon Google, Amazon or Microsoft, what happens if they change how they do business with companies such as yours? Trust me, you do not have much negotiating power with these guys. 

A good rule of thumb is that your top 5 customers should not be responsible for more than 15% of your total revenue. A similar metric should hold for suppliers. 

If you would like assistance improving the quality of your revenue, please give me a call. I would be happy to help.

What Tax Documents Should You Keep?

And which ones should you shred?

If your filing cabinet is bursting at the seams, you’re not alone. As a small business owner, you have a lot of paperwork to keep track of – everything from business licenses, employee records, lunch receipts – the list goes on.

Some of the more challenging records to manage are your business’ tax documents and all of their supporting paperwork. Navigating tax document requirements is complicated and is often unchartered territory for a small business.

As a default, many business owners end up unnecessarily saving every last receipt for years and years. Or, they become overwhelmed and throw away important information. Continue reading

Risk and Reward in Business Valuations

by Kelly Deis of SoundPoint Consulting

In its simplest form, the value of a business can be boiled down to just two components: risk and reward.
Although a significant amount of thought and rigor is required to determine the value of a specific business, the underlying concept remains the same: the value of a business is equal to the economic benefit (earnings or cash flow) that it generates divided by the risk it takes to generate those benefits.
Value = Earnings (or Cash Flow)
 Risk
Think of it this way. If two companies generate the same amount of cash, which one is more attractive (valuable) to investors?
  1. a Fortune 500 company in business for 35 years with revenues locked in for the next 5 years
  2. a start-up with an untested management team, dubious business plan and volatile revenue stream
Of course, the right answer is 1).
So, while earnings are important, don’t forget to focus on risk as well. They both play an important part in the value equation.

Continue reading

Top 10 bookkeeping mistakes by small businesses.

couple working on finances

From one-person entities to Fortune 500 companies, no business can escape the dreaded task of bookkeeping. While it’s definitely not one of the more glamorous parts of the job, bookkeeping is at the heart of small business success, which means errors can be crippling.

To avoid the financial headaches that come with bookkeeping mismanagement, it’s important first to be aware of the pitfalls that can ensnare you. Continue reading

What’s the best way to pay your employees?

by Joe Heinrich, SCORE Seattle

Congratulations!! You’ve grown your small business so much that you need help, and so you’ve hired your first employee. Now you’re confronted with the task of paying that employee properly in accordance with IRS regulations and State of Washington statutes, along with making payments to taxing authorities and reporting to them periodically. And now you’re stomach’s churning!!

payroll

Overview

To correctly pay an employee in Washington, the employer needs to deduct the following taxes from the employee’s pay and report and remit timely these amounts to the relative taxing authorities:

  • Social Security Tax and Medicare Tax (just the employee’s share)
  • Federal Income Tax
  • Washington Labor & Industry Premiums (just the employee’s share)
  • Washington Paid Family & Medical Leave Tax (just the employee’s share)

There may be other withholdings from the employee’s pay, such as garnishments for child support, contributions to a retirement plan, donations, and the like. Continue reading

Washington State’s new paid family and medical leave.

by Johnnie Hawkins, CPA
Parker Mooers & Cena, Silverdale

Starting in 2020, Washington will be the fifth state in the nation to offer paid family and medical leave benefits. This benefit offers partially paid leave to care for yourself or a loved one in times of serious illness or injury, to bond with a new child joining your home through birth, adoption or foster placement, and for certain military-connected events if you have a family member in active duty service.  This isn’t like paid sick leave; you will file your claim with the Employment Security Department (ESD), and your payment will come from ESD. Typically, you’ll have access to up to 12 weeks of paid leave.

Premium collection starts on Jan 1, 2019. In 2019, the premium is 0.4% of wages, or $3.85 per week for someone making $50,000 a year. Employers can either pay the full premium or opt to withhold a portion of the premium from their employees. Employers who choose to withhold premiums from their employees may withhold up to 63 percent of the total premium, or $2.44 per week for an employee making $50,000 annually. The employer is responsible for paying the other 37 percent. Businesses with fewer than 50 employees are exempt from the employer portion of the premium but must still collect or opt to pay the employee portion of the premium.

You can learn more about the program at www.paidleave.wa.gov/employers or contact us with questions at 360-692-8808. Continue reading

Tax Time: A Guide to Completing the Schedule C

 

Before the cold sweat and anxiety of tax season gives you a clammy embrace, make sure you know what you need to complete your Schedule C Tax Return.

tax time clockIf you operate a sole proprietorship or single-member limited liability company (LLC), tax time can be worrisome, especially if you’re doing your own taxes.

A little preparation and you’ll likely find there’s nothing much to worry about.

What is the Schedule C Form?

At its core, the Schedule C is nothing more than a profits and losses worksheet for sole proprietors and single-member LLCs (as long as the LLC hasn’t elected to be taxed as a corporation).

Before jumping into the details of Schedule C, it’s important to note that if you have $5,000 or less in business expenses, you may be able to file a Schedule C-EZ instead. Schedule C-EZ is a similar but much simpler form. It’s worth taking a moment to look at the list of requirements at the top of the form to see if your business qualifies.

The rest of this article, however, focuses on the more complex Schedule C. Continue reading

The #1 reason small businesses fail… and how to avoid it.

Cash flow.

Mention those two little words to almost any small business owner, and you’ll see them flinch.

Very few business terms get as cool a response. And sadly, those two little words (both of them four-letter words, interestingly enough), are the #1 reason small businesses fail. They take out more small businesses than any other factor.

In fact, 82% of small businesses fail due to cash flow problemsContinue reading

Personal Property Tax: The forgotten tax for many small businesses?

by Joe Heinrich, Volunteer Business Mentor, Seattle SCORE

Most small business owners are perfectly aware of the Federal, Washington and city taxes they are obliged to pay. However, the one that tends to fall through the cracks is the local Personal Property Tax on businesses by the county in which the business is located. This article explains what personal property is, how to self-report a business’s personal property, how the tax is assessed and how much a business may have to pay in Personal Property Tax.

What is “personal property” of a business?

Taxable Personal Property typically includes items used by a company to conduct business. Examples of personal property which may be assessed include furniture, fixtures, electronic equipment, telephones and machinery. Leasehold improvements and leased equipment are also included as personal property. However, personal property does not include property which is attached to a building or to the land which a business owns as that is considered “real property”.

Exempt personal property includes inventory (i.e., items owned to be resold or used as raw materials to products to be manufactured and sold) and vehicles used on the roadways.  Continue reading

What are the qualified business deductions under the Tax Cuts and Jobs Act?

tax deductionsThe Tax Cuts and Jobs Act (TCJA) created a new 20% deduction for pass-through entities. Though the IRS has not fully interpreted the new rules—which won’t go into effect until the 2019 tax season—many of the implications are clear. This article’s companion piece examined what qualifies as a Pass-Through Entity (PTE).

This blog hopefully sheds some light on how PTEs will be impacted by the new law.

Why a Deduction for Pass-Through Entities?

Since their inception, pass-through entities have been a popular choice for entrepreneurs, especially after the 1986 Tax Reform Act (TRA). Better known as President Reagan’s second tax cut, the TRA was passed by Congress to simplify the tax code and adjust the federal tax brackets.  Continue reading