ABC Solutions

Have Your Layer Cake and Eat It Too

The best cakes have layers and layers of different delicious flavors to enjoy. Stacked on top of one another, each layer is baked separately and becomes part of the whole. Like a layer cake, your business expenses have layers of meaning to them. When you can understand how expenses play a part in profit, you can manage them better.

Here’s how to make a layer cake of your business expenses. Let’s start with the most direct expenses.

Direct Costs

If you have inventory you will have a balance in the Cost of Goods Sold account. It should represent how much you paid for product or inventory that you are selling. It is the most direct expense of all the expenses; if you don’t spend this money, you would not have a product.

If you sell services, you should not have a balance in Cost of Goods Sold, but you will have direct expenses that are tied to performing your services. These might include labor from wages of the employees who carry out the services for clients. Any supplies directly involved with delivering services should be included as well.

You may also have other direct costs related to selling specific products or to servicing specific accounts.

Indirect Costs

The next layer includes indirect expenses. These expenses do not make up your product directly and might contribute to several different lines of products. Indirect costs might be attributable to a group of products or projects and can be apportioned accordingly.

Overhead

Although overhead is technically a form of indirect cost, it’s good to create a separate layer for it. It includes management salaries, rent, utilities, and other fixed costs that cannot be directly allocated to a product or service.

Assembling the Layers

A wonderful exercise is to classify each of your expense accounts in your Chart of Accounts as direct, indirect, or overhead. In that way, you can see how each account contributes to the costs of running your business. Some questions to ask yourself:

  • What is my gross margin before indirect costs and overhead?
  • What is my gross profit after indirect costs and before overhead costs?
  • How can I cut down on any of these categories of expense?
  • What is my breakeven volume in sales before overhead is factored in?
  • Can my profit margin be changed if I spent less in a certain area?

This layered view is just another way to view the financial aspects of your business and can help you make better decisions down the road.

You can also break the layers down even further by classifying the expenses as critical and non-critical. This will help you determine where best to invest while maintaining the level of profit you desire.

You can’t manage what you don’t measure. Layering your expenses will help you have your cake and eat it too. And if we can help, just reach out as always.

Seven Small Business Risks You Might Not Know You’re Taking

Running a small business is often about taking and managing risks. Market risks are normal but business and tax risks are another thing altogether. Most business and tax-related risks can be managed as long you know about them. Here are seven small business risks you will want to make sure are covered.

1. Best Choice of Entity

Are you operating as a corporation, limited liability company, partnership, or sole proprietor? More importantly, is the entity you are operating under providing you with the greatest tax benefits and separation from personal liability? If not, you might want to explore the alternatives to make sure you’re taking the amount of risk that’s right for you.

2. Employees or Contractors

Are your team members properly categorized when it comes to the IRS’s rules about employees versus contractors? Unfortunately, it’s not about what you and your team member decide you want. If you decide to hire contractors and the IRS determines they are employees, you could owe back payroll taxes that can cripple a small business. So you’ll want to do the right thing up front and make sure you and the IRS are in agreement, or be willing to take a future risk.

3. Insurance

If you’d like to protect yourself from possible losses through a disaster, theft, or other incident, insurance can help. There are a lot of kinds to choose from, and you’ll likely need more than one. At the minimum, make sure you’re covered by:

  • Business property insurance, renters insurance, or a homeowners rider to protect your physical assets.
  • Professional liability or malpractice insurance, if applicable, to protect you from professional mistakes including ones made by employees.
  • Workers compensation insurance, to cover employee accidents on the job.
  • Auto insurance or a non-owned policy if employees drive their car for work errands.

You may also want personal umbrella insurance, life insurance, and health insurance. Check with an insurance agent to get a comprehensive list of options.

4. Sales Tax Liability

Are you sure you’re collecting sales tax where you should be? As the states get greedier, they invent new rules for liability. For example, if one of your contractors lives in another state, you may owe sales tax on sales to customers who live there even if you don’t live there or have an office there.

Nexus is a term that describes whether you have a presence in a state for tax purposes. Having an office, an employee or contractor, or a warehouse can extend nexus so that you’d need to collect and file sales tax for those states. If you’re in doubt, check with a professional, and let us know how we can help.

5. Underpricing

Most small businesses make the mistake of underpricing their services, especially when they start out. If you started out that way, it’s awfully hard to catch up your pricing to a reasonable level. Knowing the right price to charge can make the difference between whether the company last six months or six years. You can mitigate this risk by getting cost accounting help from your accountants who can help you calculate your margins and determine if you’re covering your overhead and making a profit.

6. Legal Services

Legal services can be expensive for a small business, so sometimes owners cut corners and take risks. Attorneys are needed most when it comes to setting up your entity, reviewing contractual agreements such as leases and loan agreements, settling conflicts, advising on trademark protection, and creating documents such as terms of service, employment agreements, and privacy policies. Just one mistake on any of these documents can cost a lot, so be sure it’s worth the risk.

7. Accounting Services

Doing your own accounting and taxes can be risky if they’re done wrong or incomplete. You could end up paying more than you should if you leave out deductions you’re entitled to. Worse, if you do your books wrong, you could end up overpaying taxes without realizing it. A common bookkeeping error results in doubling sales, and while it might look good, you certainly don’t want to pay more than what’s been truly received.

How did you do with these seven risks? If you need to reduce your risks in any of the areas, feel free to reach out for our help.

Marketing by the Numbers

Two very important skills for entrepreneurs to master are marketing and finances. Combine them by understanding the numbers behind marketing, and you have an even more powerful understanding of exactly what makes your business tick.

Key Numbers – Cost Per Client Acquisition

Do you know how much it costs your business to bring in one client? The technical term is “Cost per customer acquisition,” and it’s computed by adding the total marketing and sales costs excluding retention costs and dividing them by the total number of clients acquired during a period of time.

Cost per customer acquisition is important to know because then you can compute how long it takes before your business begins to make a profit on any one customer. In software application services with a monthly fee, the breakeven for a client can be around ten months.

It’s essential to understand this dynamic for pricing and volume planning purposes. If your services or products are priced too low so that your acquisition costs are not recouped in a reasonable period of time, it can play havoc with your cash flow as well as your profits. If you don’t have enough volume to cover overhead and acquisition costs, then your company will be in trouble in the long term.

Customer Lifetime Value

There is a simple and an academic formula for customer lifetime value. You can estimate it by multiplying the average sale of a customer by the average number of visits per year by the number of years they remain a customer. That’s the easy version.

The more difficult version of this formula takes into account retention rates and gross profit margins. The formula is: Average customer sales for life times the gross profit margin divided by the annual churn rate.

Once you know and track these numbers in your business, you’ll be better able to make smart decisions about your marketing investments and your pricing. And if we can help you, please reach out as always.

The Triangle of Fraud Risk

A 2014 Global Fraud Study conducted by the Association of Certified Fraud Examiners (ACFE) estimates that the average business loses five percent of their revenues to fraud.  The global total of fraud losses is $3.7 trillion.  The median fraud case goes 18 months before detection and results in a $145,000 loss.  How can you avoid being a fraud victim?

The first step is to become more aware of the conditions that make fraud possible.  The fraud triangle is a model that describes three components that need to be present in order for fraud to occur:

  1. Motivation (or Need)
  2. Rationalization
  3. Opportunity

When fewer than three legs of the triangle are present, we can deter fraud.  When all three are present, fraud could occur.

Motivation

Financial pressure at home is an example of when motivation to commit fraud is present.  The fraud perpetrator finds themselves in need of large amounts of cash due to any number of reasons:  poor investments, gambling, a flamboyant lifestyle, need for health care funds, family requirements, or social pressure.  In short, the person needs money and lots of it fast.

Rationalization

The person who commits fraud rationalizes the act in their minds:

  • I’m too smart to get caught.
  • I’ll put it back when my luck changes.
  • The big company won’t miss it.
  • I don’t like the person I’m stealing from.
  • I’m entitled to it.

At some point in the process, the person who commits fraud loses their sense of right and wrong and their fear of any consequences.

Opportunity

Here’s where you as a business owner come in.  If there’s a leak in your control processes, then you have created an opportunity for fraud to occur.  People who handle cash, signatory authority on a bank account, or financial records with poor oversight could notice that there is an opportunity for fraud to occur with the ability to cover the act up for some time.

Seventy-seven percent of all frauds occur in one of these departments:  accounting, operations, sales, executive/upper management, customer service, purchasing and finance. The banking and financial services, government and public administration, and manufacturing industries are at the highest risk for fraud cases. (Source: ACFE)

Prevention

Once you understand a little about fraud, prevention is the next step.   To some degree, all three points on the triangle can be controlled; however, most fraud prevention programs focus on the third area the most:  Opportunity.  When you can shut down the opportunity for fraud, then you’ve gone a long way to prevent it.

While we hope fraud never happens to you, it makes good sense to take preventative steps to avoid it.  Please give us a call if we can help you in any way.

Will 2016 Be Your Best Year Ever?

If you want 2016 to be better than 2015, you have to do something differently in 2016 than you did in 2015. It’s a simple but profound realization. Change brings the opportunity to make things better; it can be scary yet exciting at the same time.

Ask yourself what you are going to do differently to have your best year ever. Here are some questions and exercises to consider:

Clarify Your Vision
What does the world look like after it’s consumed your product or service? A vision statement for a company helps to keep everyone on track and seeing the bigger picture of what they’re accomplishing day after day. How is the world smarter, more beautiful, happier, healthier, or wealthier after they’ve left your business?

If you haven’t written your business vision and mission statement, consider this exercise for 2016.

Create New Habits
What habits are holding you back? Which ones are propelling you forward? Choose one habit that’s costing you the most and make a commitment to drop it from your 2016 repertoire. Conversely, identify the habit that is brining you happiness and wealth and multiply it.

Let Go
Sometimes we need to let go before we can move forward. What do you need to let go of? Are there customers or employees in your life that sap your energy or your bank account?

Build Your Support Structure
Are you short-staffed? The way you manage your time has everything to do with your success or the lack of it. If you are taking up your time with a lot of low-dollar tasks, it’s going to be hard to boost your income and get ahead. Surround yourself with support to do everything that can be delegated, including personal tasks such as grocery shopping, housekeeping, cooking, and lawn maintenance as well as tasks such as filing, bookkeeping, appointment scheduling, and routine customer service.

Make a list of areas where you could use support, and fill these gaps. In today’s world, you don’t need to hire full time people to fill these slots; you can simply get responsible contractors, other small businesses, and virtual assistants to build your support team.

Focus
What project or task would make a huge difference in 2016 if you could pull it off? Focus on the high payback projects and commit to one, even though it might be out of your comfort zone. Imagine the difference in your business once it’s completed, and get inspired to get started.

Choose just one of these areas to start your 2016 out with hope, intention, and excitement.