Recently, a bookkeeper was updating the company checking account in QuickBooks and found several checks totaling close to $12,000.  All the checks were made out for amounts in excess of $2000 each and cashed against the company checking account.  The problem was no one in the company issued these checks.  After several phone calls to their bank, copies of the checks in question were faxed over to the bookkeeper.  Someone had checks printed that appeared to be the same as their company checks.  The signature was similar to the owner’s signature but was not his.  By googling the names of the payees it was found that each had some type of criminal record. 

The bank basically told the company, “too bad, it’s not our problem.  How could we possibly know that these checks were not originals?”  They were cashed at five different branches.  Of course the bank promised to work with the client in trying to resolve the issue but the bank was not willing to reimburse the client for the missing funds. 

The company proceeded to report this to their local police department.  The police simply handed them an identity theft report and ask them to complete it.  They were told that more than likely nothing would come of it.  The company was also told that they needed to file similar reports in each town that a check was cashed. 

Surviving in today’s rough economic times is tough enough but to compound that with a situation as described above, could put some small businesses out of business.  What if that business was relying on that money to meet its payroll obligations?  How long do you think employees would stick around if their paychecks start bouncing?  What if the business needed those funds to make its payroll tax deposits?  Payroll taxes are trustee taxes.  That means even if the business was to file bankruptcy, the payroll taxes are not forgiven.  The owners or officers of a company are personally liable for the payroll taxes.  The IRS and other taxing authorities determine who the “responsible parties” are and can and do put liens on personal assets until the payroll taxes are paid in full. 

What can a business do?  One suggestion might be to open a separate bank account just for payroll.  I can already hear the moan and groans.  Yes, it means reconciling another account and yes it means a little bit work but it’s a matter of risk.  If you are willing to risk your personal assets even though you are incorporated because someone cleaned out your checking account and the company cannot make payroll or pay its tax liability then don’t bother.  It you want to minimize your risk, simply transfer the gross pay plus employment taxes to a separate bank account each pay period.  Automatic deposits of employees pay directly into their personal checking or savings account as well as electronic payment of payroll taxes mean very few if any checks are actually written on that account.  That means less risk of fake checks ever being written on that account. 

 Don’t make running your business any tougher than it has to be.  Take steps to safeguard your check supply as well as your business identity.

When we are called to assist new clients with a particular QB problem, we often find several other problems exist.  Some are more common than others.  For example, we often find that clients do not set up separate accounts for their credit cards.  They simply put the credit card in as an account payable.  If they do not pay the credit card in full each month it is often difficult to determine if they have captured all the credit card activity such as late fees and interest and return credits.  If they set up each credit card as its own liability account, they can record credit card charges as they occur during the month.  They can also reconcile the account on a monthly basis just as they do (or should be doing) with all bank accounts.

 Reconciliations provide assurance that you have captured all the activity that occurred.  Another advantage to keeping separate accounts and recording the activity separately is capturing the information in the correct month.  Often credit cards run from the middle of one month to the middle of the next month resulting in a statement that shows two different month’s activity.  If each charge is entered as of the date it occurred then proper monthly cutoffs will be reflected in your financial statements.

 An important advantage that cannot be overlooked is spotting bogus or fraudulent charges.  By reconciling your card each month, you are forced to look at and check off each charge on your books against the credit card.  Any charges that appear on your credit card statement and not on your books could be possible fraudulent charges.

 Keeping separate credit card accounts is simple, advantageous and provides a system in which errors can be spotted and corrected in a more timely fashion.

INDEPENDENT CONTRACTORS

Are you an independent contractor or an employee?  In today’s tough economic times, when jobs are tough to come by, many people are taking positions that are typically employee positions but disguised as “independent contractors” without really understanding what this means. 

 What are the tax consequences of being self-employed or being an “independent contractor”?  Should you take such a position, you are responsible for paying not only your federal and state income taxes but the employee and employer share of social security and medicare. The employer and employee portion of social security and medicare are known as self-employment taxes which currently is 13.3%.  This will increase to 15.3% if congress does not extend the payroll tax cut.   If you live inMassachusetts, you would need to put aside 5.25% forMassachusettsincome taxes.  In addition, you would need to put aside funds for federal income taxes, which vary depending on your income tax bracket – anywhere from 15%-35%.  Note that this is in addition to the employment tax of 13.3%.  The IRS does allow a deduction for up to half of the self-employment taxes.  SO that $20 per hour you thought you were making is really only equivalent to about $14.82 per hour assuming you were only in the 15% tax bracket.  InMassachusettsthis does not take into account the costs to you to carry your own health insurance which is mandatory. 

 Of course being a self employed individual means that you can deduct business expenses relating to your job.  What type of expenses and how much is for another blog. I often find that individuals have very little in the way of expenses because they in fact should have been employees and not independent contractors.  What distinguishes one from the other?  You can check out all the rules on the Internal Revenue website at www.irs.gov.  Just do a keyword search for independent contractors.

 It requires discipline to save the funds needed to make your tax payments. You cannot receive a check for $500 and assume that you can use the entire amount to pay your bills.  You need to subtract your potential tax liability (after taking into consideration any direct business expenses) and put those funds in a savings account or other savings vehicle.  Tax payments should be made on a quarterly basis using estimated tax vouchers.

 If you are not prepared to put aside the necessary tax funds then maybe you should reconsider whether you were cut out to be an independent contractor.  

 Call your accountant and make an appointment to go over all the rules and tax responsibilities associated with being self-employed.

            QuickBooks allows users to track information by department or location or by property or business office or any other important breakdown you require to generate the information necessary to make good business decisions.  This is done by checking off the “class tracking” box located in the Accounting section under Company Preferences.

 How can class tracking help your business?  Let’s look at a couple of examples.  If you are a property manager with multiple apartment buildings, you can set up each building as a class.  As you enter the monthly information such as rent income or expenses such as repairs, you simple take one extra step and indicate what class or in this case what apartment building the income or expense belongs to.  Class tracking allows you to print a profit and loss by class. You can see how much profit or loss each building is producing.  This same concept of using classes to track locations can be applied to retail businesses with multiple locations.  You would be able to see how profitable each location is and determine what if any steps need to be taken to improve business in that location or even if you wish to continue operating in that location.  Such important financial information is required if you are to have a successful business.

 Another example of class tracking is using it to determine how profitable different segments or departments of your business are.  For example, if I offered web hosting, web design and web consulting, I could set up each of these as a class.  As long as I properly recorded the income and expenses associated with each, I could analyze my business by each department by printing profit and loss for each department and comparing where most of my income is derived as well as what is the most profitable department.  I could then concentrate my marketing efforts on that department in an effort to grow my business.

 Using and understanding the different features within Quickbooks is important to any size business if you are going to succeed.  Getting the information you need to make good business decisions includes getting good financial information about important aspects of your business.  Class tracking is just one way to get such important information.

CHART OF ACCOUNTS

Although it may appear rather simple to set up QuickBooks with all the support features the software has to offer, there is more to it than meets the eye.  For example, when you set up your chart of accounts, ordering the profit and loss accounts by no particular method other then alphabetical does not help you run your business.  A good chart of accounts should provide you with a wealth of information when you print your financial statements (balance sheet and profit and loss).  If your business offers different services or products, then you might want your profit and loss to show you how much income your business earned this month from each service.  For example, if you are a service company offering consulting services, repairs services, maintenance agreements and management services and have setup separate income accounts for each, you may want to your payroll expenses to reflect similar expenses such as consulting wages, maintenance wages etc to mirror your revenue sources.  This would tell you how much money is being made on each type of service.  Are you making as much as you thought?  Maybe you should eliminate an unprofitable service and develop a marketing plan around the more profitable one.  Maybe you are not pricing your services correctly.  All this information and more can be derived from setting up your chart of accounts correctly.  Grouping all your payroll related expenses near each other, then grouping all your general expenses like office supplies and dues & subscriptions together and then all your facility expenses together, makes it a lot easier to read and get information that will allow you to make good business decisions. 

For help setting up your QuickBooks, call our office at 508-485-3811.

 In my last blog I talked about setting your 2012 goals.  Maybe one goal was to make more money by making your business more profitable.  Towards that end, I have a suggestion.  Every retailer knows how much of a mark up they have on the products they are selling.  Many service providers that have no product other than their employee’s time have no idea how to determine what they should be charging for their employee’s labor.  Many don’t even have their employees track their time.  I continually see businesses quote service based jobs on best guess estimates on how many hours it will take to complete the job.  They never develop a system to compare those estimates to actual results.  How can anyone make money if they don’t know if their estimates are using the correct time or the correct labor rate?

 There are two issues involved with this problem.  How efficient are your employees with their time and are you using the correct billing rate?  The first step is to institute a time tracking procedure that will allow you to see how many hours a week are billable hours versus non- billable hours are for each of your employees.  Are you having too many office meetings?  Are you making your software engineer answer phone calls, take trips to the post office or bank? Are they taking too many long lunches?  If your highly paid employees are wasting their time on too many non-billable tasks then maybe it’s time to hire an administrative assistant or a part time college or high school student to help out.  Inefficiencies can cost thousands of dollars a year.  The only way you are going to determine this is to track time.

 The second issue of billing rates requires a little bit of work on your end.  You will need to be able to calculate an overhead rate that must be incorporated into each employee’s billable rate as well as a profit margin.  In addition you need to consider employer payroll taxes, worker’s compensation and fringe benefits cost for each employee.  The other item to consider is the number of actual work hours while taking into consideration vacation time, sick time and holidays and of course routine down time.  All of these items are factored together when you are trying to determine the proper billing rate. 

 These two steps should put you on the road to growing your business profits.

“If you want to be happy, set a goal that commands your thoughts, liberates your energy, and inspires your hopes” 

 - Andrew Carnegie (The richest man in America during the early 1990s)

  It seems appropriate to be talking about goals with the beginning of a new year and the Super Bowl around corner.  Every professional team starts each year with the goal of reaching the Super Bowl or Stanley Cup or World Series.  To reach their goal they have to change what they were doing in the prior year.  They have to improve their operations.

 The same applies to every business regardless of their size.  A business should have short term and long term goals.  They should also have a plan on how to reach their goals.  Everyone has heard of the saying that if you keep doing things the same way, you will continue to get the same results.  So if you want to grow your business and make more money you need to improve your business operations.  What type of plan do you have in place to achieve your goals?  Do you need to learn a new skill?  Do you need to hire someone?  Do you need to change your marketing?  Have you sought help from someone that has experience in your field of work?  Do you need better financial information so you can make better decisions?  To reach your goals, you need to expand your perception of what is a possible, build new relationships and learn to overcome your fears.

 Every goal needs to start somewhere so why not start with Today.  Start putting together an action plan that will help you reach your short term and long term business goals.  Then do one thing each day that helps you reach your goals. At the end of the year your financial statements will tell you whether you qualified for the Super Bowl of businesses!

It is not uncommon for us to get a company’s QuickBooks file only to find that the opening balances for the current year (for example 2011 opening balance sheet does not agree with their ending 2010 balance sheet) have changed because they voided an old check or mistakenly keypunched the prior year date on an invoice or check when they created it.  This misposting is especially common in January as everyone is getting used to using the New Year (2012 instead of 2011).  This can be an expensive mistake.  It could take as much as an hour of your CPA’s time trying to find why your numbers do not agree. You do not want to change any numbers once you have provided information to your accountant to prepare your tax return.  There is a solution to this problem.

You can set a closing date in QuickBooks which prevents unauthorized prior period entries. You still have the ability to post journal entries to the prior year once you set up a password.  To set up a closing date do the following:

            Click Company – at the top of your QuickBooks screen

            Choose – set closing date

            Click the box – set date/password

            Choose a closing date – i.e.  12/30/2011

            Choose a password – REMEMBER this password.

Once you set the closing date a warning will appear on your screen if you enter a date prior to the closing date.  The warning will allow you to confirm or change your entry by entering your closing password.

Pursuant to requirements related to practice before the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

Reality needs to be just a little bit clearer. Your better half is already responsible for keeping the house which includes cooking, laundry, shopping and cleaning. In addition he or she acts as a chauffer for your children’s multiple sports and social activities. Plus, they also volunteer for school trips or go to PTA or watch the children play. So after a long day of keeping the house and playing chauffer, do you really think they can keep their eyes open long enough to do your books? The answer is a resounding NO!

You are thinking, “no problem, this does not apply to me. My children are grown and can drive themselves.” Did you forget about that part time job your better half just got so you can put some money aside for college that’s knocking at your door?

Realizing you need some bookkeeping assistance is great. Just be sure you consider who that person should be. Talk about your bookkeeping needs with your accountant. Maybe they can offer services to fit your needs or can suggest an experienced person or company that can assist you.

Those running their business by the seat of their pants, usually find they are too busy putting out fires to truly grow a successful business.