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On March 23^rd of this year, President Obama signed the Patient Protection and Affordable Care Act (PPACA) into law.  This massive healthcare legislation was over 2,400 pages long and included language around 1099 filing requirements which, if not repealed, will place an enormous burden on small business owners.

Historically, and through December, 2011, under § 6041 of the Internal Revenue Code (IRC), persons engaged in a trade or business who make payments totaling at least $600 to another person in a single year are required to file an information return (typically a Form 1099) with the Internal Revenue Service (IRS) and to provide the payee with a copy.[1]  Payments made to corporations (other than legal fees) and hospitals / extended care facilities, however, were excluded.  The new language removes the exclusion, requiring that a 1099 be issued to each “person”, including corporations.

In addition, IRC § 6041(a) specifies a list of payments that can trigger its information reporting requirements.  For payments made before January 1, 2012, these include “rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income.” If the aggregate amount of these payments to a single payee equals $600 or more, then IRC § 6041(a) requires the payer to report the amount of those payments and the identity of the payee to the IRS.[2]  The new language has been modified to include “amounts in consideration for property” and other “gross proceeds”.

The reality of these changes is that small businesses will now need to obtain Tax ID numbers and complete 1099s for ANY VENDOR that they pay more than $600 to throughout the year.  In other words, if you buy a new laptop from Best Buy, you’ll need to issue a 1099 to them.  If you use Verizon for your office phone system and spend more than $600 over the course of the year, you’ll need to issue a 1099 to them as well.  Given that it takes an estimated 16 minutes to prepare each form[3], the increase in required forms will require a significant amount of time investment on the part of the businesses that need to process them.  In addition to the time spent, there will be corresponding increases in paper, toner, postage, etc.

The fines for inaccurate or incomplete filings are per 1099 and could add up quickly.  If the Small Business and Infrastructure Jobs Tax Act (H.R. 4849) passes in the Senate and the White House, the calendar year maximum penalty for small businesses could reach as high at $500k. 

The increased reporting burden means that it will be necessary to obtain a tax ID number for any vendor you do business with and maintain that data in your accounting records.  There is already talk of repeal, but in the event that it doesn’t happen, it’s best to start planning now.  Review your vendor files and begin to accumulate EINs for your recurring vendors.  Require an EIN as part of your new vendor set up process, and enforce the requirement.  In the event that you do need to issue 1099s under the new rules in January 2012, you will be glad that you have the data you need available.

Cash is the life of the organization.  Without it, you will go bankrupt.  In every organization, cash should be the number one priority, followed by customers.

You need to understand your terms of sale and your customers need to understand your terms of sale.  Those terms are determined based on the margin that you want to earn.  If your terms are net 30, your customer is late on day 31 and your margin begins to go down.  It is costing you money to finance your customer.

Insist when you establish a new customer that you know how they are setting you up in their computer to be paid.  It must be in accordance with your terms.  You now can set up your known daily cash collections, and you monitor and manage it daily so you know that it happens.

Since you know the purchase commitments you are making, you know exactly what your daily cash flow is.

Cash is your most important asset.  Make it your number one priority.

A $10Million company was able to increase cash flow by $1 Million by eliminating their stockroom and workorder accounting.

The company collapsed raw material and work in process inventory to raw material in process. Component parts were received directly to the production floor.  Using the 80-20 rule, 80% of the parts were expensed when they were received and reordered using a 2 bag system. Component parts not expensed were added to raw material in process inventory. Component parts in finished goods were backflushed via a bill of material consisting of the 20% expensive components to relieve inventory when finished product shipped.  Accurate inventory was maintained through normal cycle counting, but only on the 20%.

The company worked with all of its suppliers to become a just in time company.  Product was assembled and shipped the same day.  Finished goods were then reduced to zero and overhead expensed as a period cost.

The result of these management decisions was the reduction of $1 Million of inventory control and work order accounting expenses.  And a big bonus was the elimination of the closed order variance time bomb.

“Danny is one of the highest quality individuals you could ever hope to do business with. He is a humble man with a great sense of integrity and work ethic. I would trust him with anything.” July 8, 2009

Jeff Hood, Owner, Technology Officials, LLC.

“We view Danny as a valuable extension of our service capability here at H A Beasley & Company. Danny, my staff and I work together in serving various clients where he takes a CFO role with us as outside, independent accountants. I believe the clients agree with us that Danny provides outstanding value and excellent, expert service..” August 29, 2009

H A Beasley, Owner and Managing Director, H A Beasley & Company PC

Have you ever asked yourself the question “I am making a profit but I don’t know where the cash is?  Many business owners tend to manage their business strictly from the income statement.   An income statement is very important to a business as it provides a historical view of what transpired in the company over a period of time and gives the business owner, banks and other investors a better perspective of what contributed to the net profit or loss reported.  However, the income statement does not necessarily translate into an increase or decrease in cash.  Understanding how the income statement results will impact the cash flow of the company is equally important, yet often ignored.

Anyone running a business needs a clear vision of how their business decisions affect the finances of the company to achieve the success they desire.  “Cash is King” and every business owner should have a clear understanding of the financial implications of their business decisions to increase the chance of success.  If you don’t take control of your cash, it will most certainly take control of you.

Here are some common issues that may affect the cash flow of the business:

1.       Invoices issued upon the shipment of product or the delivery of services is delayed because the supporting information has not been processed in the accounting system on a timely basis.

2.       Past due receivables are increasing because customers are experiencing cash flow issues themselves.

3.       Customers are paying their invoices short because of product quality issues or invoicing errors.

4.       Inventory is increasing faster than sales because of over purchasing inventory components in comparison to current production needs.  

5.       Staffing is increased to meet short term demand without any confidence that the demand will continue to support the additional cost.

Monitoring these issues is not a difficult thing to do.  A simple report incorporating income statement and balance sheet information every month will focus management in the right areas and help to improve the cash flow of your business.  This report should identify the customers management must contact to resolve quality and past due collection issues.  It should also identify excessive inventory issues and other cost drivers that may impact the financial results of the business.

Next, management must become disciplined to obtain its cash balance from the accounting system and not the bank.  Your bank will not show checks that have been written and not presented to the bank for payment nor will they show receipts that have not been deposited at the bank.   These unreported bank transactions should represent the difference between the bank balance and the cash balance reported in the accounting system.  Relying on your accounting system cash balance, which is periodically reconciled to the bank balance, will allow you to avoid serious and expensive mistakes.

Finally, management must establish a process to create cash flow forecasts to understand where the cash will be during the next 13 to 26 weeks.  Establishing cash flow projections is simply using a few basic principles with your intuition and knowledge of the business.  Adjust for any significant changes you expect to happen that are different from the past and never project revenues that you cannot be fairly certain will occur as this will create a false sense of security.  Finally, review the projected cash balance by week to determine any unexpected shortfalls.  Further analysis will identify priorities that management must focus on to resolve the issue identified in the forecast to avoid real problems in the future.

Understanding your cash flow will give you peace of mind and help you start to take control of the financial side of your business.  In addition, it will provide the management team with a course of action to grow the business profitably while knowing where the cash is.

Top qualities:

“There are many people you meet in life some good, some bad and some family. Steve Friedman is a special kind of person. He genuinely wants to help and cares about the people he works with. His insight into business is extraordinary, his ability to communicate and make people understand is beyond the norm and he does all this in a calm and quiet manner. He speaks his mind and lets you know just where you stand. To just recommend Steve is an injustice to people that need his help. Even if you think your business needs some advise get Steve in as soon as you can.” August 18, 2010

David Ebenstein

Business owners run their business to make money, right? Then why do so many owners make unprofitable decisions?

There was a great article in the Wall Street Journal titled "Major Airlines Fuel a Recovery by Grounding Unprofitable Flights." The article talked about the progress that U.S. airlines are making to become profitable and provides several valuable points for business owners.

In one part of the piece, writers Evan Perez and Melanie Trottman noted:

"The big carriers, which for decades have doggedly pursued market share at any cost, now are focusing just as aggressively on the profitability of each route and flight. The so-called legacy carriers... have abandoned many of the tactics that have contributed to their cyclical weakness. They are increasingly unwilling to fly half-empty aircraft to stay competitive on a given route just for the sake of feeding their nationwide networks.

Though their recovery is still in its early stages... the airlines' new emphasis on profitability appears to be paying off."

Imagine that!

Running the business in order to make money appears to be paying off. A brilliant strategy, indeed.

There are several fascinating points here that I would like you to carefully consider.

Be a Lover of Reality

If you ask a business owner whether he runs his company to make money, the answer will always be "Yes." The reality is that he doesn't. At the risk of sounding a bit blunt, you don't either. This is an important reality to recognize and accept.

Try this little test for the next 30 days. Listen for anyone in your company (including yourself) using words like "brand," "market share," or "shelf space." When you hear those words, you can be sure that you've just found an opportunity to make some money.

Why? Because those words always are used to justify unprofitable decisions. They are big red flags that you are not making decisions based on a common-sense approach to profitability. When you hear those words, ask yourself this simple question, "Are we making this decision based on profitability or for some other (possibly hidden) reason?"You have to clear away the smokescreen in order to put your focus on profitability and common-sense decision making.

Is Market Share Your Mantra?

For example, when you hear an executive justifying a decision based on its supposed impact on market share, he's really saying, "I want to look good versus the competition, but it's a lot easier to give our products away than have to sell them at a profitable price."Here's what happens when market share becomes your mantra. The sales force gets the okay to start selling on price. Your salespeople cut prices in order to generate volume. The volume comes and the company ramps up quickly to meet the new demand. That ramp up always drives costs up. In a manufacturing company, for example, the increased production creates capacity issues, and it begins to see requests for capital expenditures to solve the problem. Meanwhile, the competition has lowered its prices to try to get some of the business back. The sales force has gotten used to selling on price, so it comes back to you with a plan to foil the competition by lowering the price--again. Profitability continues to be driven lower and lower while the need for cash to support the higher revenue goes up. That's a recipe for disaster.

This happens to company after company despite how illogical it sounds. You have to battle it out by sticking to your guns. You have to be maniacal in your focus on profitability.

Start by removing market share from your company's vocabulary and see how fast you can improve profitability. Remember, one of the fastest ways to make more money is to stop doing things that lose money.

I recently had a conference call with one of my partners and an engineering client of his. They were curious about whether QuickBooks could handle their requirements for invoicing. QuickBooks has a very rich set of functionality which allows a company to charge their clients for billable activity of their employees and track those costs to the customer and produce great Job Profitability reports. This article describes how this is accomplished.

Click here to read the article