New Business Direction LLC
At first glance, this article topic might seem too simple. After all, to get paid, don’t you just take money out of your business? Well, yes, but there is much more to it in the long run as well as from an accounting side. Let’s take a look.
The Traditional Paycheck
If you’ve ever worked for someone else, you probably received a paycheck every few weeks. It took care of three major things:
- Your regular pay that you live off from day to day
- Taxes you owe to the federal and state government
- Benefits. Depending on the employer, you might have received health care, retirement contributions, and vacation and holiday pay.
The employer took care of the needs you have today as well as some of your future needs.
Your Business Pay
Now that you’re the employer – of yourself, your business must cover all the items mentioned above. How it does that depends on the type of entity you chose when your business was formed.
Sole Proprietors
If you are doing business as a sole proprietor, you take draws from your business instead of paychecks. A draw is simply a cash withdrawal that reduces the ownership investment you have made in your company. The draws do not include any kind of taxes, including self-employment taxes; these need to be deposited separately, usually through quarterly estimated tax deposits to the IRS and to any relevant state agency.
As a sole proprietor, you’ll likely need to find your own health insurance. And the most important thing you’ll need to do is plan for your retirement by investing in IRAs or otherwise saving money that is earmarked for your retirement.
From an accounting standpoint, owner’s draws are shown in the equity portion of the balance sheet as a reduction to the owner’s capital account.
Corporations
If your business is formed as a C Corporation or an S Corporation, you will most likely receive a paycheck just like you did when you were employed by someone else. You will also be responsible for making the payroll tax deposit, funding the retirement plan, and paying for health care insurance.
From an accounting standpoint, corporate payroll, taxes, and benefits are all considered expenses and are shown on the income statement. Any money taken out additionally is a reduction to the owner’s capital account, and this is shown in the equity section of the balance sheet.
Rules for Shareholder benefits and additional distributions are complex, so please reach out to your tax professional for guidance.
Partnerships
If your business is formed as a partnership, each partner will be paid distributions based on the partnership agreement. Typically, that means receiving a base salary and a portion of the profits. You can also take money out of the partnership. Taxes are not included; you are responsible for making your quarterly estimated payments. Plus, you will also be responsible for paying self-employment taxes.
For benefits like retirement plans, partners can be eligible, but the tax treatment of these and other benefits is not necessarily the same as it is for a W-2 employee. Again, the rules are complex for deductibility, so it’s best to contact a tax professional to find out more.
Evaluating Company Profits
It’s critical to understand where your wages show up on your books so that you can truly understand your business’s profitability. With corporations, the salaries are included in the expenses, so net income is after, or net of, salaries and payroll taxes.
With sole proprietors and partnerships, the net income figure on the income statement does not include owner salaries because there aren’t any. Instead, only the equity section is impacted. Net income for partnerships and sole proprietors should always be high enough to at least “cover” an amount equivalent to a “so-called salary” for all of the active, participating owners.
If you have questions or need help understanding how business owners get paid, please feel free to reach out any time.
The best way to get smarter about how to invest your marketing dollars is to document and measure what’s happening now in your business. Once you’ve measured, you can then improve. Here are three metrics to measure in your marketing:
Marketing Spend
The first step is to look at all your marketing costs. They may be in one account or several. Some of the places to look for marketing expenses include:
- Advertising – for online or print ads, trade shows, sponsorships, and other advertising costs
- Dues and subscriptions – for membership fees to networking and professional associations
- Education – for marketing training
- Marketing – for obvious reasons
- Office supplies – for graphics subscriptions and fees
- Payroll, salaries, and wages – for allocation of employee time spent on marketing projects
- Printing and postage – for flyers and direct mail
- Professional fees – for marketing consultants, coaches, designers, and writers
- Software/Technology – for marketing software and apps
- Travel – for trade show or conference attendance
Once you have aggregated these costs, you’ll have a good idea of what you’re spending on marketing and you can calculate the first metric: Marketing Spend. The formula is:
Total marketing costs / total gross revenue = Marketing spend
This gives you a percentage.
Most companies spend five to ten percent on marketing. Higher growth companies will spend close to ten percent, and stable growth or slow growth companies will spend close to five percent. Large companies will spend more, from nine to 12 percent of gross revenues, than small companies. There may also be benchmarks for your specific industry, which you can find by reviewing trade publications and websites.
CAC – Cost to Acquire Customer
Next, you’ll look at how much it costs on average to acquire one customer. To compute this, count the number of new customers for any period of time, and use this number in the following formula:
Total marketing costs / number of new customers = CAC
Revenue per Customer
Revenue per customer is a good measure in many companies. It can tell you how much, on average, a customer will spend at your company over a period, adding up all the orders, projects, visits, or engagements for that customer. The formula is simple:
Total revenue for a period / total number of customers for the same period = Revenue per customer
A similar metric that’s valuable is how much a customer will spend at your company in their lifetime. That’s called CLV or customer lifetime value. Use the same formula above but compute it based on the longest period of time you have records for.
When you can compare revenue per customer or CLV with CAC, you can determine how much you can afford to spend to acquire new clients.
Let us know if we can help you calculate these metrics so you can become wiser about how to invest your marketing dollars.
All business functions need to run smoothly, including your accounting system, to maximize profits in your business. Here are five signs you can check for to determine if it’s time to upgrade or replace your current accounting system, or if you need more training on the features of your existing software.
- Not enough users
If your current system limits the number of users you can have in the system at any one time, this could be a major enough reason to switch to a larger option. If you’re not sure how many users you currently have a license for, we can help you find out. It might be as easy as buying more licenses if you’re not at the maximum capacity. But if you’re already at maximum, it may be time to look for a better accounting system with room for you and your business to grow.
2. System is Outdated
If your accounting system runs on desktop-based software that’s upgraded every year and you have not paid for or installed the upgrades, then your system is outdated. If it’s been sunsetted, that means the software company no longer supports that version. You are at major risk for the software crashing, getting buggy, getting hacked, or worse, permanently breaking. 
The cost of getting the system current may be better spent looking for a new alternative, or moving to a cloud-based system where updates occur automatically.
3. Lack of functionality
It is commonly the case that your business has grown so much that it’s outgrown your original accounting solution. That’s good news! It’s time to find a solution that will scale better for your business, as you might be missing important features that are costing you more time and money than if you were on a system that offered those features.
Something that we see regularly, is that there is existing functionality in a software solution that is not being utilized because users aren’t aware that the feature exists. Spend time learning everything you can about what your software solution provides for features.
4. Lack of reporting and analytics
If you’re unable to receive the reports and analytics you want to run your business better from your current accounting system, it may be time to switch. With better data comes better decision-making and if lack of data is costing you money, then it’s time to find a more robust system. Again, users may not have the knowledge or training they need to customize the reports and analytics that already exist in your 
software solution.
5. Lack of integrations
Thousands of apps exist to expand accounting systems’ core functionality. If your current accounting system lacks integration capabilities or does not have apps that are built to integrate with it, you may be missing out on additional functionality. This include mobile apps; it’s quite common now to do much of your accounting work from your mobile phone or tablet.
Does your current accounting system have any of these red flags? If so, please reach out. We can help you find a best fit for your accounting needs, and help you with additional training.
Many small businesses have become extra innovative and resourceful when it comes to cash flow. Here are some ideas to help make it through the next few weeks or months. Rearrange your 2020 budget There are a lot of things you may not need to spend money on this year. They can…
Three Vital Business Roles for Success and Balance
A passionate visionary, a get-your-hands-dirty operator, and a responsible, finance-minded executive, are what author Chip Conley describes as what investors look for in a management team when they consider providing startup money to new businesses, in his book The Rebel Rules: Daring to Be Yourself in Business.
Even if you’re never going to seek venture capital money to fund your business, this tidbit of advice makes a great strategy question to consider for your business, especially if you are an entrepreneur. Do you have these three roles in your company?
If you’re not sure which leadership role you play or who plays what role on your team, consider reading Predictable Success by Les McKeown and taking the quiz at https://getpredictablesuccess.com/styles-quiz/
Passionate Visionary
The passionate visionary is a creative idea person. They have the technical knowledge that supports the service or product that will be created and offered. They see the market need, and just how to sell and position the product so that clients or consumers will want the offering.
The visionary often has more ideas than budget. The finance role can evaluate the profitability of the visionary’s ideas and prioritize the projects. The operator can execute the visionary’s ideas.
The visionary provides strategic direction for the company and keeps the market offerings fresh.
If your business is missing a visionary, you might also struggle to keep your practice full as often (but not always); the sales function could fall to the visionary. You might also find yourself getting stagnant with your service offerings and falling behind the marketplace.
The fix for a missing visionary is to develop a sales and marketing team and/or a research and development team that can serve these functions.
“Roll-up-your-sleeves” Operator
The operator is an action person who can execute. They get things done. They can find and hire the right team. They can develop the systems, job descriptions, procedures, and processes that makes the company unique.
The operator takes the visionary’s ideas and makes them happen. They need the visionary’s ideas because they would rather take someone else’s ideas and work with them than create their own. They also need the support of the finance executive to stay on budget and to focus on one project at a time or avoid hiring too many people.
A business without a good operator never gets the product to market and may also constantly be short of team members.
Responsible, Finance-minded Executive
The finance expert helps to make the dollars work for the company. They can tell us how much we need to sell and how much we can spend. They can also provide capital sources for the company via investors or loans.
The finance executive loves numbers and can help to make sure the company’s operations are profitable. They’ll work closely with the operator to make sure that the right number of people are hired at the right salary levels. They’ll work with the visionary to plan and budget for new sources of revenue and new product lines.
Without a finance executive, a company often spends more than they bring in and may not have a viable profit plan. They may also run out of cash which can cause problems with creditors and investors.
This is the role we can not only help you fill, but also help you build your financial literacy to the level that you need for the stage your company is in now and for the future.
Your Business Success Trinity
As you were reading, which role are you? Which role jumped out at you that might need shoring up in your business? You might be strong in one area and need to outsource another while keeping a strategic eye on things overall.
Look at each of these roles and objectively assess your business. How are all three roles being served in your company? Which ones need more development for your business to grow?
Getting clear on your company’s roles can very well take you to the next level of success.
Which trends impact your business the most? Which ones speak to you? Feel free to reach out to discuss any of these ideas with us.
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