Bookkeeping

The Trap of One

Becoming too reliant on one employee, one vendor, one customer, or one marketing avenue is a common pitfall of businesses. Consider the lesser risk of having 100 customers paying $1,000 each than one customer paying $100,000. The same rule applies to employees, vendors, and the number of ways to attract new customers. In business, diversity is key to combating stagnancy.

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The following is a cautionary tale: A dentist built a substantial book of patients by using a particular mailing piece to attract new patients who had recently moved into the area. Over time, other local dentists caught on to this approach and copied the marketing piece. Literally overnight, the response from the dentist’s mailing campaign – upon which he had relied heavily for business – dropped dramatically. The mistake he had made was not developing other methods to obtain leads, thus making him susceptible to professional attrition and causing his dental practice to decline substantially.

In the long run, it’s better to know 20 different ways to bring a new customer into your business than to weigh your efforts too heavily in one way. It is actually easier and more realistic to devise 20 little ways to get one new customer at a time as compared to achieving an immediate, mass response with one marketing ad.

This can help you achieve financial stability in the long run.

Connect with your accountant about how your business can avoid the trap of one.

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Driving your Costs Down

If you have one of the more than 25 million road motor vehicles registered in Canada, then you should make sure your car is driving your costs down. Deducting automobile costs is a very important part of tax planning for many small businesses, one that comes with many rules and restrictions.

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Generally, any expense incurred to operate a vehicle can be deducted, including: fuel, insurance, maintenance and repairs, interest, lease costs, and more. However, it is important to keep track of all business kilometers driven at the beginning, end, and throughout the year, along with all automotive receipts. To help me keep track, I keep a logbook in my car that I fill out after each trip.

 There are significant tax savings to be had throughout the vehicle buying and ownership process. Here are a few tips:

– Purchasing a Vehicle

There are special rules in place to prevent business owners from purchasing high-cost luxury vehicles and writing them off for business purposes. These rules only allow you to write-off up to $30,000 of the cost of a passenger vehicle, along with many other restrictions. However, if you are purchasing a vehicle that is not for passengers, such as a pick-up truck, then there is no limit. 

– Lease or Finance?

Similar to when you purchase a vehicle outright, there are limits on the amount that you can write-off when you lease or finance the purchase of a vehicle. If your lease costs exceed $800 per month plus HST then there are restrictions imposed to limit your tax write-off. One way to avoid this is to keep your month lease cost as low as possible by excluding insurance, repairs, maintenance, and licenses from your payments. If you are financing your vehicle, then the maximum amount of interest that you can write-off is $300 per month. One way to ensure that you come in within this limit is to bring down your interest payments by making a large enough down-payment upfront.

 – Vehicle Ownership: Personal or Business?

This decision ultimately comes down to how much the vehicle is going to be driven for business purposes. If the vehicle is driven 90% for business purposes then it makes the most sense to have it owned by the business. However, if this percentage is less you might want to consider registering it to you personally. The reason for this is that there are strict rules imposed on those who use vehicles owned by their business for personal purposes. This can add a lot of complexity and come at a significant cost to you. Instead, you can charge your company a reasonable car allowance for the business use of a vehicle registered to you personally. This will save you tax and a lot of hassle.

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Pick Up that Fork

Writing Off Eligible Meal and Entertainment Costs

A common expense business owners may be able to write-off are a portion of meals and entertainment costs. It’s an important tool to make sure you are minimizing your tax obligation. However, it can also be disastrous to get wrong (hello unexpected tax bill and penalties!) Always work with your accountant to make sure you are claiming items correctly.

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In general, the maximum amount you can claim for meals and entertainment expenses is 50% of the either (whichever is less):

·         the amount you incurred for the expenses; OR

·         an amount that is reasonable in the circumstances.

For example, if you take a client out for dinner to discuss a project, you would typically be able to expense 50% of the bill – i.e., the portion of the bill that is allocated to your client’s meal.

 These limits may not apply if any of the following are the case for your business:

  • Your business regularly provides meals or entertainment to customers for compensation (e.g., restaurants, hotels)

  • You specifically bill your client or customer for the meal and entertainment costs.

  • You include the amount of the meal and entertainment expenses in an employee's income or would include them if the employee did not work at a remote or special work location.

  • You incur meal and entertainment expenses for an office party or similar event, and you invite all your employees from a particular location. (The limit is six such events per year though!)

  • You incur meal and entertainment expenses for a fund-raising event that was mainly for the benefit of a registered charity.

In order to slash your taxes, consider what meal and entertainment expenses your business can claim. Stonehenge Accounting can help you determine how to do this to your best advantage.

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How to Choose the Right Accounting Firm

A compatible accounting firm is integral to a business’s success. The truth is that accountants, CPAs, and tax preparers are not all the same. Most accountants spend the majority of their time with their clients’ monthly bookkeeping work, tax filings, and mundane compliance work – all of which take time away from paying attention to the unique financial and tax needs of a business. Accountants are often overworked, understaffed, and generally overwhelmed during tax season as they fight against the clock each year to complete all of their clients’ tax returns.

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As you consider who you want to partner with for the strength and success of your business, consider the following things:

 ➤ When you talk with your accountant, are you getting his or her full attention?

 ➤ Does your tax professional really understand your business?

 ➤ Is your accountant giving you advice that increases profits, reduces taxes, and protects your assets?

 ➤ Does your accountant ensure there are no red flags for the CRA to audit your business?

 ➤ Does your accountant specialize in areas relevant to your industry?

If you answered “NO” to any of these questions, then it may be time to reconsider in whose hands you are entrusting your business. As you strive to be the best professional and best business owner you can be, help yourself by partnering with a compatible accounting firm – one that understands your work and can guide you in reducing your taxes, maximizing your profits, and protecting your assets. 

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The 2 Sets of Numbers Every Business Owner Must Know

Tracking the critical numbers and indicators in your business is one of the best, and most important things you can do as a business owner. What is not measured cannot be improved, but in keeping a financial dashboard that tracks core figures, you can carve a niche for your business that fosters a competitive advantage.

 There are two sets of numbers that every business owner should keep and look at on a very regular basis: lagging numbers and leading numbers.

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Lagging numbers, or indicators, are historical in nature and do not give much visibility to the business. Lagging numbers include gross revenues by day, week, month, quarter and year, gross margin; and net profit.

 

These are important indicators and all business owners should closely monitor them because they reveal a business’ overall trajectory and level of success.

 

On the other hand, leading numbers inform a business’ performance. Examples of leading numbers include:

 

➤ Money spent by clients per year

➤ Number of new leads and how they were derived

➤ Percentage of leads that converted to clients

➤ Marketing cost to attain leads

➤ Marketing cost per clients

➤ Projected revenues

➤ Projected expenses

 

Leading numbers give more insight into the business as a means of making good, day-to-day decisions. In other words, these are indicators of what is happening, magnified so you can clearly see and understand.

 

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How Systemizing can Reduce your Stress

One of the most important things a business owner can do is systemize operations for the long-term, considering how things might function in the owner’s absence. Ensuring that your business operates like a finely tuned machine will increase your stability and reduce your stress!

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First you need to answer the question: what are the systems of your business?

A system is something that describes and spells out how things are done in your business, often taking the shape of a “policies and procedures” manual. Ultimately, your business is a system or a set of systems working together.

 The benefits of documenting a system include being able to deliver service in a predictable and consistent way. This helps you meet the expectations that your clients will expect from you every time they do business with you. It also allows you, as the owner, to have a life outside of the business and makes it easier to sell the business if/when the time comes.

 Getting Started

 Most businesses can be broken down into the following six distinct areas:

 1.  LEADERSHIP

 Articulating a vision or mission statement, and living it.

 2.  MARKETING

 Defining who your customers are within analytical/statistical areas: income, age, ethnicity, geographical locations, etc.

 3.  MANAGEMENT

 Producing the service; recruiting and training staff; taking care of the facilities.

 4.  MONEY

 Keeping track of key financial reports and critical financial numbers.

 5.  LEAD GENERATION

 Attracting customers; employing various advertising methods to establish leads.

 6.  CLIENT FULFILLMENT

 Delivering what is promised, in the form of services and products, consistently and predictably.

 Using this structure will allow you to begin delegating yourself out of certain responsibilities, opening you up to more individual freedom. The bottom line is that you didn’t start your business so that it would control your life! You want your business to serve you, not the other way around.

 Systemizing is just one of the ways that Stonehenge Accounting can help your business achieve financial stability.

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Gross versus Net Income

 

In business, where gross refers to the total income, net refers to income after all expenses, overheads, taxes, and interest payments are deducted. The difference in value between these two amounts can be significant.

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As the head of your business, it is important for you to know:

  • The difference between your gross and net income;

  • How gross and net express themselves in the context of your business; and

  • That your accountant emphasizes profit and net worth over gross figures and helps you to track and measure both constantly.

 Seldom do business owners spend time analyzing, and re-analyzing, what parts of their business—what services, what clients, what facilities—are the most net profitable. Business owners often allow low-profit considerations to consume the same resources as high profit ones, paying exorbitant amounts of money for unnecessarily large offices, an excessive number of staff, and other features used to impress people without profitable purpose.

 For the health of your business, it is incumbent upon you—and your accounting team—to consider your expenses and ask yourself: How much does this contribute to net? Because without net viability, all other perceived benefits are unsubstantial.

 Stonehenge Accounting can help your business maximize its profit by tracking and measuring your profit and net worth.

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What is income splitting and how do I use it to maximize returns?

One of the keys to tax planning in Canada is the concept of income splitting. This is the process of maximizing income taxed at lower rates and minimizing income taxed at higher rates.

While the federal government has already eliminated some forms of income splitting, and is currently exploring actions to further limit this, there are still many legitimate ways to shift income from one tax rate to another.

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 However be careful! If you don’t understand the complex rules around what is and isn’t allowed when it comes to income splitting, be prepared for a costly audit and tax battle. It is important to carefully map out your income splitting strategy with your chartered professional accountant well in advance of tax season to make sure you are following the tax code properly.

Here are some income splitting strategies for you to consider:

– Family Income Splitting

This involves transferring income between family members, especially to those in the lower tax brackets. This can be achieved using RRSPs, loans, dividends, and salaries.

 – Personal Income Splitting

Income can be transferred from one year to the next by using RRSPs, reserves, losses, and by timing discretionary expenses.

 – Corporate Income Splitting

Since a corporation is often taxed at a lower rate than you would get personally, it can be advantageous to defer income in a corporation and save tax by smoothing out your personal income year-over-year.

 

Income splitting is a very complex subject with many rules that must be followed. Contact us today to discuss how you may be able to incorporate forms of income splitting into your tax planning strategies.

5 Things Small Businesses Can Do Now To Save Money Come Tax Season

As the old saying goes, there are only two sure things in life: death and taxes. For many small businesses, this has become more of a reality than ever. The federal government has recently proposed changes to the tax code which are sure to negatively affect many corporations. In fact, these changes could even result in "double-taxation" for some entrepreneurs.

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To make matters worse, the federal government has invested $444 million in the Canada Revenue Agency (CRA) to increase the number of tax audits that take place each year. This is expected to generate an additional $2.6 billion in tax revenues over the next five years. As small businesses are often prime targets for CRA audits, this is sure to cause more headaches for owners, not to mention the potential cost of the CRA penalties and interest that would be incurred if any errors are found. 

While the deck may be stacked against small businesses, there are still many tax breaks available to keep hard-earned money in their pockets. But simply filing a tax return at the end of the year won’t cut it anymore. Why act now? Taking these small steps could save your small business hundreds, if not thousands, of dollars come tax season.

1.       Keep your Records Complete

The best, simplest (and yet most overlooked way) for small business owners to save taxes is by keeping their business records complete and well-organized. In fact, many small businesses pay far too much tax simply because they do not commit to a system that keeps track of and records their business expenses. Not only does this save money through a lower tax bill but it also protects you if the CRA auditors come knocking at your door.

If you are just starting out, the easiest way to keep track of business transactions is to have an envelope for each type of income and expense that your small business has, and place each receipt into its respective envelope throughout the year. As your small business grows you may want to consider moving to a software solution that can handle more complex business transactions. These software packages also provide you with valuable reporting tools that will help you better understand how your business is performing throughout the year. 

2.       Split your Income

One of the keys to tax planning in Canada is the concept of income splitting. This is the process of maximizing income taxed at lower rates and minimizing income taxed at higher rates.  While the federal government has already eliminated some forms of income splitting, and is currently exploring actions to further limit this, there are still many legitimate ways to shift income from one tax rate to another depending on your business’ legal structure, family situation, and other factors. It is important to carefully plan your income splitting strategy well in advance of tax season.

3.       Track your Capital Assets

To operate any business, capital items like furniture, computers, office equipment and other useful assets are essential. These major purchases typically have a high up-front cost, but can often only be written-off over time for tax purposes. It is important to carefully consider the tax implications when making the decision to either purchase or sell a capital asset as there are significant tax savings to be had by timing these transactions correctly.

4.       Deduct Home Office Expenses Properly

If you operate a home-based small business, you may be eligible to deduct a portion of your home expenses that would otherwise not be tax deductible. These expenses could include things like mortgage interest, insurance, maintenance and repairs, utilities, and property taxes. As home expenses are only partially tax deductible, it is important to track them separately from your business expenses throughout the year. You may also want to consider where in your home to conduct business as this can have an impact on the tax savings available.

5.       Vroom! Deduct Motor Vehicle Expenses

Deducting automobile costs is a very important part of tax planning for many small businesses, one that comes with many rules and restrictions. Generally, any expense incurred to operate a vehicle can be deducted, including: fuel, insurance, maintenance and repairs, interest, lease costs, and more. However, it is important to keep track of all business kilometres driven at the beginning, end, and throughout the year, along with all automotive receipts. Don’t forget to consider the tax implications when choosing which vehicle to purchase, whether to lease or purchase a vehicle, and whether to own your vehicle personally or in a corporation.

You should always consider seeking the advice of an expert to ensure that these tax saving ideas are right for you. 

Published in Huffington Post Canada. (URL: ow.ly/4qfO30f4ktr)

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Daily, Weekly, Monthly: What to do to Maintain Accounting Records for Your Small Business, and Rake in the Benefits!

Often the most time consuming and stressful part of running a small business is the process of keeping clear and accurate financial records. Even those who manage to keep their books organized can find it challenging to use them strategically in their business decision-making. As a result, many small business owners simply throw all of their receipts into a shoe-box and give it to their accountant at tax time, which causes them to miss out on a lot of valuable information about how their business is performing.  

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Maintaining a good record keeping system throughout the year is crucial to ensuring that your small business reaches its full potential. This system can be used in many ways to make business decisions. For example, it can easily determine things like: whether or not you are making any money, how financially strong you are at any given time, and be able predict rough patches before they happen.

Here are some tips for setting up your accounting system so that it can be used year-round as a business decision-making tool, not just for tax season.

Before you start: Choose Your Accounting Software Wisely

If you are just starting out and do not have a lot of transactions then a manual record-keeping system could be a good option for you. It is a low cost option but does require someone (likely yourself) to maintain it regularly. The other disadvantage of this method is that you typically end up spending most of your time on the number crunching, leaving little time to analyse and understand the numbers.

As your small business grows you will want to consider moving to a computer software solution that can handle more transactions efficiently. These programs can provide you with the ability to customize your records to suit your business and the level of detail that you require. They also offer valuable reporting tools that will help you to better understand how your business is performing throughout the year.

Before you start, make sure that you get proper training on how to use the system that you have chosen. These programs can be more complicated to use than people often realize. If the software is not used as intended then the data that comes out of it may be compromised, which can be very time consuming to fix.    

Daily: Maintain Records

As a small business owner, you should be regularly monitoring the progress of your business by updating your accounting records daily. You know the financial condition of your business only when you maintain accurate records. Make it a daily habit to review your bank balances, record all payments made, record all sales/cash receipts, correct any entry errors, and record any inventory sold/purchased. Follow this process daily and find out how easy it can be!

Weekly: Review Accounts Receivable/Payable

A small business can run into major problems if its customers are in the habit of paying their invoices late. To reduce the risk of late or non-payment, you should clearly state your credit terms and conditions on your invoice, along with an interest penalty to be imposed if the payment is past due. In some cases, these precautions may not be enough. It is recommended that you review your accounts receivable on a weekly basis and take action on any slow payers. If your customers know that you are on top of your accounts receivable, they are more likely to pay on time. For the same reason, it is also a good idea to review your accounts payable on a weekly basis to ensure that you stay in good standing with your vendors.

Monthly: Reconcile Your Accounts

An accounting system is only useful to you if the records are complete and maintained accurately. For this reason, it is important to have your financial records reviewed and reconciled monthly against the bank, petty cash, and credit card statements to confirm that all entries have been recorded in the correct accounts. 

Now Reap the Benefits

Once your accounting records have been reconciled, you are then in the position to actually use this vital information to help discover profit opportunities, cost savings and efficiencies.

A clear and accurate Profit & Loss Statement, Balance Sheet, and Statement of Cash Flows hold an abundance of these clues! These reports can be populated right from the accounting system. It is important to review these reports in detail to ensure that you have a thorough understanding of what is happening and if anything unusual needs to be investigated.

You should always consider seeking the advice of an expert to ensure that your accounting systems are designed to suit the specific needs of your business. An expert can review your financial records and uncover tax savings, profit opportunities, and underlying issues that may otherwise go unnoticed.

Published in Medium. (URL: http://ow.ly/k6PG30f8rlD)

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