accounting

7 Modern Ways to Balance Your Checkbook

Tim Lemke — Thu, 24 May 2018 08:00:46 +0000

I remember watching my mom sit at the kitchen table at the end of each month, examining a checkbook ledger and paper statement from the bank. It was time to balance the checkbook — an essential task for any family looking to accurately track spending, avoid overdrafts, and stay on budget.

Balancing your checkbook is still practiced in some circles. It's akin to how some people still listen to compact discs or carry around flip phones. But these days, balancing your checkbook manually isn't nearly as essential due to advancements in technology and changes to our financial habits.

It's still necessary to make sure you're tracking withdrawals and deposits and staying on top of your checking account balance. So how do we do it? Check out these ways to balance your checkbook in the modern age.

1. Use online banking

These days, every bank encourages you to sign up for their online banking service. In fact, many modern banks don't have physical branches at all. Online banking gives you a real-time look at your money, so you know if payments and deposits are processed correctly. It's easy to check balances, transfer funds, and pay bills. There's no waiting around for monthly statements; you can look immediately to see if a transaction cleared, and you'll notice any errors immediately. (See also: 5 Best Online Savings Accounts)

2. Use smartphone apps

If you have online banking, most banks also offer smartphone apps with the same functionality as their websites. Many of them also allow you to deposit checks by sharing an image. Other apps like Clarity Money and Wally will also help you track spending money so you know precisely what's going in and out at any given time. (See also: These 5 Apps Will Help You Finally Organize Your Money)

3. Get text alerts

If you really want to stay on top of every dollar that goes in and out, you can use online banking apps to set up text alerts for when transactions post. You can get text alerts for when your balance dips below a certain limit, or when you face a possible overdraft charge. You'll know the very second when a check clears or when a bill is paid, so you're never confused about where you stand financially. It's also possible to get fraud alerts via text.

4. Automate everything

It's possible these days to send paychecks directly to your bank account through direct deposit, and also set up bills to pay automatically as well. It's may not be possible to automate everything, but the bulk of your income and most of your major bills (mortgage, loan payments, utilities, etc.) can all be sent directly from your bank account with no check required.

You can even select the dates when you want money to go out. This means you will never miss a bill, and the possibility of error is very small. Automate enough, and you may be able to "set and forget" a lot of your monthly transactions. (See also: 5 Ways to Automate Your Finances)

5. Use an account aggregator

If you want to see your full financial picture in one place, websites and apps such as Mint.com and Personal Capital will let you aggregate your accounts into a single view. These sites let you see everything from bank accounts to investment portfolios, loans, and even college savings accounts. Did you transfer money from your checking account to your brokerage account? Did you pull money from your online savings account to make an extra mortgage payment? These sites don't miss a thing.

6. Use Quicken or similar programs

If you still want to feel directly engaged with your finances by entering transactions, you can do so on the computer online through any number of accounting programs. Quicken may be the most popular, but there are other tools such as GnuCash and You Need a Budget that have similar capabilities.

7. Avoid checks if possible

One of the key reasons people have balanced checkbooks manually in the past is that it allowed them to keep track of checks that had not yet cleared. But if you never use checks to pay for things, this is not as much of an issue. Nowadays, you can use credit or debit cards for many purchases, or use services such as PayPal or Venmo that allow for instant transfers of cash.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Tax Mistakes Freelancers Need to Stop Making

Aja McClanahan — Wed, 07 Feb 2018 09:00:06 +0000

No doubt about it, being a freelancer is hard. From serving clients to staying on top of your money game, there's no shortage of work to do. Sometimes, things may be overlooked or set on the back burner while you tackle pressing business matters. However, there is one major thing that just can't be ignored — taxes.

As your own chief financial officer you'll need to be aware of major tax missteps that could ultimately ruin your business. Ideally, you'll engage the help of an experienced small business accountant who knows the ins and outs of tax strategies for freelance business owners. However, you've got to have your ducks in a row to double and triple check their suggestions and advice, too. (See also: What Freelancers and Side Giggers Need to Know About Income Taxes)

These are the top tax mistakes freelancers really need to stop making.

1. Not paying self-employment tax

As a freelancer, you probably have a number of clients that pay you without deducting any taxes. Because you are a contractor, you are responsible for any and all taxes on your income.

Self-employment tax is a term that covers two main taxes: Social Security and Medicare. As an employee of a company, your employer would cover part of this tax. However, lucky you, since you are your own employer, you get to pick up the tab on the entire tax bill.

On the other side of paying all these taxes, you do get some reprieve by deducting a portion of these payments from your gross income, which can reduce the amount of taxes you owe overall.

Just know that it's very important to pay self-employment taxes on your freelance income. If your client issues you a 1099 form, it's also transmitted to the IRS. The IRS becomes aware of this income and can demand you to make an accounting for that money if they suspect you owe taxes on it.

2. Not having an accounting system

Making a lot of money as a freelancer can also increase your tax liability. If you don't have a good system in place to track all of your income and expenses, you could end up paying more (or less) taxes than you're supposed to.

Charleen Fariselli is a CPA who has worked with small businesses for over 10 years. She says that freelancers who don't accurately track income and expenses are at a disadvantage. "This affects their taxes because they don't have a good accounting system and are often losing deductions so they pay more in tax," she says.

Charleen also adds that a lack of a good accounting system can have an impact on making timely, accurate tax payments: "These freelancers can't calculate what their taxable income is each quarter for making tax payments, so they over or underpay, if they pay at all."

The good news is that there are many accounting software options out there to help you organize your books, including QuickBooks, Xero, Wave, and Freshbooks. You can also use a simple Google Sheets document. (See also: 5 Free Accounting Tools for Freelancers)

3. Mixing business with pleasure

One of the worst things a freelancer can do is allow their business expenses and income to spill over into their personal finances. For example, a business owner may use a business credit or debit card to cover a personal expense like purchasing groceries for their family.

The biggest problem with this behavior is how it affects record keeping for tax filing purposes. Joshua Zimmelman of Westwood Tax & Consulting says that bad record keeping can cause confusion for freelancers at tax time. "Too many freelancers miss out on deductions because their finances are not organized," he says. "Separating your expenses from the start makes filing your tax return so much easier."

If you need help keeping your personal and business finances separate, you can opt for a business checking account or credit card. You could also use both.

If you do have to use money from your business dealings to cover personal expenses or vice versa, make sure you keep a record of such transfers. A small business CPA can help you categorize (loan, owner draw, paycheck, etc.) the transactions so that you don't run into problems with record keeping or tax liabilities. (See also: The 5 Biggest Mistakes Freelancers Make)

4. Neglecting retirement savings

The freelance life can be a roller-coaster ride of feast or famine, but it's still important to keep savings in the equation — especially retirement savings. Saving for retirement is not only critical for your golden years, but can also help you save on taxes.

When you put money away for retirement, it reduces the amount of your income tax withholding. Joanna Zarach is a consultant who helps freelancers plan for retirement. She says, "Solo retirement plans are the most effective way to lower your tax bill now and to build tax-free growth in your investment accounts."

There are different options to save for retirement. Some smart options include:

Individual 401(k): This type of account is ideal for solopreneurs who want higher contribution limits. You can save with pretax dollars while receiving tax deductions for employer contributions (you are the employer) as well.
SEP IRA: Tax-deductible contributions are made by the employer (in this case, you). Growth is tax-deferred until withdrawal.
ROTH IRA: With this type of retirement account, you save after-tax income that grows tax-free forever.

5. Neglecting health care contributions

Paul Jacobs is a CPA, EA, and officer at Palisades Hudson Financial Group. He says he often sees freelancers, "Forgetting to deduct health insurance premiums. A great tax break that is available to the self-employed is the ability to deduct this expense."

As a small-business owner, there are tax benefits when you pay insurance premiums for yourself and family members. Premiums for medical, dental and, in some cases, long-term health insurance qualify.

Reporting these premiums on your taxes can reduce your adjusted gross income (AGI) which can make you eligible for certain tax breaks. The only caveat here is that you may now have to itemize deductions in order to take advantage of this deduction come tax time due to the recent Tax Cuts and Jobs Acts of 2017.

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Big Business Accounting Tools Every Side Gig Needs

Kat Tretina — Fri, 21 Apr 2017 08:30:15 +0000

While side gigs are becoming an increasingly common way for Americans to bring in extra income, many people do not understand how that additional income can affect their taxes. If you're not prepared, freelancing or working on the side can lead to serious issues with the IRS, costing you thousands in penalties and fees.

If you plan on taking business deductions for expenses, you'll need some tools to manage your reporting and minimize your tax headaches. Treat your side hustle like a small business. Below are four business tools you should use to keep your side gig from overwhelming your finances. (See also: 6 Signs It's Time to Make Your Side Gig Your Career)

1. Business bank account

If you have a side business, you should seriously consider opening a dedicated business bank account. It will make tracking your expenses and profits so much simpler, which makes tax time simpler as well.

Keeping your business and personal finances separate is not just easier, it's also important. Should the IRS ever take a closer look, you want them to see a clear distinction between personal and business expenses, as well as all of the business income you've earned. Jumbling this together with your personal banking is a recipe for confusion and possible contention.

Having a business bank account lends you more professional credibility, too. Asking a client to write a check to your business, for example, feels much more legitimate than having them make it out to your name.

All of the business income you earn doesn't have to stay in your business bank account. You can pay yourself the appropriate amount after considering taxes and expenses. Simply transfer that money to your personal account, and leave the rest in your business account.

2. Business credit card

Similarly, it's a good idea to have a separate credit card you use solely for business expenses. (See also: When You Should Get a Business Credit Card Over a Consumer Card)

By having a card solely for your side gig, you will be able to manage your business deductions quickly and accurately. When you do your taxes, or if you work with a tax professional, you just need your credit card statements to get an accurate picture of your expenses and deductions. Some business cards even offer special reporting tools that automatically itemize your spending for you. This can greatly streamline your accounting process and save you some trouble come tax time.

Many business credit cards offer other unique benefits, such as extended warranty protection and rewards targeted specifically for business-type purchases. They also tend to come with higher limits than personal credit cards. If you need to make a substantial business expense but don't want to dip into your own savings or take out a business loan, these higher limits can be a huge help. They're also a great way to build credit for your business, should you ever need a loan or other financing down the road. (See also: The 5 Best Credit Cards for Small Businesses)

3. Invoicing system

While you can find free invoice templates online and create your own in Microsoft Word or Google Docs, it's a good idea to use a professional invoicing system. Invoicing software tracks clients, invoice numbers, and your profits. They are more accurate than something you create on your own, and they look more professional than the do-it-yourself approach.

And you don't have to spend a lot of money to create polished invoices. There are a number of free and low-cost bookkeeping programs out there that are designed specifically for freelancers and side hustlers. PocketSuite, Freshbooks, and Wave are excellent and no-cost options that can help streamline your business management.

4. Tax professional

While many people opt to do their own taxes, when you add a side business to the mix, a tax professional can be a huge asset. When you're self-employed or freelancing, even on a part-time basis, you owe self-employment taxes, which can be complex and confusing. You'll receive forms 1099-MISC from any clients that have paid you more than $600 during the tax year. If you receive a 1099-MISC, you have to pay self-employment taxes. Not to mention if you add expenses in the mix, you'll want to make sure you are claiming the proper deductions.

Tax professionals can help you navigate paying estimated quarterly taxes, or calculate how much money you need to withhold from your main job's salary to avoid paying quarterly taxes. They can also identify deductions and credits you may be eligible for, such as a home office or education deduction. These are substantial tax breaks that no self-employed individual should overlook. You want to be sure you're claiming any deductions or credits accurately in order to receive the maximum benefit possible. A tax pro can help you do this.

By working with a professional, you'll have overall peace of mind and avoid any surprises at tax time.

This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Reasons You Should File Your Taxes as Soon as Possible

Mikey Rox — Tue, 28 Feb 2017 10:00:21 +0000

What do we want? A tax refund! When do we want it? Now!

Here are eight reasons you should pick up the pace on your tax preparation and file well before this year's deadline.

1. You'll Get Your Refund Faster

Simple logic, folks: The sooner you file your returns, the faster you'll receive a refund (if you're owed one). The IRS says it issues nine out of 10 refunds within 21 days (sometimes less) with e-file and direct deposit. Use that money to get a head start on spring and summer home improvements, pay off debt sooner than later, or bulk up your emergency savings account.

2. Filing Online Is Easy

If your taxes aren't complicated — and they shouldn't be if you don't have multiple sources of income — filing online should be a walk in the park. Using TurboTax online, for example, is almost effortless, and it will help you submit an accurate return while also saving you money. Best of all, you can do it on your own time and in the comfort of your own home.

3. You'll Have Extra Time to Pay the Taxes You May Owe

Filing early doesn't mean you have to pay the taxes you may owe immediately. In fact, it'll give you a decent window to figure out how to cover that cost, especially if you don't readily have it available. If you submit your tax return in February, for example, you still have until the April deadline to come up with payment.

4. Your Accountant Can Spend More Quality Time on Your Return

I'm an entrepreneur, and I own a business that requires a decent amount of accounting at tax time. Admittedly, this is not something I want to handle on my own, which is why I have a CPA. I usually schedule my annual meeting with him mid- to late-February — before he's bombarded with his other clients' returns — so he can give mine the TLC it needs. If you have a lot of components to your own taxes, this is definitely a strategy to consider. You don't want to lose out on refund money because your accountant was in a hurry.

5. You Can Spend More Quality Time on Your Return

Even if you're handling your taxes on your own, it's still wise to give yourself ample time to prepare. A lot of information goes onto a return, and you need to ensure that everything is correct. Tax mistakes can be costly, but they can also be avoided if you plan ahead instead of trying to beat the clock at the last minute. Triple-check your numbers and personal information for accuracy. (See also: 5 Common Tax Mistakes We Need to Stop Making)

6. You'll Reduce the Chance of Identity Theft

Identity theft is a major concern with regards to your finances, and even your tax return is at risk. Scammers can file fraudulent returns in unsuspecting taxpayers' names, but the chances of that happening are reduced the earlier you file. (See also: Beware These 6 Phony IRS Calls and Emails)

7. It'll Make Your Home-Buying Process Easier

I've bought several homes over the years, and it's very stressful. For one, the mortgage company needs every last piece of your financial information that they can get their hands on — and then some. Your homebuying process will go much smoother this time of year if you've already filed your taxes.

8. You'll Have Time to Help Advise Your Working Dependent Kids

Your working children can also make mistakes on their own returns, filing as independents when they're clearly still dependents. Have a discussion with your kids about this designation — especially important to remember if they're away at college and filing on their own — so you don't miss out on deductions that you deserve.

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Money Software Tools Worth the Price

Christa Avampato — Thu, 30 Apr 2015 11:00:29 +0000

How was tax season for you? Complicated? Confusing? Exhausting? All of the above? (It's okay — I'm feeling all of those things, too.) Sure, the tax code needs a major overhaul. Since that could be a long time coming, here are a list of software titles that are worth the investment to help you get and stay on track of your finances, whether it's tax season or not.

1. Empower

There are so many types of savings and investment accounts — 401(k)s, IRAs, annuities, money market accounts, and the list goes on. Wouldn't it be nice to have all of these accounts in one place so that you could easily track performance, fees, and your allocations? Empower makes that possible, and it's gained quite a following. Users currently track over $1.2 billion of assets using the software.

2. Neat

There's no piece of financial paperwork more annoying than all of those tiny receipts we need to itemize and categorize. The Neat Company has software, mobile apps, and hardware so that you can set up the system that works best for you.

3. Morningstar

For those who want a more in-depth look at their investments, Morningstar gives users quite a range of proprietary tools. It will analyze the performance of your investments, and that's only the beginning. It will also provide you with proprietary, industry-standard Morningstar ratings for all of your investments and help you drill down into exactly which specific investments comprise your mutual funds. It doesn't link directly to your investment accounts, so you must manually enter all of the information when you start an account.

4. TurboTax

If you're looking for a piece of software to simplify tax filing time for you, I highly suggest TurboTax. There are a now a number of different versions for those of us with more complicated tax situations (the ownership of rental properties or a business, for example) and it has plenty of bells and whistles to makes sure the filing is accurate, while also maximizing your deduction opportunities.

5. Google Finance

If you're investigating different investment options, Google Finance is a free and simple tool that gives you a snapshot of a company's performance in easy-to-read charts. You can also use it to track your specific portfolio of investments, investment news stories, and domestic industry trends.

6. You Need a Budget

The name says it all. To achieve your financial goals, you need a budget and you need a budgeting tool that helps you stick to it. You Need a Budget (YNAB), is a simple and elegant tool that is also sophisticated in the amount of customization it provides. Easily record, tag, and track expenses, especially on-the-go with its mobile apps. You can try it for free for a month to see if you like it, and then to continue after that, there's a one-time fee that will work with all of your devices.

7. Budget Simple

Budget Simple is also an excellent budgeting tool that is simple and easy to use. The web app is free to set up and use. It's straightforward and also highly visual so you can quickly see how you're spending your money. If you'd like to get the mobile app and directly link your various bank accounts to the tool, there's a $5/month fee.

Achieving your financial goals requires organization, willpower, and performance information. These tools will help you get started.

Which financial software tools have you used?

This article is from Christa Avampato of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Find the Right Accountant for You

Thursday Bram — Tue, 07 Feb 2012 11:00:34 +0000

Finding the right accountant can make a world of difference when it comes to managing your money, but it can be easier said than done. There are a few ways that you can make the process go much easier, though.

Why Do You Need an Accountant?

The first question you need to think about when looking for an accountant is why do you need help with your finances — and what sort of help do you need? Not every individual really needs an accountant. There are a number of services out there that can help you with your taxes, if that's your only concern. An accountant usually works with individuals or organizations with slightly more complicated finances, ranging from managing a business' finances to helping an individual keep investments straight. (See also: 6 Mistakes to Avoid With a Financial Adviser)

You could just start calling accountants based on who is closest to you, but most accountants have specialties. You're not going to get exactly the help you need from just any accountant.

When we talk about accountants, we can actually be referring to one of several different kinds of financial expert. There are quite a few different designations for accountants, from the common "certified public accountant" to a certified management accountant or an accredited business accountant. It's most likely that you're looking for a CPA if you're generally looking for an accountant in the U.S. (other designations are used in other countries). A CPA will help set up the books for a new business, prepare tax returns, and handle a wide variety of other accounting tasks — unless you have a sizable business and need specialized help with your accounting, a CPA is usually the place to start.

It's still important to narrow the field down even further, though. Many CPAs work with specific types of clients. For instance, the CPA who helps me with my business focuses on small businesses that don't need much in the way of payroll but do need advice on business operations from time to time. He works with a lot of freelancers and small business owners, though he does take on other clients. Ask right off the bat about whether an accountant you're considering working with handles your type of situation — most are very clear about what types of clients they want to work with. You should also ask about specifics like price and who will actually do any work, like preparing a tax return.

Make a note of what sort of help you need. The price you'll pay for an accountant's help can definitely depend on exactly what you need done. Most CPAs work on an hourly basis, often starting at a price of $150 and going up from there. But for common situations, like needing a tax return prepared, you can expect prices to start closer to $90 — provided you are employed and don't have particularly complicated finances.

It's All About the Referral

Because an accountant may wind up knowing every last thing about your financial situation, it's important to find someone you're personally comfortable working with. Starting with a referral is often the best way to do so. Ask around to find out whom your peers use and whether they recommend their current accountants. If you're having a hard time getting a recommendation, many review-based sites, such as Yelp, do list accountants and other financial professionals. However, you'll want to dig a little deeper than just a review online — while it's fine for choosing a restaurant for dinner, you'll want more information when you're putting all your financial information in someone's hands.

If you operate a business, it may be worth going to your professional associations (such as the local Chamber of Commerce, if you are a member) and getting referrals there. You can get good leads on reliable accountants quickly.

Of course, you'll do the necessary due diligence to make sure that you're working with a reliable accountant. But because of that "certified" part of the job title, it's relatively easy to make sure that anyone you choose to work with has the necessary credentials to handle any accounting quandary you may face. Individual state boards are responsible for issuing certifications, and most will now allow you to verify an accountant's credentials online. A quick online search can also confirm that you've chosen the right person to work with. Many CPAs (including the one I work with) now have websites, Twitter accounts, and even blogs to help you make the right decisions.

An Ongoing Relationship

Even if you only visit your accountant for a yearly tax planning session, it's important to have an ongoing relationship. The best accountants will go out of their way to update you on new legislation, as well as anything else that might impact your finances. You may not anticipate needing help, but already having a great working relationship with your accountant can put you ahead of the game in the event of an audit or other financial situation.

Depending on how you expect your finances to change in the future, you may want to ask about some of the options that an accountant might offer before making your final decision. If you know you need to start planning for retirement or a child's education, you should ask about what sort of financial consulting or planning services a particular CPA offers.

This article is from Thursday Bram of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

18 Year End Financial Must Dos

Kate Lister — Sun, 11 Dec 2011 22:23:20 +0000

Link:

http://www.openforum.com/articles/18-year-end-financial-must-dos

There are financial moves you need to make before year-end if you want them to impact your 2011 financial statements and taxes. Some can even affect your ability to raise money, secure vendor credit, or sell your business in 2012, 2013 and beyond. With 2012 fast approaching, the time to act is now.

Must Dos that Make a Bad Year Look Better

1. Make a last ditch effort to collect from delinquent accounts, even if you have to negotiate on the amount. If you can’t, you’ll probably want to write them off as bad debt. Not doing so will hurt your accounts receivable turnover ratio—a red flag for lenders and investors.

2. Encourage other customers to pay before year-end, too. But before you offer an early payment discount, be sure it won’t take too big a bite out of your overall gross profit margin—another financing red flag if it declines from prior years or is below industry standards.

3. Ask for progress payments on projects already underway and see if you can secure deposits for any that will begin this year.

4. Delay paying bills that can wait until 2012.

5. Offer year-end specials on slow moving inventory. This will improve your inventory turnover ratio—something that will please your banker.

6. Sell any underperforming property and equipment that is fully depreciated.

Must Dos that Make a Good Year Even Better

7. Wait to deposit any new checks until after the first of the year.

8. Purchase property or equipment that qualifies for Section 179 or 100 percent bonus depreciation, as these benefits are likely to be scaled down in 2012. Note that qualifying equipment has to be in service before year-end.

9. Make charitable contributions.

10. Pay employee bonuses.

Must Dos To Do in Years Good or Bad

11. Download copies of all your year-end bank and credit card account statements. Don’t forget those PayPal, investment, and Google Checkout accounts. You’ll need proof of 12/31 balances and they’re sometimes hard to come by after the fact.

12. Try to pay down any bank lines of credit, preferably to zero. Lenders like to see that you’re using them as intended—for temporary or seasonal needs. Maintaining a balance year-round suggests that they’re being used for long term financing.

13. Take a close look at your inventory. You can reduce your taxable income and improve your inventory turnover ratio by writing off any obsolete items.

14. Carefully consider whether the IRS or other government agency might look at anyone you treat as a contractor and decide they’re actually employees. Desperate for revenue, governments are hot on the trail of such misclassifications. If you think you may have misclassified workers in prior years, you might be pleased to know the IRS recently announced a program that can reduce the penalties for admitted transgressions, but you need to have at least filed 1099’s for those contractors in each of the last three years. A word of caution if you plan to fess up—the IRS isn’t the only agency that can make your life miserable if you’ve misclassified workers. Be sure to get advice from a competent attorney or accountant before you proceed.

15. If you incurred costs to start a business in 2011, but haven’t yet made a sale, hurry up and sell something! Anything! You can’t deduct any of those expenses in 2011 unless you do.

16. If you’re planning to squirrel money away in a 401k, keep in mind that while it can be funded in 2012, the account has to be in place by December 31, 2011.

17. If your personal income will be relatively low this year, consider converting your traditional IRA to a Roth IRA. Fidelity has a handy calculator to help you figure out if this is a good move.

18. Take a look at your investments and decide if it’s time to cash out. The special treatment of Capital Gains at a maximum tax rate of 15 percent is set to disappear at the end of 2012. After that, they’ll likely be taxed at ordinary income rates. If your capital losses exceed your gains, you can carry them forward to offset future capital gains.

Finally, most experts agree that tax rates will increase after 2012 and tax breaks will be harder to find. Be sure to consult a qualified professional about whether these and other strategies are right for you. A good place to start is with those who contributed their tips for this article: Brian Price—founding partner of Dallas-based PriceKubecka, Rick Dlugasch—CPA with Boston-based Waldron Rand, Robert Mahoney—president of Belmont MA-based Belmont Savings Bank, and New Jersey-based Gail Rosen, CPA.

This article is from Kate Lister of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3 Things Your Accountant May Not Be Telling You

Barbara Weltman — Sat, 26 Mar 2011 18:57:19 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/3-things-your-accountant-...

Working with an accountant usually is a smart strategy for handling your taxes and tax planning. More than 80 percent of small business owners do just that. However, be aware that your accountant may not tell you everything you’d want to know.

1. Your disclosures to your accountant may not be privileged.

You know that anything you say to your attorney is privileged; it’s a right created by common law. However, there is no such common law privilege for accountants and their clients. There is a limited privilege which was created by statute in 1998 for a federally-authorized tax practitioner — CPAs, enrolled agents, and enrolled actuaries — and his or her client. What you say to your accountant may or may not be privileged.

Scope of federal privilege: The limited privilege applies to disclosures to accountants to the same extent that they would for disclosures to an attorney. Thus, your accountant can give you advice about a tax question you raise. However, the privilege may be asserted only in civil matters before the IRS or before any noncriminal tax proceeding brought in Federal court by or against the United States. The privilege does not apply to:

State taxes, such as state income taxes;
Criminal proceedings, such as a criminal tax prosecution;
Preparation of a tax return;
Any civil proceeding involving a tax shelter.

State-level privilege: In some states, including Florida, Pennsylvania, Colorado, and Missouri, there is accountant-client privilege. If you have any concerns about what you tell your accountant, first ask about whether state-level privilege applies to you.

Best strategy: When in doubt about discussing highly sensitive tax matters that could potentially lead to a criminal case, talk to an attorney; all communications are privileged.

2. Specific entries or omissions on your return that may cause audits.

Your accountant isn’t being evasive; he or she just doesn’t know for sure in most cases because the IRS isn’t talking.

There are some tax issues that everyone knows are subject to special IRS scrutiny, such as worker classification. The IRS is always looking at businesses to see whether workers have been treated as employees, rather than as independent contractors, where it is appropriate to do so.

However, other tax issues, such as claiming a home office deduction, are not guaranteed audit red flags. The IRS doesn’t publish a list for most of its audit targets, although from time to time it does say at which issues it will look closely. For example, it has put the research credit in its crosshairs for large and mid-sized businesses by designating it as a “Tier 1 issue,” and will look at every return on which the credit is claimed. Whether the same scrutiny is applied for research credits claimed by small businesses isn’t clear.

Best strategy: To minimize any audit exposure, make sure that there is a basis for taking a deduction or other tax position, as well as having all necessary documentation to support the position.

3. Who is actually preparing your return.

You’ve met with your accountant, but is he or she the person who is preparing your return? If you use an accounting firm, your return may be delegated to young associates or even temporary employees. This isn’t necessarily a bad thing, but you’d certainly like to know about it.

Today, as a cost saver to firms, tax returns are increasingly being outsourced to preparers in other parts of the country or even overseas. In 2008, new IRS regulations directed tax preparers to obtain consent from clients before disclosing information to third-party tax preparers located outside the U.S. However, this rule does not apply when outsourcing to preparers in the U.S.; firms can disclose a client’s tax information to another preparer in the U.S. without obtaining client consent.

Best strategy: Just ask your accountant who is preparing your return. Likely your accountant will review any return prepared by someone else. Once your accountant adds his or her signature to your return, you can look to this preparer for responsibility for any preparation problems on the return.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Free Tools That Automate Your Business

John Joyce — Fri, 18 Feb 2011 22:15:12 +0000

Link:

http://www.openforum.com/idea-hub/topics/technology/article/5-free-tools-that-au...

The challenging economic climate has taught business owners that it’s absolutely imperative they embrace solutions that will help them work smarter and focus on generating revenue. Of course, limited budgets make business automation solutions that much more difficult to evaluate and implement. If your number one goal for 2011 is to bolster lead generation, customer acquisition, or customer retention, you must ask yourself this question: How am I going to create operational efficiencies that will free up my time, give me leverage, and allow me to grow my business? Use these free tools:

ZohoCRM

If you’re focused on increasing revenue, it makes sense to consider implementing a CRM (customer relationship management) solution. Qualified visitors to your website are like gold, and you want to create multiple touch points to extend the conversation/interaction and convert them into customers. ZohoCRM is one of the most robust free offerings available to small business owners and allows you to formalize your sales process and manage the pipeline.

Included in the free version of ZohoCRM are the following:

Accounts for up to three users
Sales force automation: leads, contacts, accounts, and opportunities
Marketing: campaigns, email templates, and email opt-out
Customer support: cases and solutions
Common features: tasks, log calls, calendaring, reports, dashboards, and product customization

ZohoCRM offers various a la carte options, like Outlook integration that is reasonably priced at $3/user/month. If you find you need more advanced features like security administration, workflow management, group chat, or case escalation rules, you have the option of upgrading to the Professional or Enterprise plan.

ZohoCRM offers a 15-day free trial of its pay plans, which range from $12/month to $25/month.

Zopim

Another way to make sure you’re nurturing incoming leads is to give visitors the option to interact with a representative via Instant Messaging with a service like Zopim. Many times, visitors don’t want to pick up the phone to ask a question nor do they wish to wait for a response to an email or form submission. This solution is also another way for you to interact with existing customers and maintain a history that can be shared with the rest of your team.

The highlights of this solution include:

Integration with your existing IM client (AIM, Google Talk, MSN, or Yahoo)
Integration with your CRM system, such as ZohoCRM, to maintain history of customer conversations (in beta and available to all users)
Multiple-language support
Automatic integration with Google Analytics
Offline form

If you find you need more agents or want advanced features, you can upgrade to one of the pay plans that range from $9–$99/month. Zopim offers a 14-day free trial of these plans that doesn’t require a credit card.

HootSuite

You hear a lot of talk about social media being “free,” but it still requires a great deal of time and effort to make sure you’re presenting a consistent message across all relevant channels. One of the best solutions for consolidating and streamlining your “social marketing” is HootSuite. It allows you to maintain a central view of your social presence, schedule messages in advance, and track the results of your efforts. The most powerful feature is called Hootlet, which is a plug-in for Firefox and/or Chrome that is essentially a bookmarklet that allows you to share links right from the page you’re viewing.

The HootSuite free plan lets you:

Monitor up to five social profiles (Twitter, Facebook, etc.)
Monitor up to two RSS feeds
Use iPhone, Droid, and Blackberry apps
Schedule tweets
View threaded conversations
Integrate with Ping.fm

An upgrade to the $5.99/month Pro plan adds the following:

Integration with Google Analytics and Facebook Insights
Influence scores
URL parameters for identifying and tracking campaigns
No ads

You can also add and manage additional team members for $15/user/month. HootSuite offers a free 30-day trial for the Pro plan.

FreshBooks

Most successful companies eventually make the transition from Microsoft Excel for managing invoices to a more robust solution. If you do some research, you’ll find a very large number of small businesses using FreshBooks to simplify this time-intensive process. FreshBooks has done a great job of listening to their customers when it comes 3^rd party integrations, so you can share data across various tools. You can view an exhaustive list on their site, but some of the more notable partners are Basecamp, Outright, Shoeboxed, Highrise, Wufoo, MailChimp, and Zendesk.

The free version allows you to:

Manage up to three clients
Enter unlimited invoices and contractors
Accept online payments
Create timesheets, document sharing, support ticketing
Add custom logos your invoices
Perform data imports/exports
Automatically schedule invoice creation

FreshBooks offers a 30-day money-back guarantee on all pay plans, which range from $19.95–$39.95/month.

Spiceworks

If your business can’t operate with free or low-cost SaaS applications alone, you’ll have to allocate resources to evaluate and deploy some kind of network management solution for your internally hosted hardware and software. Spiceworks is a unique solution in that you get access to all features and functionality of their Spiceworks IT Management solution absolutely free. The tradeoff is simply that you will be presented with advertising from companies like Microsoft, HP, and Google while using their product.

Rather than purchase several different network management tools from multiple vendors, you can deploy Spiceworks and:

Inventory everything on your network
Run an IT helpdesk
Monitor your network for trouble
View an automatically generated visual map of your network elements and how they interrelate
Generate and publish custom reports
Troubleshoot network issues
Manage your IT purchasing
Manage your users
Track network configuration changes
Connect with more than 1.3 million Spiceworks users and share expertise and best practices

This includes a “buyers club” offering discounts on various 3^rd party products and services. Spiceworks does offer an ad-free deployment for $30/month.

This article is from John Joyce of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Language of Accounting

JoAnne Berg — Thu, 17 Feb 2011 17:02:40 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/the-language-of-accountin...

Did you ever look at a set of financial statements and wonder what it all meant? Would you like to know how to get more value out of the information?

You’re not alone. Many business owners find that learning to read, truly understand, and benefit from their financial statements is a challenge.

I like to think about it this way: Your financial statements tell the story of your business — using numbers instead of words.

Accounting is the universal language of business. In the simplest sense, it is the process of recording what happens in a business on a daily basis. Sure, we’re recording the dollars involved in each transaction, but we are also recording the economic meaning of the transaction and categorizing it in a way that will give us useful information later for decision-making and planning.

After being entered using the categories on the chart of accounts, the accounting data is summarized into a standardized format, which is broken down into three different financial statements:

Balance Sheet
Income Statement
Statement of Cash Flows

Let’s look more closely at these three basic financial statements and analyze the story they’re telling us.

The Balance Sheet

The balance sheet is also referred to as the “Statement of Financial Position,” and that’s exactly what it’s about. This statement tells the story of what your business owns (assets) and what it owes (liabilities) as of a given moment in time (say, December 31). It is literally a “snapshot in time.”

During the month, as transactions are recorded, the impact of each transaction on the assets and liabilities of the business is also recorded. For example, when you make a cash sale, you not only record income, but you also record an increase in the value of an asset — your cash balance. When you incur an expense, you record the amount of the expense, but you also record the reduction in the value of your cash. (This is why it’s called “double entry” accounting!)

The difference between the assets and the liabilities of the business represents the book value of the owner’s equity in the business. In a corporation, this is referred to as shareholder’s equity.

The balance sheet is used primarily to help us understand the financial strength of a business. Changes in the balance sheet accounts over time help us understand important trends in the business as well.

The Income Statement

The income statement can also be referred to as the “Statement of Activities.” This statement tells the story of what your business actually accomplished during the time period that it covers (for example, the month of December). It does this by summarizing the economic results of all of the transactions that occurred during that time, and letting you know if you made or lost money on those activities.

You can learn a lot about your business from analyzing the income statement. It’s not enough to simply know if you made or lost money. You will also want to use this statement to understand exactly where your money is going each month.

Also, by comparing different spending categories as a percentage of sales from month-to-month and watching your sales, cost of goods sold, and spending trends, you can get a pretty good idea of any changes that you need to make to become more profitable. Negative trends on the income statement are important to investigate — don’t ignore them!

The Statement of Cash Flows

Last, but certainly not least, is the statement of cash flows. Many businesses don’t bother with this statement, but it’s an extraordinarily important storyteller. This statement explains the change in your cash balance from the beginning to the end of the time period by breaking down your business activity into three sections:

Cash flow (in or out) from operations
Cash flow (in or out) from investing activities (for example, funds used to purchase assets to run the business)
Cash flow (in or out) from financing activities (such as loan proceeds or loan repayments)

Since good cash flow is critical to any business, it’s extremely important to clearly understand where your cash is coming from and where it’s going. This statement is a little trickier to learn to read, but it is worth the effort.

Understanding the story of your business as told through your financial statements is a powerful tool for business success. You’ll be glad that you took the time to learn the language!

This article is from JoAnne Berg of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Make More, Save More With Project-Based Accounting

Julie Rains — Tue, 26 Oct 2010 21:12:36 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/make-more-save-more-with-...

You may sense that profits are lower than they should be, despite full slates of projects and timely collections. Providers of creative, technology, consulting, and even project-management services have joined construction businesses to benefit from project-based accounting or job-cost accounting. Getting a handle on what constitutes a project and the resources required to develop, sustain, execute, and complete project-oriented assignments can mean the difference between barely getting by and showing strong profits.

Predict findings and benefits of project-based accounting

Until you see project totals and cost breakdowns, you may not know precisely what you'll do with the financial intelligence that project-based accounting delivers.

Instinct may be telling you that projects are underpriced, especially if demand is high but profits are low. The benefit in this scenario is that you'll have a foundation for justifying and negotiating higher prices. You may be able to pinpoint project details that are critical to clients' successes as well as those that are expendable because they increase cost but add little value.

Discoveries that you may make based on compilation of total project costs:

project types that are most profitable;
client profiles that tend to engage your business in high-profit projects;
inconsistent pricing among similar projects; and
problems with pricing that occur only when scopes of projects are broadened.

Drilling deeper into costs by category may lead to revelations such as:

inexpensive per-unit costs on project materials through bulk purchases (but accompanied by the need to dispose of excess inventory);
higher efficiencies among in-house labor compared to contract labor;
use of materials with specifications not appropriate to project requirements; and
failure to assign certain costs to projects.

Cataloging benefits can provide inspiration and direction for pursuing, shaping, and implementing project-based accounting and financial reporting.

Decide that you're going to adopt project-based accounting

This approach will require your full support and commitment from nearly everyone in the business. Your accountant can produce reports but the raw information will come from your team. They'll need to track resources (labor hours, professional services, inventory, etc.) dedicated to each project.

Create boundaries for what constitutes a project

Much emphasis is rightly placed on defining the scope of projects. Clients and service providers should agree on project deliverables along with features to be included and those available for additional fees. Uncertainties can still exist in regard to scope, such as the cost of preliminary research prior to the project start or routine maintenance and upgrades scheduled just prior to completion. Set guidelines for charging expenses to projects for consistency in comparing and scrutinizing costs.

Design processes for capturing project information

Ideally, financial data relevant to projects can be recorded at the same time that accounting information is being captured for the general ledger. Billable (or labor) hours and materials used for projects should be included; other line items may include equipment rental, professional services, insurance, and supplies pulled from inventory for specific projects.

Employees or their supervisors can provide breakdowns on hours expended by project when completing timesheets. Managers can designate project names and authorize payment approvals when they review vendor invoices. Depending on the size and complexity of your projects, find software solutions that will capture and keep project information integrated with your accounting system.

Start tracking all information

To get project reports that are meaningful, allocate all resources among active projects. Otherwise, some expenses may be omitted altogether or charged to the wrong project, canceling out reasons for setting up project-based accounting.

If time constraints prevent assigning all related expenses to projects, then start by recording one category, such as payroll. Implement processes for assigning billable hours to projects. Reconcile project hours with payroll hours to confirm that information is being captured and recorded properly. Research and resolve discrepancies, and redesign processes or reeducate team members on methods of assigning expenses to projects. You may uncover questions about the difference between overhead and project hours; decide how you'd like to treat these issues so that information among projects stays consistent.

Create project-based financial reports

Compile numbers and produce project financial reports with total revenues and expenses. Seeing project profits (or losses) is the first step in gaining insight into methods of improving results. Compare pricing and expense ratios among projects to discover ways to enhance efficiencies, find cost-savings techniques, or eliminate certain tasks not relevant to project successes.

Looking at project financials can be startling. The projects that you love may not be the ones that are the most profitable. The clients who are the most endearing may be the ones who continually ask for extras and expand project scopes to the point that profits plummet. Get a true understanding of costs so that you can negotiate pricing and earn the profits you deserve.

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Solve the Mystery of Staffing Your Accounting Department

Ken Kaufman — Thu, 27 May 2010 01:17:43 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/solve-the-mystery-of-staf...

You are either spending too much or too little time and money to get what you need (and should expect) from your accounting and finance department. Most startup, entrepreneurial, and growing businesses struggle to solve the mystery of how to properly and effectively structure their accounting and finance department to maximize the value they receive from it.

There are basically three Tiers to running an accounting department, whether large or small. Tier 1, which is the lowest in terms of compensation and hierarchy, includes data entry and other routine tasks like receiving, entering, and paying bills and entering timecards for payroll. The middle Tier includes somewhat higher level tasks like reconciling accounts, ensuring receivables are entered accurately and correctly, managing cash, and providing some reporting to management. The highest Tier focuses only on high level accounting entries, financial statement reporting and analysis, accounting/ERP system design and structure, training others in the accounting and other departments, forecasting, and helping make strategic decisions that impact the company's operations, bankability, taxes, competitive advantage and much more.

Giving one person the responsibilities of all three Tiers is irresponsible, especially if you expect that person to perform them all efficiently and at the lowest cost possible. Either the person does not have the right background to do it all, or, if they do have the right background, you end up over-paying them to do routine and simple tasks. Knowing that most companies cannot afford to hire someone in all three Tiers right away, what is the best way for a business to get everything it needs for the best price?

Start by hiring a very part-time independent bookkeeper or bookkeeping solutions that can recommend an affordable accounting system that they know and can train others to use to fulfill Tier 1 tasks. This person will fulfill items in Tier 2 and a little bit of Tier 3 initially, and they can be as affordable as $100/month. The bookkeeper is essential because they will make sure your business is compliant and even getting a little bit of strategic data. Then have this person train lower cost employees to handle the Tier 1 functions. This will be a very good and healthy start, although some of the Tier 3 functions will not be covered. This will be OK in the interim, but ultimately most businesses cannot neglect Tier 3 for too long without suffering negative consequences.

Finding the right part-time bookkeeper is not always easy. They need to know your accounting system and have some experience in your industry. Some CPA firms have bookkeepers on staff that they hire out to their clients, but more affordable options exist in the form of independent bookkeepers if you put in the effort to find them. There are usually ample options in every market, and they are often more affordable and more flexible to best fit your needs.

As the company grows the part-time bookkeeper may need to put in more time, but the bulk of the work will be absorbed by lower cost employees in Tier 1. The uncovered parts of Tier 3, like forecasting and strategy, will need to be solved by another part-time addition to the team, and they are usually referred to as a part-time or outsourced Chief Financial Officer, or CFO. The CFO Services these professionals offer have grown in popularity and demand over the last decade because of the affordable and high-impact solutions they offer. For more information on the right time to engage these services, read my recent article, 4 Signs You Need a CFO.

Ultimately the part-time bookkeeper will become overwhelmed by the time and expertise demands of the company and it will make sense to bring on an Accounting Manager or Controller full-time to handle all of the Tier 2 functions as well as assist in the fulfillment of the Tier 3 functions. The last full-time hire in a company's accounting and finance department should be the CFO. Not only is the CFO the most expensive position in this department, but it also requires the least amount of time dedicated to it. It will also need to become full-time when an organization grows so large (usually over $50 million in sales) and too complex (multiple locations, international expansion, multiple business models, etc.) for a part-time solution to truly cover all the needs of the business.

You can solve the mystery of properly staffing your accounting department by understanding these three Tiers of tasks and leveraging part-time and full-time resources to get exactly what you need at the very best price available.

This article is from Ken Kaufman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Cash vs. Accrual and Why Accounting Matters for Taxes

Thursday Bram — Sun, 07 Mar 2010 17:00:07 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/cash-vs-accrual-and-why-a...

When you're running a small business, it may seem like deciding between cash and accrual accounting is just one more thing on the long list of things you need to get done. But the fact of the matter is the decision on which accounting method you're going to use makes a difference in something as simple as how you do your taxes and can have long-lasting effects beyond the end of the year.

The Difference Between Cash and Accrual Accounting

The cash method of accounting is the most common choice for small business owners. Under the cash method, you don't count income until you have the cash or the check in hand and you don't count expenses until the money leaves your account. In comparison, under the accrual method of accounting, you record transactions when they happen, no matter when the money actually changes hands. The cash method tends to more popular because it's easier for many businesses to keep track of. But if there's a lengthy delay between when you do work and when you receive payment, some issues can occur.

There are some situations in which your business absolutely must use the accrual method. If you have sales of more than $5 million per year or your business maintains an inventory of items you sell to the public and your gross receipts total more than $1 million per year, you're required to use the accrual method.

Paul Miller, a professional juggler who just happens to have a degree in accounting, chose the accrual method in an industry — entertainment — that tends more towards the cash method. His choice was based on the fact that it's easier to tell where your business' finances actually are with accrual accounting, rather than just knowing what cash you have on hand. Miller says:

I selected the accrual method for more accurate reporting. Many of my receivables are paid net 30, net 60 and sales as a whole are very dependent on the month of the year. I will earn $20-30,000 from library and camp work in August and much of it won't be paid until September. Most of this income in September will be from school and after-school programs. By using the accrual method, I can get an accurate picture of how much I earned each month and from what sources.

Using Accounting to Manage Taxes

One of the biggest changes a choice in accounting methods can create is how you handle tax deductions. Under the cash method, if you make a purchase in 2010 but don't send payment until 2011, you won't be able to deduct that expense until 2011. Under the accrual method, however, you would be able to claim the deduction in 2010. That may sound like a subtle difference, but depending on your business' expenses and income, it can be quite complex.

For instance, if you often have long periods between the point when you make a sale and when you receive payment, the accrual method can actually cause some problems. For instance, you may send out an invoice at the end of December, but not receive payment by the time you need to send in your tax return. If you're using the accrual method, you're still expected to pay taxes on that expected income, although it isn't in your bank account yet.

There are certain situations in which the system of accounting that you choose will play a more minor role. Dick Barnes has operated several small businesses over the years and is now a partner with the Freeland Group, a management consulting firm. Barnes says:

If cash accounting shows too much profit one year, it will likely show too little the next and vice-versa. An example of a difference might be if using long-term debt with a single balloon payment and you write-off the entire debt load in a single year (kind of dumb normally, unless you're having an extraordinary year).

Making the Switch Between Accounting Methods

As a small business owner, you're likely already using one accounting method or the other. But just because you've been using a particular method in the past does not mean that you cannot switch to the other. Barnes suggests talking to your accountant, especially if you're moving from the cash method to the accrual method.

Depending on the type of business, the switch could be very simple...or it could be pretty complex." Barnes points to certain issues that may slow down the switch: if you already have a commercial line of credit, where your accounts receivable stand and how long your operating system is.

If you're the one keeping the books for your company, you may need to pick up a few new skills if you make the switch to accrual accounting. Miller says:

I do think that an attentive small business owner can pick up the steps to run an accounting system based on the accrual method. It is mostly a case of reporting and a couple of extra accounts.

Your CPA may even be willing to walk you through the differences, especially if you're using common software, such as Quickbooks.

Beyond Taxes: Make Sure You Have Room to Grow

Your accounting method isn't just a matter of doing your taxes. Barnes has owned a number of small businesses and, as a business owner, preferred the simplicity of cash accounting. But when he changed tracks, he realized how important it was for small businesses to use the accrual method when possible:

As a commercial lender, I found that cash accounting makes it difficult to verify or judge what the firm is actually doing at any one point in time. Most banks will not consider putting together a loan package with cash accounting financial records, particularly if the firm grows beyond the $500k annual revenue level. They simply want the owner to go back to the blackboard, hire a CPA for accuracy, and come back with what they often call 'legitimate' financials (accrual).

If you think that, down the road, you may need capital to expand your business, it's important to make sure that your accounting method won't get in the way of you getting a loan. Barnes suggests meeting with your bank long before you ever need a loan to check what your options will be with the bank that already has your business; ask your banker if the bank would have a problem with cash accounting if you ever ask for a line of credit.

This article is from Thursday Bram of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

FINANCIAL IQ TEST: How Healthy Is Your Budget?

Nora Dunn — Thu, 11 Feb 2010 14:00:11 +0000

Budgeting is one of the hardest things for any of us to do well — and stick to. It requires discipline, attention to detail, and persistence. But it doesn’t have to be impossible; and effective budgeting can actually be quite empowering.

Following is a Financial IQ Test to help you determine how healthy your budget is. Simply look at each statement, and answer it with a YES, NO, or NOT SURE. Keep track of your answers, and we'll see how you score at the end. Then, check out the resource articles below to increase your knowledge base.

Budget Maintenance

I plan ahead for large expenses like repairs, appliances, or periodic bills.

I amortize annual expenses over 12 months for budgeting purposes (I apply the same principle to other periodic expenses too, for example quarterly expenses are amortized over 3 months).

I record all my expenses (or have an accurate record of expenses through bank statements or the like).

Before I created my budget, I monitored my expenses over a few months to figure out what I spend.

I review my budget regularly for effectiveness and modify as needed.

Savings

My savings plan is an expense that is part of my budget.

Extra money like pay raises, bonuses, and tax refunds go directly into savings or to pay off debt.

Gifts and charitable donations are part of my budget.

Flexibility

If I anticipate that I’ll go over the budget in one category, I find the money from another category that month.

I have financial padding built into my budget for flexibility (and sanity).

I have allowances in my budget for unexpected expenses.

Holiday season festivities and birthday gifts don’t throw me off budget.

Accountability

I know how much money I live on each month/year.

I balance my chequebook so I don’t go into overdraft.

I can account for all my spending.

I live within my means.

I don’t charge anything to my credit card unless I can pay it off in full by the due date.

I pay all my bills on time.

My income is larger than my expenses.

Budget Lifestyle

I don’t allow myself to feel pressured by peers to spend money that I don’t have.

I don’t buy caviar (for example) unless it’s in the budget – even if it is on sale for half price.

I view my budget as a way to figure out what I CAN afford, instead of what I CAN’T.

I have a positive goal or vision to keep in mind (like being debt-free, or having a vacation) for times when the budget is tight or I start to feel deprived.

I budget for small rewards to keep me on track and motivated.

Everybody in the family participates in the budgeting process.

Scoring

Did you keep track of how many times you answered YES, NO, and NOT SURE? Great! Give yourself the following points for each answer:

YES = 4 points

NO = 0 points

NOT SURE = 2 points

Analysis

Score: 0-35 – More Budgeting Required

If you have a budget at all, you’d probably agree that it’s not particularly effective. You might manage your expenses on the fly each month, and although it may work for now, there may come a time when some unexpected expenses will railroad you – or you may simply not realize that you could do more with the money you have. A little more attention to what you spend could be enlightening.

Score: 36-70 — Getting There

You probably make an attempt to budget, but it’s not quite effective, and you may not even realize why or where you’re going wrong. Don’t be too hard on yourself; budgeting requires a lot of discipline, tenacity, and attention to detail. This isn’t easy for everybody. Check out some of the resources below to improve your technique.

Score: 71-100 – Budget Master

Although there’s always room for improvement, you’ve got a system that largely works for you. Take a look at the questions you answered “not sure” or “no” to, and see where you can improve. But for the most part give yourself a pat on the back – you are in the minority of people who have – and stick to – an effective budget. Congratulations!

Resources

The First Step to Budgeting

Ponder It: To Budget or Not to Budget

Budgeting Hack: Gift Calendars

Prepaid Gift Cards for Modern Envelope Budgeting

Make Grocery Budgeting a Game — The Price is Right Style

Why You Can’t Stick With a Budget

3 Ways Technology Makes Personal Finances Easier

Tricks for Budgeting as a Parent

Beyond Budgeting: Pocketsmith Helps you Forecast

How to Save Money at Restaurants: Budgeting Tips for Dining Out

Taco Tuesday: The Inner Mechanics of Budgeting on Vacation

Budgeting For your Next Vacation: Yaycations

Your Budget: Envelopes, or a Plan

A Budget is Not a Constraint

This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Common Money Mistakes Small Business Owners Make

JoAnne Berg — Fri, 08 Jan 2010 20:17:01 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/6-common-money-mistakes-s...

We’ve all known businesses that appear to be doing well, but end up going out of business because they’ve made major mistakes in pricing, cost control, or financial management. Here are some of the areas where these problems arise, and some suggestions for how to avoid making the same mistakes.

1. Pricing Strategy

Pricing is probably the most important decision you make every day. If your prices are too high, you won’t do enough volume. If you set them too low, you may get lots of sales, but you will lose money. So how do you find the right price?

If you’re in a business where your prices can be directly compared to your competitors’ (shoes, for example), your flexibility is limited. You can always run specials and have sales, but your competitors may follow. You’re better off trying to create a sense of immediacy so that your customers buy as much as possible at full price. This is where good marketing makes all the difference. Try different approaches, track customer behavior, and make adjustments as you learn what works.

On the other hand, many non-retail businesses and businesses with patented products have more flexibility in their pricing. It’s common here for entrepreneurs to actually under-price their products. Most advisors recommend starting a little high and monitoring the response — it’s easier to lower a price than to increase it.

2. Tracking Gross Profit

Many small businesses do not correctly account for the full cost of their products or services. It’s much more complex than many realize. For example, if you are a clothing retailer, the cost of the freight to your store is part of the cost of the clothes. You also need to track and factor in shrinkage, damages, and unsalable returns — all of those costs that can eat up your profit margin.

If you’re a service provider, the wages that you pay the employees providing the service; including payroll taxes, insurances, and benefits; should be considered “cost of services provided.”

Accurately accounting for cost of goods sold is important so that you can control those costs and also so that you can easily monitor gross profit, which is the difference between sales dollars and the cost of goods or services sold. It’s not enough to just monitor sales volume — what matters is the profitability of those sales.

If your gross profit percentage starts to slip, you need to immediately find out why and fix it. It could be caused by a cost issue, a pricing problem, or both. Don’t wait until the end of the month to look at your gross profit numbers — put a system in place where you can monitor them weekly or even daily.

3. Credit and Collections

Many small businesses do a poor job of credit and collections. In many industries, customers expect to buy on credit, and in many service businesses, fees are billed after services are performed. This means that your business is making an investment in your customer or client’s company. Treat this with the seriousness it deserves! Use a solid credit-checking process, set realistic credit limits, be very clear about what your credit terms are, and stick to those terms. You can also ask for a deposit up front, or a retainer if you are providing services. You may lose a sale or two, but it’s better than never getting paid.

4. Budgetary Controls

Every business has overhead expenses, which can get out of control. These are things like rent, utilities, administrative employees, insurance, and office supplies. You should prepare an annual budget for these. Have your accountant load it into your accounting software, and then run a “budget vs. actual” report each month. This will show you where spending is creeping up.

5. Necessary Business Infrastructure

Small businesses often skimp on the personnel, resources, and infrastructure needed to run a business effectively. You need top-notch accounting help to track your day-to-day activity as well as a good CPA. You also need a robust accounting system, a great attorney and insurance broker, good computer systems, and a responsive IT firm to keep your systems running, Make sure these are in your budget.

6. Taxes

You need to be informed on tax issues in order to make good business decisions. These taxes include income taxes, sales and use taxes, payroll taxes, and business property taxes. Don’t be afraid to ask questions of your tax advisor when you need to. The cost of non-compliance, especially with payroll taxes, can be staggering, and knowing how to manage your business decisions with income taxes in mind can leave more money in your pocket.

Even if you’re already doing a good job in these six areas, you may be able to enhance your profitability by making small improvements to your current procedures. If you’re not doing these things, I encourage you to start implementing them. You’ll be amazed at the results.

This article is from JoAnne Berg of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: