For many businesses, January marks the beginning of a new year of financial records, evaluations and sometimes, difficulties. For small businesses in particular, a lack of experience with banking can present a host of problems on top of other issues that startups already have to deal with.
“The biggest financial issue facing small business owners today is capitalization, specifically, difficulty getting loans,” said Ken LaRoe, CEO of First GREEN Bank. “Even though lack of capital can affect any business, it is particularly prevalent and tricky for small businesses. This also acts to limit the development of many small businesses, because without sufficient capital they cannot afford to make key investments necessary for growth and expansion.”
Whether you’re applying for a loan or simply want to be more knowledgeable about business finances, there are plenty of things you can do to boost your financial expertise. LaRoe offered these three tips for small businesses looking to bank smarter in 2014:
- Keep tabs on your accounts. Business owners should get all of their accounts — personal and commercial — in order and perform a realistic assessment of expenses and financial needs. Set aside time each quarter, or even each month, to review your accounts and re-evaluate your business finances.
- Join a community bank. Community banks are the lifeblood and backbone of a small business- based economy, LaRoe said. Many community banks look beyond just banking services and are helping clients discover financial products they might not have otherwise considered through education and counseling.
- Take advantage of professional services. Hire a strong CPA and have monthly financial statements prepared to GAAP (generally accepted accounting principles) standards. Also meet frequently with your banker, who can provide great counsel to small business owners.
With tax season at an end, many small businesses assume that the worst of their IRS filing worries is over. However, a handful of business owners still have one more battle to fight: the dreaded tax audit.
As stressful and overwhelming as an audit may seem, there’s no need to panic. It does need to be taken seriously, but sometimes, audits deal with simple data or reporting errors that the IRS suspects may have occurred, said Frank Pohl, an attorney at Gunster law firm.
“Keep in mind that not all tax audits end adversely for taxpayers,” Pohl said.
If you do receive an audit notice, here’s what to do to make the process go as smoothly as possible, and to minimize any negative impact on your business. [See Related Story: 5 Tax Deductions That Could Get You Audited]
1. Review the audit letter carefully.
Open the letter promptly, and understand what information the IRS needs from you, Pohl said. If you don’t have a designated financial adviser, hire an accountant or tax attorney to help you go through the audit letter and identify the issues the IRS has flagged. Pohl also warned not to delay action or ignore the letter.
“The IRS will not go away, and not acting promptly may only make the auditor suspicious or antagonistic,” he said.
For security purposes, if you are being audited, you will receive a mailed letter, Pohl said. Scammers will often masquerade as the IRS by sending emails or leaving phone messages in an attempt to get your personal data, but the real IRS does not communicate with taxpayers in these ways, Pohl said.
2. Get your records organized.
Before you and/or your tax professional meet with an IRS auditor, take the time to dig up and organize all of your business records from the past tax year, said Kimberly Foss, a certified financial planner (CFP); founder and president of Empyrion Wealth Management; and author of “Wealthy by Design” (Greenleaf Book Group Press, 2013). This includes receipts and invoices for income and expenses, bank statements and canceled checks, accounting books and ledgers, hard copies of tax-prep data, and leases or titles for business property, she said. If the IRS has requested specific documents to review, be sure you have those readily accessible as well.
3. Answer the auditor’s questions (and that’s it).
When you sit down with the auditor, you’ll be asked numerous questions about the information reported on your tax return. Our expert sources agreed that you should not volunteer any information you are not required to give.
“Just respond with the information [that is] requested,” Pohl told Business News Daily. “Providing unneeded or unasked-for information may lead to more questions … and additional issues.”
“Be straightforward in responding to questions, but don’t manufacture excuses,” Foss added.
Unsure of what you should and shouldn’t say? Sandy Gohlke, a CPA, chartered global management accountant and principal at Rehmann financial services company, advised giving the IRS a signed power-of-attorney agreement that will allow the IRS to deal directly with your tax professional.
“That takes you out of the loop and puts them in,” she said.
Pohl agreed, and said that even if your tax professional doesn’t have power of attorney, you should still have him or her present when you meet with an IRS auditor. He also advised business owners not to get defensive or hostile during the interview.
“The auditor. cannot and will not forgive and tax debt or mistakes, and any admissions you make can be used against you,” Pohl said. “Adopting an antagonistic attitude risks alienating the auditor, [which] will not be in your best interest.”
Avoiding future audits
Gohlke reminded business owners that audits are generally random, and you can’t prevent them entirely. However, some companies are selected because of certain “red flag” expenses — either amounts or types — that are out of the ordinary and would cause a second look, she said.
Foss noted that bank transfers and other financial records beyond your receipts should be tracked, and anything that can’t be explained on the standard IRS form should be explained on paper. She also advised double-checking all of your math before filing.
“Keep proper documentation, and only deduct ordinary and necessary business expenses that are allowed by the IRS,” Gohlke added. “Even if you are selected for an audit, you will know you have nothing to worry about.”
When applying for a small business loan, your credit score is a major factor in determining whether you get approved. So entrepreneurs with bad credit can benefit from taking steps to boost their business’ ratings.
According to Experian, one of the United States’ three credit-reporting agencies, a credit score is a number that lenders use to help decide how likely it is that a loan would be repaid on time. In addition to the role these numbers play in the approval process, credit scores are also used to set the interest rates on the loans that lenders do pass out.
It is important to note that a business’s credit score is different from a personal credit score. According to BusinessLoans.com, a personal credit score is a reflection of how someone repays their mortgage, auto loans, or other personal obligations, while a business credit score reflects how a business owner meets their company’s financial obligations. While the two scores are different, lenders can look at both when deciding whether to approve a loan.
“Having a positive business-credit profile is extremely important because it presents a current, objective picture of how a business manages its financial obligations,” Brian Ward, vice president for Experian’s Business Information Services, told Business News Daily. “A negative credit profile can lead to higher interest rates, difficulty in securing loans and potential problems with suppliers, but a positive business credit profile can help save your business money by enabling the business to secure the best possible rates and terms.”
Recent research shows that most business owners are in the dark when it comes to their credit scores. A study from Manta and Nav revealed that 72 percent of small business owners don’t know what their credit score is and nearly 60 percent don’t know where to find their credit score.
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Credit scores can range anywhere from 100 to 990, depending on the scoring model. Amber Colley, a business-credit expert and director with Dun & Bradstreet, said since there isn’t a definitive “good score” business owners should be aiming for.
“There is not necessarily one score that is more important than others or that you should completely disregard,” said Amber Colley, a business-credit expert and director with Dun & Bradstreet. “It depends on what scores your lender uses to make its decisions. ”
Since there isn’t a specific number that businesses have to achieve, the best strategy is for business owners to focus on managing the factors that help build positive scores, Ward said.
“This is done by monitoring the business credit report on a regular basis to help verify the information and be educated to what drives changes,” he said.
Colley and Ward said there are several ways that business with bad credit scores can improve their ratings:
1. Pay bills on time: Colley said the most important thing you can do as a business owner to boost your business credit score is to pay your bills on time.
“The amount of payment experiences recorded in your report that show your historical ability to meet your vendors’ payment terms, along with the amount of high credit you have been extended by those vendors, are important components within your business credit report,” Colley said.
2. Pay down current balances: Ward said another way to improve a credit score is by paying down balances on commercial accounts and credit cards as much as possible.
3. Keep tabs on your credit score: Colley advised business owners to pay close attention to their credit report in order to see changes to their scores and ratings as they happen.
“Monitoring your company’s credit information can allow you to react and update or confirm the information being reported about your company,” Colley said. “This, in turn, can allow you to be proactive versus reactive in managing the information within the report.”
Other tips from Experian include applying for and opening new credit card accounts only when necessary and avoiding closing unused credit-card accounts. Owing the same amount but having fewer open accounts may lower your credit score, Experian said.
But there is no set time frame for how long it will take a business or business owner to improve a credit score, Colley said.
“There is no definitive answer to this question,” she said. “What information is being updated, added, disputed or confirmed could dictate how long it may take for information (scores/ratings) to change within the report.”
Zero based budgeting is a method of managing cash flow in which all expenses must be justified in each new period rather than basing financial decisions on the previous year’s funding. Zero-based budgeting forces companies to scrutinize and justify all expenses in a never-ending goal to redesign cost structures and boost competitiveness. An organization watches its spending and challenges the costs it creates through expenses and employee activities, attempting to identify inefficiencies and necessities to reduce corporate spending and increase market competitiveness.
The focus on reducing overhead while still increasing performance proves helpful in aligning resource allocations to company strategic goals. Zero-based budgeting places the emphasis of cost analysis on identifying the activities that need to be performed at what levels and frequency. After that, a company must answer the question of how these activities can be better performed — whether it is through streamlining, standardization, outsourcing, offshoring, automation or simple fiscal conservation.
How zero based budgeting works
When a company adopts zero-based budgeting, a massive shift in mindsets is required. Management must be willing to make sacrifices and cut expenses traditionally viewed as necessary to help in the goal of reaching a bottom line of zero. The company first re-envisions its business and asks what activities and resources are needed to remain competitive under current and future market conditions. Once the necessary items are identified, the company then sets clear cost targets and strategic visions that share in this goal.
Company management should justify every activity needed to continue with the company’s function, while at the same time making concessions in removing unnecessary expenses and activities. In the end, resetting budgets and full-time employee levels, redesigning the organization and implementing the zero-based budget initiative prove the most time consuming parts of the process.
The benefits of zero based budgeting
The main goals behind zero-based budgeting are to save money and improve services. However, in addition to these main benefits, the strategy also impacts the restraint of management and employees when developing budgets.
With a traditional budgeting strategy, companies generally have one goal: to have money left over at the end of each month or fiscal year. This creates a mentality of entitlement where employees and management alike feel justified in spending money, provided expenses don’t exceed income. Rather than letting money pile up to protect against slow economic seasons or unexpected company-wide expenses, many organizations spend more than is necessary, both on purchasing equipment and performing activities that waste profit and reduce company efficiency.
When the mentality of entitlement is removed, expenses likewise reduce and budget discussions then become more meaningful.
The negatives of zero-based budgeting
While the strategy behind zero-based budgeting is well intended, it causes some adverse impacts on company culture and expenses. Preparing budgets becomes even more time-consuming because of the amount of justification needed for each expense. The use of zero-based budgeting may even prove too radical of a strategy for a company and may cause more harm than help.
How companies use zero based budgeting
Zero-based budgeting forces management to overcome conventional thinking and instead challenge every expense and assumption, no matter how sacred. In the event of acquisitions or mergers, this strategy proves even more appropriate as it helps align resources with mission functions and strategic imperatives. The main goal, however, is to reduce wasteful expenses without reducing company value.
For example, a software development company may be using the a third-party organization to purchase IT services to reduce staffing overhead and free up existing company resources to focus on production-related activities. However, they are paying a significant fee each month for unlimited access to the service’s support department, a feature they use no more than once a year. By removing this monthly cost and instead paying for the occasional and infrequent fee of a support call, the company makes significant strides toward reaching a bottom line of zero.
When consumers apply for credit cards or loans, their credit scores are often the single most important factors in deciding whether their applications are approved. But what about when you’re applying for a business loan?
While business lenders will certainly take your personal credit into consideration, it’s far from the only factor they will consider. Ted Peters, chairman and CEO of the Bluestone Financial Institutions Fund, outlined what is known as the five “C’s of credit” that commercial lenders look at to make a credit decision.
Cash flow. Lenders look at your historical and projected cash flow, as well as your sales numbers, to determine your ability to pay them back in a timely manner.
Collateral. Depending on the strength of your cash flow, banks may look at your current assets — mortgage, working capital, inventory, etc. — to see if anything can be used as collateral to secure your loan, should you have trouble paying it back.
(Business) Credit. In addition to your personal credit and payment history, lenders will check if your business entity has established any past credit, including on-time bill payment for any B2B services. Many lenders use reports from business data company Dun & Bradstreet to access this information, Peters said.
Character. Your overall character and reputation in the community matter to the people taking responsibility for funding your business. This is part of the reason lenders will set up an in-person meeting to discuss your application and credit needs.
“Lenders meet with people [to] look them in the eye [and determine], ‘Is this someone we trust and want to do business with?'” Peters said.
Capacity. Peters noted that this is typically the least important factor in a credit decision, but lenders still want to know the capacity your business has to grow. A local ice cream franchise, for instance, has a limited capacity to boost sales, but a global e-commerce or tech business could grow exponentially in just a few short years.
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Looking ahead: Social media for credit decisions
Although it’s not yet a publicly available product, the team at Experian’s research and development branch, DataLabs, has been hard at work over the last three years looking at the correlation between social media and commercial credit risk. In the not-too-distant future, DataLabs’ solution may allow lenders to factor data from a business’ social media channels into a credit decision.
“Breakthrough experimentation in Experian DataLabs has uncovered that social media has predictive value in assessing the credit risk of a business,” said Eric Haller, executive vice president of DataLabs. “While not being productized for lenders to use today, the future may hold that business reviews, likes and check-ins can all help to paint the picture of a successful and growing business.”
Haller said that DataLabs aligned data from businesses’ accounts on Facebook, Twitter, Foursquare, Yelp and other major social platforms with those companies’ commercial credit data. The results showed that certain social trends can help predict a credit default.
“The strongest value is for businesses that have not established credit in the past,” Haller told Business News Daily. “This is significant because one-third of all inquiries for commercial [lending] are businesses [without] established credit.”
Advice for borrowers
If you’re looking to take out a traditional bank or SBA loan, Peters advised meeting with two or three different lenders before making a decision, so you can fully understand your options.
“Not all banks look at everything the same,” Peters said. “Some won’t do a restaurant loan, for example. It’s a good idea to talk to multiple banks, as [they may have] different preferences.”
He said interested borrowers should also put together a “package” for potential lenders. This package should minimally include an executive summary of your business, your business plan, financial information, how much you want to borrow and what you intend to do with the money.
“There’s no set rule [about it], but make sure it’s well-organized, clear, up-to-date and done neatly,” Peters said. “It’s going to be one of your first impressions at the bank.”
Accounting is vital to a strong company, keeping track of the business’s finances and its continued profitability. Without accounting, a business owner would not know what money was coming in or going out, or how to plan for the future. The actions taken by accounting professionals — from bookkeepers to certified public accountants (CPAs) — make it possible to monitor the company’s financial status and provide reports and projections that affect the organization’s decisions.
What do accountants do?
The American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” This is often done by logging a business’s accounts payable, accounts receivable and other financial transactions, typically using accounting software.
While bookkeepers tend to focus on the details, recording transactions in an efficient and organized manner, they may or may not see the overall picture like accountants do, said CPA Stan Snyder.
“Accountants use the work done by bookkeepers to produce and analyze financial reports,” Snyder said. “Although accounting follows the same principles and rules as bookkeeping, an accountant can design a system that will capture all of the details necessary to satisfy the needs of the business — managerial, financial reporting, projection, analysis and tax reporting.”
One part of accounting focuses on presenting the company’s financial information in the required ways to those outside of the company. In order to present this information in a format everyone can understand, accountants follow a set of guidelines. In the United States, most accountants abide by the Generally Accepted Accounting Principles. There are different sets of accounting standards for companies that operate overseas, as well as for local and state government entities.
CPA Harold Averkamp said accounts also provide a company’s internal management team with the information it needs to keep the business financially healthy. Some of the information will originate from the recorded transactions, while some will consist of estimates and projections based on various assumptions, he said.
To come up with a company’s status and projections, accountants rely on various formulas. Accounting ratios help uncover conditions and trends that are difficult to find by inspecting individual components that make up the ratio. Accounting ratios are divided into five main categories:
- Liquidity ratios measure the liquid assets of the company versus its liabilities.
- Profitability ratios measure the organization’s ability to turn a profit after paying expenses.
- Leverage ratios measure total debt versus total assets, and gauge equity.
- Turnover ratios measure efficiency by comparing the cost of goods sold over a period of time against the amount of inventory that was on hand during that same time.
- Market-value ratios measure the company’s economic status compared with others in the industry.
Many accountants within the industry choose to become CPAs, a title they achieve by passing an exam and getting work experience. According to the Pennsylvania Institute of Certified Public Accountants, CPAs audit financial statements of public and private companies; serve as consultants in many areas, including tax, accounting and financial planning; and are well-respected strategic business advisors and decision-makers. Their roles range from accountants to controllers and from chief financial officers of Fortune 500 companies to advisors for small neighborhood businesses.
According to the University of North Carolina at Wilmington’s Career Center, there are countless other jobs that require accounting proficiency, including auditor, financial investment analyst, claims adjustor, loan administrator, tax lawyer, underwriter and stockbroker.
If you run a small business, it’s likely that you’re operating on a relatively limited budget. Whether you bootstrapped your business or are trying to pay back loans you took out to cover your startup costs, it’s in your best interest to conserve money wherever you can.
Without a thorough budget plan, however, it can be difficult to track and manage your finances. This is especially true for any unexpected business expenses that may come up, as they often do. A 2015 survey by small business credit provider Headway Capital found that although 57 percent of small business owners anticipated growth this year, nearly 19 percent were concerned about how unexpected expenses would impact their business.
If you want to keep your business operating in the black, you’ll need to account for both fixed and unplanned costs, and then create — and stick to — a solid budget. Experts offered their advice for small business owners looking to keep their finances in order.
Define and understand your risks
Every business venture has a certain degree of risk involved, and all of those risks have the potential for a financial impact on your company. Paul Cho, managing director of Headway Capital, said that small business owners need to consider their long- and short-term risks to accurately plan for their financial future.
“How will changes in minimum wage or health care requirements impact your workforce?” Cho said. “Do you operate in a geography at high risk of a natural disaster? Do you rely heavily on seasonal workers? Understanding the potential risks facing you on a short- and long-term basis is important for all small businesses. Once you’ve mapped out the threats to productivity, a clearer picture can be built around emergency planning, insurance needs, etc.”
Overestimate your expenses
If your business operates on a project-to-project basis, you know that every client is different and no two projects will turn out exactly the same. This means that often, you can’t predict when something is going to go over budget.
“Every project seems to have a one-time cost that was never anticipated,” said James Ontra, CEO of presentation management company Shufflrr. “It usually is that one unique extra item [that is] necessary to the job, but [was] not anticipated when bidding the job.”
For this reason, Ontra advised budgeting slightly above your anticipated line-item costs, no matter what, so that if you do go over, you won’t be fully unprepared.
“I go by the cost-moon-stars theory,” he said. “If you think it will cost the moon, expect to pay the stars.”
Pay attention to your sales cycle
Many businesses go through busy and slow periods over the course of the year. If your company has an “off-season,” you’ll need to account for your expenses during that time. Cho also suggested using your slower periods to think of ways to plan ahead for your next sales boom.
“There is much to be learned from your sales cycles,” he said. “Use your downtime to ramp up your marketing efforts while preventing profit generation from screeching to a halt. In order to keep your company thriving and the revenue coming in, you will have to identify how to market to your customers in new and creative ways.”
Plan for large purchases carefully and early
Some large business expenses occur when you least expect them — a piece of equipment breaks and needs to be replaced or your delivery van needs a costly repair, for instance. However, planned expenses like store renovations or a new software system should be carefully timed and budgeted to avoid a huge financial burden on your business.
“Substantial business changes need to be timed carefully, balancing the risk with the reward and done with a full understanding of the financial landscape you’re operating within,” Cho told Business News Daily. “An up-to-date budget and data-driven financial projections are important components that help guide when to make large investments in your business.”
Remember that time is money, too
One of the biggest mistakes small businesses make is forgetting to incorporate their time into a budget plan. Ontra reminded business owners that time is money, especially when working with people who are paid for their time.
“Timing underestimation directly increases costs,” Ontra said. “For us, the biggest underestimation is allotting time for client feedback. It is a Herculean effort sometimes to meet a deadline with lots of people focused on a single task. Then, the client needs to give feedback for us to proceed. If the client is distracted with other issues, feedback planned for a three-day turnaround, can become a week or longer. Not only do you start to lose time to the delivery schedule, your team also loses momentum as their collective thought shifts focus to another project.”
Ontra recommended treating your time like your money, and set external deadlines later than when you think the project will actually be done.
“If you believe the project will finish on Friday, promise delivery on Monday,” he said. “So, if you finish on Friday, deliver the work early and become a star. If for some reason time runs over, deliver on Monday and you are still a success.”
Constantly revisit your budget
Your budget will never be static or consistent — it will change and evolve along with your business, and you’ll need to keep adjusting it based on your growth and profit patterns. Cho suggested revising your monthly and annual budgets regularly to get a clearer, updated picture of your business finances.
“Regularly revisiting your budget will help you better control financial decisions because you will know exactly what you can afford to spend versus how much you are projecting to make,” Cho said. “Take into account market trends from the previous year to help you determine what this year may look like. Once you have a clear understanding of your business’s budgetary needs, you can accurately forecast what can be set aside for an emergency fund or unexpected costs.”
Job seekers spend so much time fine-tuning résumés and preparing for interviews that they are often unprepared for the salary proposal that accompanies a job offer. The company has made a significant investment in filling that vacancy and may be willing to come to more attractive terms, but many candidates fail to realize that employers are open to salary negotiation.
A 2013 study by The Creative Group revealed that professionals who accept an initial job offer may be leaving money on the table. More than 60 percent of the executives surveyed are at least somewhat willing to negotiate compensation when extending a job offer to a top candidate.
“Job seekers often have more leverage than they realize when negotiating a starting salary,” Donna Farrugia, then-executive director of The Creative Group and now CEO of Nelson Cos., said in a statement. “Businesses that have gone through the process of selecting a top candidate are motivated to hire that person, even if they have to sweeten the deal.”
Because salary conversations are delicate and can easily go off track, Farrugia said job candidates who are thoroughly prepared for negotiations are the ones who have the most success. The key to a good, mutually respectful negotiation is informed and honest communication. Here are six tips to help you get the salary you deserve.
Prepare for your negotiation
Research a reasonable salary for the position considering your education and experience. Do not base your counteroffer solely on the wage you would like to make. By approaching the negotiation with appropriate information and a reasonable expectation, you will make a better impression on the employer as well as position yourself reasonably from the start. In an article on The Ladders, career expert Amanda Augustine suggested looking up how your current role compares to the market rate, and then changing some of the variables to match those of the companies you’re applying to.
“If the roles you are targeting are in different industries or locations, or the size of the company is very different, this could have an impact on what salary you can expect to make,” Augustine wrote.
Keep personal issues out of it
Do not use your mortgage payment or other bills as a reason you should be paid more. Employers may be sympathetic, but that is not a reason to provide more compensation. Instead, focus on the increased value you bring to the organization. Stress your unique qualities, experience, education or some other feature to demonstrate benefit to the company’s goals, vision or purpose.
Honesty is always the best policy. If asked what your previous salary was, don’t lie about it. While you may fear that it will weaken your position, it instead provides a strong foundation for your future working relationship. A reference check will reveal a lie, which could result in the offer being withdrawn altogether.
Remember that compensation is more than money
Salary offers include benefits such as vacation time, sick days and other work-life-balance options like a flexible schedule or telecommuting. Those items may also be negotiated. Depending on their importance to you, maybe an extra week of vacation is worth a little less in pay throughout the year. Consider the offer as a whole, and be open to negotiating aspects other than money.
Be willing to compromise
How you conduct yourself during a negotiation is as important as what you say. Be kind but firm, confident yet compromising. Your tone and demeanor will keep the conversation going or shut it down completely. Delivering ultimatums seldom works, and if it does, it can result in a negative atmosphere for future interactions.
Don’t lowball yourself
Many employers will ask you for a salary range on your application, during your interview or when they first contact you with a job offer. Whatever your very bottom number is, make sure the lowest number in your salary range is still above that (but within a reasonable range based on your research). If you go in with your minimum acceptable offer, the final number may be dangerously close to that.
Getting a new job offer or making a new business deal is exciting — but negotiating? Not so much. The process of negotiation can be nerve-wracking, and it’s easy to make mistakes, especially if you haven’t had much experience negotiating. Before your next negotiation attempt, make sure you watch out for these seven common negotiating mistakes.
“Many people think they need to show a certain kind of confidence, like being loud, bold or brazen, to successfully negotiate a deal. Others think that a lot of experience is required to be a good negotiator. Most of the time, it merely takes tenacity and good old preparation to ensure you are aptly equipped to assert mutually desirable terms, anticipate objections, and discern what … motivators or ‘hot buttons’ will resonate with your opponent,” said Eldonna Lewis-Fernandez, CEO of consulting and training firm Dynamic Vision International and author of “Think Like a Negotiator” (Amazon Digital Services, 2014).
Lewis-Fernandez added that projecting confidence also means having a heart, which can make the opposition less defensive and more likely to agree with your stipulations. However, it’s also important to back up your confidence with solid, well-researched information.
Thinking something is non-negotiable
You may not think the terms in front of you are negotiable, but anything is possible with the right attitude.
“When you think like a negotiator, everything is negotiable! It’s a mindset you have to operate from in order to become not just a good negotiator, but a great one,” Lewis-Fernandez said.
She added that, while negotiators must adhere to several rules, even those are negotiable so long as you can propose an ethical, viable and mutually beneficial alternative.
Not building relationships first
Relationship building is key to a successful negotiation, but it goes beyond networking events where professionals hand out business cards, Lewis-Fernandez said. Her advice? Slow down and make real, personal connections with people, and learn as much as you can about them. By doing so, you can make negotiating more meaningful for everyone involved.
“Find out something about them, personally, and not just their business. You might be surprised how well you can leverage what you learn through a genuine conversation with someone,” Lewis-Fernandez said.
Not asking for what you want
If you don’t ask for what you want, you’ll never have the opportunity to get it. While facing rejection is tough, letting it hold you back during a negotiation is a big mistake.
“In business, rejection is never personal. It’s merely a reflection that you did not present a viable argument substantiating why you should get what you want. It’s the offer that’s being rejected, not you, so keep emotions in check and recalibrate your approach,” Lewis-Fernandez said.
The only way to master the art of dealing with rejection, Lewis-Fernandez said, is to get rejected and keep asking. Most of the time you, will either receive what you want or an acceptable alternative.
Talking too much
When negotiating, you have to have to explain your side and give your pitch, but talking too much could actually be a deal-breaker.
“There’s an old adage that says, ‘He or she who speaks next loses.’ When discussing a deal, if you simply stop talking and get comfortable with the awkwardness of silence, your ability to win your argument, sell the product or get a concession in the negotiation increases significantly,” Lewis-Fernandez said.
Not documenting it
A successful negotiation is about much more than just getting the other side to agree to your terms. You need to properly document everything that happens during a negotiation to avoid future issues.
“A myriad of problems can occur when the terms of a deal are not put in writing, because what you think the other party said and what they think you said can be two different things,” Lewis-Fernandez said.
Signing without reading
“Modern life is fast-paced, and people are usually engaged in multiple things at once, making it difficult to focus and causing some to sign legal documents without reading them first. The result can be nothing short of disastrous. Make sure you read any agreement or contract in full, to ensure you are not confirming terms you will regret and cannot undo, which can cause copious problems for your future,” Lewis-Fernandez said.
To avoid future problems, Lewis-Fernandez suggested consulting with a contracts attorney to review contractual documents or anything that requires a signature.
While small business owners acknowledge that there are some downsides to increasing wages for their entry-level workers, many of these business owners also find positives in doing so, new research finds.
Nearly 60 percent of small business owners said they favor raising the minimum wage, and the same percentage said they would likely vote for a state or national candidate who supports a minimum-wage increase, according to a study from Manta, a provider of products, services and educational resources for small businesses.
The results were released as both California and New York recently approved measures to gradually increase their minimum wages to $15 per hour.
The majority of small businesses surveyed are already paying their employees above what’s required. The research revealed that 40 percent of small business owners pay entry-level employees “far above” the required minimum wages in their areas of operation, while 38 percent pay “slightly above” the minimum wage. Just 14 percent are paying the state or local minimums, and only 9 percent are paying the federal minimum wage of $7.25 per hour. [See Related Story: 6 Proven Ways to Negotiate a Higher Salary]
“Many small business owners feel that paying above minimum wage is vital to staying competitive in their industry,” John Swanciger, CEO of Manta, told Business News Daily. “From a talent-acquisition and employee-retention standpoint, providing attractive compensation packages can help owners hire qualified individuals who will ultimately help grow their business.”
While nearly 30 percent of small business owners said a minimum-wage increase would have no impact on their operation, the requirement to pay employees more would require many businesses to make some changes.
Nearly 40 percent of those surveyed would have to charge more for their goods and services, 33 percent would need to reduce staffing levels, 27 percent would need to cut employee hours, 25 percent would be unable to expand their business or hire more employees, and 9 percent would need to cut their hours of operation.
Despite the negative effects, many small business owners still see the value of paying their employees more than the amount currently mandated.
“In tough markets especially, pay plays a large factor in recruitment and retention — so paying higher than the state or federal minimum is a huge plus, and one of the major pros of an increased minimum wage,” Swanciger said.
Additionally, raising the minimum wage will put more money into the hands of low-income individuals who will then have more expendable income for things like food, gas and housing, according to Swanciger.
“This boost in demand will stimulate the economy and create even more opportunity for small businesses,” he said.
Nonetheless, small business owners that are forced to raise wages will likely feel the pinch while they make the transition.
“This means some small business owners will hold off on hiring new employees while they figure out how to successfully navigate this shift,” Swanciger said.
The study was based on surveys of 2,409 small business owners.
In preparation for the April 15 tax deadline, Business News Daily consulted small business tax experts to find out what things business owners should pay attention to now as the 2016 tax season approaches. Some of these issues involve recent tax changes, while others are issues small businesses should watch for in the future.
Two important tax breaks for small business have been extended: Section 179 and bonus depreciation. Section 179 allows businesses to deduct the full price of any qualifying equipment or software purchased or leased during the year. The tax-extension bill makes permanent the $500,000 maximum deduction for new and used equipment that was purchased or leased in 2015. Bonus depreciation, which was extended through 2017, allows business owners to depreciate 50 percent of the cost of new equipment purchased in 2015. The two tax incentives can be used together.
“Now that small businesses know they can write off … eligible equipment, we may see a lot more spending by small businesses,” Priyanka Prakash, finance specialist at FitBiz Loans, told Business News Daily. “The nice thing is that Section 179 applies to almost any kind of equipment, from office furniture to software to vehicles.”
Other notable tax extenders include the research and development credit, work opportunity tax credit, energy production tax credits, and a deduction for local and state sales tax. Grafton “Cap” Willey, a managing director at CBIZ MHM, said the extensions — even the temporary ones — are an important step in helping small businesses plan ahead.
“[The extensions] will help with some tax planning over the next few years,” Willey said. “Small businesses have been crying out for some consistency in the tax code, so that they know what the rules are when they make their decisions.”
However, he added, the 2016 elections could change the political landscape in such a way that more changes and inconsistencies might be on the horizon.
The Affordable Care Act
The implementation of the Affordable Care Act (ACA) will affect some small businesses at tax time. The most notable issue for many businesses is that they could face tax penalties for failing to provide health insurance to employees or for failing to report to the Internal Revenue Service what type of coverage they have provided for employees.
“[The ACA] in 2016 now applies to businesses that have 51 to 99 employees,” Ravi Ramnarain, CEO and founder of Ravi Ramnarain, CPA, LLC, said. “Businesses that are not in compliance with the necessary requirements are subject to heavy fines.”
Janemarie Mulvey, former chief economist for the U.S. Small Business Administration’s Office of Advocacy, said that since the start of 2016, businesses with 51 to 99 employees are required to offer health insurance to at least 70 percent of their full-time–equivalent employees or face a tax penalty of $2,000 per employee. Mulvey has published a reference guide for small businesses called “Health Reform: What Small Businesses Need to Know Now!”
Business owners should understand the reporting requirements that come along with the ACA, in order to avoid tax penalties, she added. The act requires employers to report, on each employee’s W-2 form, the cost of the health coverage the employer provided. A breakdown of what the employer and the employee each paid is required in Box 12 of the form. Failing to report this information could lead to fines of $200 per employee, Mulvey said. The IRS recently extended the reporting deadline to May 31, 2016, for paper filings and June 30, 2016, for electronic filings.
“Because the IRS is now the gatekeeper for insurance coverage, they are going to start collecting info from employers about what kind of insurance they provided,” she said.
Miguel Farra, chairman of the tax and accounting department at public accounting firm Morrison, Brown, Argiz & Farra LLC, agreed that the ACA insurance and reporting requirements could be burdensome to small businesses. He recommended consulting an accountant or insurance expert to make sure the coverage you provide meets the minimal essential coverage. In many cases, he said, a skilled insurance agent can also help businesses determine whether it is a better financial decision to provide insurance to employees or just pay the tax penalty.
Taxation of online sales
The Marketplace Fairness Act, which stalled in the 2014 session of Congress, is still churning its way through the legislature. The bill seeks to level the playing field between online merchants and brick-and-mortar stores by allowing states to require online sellers that gross more than $1 million per year to collect and pay the state sales tax. Unsurprisingly, brick-and-mortar stores support the move, but it faces major opposition from online retailers. The last action taken on the bill was on March 10, 2015, when it was referred to the Senate Finance Committee.
“By changing definitions of who is a local taxpayer to include even those who do not reside locally, local governments can increase the number of taxpayers, and by that action increase their tax revenue without increasing taxes,” Jonathan Barsade, CEO of Exactor, said.
Tax tips for small businesses
Just because tax law can be complicated doesn’t mean you have to get overwhelmed. Here are some tips on how to manage your taxes year-round.
- Think about taxes all year long. Small business owners should not treat taxes as a once-a-year event. Rather, tax planning should be a year-round activity. Waiting until the last minute makes tax preparation more complicated, and it limits your money-saving options.
- Hire a pro. A knowledgeable tax attorney or accountant is well worth the expense, experts say. Tax laws are complex, and they’re difficult for many busy small business owners to weed through. A professional can identify tax breaks and deductions you might otherwise miss.
- Be aware. Even with the help of a skilled professional, a small business owner must keep up with news related to laws. Read the business papers and keep up with Congress’ work on tax laws.
- Don’t make assumptions. Tax planning, to some extent, is a gamble, Farra said. Although, historically, Congress has always passed the tax-extender bill at the last minute, there are no guarantees. Never make business decisions assuming that tax breaks will pass.
A tax audit is an examination of an organization’s or individual’s tax return. Each year when tax season rolls around, the Internal Revenue Service, as well as state departments of taxation, kicks into overdrive to meet with the onslaught of tax filings. The purpose of a tax audit is to verify that the financial information is being reported correctly.
How tax returns are selected for audit
Americans filed more than 186 million tax returns in 2011. The Internal Revenue Service examined, or audited, about 1.6 million of those returns — less than 1 percent. The odds of being audited are slightly higher for individuals who make less than $25,000 or more than $200,000.
Being selected for an audit does not always mean that you’ve made an error in your return. Most returns are chosen at random by a computer. The IRS has several criteria to determine a tax filing’s eligibility for an audit. Below are just a few ways the IRS detects errors:
The Information Returns Processing System (IRP): This computer system handles all data received from entities required to report taxpayer income. This includes employers, banks, brokerage forms, Medicare, Social Security and all other organizations required to report taxpayer information. The IRS will then run the information provided by these entities against what was entered on a tax return.
The Discriminant Inventory Function System (DIF): Each tax return is given a DIF score, which determines how accurate a tax return is likely to be. The higher the number, the more likely a return is to be audited. The algorithms used to determine this score are based on hundreds of variables, though deductions and exemptions carry the most weight in determining this.
The Unreported Income Discriminant Inventory Function System (UIDIF): This system looks at different areas from the DIF and rates a return on its potential of having unreported income. The formula used for this is simply a comparison of income to expense ratios. If a person spends more than they make, this is a red flag to the IRS.
Audits of related entities: If the IRS received a tax return involving transactions with other taxpayers, either investors or business partners, and the return has errors on it, the IRS will select all affected tax returns for audits.
Types of audits
Once a tax return is determined an eligible candidate for auditing, the IRS will send you a letter making the announcement of an audit. The type of audit you’ll be required to do typically falls into one of three types:
Correspondence audit: The most common of audits, this typically entails mailing specifically requested documentation to the IRS.
Field audit: For individuals or businesses who’ve earned more than $100,000 in income, the IRS is more likely to send an IRS agent to your home, place of business or tax professional’s office.
Office audit: Sometimes the IRS requires you to attend an IRS facility and meet with an auditor. The factors influencing this type of audit vary.
Avoiding an IRS tax audit
You can do a few things to reduce your chances of being audited. These are pretty straightforward, but some people overlook the obvious during their tax return preparation.
Check and double-check. The most important thing to do to avoid an audit is to make sure your return is correct. Check that your personal information, such as address and Social Security number, is correct. Double-check your math.
Keep good records. Good records help you organize and accurately calculate your return. Records also provide proof for your deductions.
Reduce expenses. Eliminate or reduce business expenses related to entertainment, food and your car. These three items raise red flags with the IRS because they are often personal rather than business expenses. If you do report them as business expenses, make sure you have documentation.
After an audit
Once an audit has concluded and you’ve either met with an IRS auditor or sent in the requested documentation, you will receive the IRS Form 4549. This is the IRS examination report and will show any changes to your tax liability. Explanations will be given for changes or adjustments and the final return (or deficient) amount will be indicated. If the report states you are due a refund, then no action is required on your part.
However, if the report finds you owe money, this will include additional taxes in addition to interest and penalty fees. In the event of this, you have two options: approving the changes or disputing them. If you approve, then you’ll simply need to sign and return a copy of Form 4549 in addition to Form 870, which gives your consent of the tax adjustment. You will likewise need to pay any tax deficiencies and penalties as they apply.
Disapproving the audit findings requires you to do one of the following:
- Provide additional documentation for consideration
- Request another meeting with the IRS examiner to discuss the audit’s findings
- Meet with a group or senior manager to discuss the audit’s findings
- Request an appeal
Whether you choose to approve or disapprove of the audit changes, you’ll only have a window of 30 days before the IRS considers your case disapproved. After that, the IRS provides another 30 days before the findings are finalized.
While being audited by the IRS feels quite frightening, the process is quite painless if you’ve made a good habit of documenting all expenses reported on a tax return. When you make a habit of reporting deductions you have no proof of, the IRS can be a most unforgiving entity. Overall, the IRS is in place to ensure the fair treatment of taxpayers and IRS audits are the only way of ensuring everyone plays fairly with their tax returns.