Kent Greaves No Comments

Terms to Understand and Strategies to Help Small Business Avoid Bankruptcy

When people start companies, no one sets out with the idea in mind that eventually they’ll go bankrupt. Bankruptcy is often a combination of unforeseen circumstances and a lack of professional advice – one of the main reasons that a company goes bankrupt is because they run out of operating cash to pay their monthly expenses, and stop paying their bills. When you have a reliable and knowledgeable accountant on your team, avoiding bankruptcy becomes a part of your strategic plan from the beginning. Here at Kent Accounting we’ve provided some of the terms that are important for every business owner to know regarding bankruptcy and some starter strategies you can implement to help you avoid it!


Creditors

Formally, bankruptcy is what happens when a business is unable to pay creditors (those parties whom have lent the company money) and those creditors choose to take legal action by suing the company for the money that is owed.

Assets

When a company goes bankrupt, the first step is to sell off all the assets of the business. This can happen in many ways, but is usually done using a court appointed trustee, who oversees the sales process, and the proceeds are then distributed amongst the creditors by the trustee.

Profit versus Cash

The terms “profit” and “cash” are not interchangeable. If a company earns $10,000 in revenue in a month, and has $8,000 in wages and other bills in that month, then they earn a profit of $2,000.  However, as we all know, our clients like to pay us after 30 days (or more), but our employees usually want to get paid after one or two weeks.  The cash flow for the month will depend on how much money was collected from prior months’ sales in the month and it could turn out that the business may actually lose cash in the month, despite earning a profit.

Kent Greaves, CPA, CA of Kent Accounting, gives us this example to help explain how small businesses can find themselves overwhelmed by their profit versus cash situation:

“Take for example getting a big order or project that starts on January 1 and you estimate that order will take a year to complete.  Your initial cash outlay (for payroll and materials) would likely be in January with continuing cash outlays each month for additional payroll/materials.  If the project completes in December, normal payment in Alberta would be 30 – 90 days, with some larger companies taking as long as 6 months to pay.  This puts 18 months from your first cash outlay to receipt of all of the cash related to the project.  It is imperative that you map out the cash outlays your project will incur and incorporate progress payments into your negotiations with the prospective client.”


So what goes hand in hand with small businesses taking on larger projects? Running into cash flow problems, which can lead your company directly to bankruptcy. Here are just a few suggestions on how to avoid cash flow problems:

  • Project Size: When you are pitching to larger companies or responding to requests for proposals, ensure that your company is in a position to take on the additional work load. When considering, take into account labour costs, materials, and especially the drain on cash flow. Working closely with your small business accountant on these proposals will ensure you can deliver what you are promising. Unsure about how much more work your small business can handle? Contact Kent Accounting so we can help you accurately understand your capacity.
  • Cash Flow Forecast: With your accountant, build out a basic Cash Flow Forecast, which is a simple spreadsheet that lays out your estimated incomes and expenses for the year. This will enable you to understand the big picture of your business, and what kind of resources would be required on monthly basis to take on more projects and grow your business. BONUS: Download our Kent Accounting’s basic Cash Flow Forecast excel sheet to get started. Have questions? Don’t hesitate to reach out to our team.
  • Contracts: Set up a contract (a written one!) for every project over a certain dollar amount (e.g. $1,000). There are many contract templates available and your small business accountant can help you tailor those templates to ensure your business is protected from a financial standpoint. Contact Kent Accounting to review your current standard contract template.
  • Payment Terms: One thing smart small business accountants do is help business owners set up appropriate payment terms. An example of standard terms could be requesting 25% of payment up front, 25% half way through the project, 25% when the project nears completion and 25% upon client acceptance of finished product. Every business is unique and it’s best to consult with a small business accountant to make sure the payment terms you’ve set up are appropriate for your business and industry – contact Kent Accounting today for advice on payment terms.
  • Credit Policy: Simply put, a credit policy is a defined time-period for payment of goods and services and it is something many small businesses overlook when they are setting up their company. In the early stages of every business, finding a balance between generating new business and ensuring you do work with companies that will pay you promptly is critical. While setting up a Credit Policy isn’t difficult, what can be difficult is enforcing it. There will always be exceptions to your policy, but if you ask and expect your clients to abide by your policy, then you significantly reduce your risk of low cash flow and bankruptcy. To ensure your credit policy is thorough enough to get you paid, contact Kent Accounting.

Connecting with an accountant who specializes in small business is the first step to protecting your business from cash flow problems and bankruptcy. For a review of your current policies, don’t hesitate to connect with Kent Accounting.


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.

Kent Greaves 9 Comments

Smart Tax Deductions for Small Business Owners

Getting the most out of your business tax deductions requires more than just the diligent tracking and filing of your expenses – to maximize your business returns, you need to know what you can and can’t claim come tax time. However, understanding what components of your business qualify for a tax deduction can be a challenge for many owners – you are busy enough as it is running your business. Prioritizing and tracking the expenses you can claim can fall to the wayside. Kent Accounting has put together a simple list of the best tax deductions for you to record and claim to make the most of your yearly tax return.


Client Hospitality

Building strong relationships are essential to business, and the Canada Revenue Agency understands this. When you host your clients and take them to events, you can claim that for a tax deduction. Relationships can grow stronger when there’s a connection, so why not use that tax break to your advantage and treat your clients by taking them to events you enjoy. These events give your customers a chance to get to know you better as a person, and allow you to receive a tax deduction for doing fun things you will enjoy! How much on the dollar will you get back? Connect with Kent Accounting to find out.

Rewarding Your Employees

The hard work and dedication of your staff should be rewarded, and the Canada Revenue Agency knows this as well. So how can you build loyalty with your employees? Taking them out for exciting and unique team building events benefits small business owners, as job satisfaction levels increase, but it is also a claimable expense. To receive a tax deduction for employee parties and outings, all employees must be invited to attend so make sure to pick a variation of events and themes throughout the year that all your employees can take part in. How much on the dollar will you get back? Connect with Kent Accounting to find out.

Vehicle Mileage

Whether you drive a little for your work, or a lot, claiming your vehicle mileage is simple. In fiscal 2017, for every kilometer you drive, the company can reimburse you, tax free, for 54 cents per kilometer for the first 5,000 kilometers (i.e. if you drive a personally owned vehicle 1,000 KM’s for business purposes you can receive $540 tax free from the company). Depending on the vehicle you drive, the actual cost of driving is closer to 20 cents per kilometer, so tracking and recording your mileage can add up to extra money that’s tax-free. To regularly track your distance, consider an app for your smartphone or go the old fashion route by printing out a simple spreadsheet to keep in your glovebox. Does your commute qualify as vehicle mileage? Connect with Kent Accounting to find out.

Company Owned Vehicle

If your vehicle needs an upgrade, then leasing it as a company owned vehicle will allow you to claim up to $800 a month in fiscal 2017 for the cost of that lease. You are allowed to use a company owned vehicle for personal purposes, but you do pay personal tax via a taxable benefit at year end. Make sure you fully understand claiming your Company Owned Vehicle – contact Kent Accounting here.

Home Office

Claiming your home office on your taxes opens up deduction possibilities, such as mortgage interest, insurance, property taxes and utilities, to name a few. There are rules on how much time you must spend working in your home office to allow you to claim it on your taxes, so consulting with an expert Calgary small business accountant will allow you to make the most accurate tax filing.  Connect with Kent Accounting for help calculating the percentages of your bills that you can claim on your taxes.

Investing In Canadian Privately Held Companies

Investing in a Canadian small to medium business is not just good for your taxes, it is good for the economy, and it is good for your fellow business owners. There are many great advantages to starting your own small business, here are two of them:

Benefit 1: in fiscal 2017, when you earn income in a privately held company, you only pay 13% tax on those earnings.  This allows you to invest 87% of your money in new business ventures or the stock market. As an employee of a company, depending on the tax bracket you are in, many pay 35% tax which would only allow them to invest 65% of their money.  There is a substantial difference in investment potential.

Benefit 2: in fiscal 2017, if you sold a business for $824,176, you would pay zero in tax (note there are several restrictions on the type of business that qualifies).  This is one of the strongest tax deductions that are available to you as a Canadian resident and should be carefully considered as you plan your career.  The Canadian government provides this tax benefit as an incentive to you to start your own business.

To get a better idea of how to invest your funds in a Canadian privately held company, contact Kent Accounting today.


Disclaimer: tax rules change frequently and can depend on your individual circumstances.  The above is not to be relied upon as tax advice and is meant for information purposes only.  Please consult a tax professional.