Kent Greaves 964 Comments

Starting Your Small Business (Part 1 of 4)

Do you think it’s time to strike out on your own and start your small business? It’s one thing to have an idea, and it’s another thing to put that plan into motion and start your business. For most entrepreneurs, taking the first steps to creating your business can be one of the most challenging processes along the way. Read the top questions we ask individuals when they are considering starting their small business.


1. What Kind Of Business Are You Starting?

The very first step you take before you start your small business is to decide how committed you are to it.  Are you prepared to quit your full time job and devote your full time attention to it?  If you want to start slowly (and that’s ok!) and work on your business part-time, it really changes the commentary that follows. Assuming you’re going to make this business your full time job, one of the first things you’ll need to decide is how you are going to structure it. Should you incorporate your small business or start off as a sole proprietor? Click here to read a thorough explanation of the pros and cons being a sole proprietor or incorporating as a small business. Do you still have questions? Contact Kent Accounting for a one-on-one consultation, to make sure you start your new venture on the right foot.

2. Getting Off the Ground

What Are You Willing To Risk: When I first started my business, it was humbling to reach into my personal bank account, withdraw $50,000… and then spend it on cards, furniture, website, etc.  You’d be amazed at how fast $50,000 disappears when starting a business. More than once I had thought about the other things I could have purchased with that money. Furthermore, most businesses require anywhere from $150k – $300k of startup funding to pay for key equipment, leasehold improvements and other necessary business items.  If you’re going to borrow that money from a bank, they will want a personal guarantee (i.e. they take everything you have, including your home, if you don’t pay them back). Are you certain you’re willing to risk it all? Be certain before you move forward.

Do you need additional investors for capital to get started? If you do, you’ll need a well-written contract or agreement in place before you accept funds, and you’ll want a solid plan for accountability regarding how you’ll use those resources. Kent Accounting can make sure you maximize the investments your partners are making. Talk to us today about how to organize the financial aspects of your business plan.

Business Development: Every business owner is first and foremost a salesperson. Can you sell your product/service? Do you know who will buy your product/service? Sales and marketing should be covered in detail in your business plan, which is discussed more in the next point. I separate it here to draw attention to the importance of clients. A business is nothing without its clients.

Write a Business Plan: There are a million clichés about why having a plan makes sense, but I’ll keep it simpler than that — any business that I have come across that was struggling had no actionable business plan. While a plan in and of itself doesn’t guarantee success, it is my opinion that the absence of a plan dramatically increases your odds of failure and/or creating a business you don’t actually want. The latter is the more concerning; I have met many entrepreneurs who work 60+ hours a week in their business and they are not happy with what they get out of the business (i.e. crappy clients, poor pay, etc). Furthermore, they are trapped in their business due to large debts that have personal guarantees attached to them. I will be writing a separate blog on what to put into your business plan.

Quality Control: How can you ensure you are delivering the services you are offering in a timely and professional manner? How can you ensure that the services you’re offering are the high standard you’re setting for yourself? What hiccups or roadblocks can you foresee in accomplishing that?

Customer Service: Who’s doing the basics, like answering the phone calls, responding to emails and checking the mail each day? These might seem like small parts of your daily routine, but once your business gets off the ground and you start getting busier, these customer service jobs might get lost in the bustle. Be sure you have a team member in place from the start to handle your incoming inquiries and basic day-to-day operations. For more information on how to set up your small business, contact Kent Accounting.

What Kind Of Licensing Do You Need: Your business could need a municipal, provincial, or federal license (or all three). For example, if you’re looking to provide health and beauty services, care for children, or serve food, a municipal license is a must. Spend time researching and understanding if your business requires specific licenses, certifications or permits to operate.

Liability Insurance: Keep your assets and property safe from any potential damages or obligations that could occur from your business. If there is an accident, or someone gets hurt on your jobsite, liability insurance will help keep your business and personal assets protected.

If you read the above and feel a little overwhelmed, then you’re in good company. I think that any entrepreneur who is being honest would tell you that starting a business is not easy and involves a great amount of uncertainty. That said, it is also one of the most rewarding experiences a person can experience. At Kent Accounting, we help folks get going and operate highly successful businesses. Would you like to chat? We offer everyone a free hour of time, so give us a call and we’ll help you any way we can.

 


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

Kent Greaves No Comments

Starting Your Business – Federal Tax Accounts

If you are considering starting your own business, now is certainly an exciting time to be joining the hundreds of thousands of Canadians who are currently business owners. One of the first steps is deciding how you want to run your business and understanding the accounts you’ll need to set up. Today’s blog will cover a few important choices you’re going to have to make!


Deciding on a Legal Structure

Before we begin discussing tax accounts, you’ll need to choose a legal structure for your business; make sure to get properly informed on the various options. There are many ways to structure your business — the two most common are as a sole proprietor or as an incorporated business.

Sole Proprietor: As a sole proprietor, you are your business, from a tax point of view. Business income/expenses are reported on your personal income tax return; there is no ability to defer income tax. If your company loses money, those losses can typically be used as deductions against your other sources of income (i.e. you get a tax refund). Note that there are rules to follow here, so make sure you know what they are. (The rules are too lengthy to describe here.)

Incorporated business: As an incorporated business, you and your business are two separate legal entities. This results in a variety of distinctions, two of the most important ones being that you have to file a separate tax return for the company, and that you add a legal buffer between you and the work your company does. As your business earns money, you may leave money in the business or take the additional funds as salary or a dividend. (See our blog on dividends vs. salary.) Any business losses remain in the company to offset future earnings, but if you never earn a profit, these losses are ‘trapped’ in the company.

Business Number

Your next crucial step is an easy one. Regardless of whether you choose to operate as a sole proprietor or as an incorporated entity, you will need a Business Number (which operates like a social insurance number for your business). You can get one easily by phoning the CRA (1.800.959.5525). Make sure you have your business name, address, nature of your business, account types (which we will discuss below), phone number and Articles of Incorporation (if applicable) in front of you before you call. Want to double check you have everything you need before you call the CRA? Set up a time with Kent Accounting so we can ensure you’re completely prepared.

GST Account

Almost every business requires a GST number, although there are a few exceptions. Unfortunately, the rules are quite complicated so it’s hard to give simple pointers here — you’ll need to either read the rules or contact a professional. To find out whether your business needs a GST number, call Kent Accounting and book a consultation. As a rule of thumb, you are required to collect GST once your business makes $30,000 worth of sales in a single year, and since many new business operators don’t know how much they will make or when, it is best practice to register for a GST number as soon as you begin operations. At the time of this blog post, Alberta has GST and not PST/HST. However, other provinces have PST and HST; if you plan to sell in other provinces, ensure you understand the rules on collecting and remitting. Like any federal tax, GST returns must be filed annually. Filing deadlines depend on when you register for your GST number and what revenue volume you anticipate. If you fail to file your return and make the GST payment on time, it will cost you interest and penalties.

Corporate Income Tax Account

This applies to those small business owners who have decided to incorporate their business. As you’ll be filing a separate annual tax return for your business, it will need its own income tax number, and these taxes must be filed both provincially and federally. Your corporate income taxes are due within six months of your fiscal year end, and a failure to file and pay can flag you for an audit.

Payroll Tax Account

Issuing payroll cheques has taxation requirements, starting with registering for a payroll account. Registering for your payroll account (or closing your payroll account) is as simple as contacting the CRA, and we suggest registering before you hire any employees, so it is ready to go when you start bringing on staff.

A word of caution: be organized with payroll. If you don’t know what you’re doing, STOP and either read the rules or contact a professional. The CRA is very punitive with payroll errors and/or late remittances; it is common to incur financial penalties as a result. One point we cannot stress enough is to not to be late with your remittance — payroll withholdings are the CRA’s money, and they want it in a timely fashion. Remittances are generally due on the 15th of the month, following the payroll payment. If your payroll exceeds certain thresholds, the remitting frequency will be accelerated. The first time you are late with a payment, it’s a 10% penalty. The second offense is a 20% penalty. If your payment is due on the 15th and you make it on the 16th, it’s considered late, and the CRA will not ‘give you a break.’ Finally, payroll accounts require that you issue T4s to all your staff. If payroll seems overwhelming, contact Kent Accounting to find out more about our payroll services.

Import/Export Account

If your business includes importing and exporting goods across the border, then you’ll need to set up an Import/Export Account. If you are planning on using a customs broker, you might not need an Import/Export Account. Not all goods are allowed into Canada, so make sure you determine their eligibility before putting significant efforts into your business. And finally, there are duties and tariffs associated with importing and exporting goods — know the tariffs and duties before you get started. Failure to adequately consider these costs in your pricing could cause real challenges.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

Kent Greaves No Comments

Paying Yourself: Salaries vs. Dividends – Part Two

The Pros and Cons of Salaries

Today’s blog is the second of a two part series on paying yourself as a Small Business Owner — should you pay yourself a salary or in dividends?

In part one of this two-part blog, I examined the benefits and drawbacks of compensating yourself with a salary; this second analysis will provide a breakdown of dividends. Click here to read part one!


So what are the ins-and-outs when, as a small business owner, you decide to pay yourself via dividend?  Here are some of the pro’s:

It’s simple: when you need money, just write yourself a cheque.  There are no source deductions to make and no reports to send to the government.

Lowest tax in the short term: with dividends, you do not pay into the Canadian Pension Plan (CPP). CPP contributions in 2017 are $2,564 for the employee and an additional $2,564 matched by your employer (i.e. your company), so your annual tax savings here is $5,128…a nice little weekend get away!

Depending on how you think about CPP, this can be a good thing or a bad thing. Generally speaking, if you don’t pay into the CPP program, you don’t get any pay outs once you retire. Some folks think that CPP won’t be around when they retire in 30 years, so they don’t want to pay into it.  Our opinion is that CPP is here to stay and provides a good safety net if your business unexpectedly fails.  Paying $5,128 per year into an investment portfolio for 45 years (the average working life of a person) and then being entitled to receive roughly $1,200 per month until you pass away is a very reasonable return on your investment.  Are you sure that you can do better than this investing the money yourself?  Not paying CCP premiums is the primary reason that the tax rate differs between salaries and dividends.  When CPP is ignored, the tax rate is nearly equivalent between salaries vs. dividends.

You can pay inactive persons: income splitting is a powerful tax management strategy.  Currently, you can pay shareholders (i.e. your spouse, your brother, anyone that owns shares in your company) a dividend even if they don’t provide any services to your company.  This allows you to direct income to lower income earning people and save a significant amount of tax.  Note, our liberal government is currently working to end this benefit.

Flexibility: we can easily change how much income we declare to you by having you repay any excess monies you withdrew from the company.  This can be helpful to manage your income tax rate in any given year.

There is always a downside. Here are some of the cons associated with dividends:

Surprise tax bills: depending on how much you withdraw from the company, you may have a tax bill the following April.  Your taxes could be as little as 0% or as high as 50%…it all depends on how much you withdraw.  MAKE SURE you talk with a qualified accountant before withdrawing more than $50,000 from your business.  Clients and accountants both hate surprise tax bills.

RRSP’s: you will not have access to the RRSP program.  RRSP’s are super important…in our opinion they are one of the best tax deductions available. We wrote a whole blog just on them for that reason (read it here).

Higher tax rate in the long term: generally speaking, you will end up paying more tax in the long run if you utilize dividends consistently over your lifetime, primarily due to the RRSP component described above. Please note that this depends on your personal tax circumstances and is not a universal truth.

Summing it all up, we generally take a mixed approach to the salary vs. dividend question.  This way we get the benefits from both salaries and dividends, while minimizing the downside.  While we would love to give you some specific instructions here, the “right” answer for you really depends on how much money you’re going to need over the long term from your business. Are you wondering what the best combination is for you? We offer everyone a free hour to discuss any questions that you may have. Contact us here.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

Kent Greaves 1 Comment

Paying Yourself: Salaries vs. Dividends – Part One

The Pros and Cons of Salaries

Today’s blog is the first of a two part series on paying yourself as a Small Business Owner — should you pay yourself a salary or in dividends?

You’ve started your own business and you’re finally starting to make some money — your suppliers and staff are being paid, as well as your bills, which means it’s time to take some money out for yourself. So, is there a difference between the money you earned while working for someone else and the money you’ll earn working for yourself? Not really — but there is a difference in how you collect that money. Today we’re talking about the pros and cons of taking a salary as a small business owner.

In terms of how often you get paid, there is no difference at all! Set yourself up to receive a pay cheque as often as your other employees do (for simplicity’s sake) such as bi-weekly, monthly or perhaps quarterly.

When it comes to writing the cheque, what’s easier? With a salary, you will have to manage payroll, which can be time-consuming and for many small business owners, a little overwhelming. Talk to Kent Accounting about our Payroll Service Bundles and take one more thing off your to-do list. As for overall money management, when paying yourself is a part of your monthly rhythm, it’s a lot easier to control and monitor how much you’re spending and how often you’re taking money out, as opposed to those who take money out of their business ad hoc.

In the short-term, taking a salary will mean you will pay a slightly higher tax rate. You’ll pay CPP (Canadian Pension Plan) and income tax off of every cheque (generally speaking, business owners and their immediate family members are exempt from EI). As a small business owner, remember not to be late with remitting your source deductions to the CRA, as there are penalties every time you are late (10% the first time you’re late, 20% the second time you’re late).  To avoid remittance penalties, contact Kent Accounting and let us manage your payroll services and your source deductions.


However, salaries give you some great tax advantages in the long-term — namely, the right to receive a pension when you retire and access to RRSP room.

CPP: by contributing to CPP, you gain eligibility to receive CPP payments starting as early as age 60. While the payout amount varies from person to person, many Canadians over 60 years receive approximately $1,200 per month. CPP is a savings safety net that ensures all Canadians can have a comfortable retirement.

RRSP:  salary also allows you room to contribute to your RRSPs (up to 18% of your calculated total yearly salary) with a maximum, in 2016, of $26,010.  When you contribute to an RRSP, you get a refund on any tax paid on the income you earned.  Many of our clients receive 30% or more back for each $1 they contribute… so a $10,000 RRSP contribution could get you a $3,000 refund. That refund would pay for a nice vacation for you!

Note that the refund amount depends on your total income for the year. Further, investments in an RRSP grow tax-free. Not sure what that means in terms of dollars and cents? It’s such an important topic I wrote a separate blog about it (click here to read it). RRSPs are considered by many to be the best tax deduction available to Canadians.

There are some rigid rules to salaries that can’t be discounted. With salaries, you can only provide pay cheques to people who have provided services for your company, so your salary is yours alone. Also, once you’ve reported your total salary to the CRA, there’s almost no flexibility in changing how much you earned for any given year, and that lack of flexibility can be challenging for some.

We strongly encourage you to discuss your remuneration with a qualified small business accountant.  Want to talk to us about it?  Contact us here.

 


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

Kent Greaves 365 Comments

The Pros and Cons of being an Incorporated Business versus a Sole Proprietor

Your business is growing — in fact, it’s booming! For many entrepreneurs in your position, this big picture question might be in the back of your mind. Should you incorporate or run your business as a sole proprietor? There are pros and cons to each choice, and making the decision can be challenging. Understanding each option thoroughly before you make the decision is critical – read through our brief overview below and contact Kent Accounting today for a more thorough analysis on the future of your business!

As with everything in life, there are pros and cons no matter what path you choose.


INCORPORATION – PROS

  1. Limited Legal Liability: Operating a small business can be risky. Despite our best efforts, mistakes do happen — not to mention simple risks like a slip-and-fall on your business’ premises. When incorporated, Canadian law will treat your company as its own ‘person,’ which means that when there is a legal issue, that issue is directed at your company, not necessarily at you as an individual (see disclaimer at the bottom of this post). Incorporation provides an added layer of security against claims and adds peace of mind.
  2. Tax Planning: Incorporated businesses can take advantage of tax planning. Tax planning is such an important concept that I wrote an entire blog about it (click here to read it). Long story short, a proper tax plan can save you tens of thousands of dollars every year.
  3. Increased Professional Image: Businesses often prefer to deal with other businesses — as opposed to sole proprietors — as there is an added brand value to seeing a fully established (i.e. incorporated) business. Essentially, there are brand development and business development benefits that can help your business grow faster than as a sole proprietor.

Kent Accounting understands all the growing pains of incorporating your business — contact our team for a consultation.


INCORPORATION – CONS

  1. Cost: There is a cost associated with incorporating your small business, including filing a tax return every year, which carries an average annual cost of $1,000.
  2. Paperwork: As a corporation, there is more legal paperwork that must be filed each year (such as an annual return, a corporate tax return, etc.) so costs and time spent with your legal representation will also grow.
  3. Losses Remain in Your Business: On the off chance that you lose money for your first year or two, these losses are ‘trapped’ in your company (i.e. you can’t apply them to other sources of personal income). But you can carry those losses forward into future years to deduct against future profits.

Don’t incorporate your business without understanding whether it’s the right time — the Kent Accounting team will help you see the full scope of your position.


SOLE PROPRIETOR – PROS

  1.  Simplicity: To start your small business as a sole proprietor, there is very little for you to prepare; you really just start doing it (note: there are items like business licensing and insurance that you would need to attend to). All you need are the basic tools to get going — a website, a phone number and business cards. As a sole proprietor, make sure to register for a GST number so that you can collect and pay GST. Registering your trade name is also an option for sole proprietors, and this can be done at any provincial registry (the same place you get your driver’s license).
  2. You Can Incorporate Later: There’s no harm in waiting to incorporate — you can always incorporate after you’ve grown your business to a place where you have the funds to pay the additional costs, and when you reach a point where your clients would rather work with you as a business.
  3. Business Losses Offset Other Income: If you have losses from your new venture, you can apply those losses against other sources of income. This can be beneficial in the early days of your business when it’s likely that you will have expenses greater than revenues.

SOLE PROPRIETOR – CONS

  1. Personal Assets are at Risk: There are risks if things go awry. As a sole proprietor, all of your personal assets (i.e. your home) are at risk. With risk, there is reward, but the financial and personal consequences can be great if someone gets hurt or killed on your job site.
  2. No Tax Planning: As a sole proprietor, there are no tax planning options, which can result in a higher bill at tax time.

As an entrepreneur, there are a few additional elements to consider when you’re building your business that are best addressed sooner rather than later! Regardless of the path you choose, get insurance! And make sure it’s large enough to handle potential claims — we would recommend $2,000,000 as a minimum amount.

For a better understanding of what insurance coverage you should be looking for, contact Kent Accounting to set up a consultation.

Our founder, Kent Greaves, CPA, CA, offers this additional advice: “If you know you’re going to make a profit in the next 24 months, and your business has any real amount of risk (note: I have yet to come across a business that doesn’t have any risk) and you know (for sure!) that you want to be a small business owner and you are going to ‘do what it takes,’ then just incorporate. The tax planning, risk mitigation and brand pros are significant relative to the cost of filing a tax return. Most incorporated small businesses pay less than $3,000 per year for their filing requirements.”


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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Understanding Your Personal Earning Potential When You are Starting a Small Business

Alberta is a province that is ripe with potential for small business owners to build their companies and their future.  As a province, we have a higher than average family income than the rest of Canadians, sitting at $100,750 per household compared to $78,870 per household, the national average (source: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108a-eng.htm). This additional household income means more flexibility regarding saved capital for starting a small business but can also mean a larger discrepancy between your take-home pay as an employee and what you can expect to earn in the early years as a small business owner.

When you are trying to plan for your future, it is imperative to consider your financial well-being and earning potential, both in the short term and in the long term. How can you know how much to invest in real estate, stock portfolios or ancillary spending if you do not have any idea of how much your earning potential will be?

If you are considering starting your own small business, evaluating the realities of your earning potential is not only a smart business decision, it is an important life-planning decision. At Kent Accounting, we help prospective business owners thoroughly evaluate the potential of their business and, not only assist them in deciding if starting a business is the right decision, but help them map out a plan for financial success.


What is the earning potential of owning your own business?

It is no secret that in the early days of your small business, you might struggle with consistent client acquisition and cash flow. The average new small business takes 3 – 5 years to “get off the ground,” and often entrepreneurs work for “free” for the first 1 – 2 years, before they begin to take home a regular pay cheque. While there are certainly some startups that do well right out of the gate (such as restaurants or other franchises), your household income might fluctuate from where it was before you started your small business. As an individual, the best way to balance this out in both the short and long term is through tax deductions.

The tax benefits of being a small business owner are much greater than that of an employee. Income tax is the single largest expenditure a person will make in their life (even more than their home!). When a business earns $100 in income, it pays roughly $13 in tax and, therefore, keeps $87 dollars to either reinvest into the company or to pay out as dividends.  When an employee earns $100, they pay roughly $35 in tax and keep $65 to invest (please note, there are numerous assumptions being made here). As you can see, the after-tax profits are $22 higher for the business vs the employee in the example given.  Simply put, a business can earn more after tax than an employee.  As you build your business, bear in mind that a smart small business accountant will help you understand all the tax deductions available to you as a small business owner, as well as how to take advantage of those after-tax profits.

But we haven’t even gotten to the best part yet.  In addition to receiving better tax rates throughout your earning years, when it’s time to retire you can sell your small business.  When an employee retires, they typically get nothing extra from the company; they simply stop working.  The cash injection from a small business sale in the later years of one’s life can prove very beneficial in funding an enjoyable retirement.  Furthermore, if you are selling a Canadian small business you can receive up to $835,716 tax free (note: there are many restrictions on what qualifies; ensure you seek a qualified small business accountant).  In my opinion, this is the single best tax deduction available to Canadians; you should take advantage of it!

Keeping accurate, detailed financial records is critical for future sales potential – at Kent Accounting, we are happy to help you map out a record keeping plan that, if kept up to date, will save you hours of work and headaches if you choose to sell your business at some point in time.

So what should you do with those after-tax profits? To maximize the growth potential of your income, we recommend flipping that income to a secondary venture and allowing it to grow alongside your business, increasing your cash flow and earning potential. Feel free to connect with us at Kent Accounting to talk about what those new ventures could be and whether taking a passive or active role is best for you.


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.

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What Is the Difference Between Owning Your Company Vs Being an Employee?

When people are deciding whether they want to take the leap and become a small business owner, often they are more concerned with the personal pros and cons, and less the strategic financial and business concerns. Questions like, how will it affect my personal time? and do I have what it takes? are valid, but these questions are just a small part of the equation when it comes to making the decision about becoming a small business owner.

Before you make that decision, a consultation with a small business accountant like Kent Accounting can go a long way (and we offer these at no charge!). Consider it more of an educational session that will help you see and understand the full picture of owning your own business, both in the short-term and in the long-term. Here are some of the top benefits and challenges to consider when you are thinking about starting out on your own.


Benefits

There are plenty of enticing reasons to become a small business owner – here are just a few.

Freedom to Work from Wherever You Want

Regardless of whether you obtain space for your business or decide to start from your home, as an entrepreneur you get to work where you want to.  Coffee shops, your comfy chair – even the local pub can become your office. If you have a dedicated office space within your home, you can consider that square footage tax deductible, as well as some of your utilities and monthly bills. To best understand what qualifies as a deduction and what doesn’t, contact Kent Accounting.

Results and Gratification

The saying goes “Work Smarter, Not Harder.” Moreover, when you are a small business owner, the more you work, the higher your financial and personal return on investment will be. The success of your business is a direct result of the amount of energy and intellect you put into it. As an employee, success is more likely to be attributed to a team, and you might not directly benefit from your efforts. We have all experienced the fatigue of working in an underperforming team where we have equal share in the reward but end up completing the majority of the work ourselves.

Building A Company Is an Investment

When you build a successful small business, you also have the flexibility to sell your business after it has become profitable and well-established. The sale of your business can be a useful lump sum to help fund your retirement or a new venture you are passionate about. Building a successful small business starts from the beginning. Start with a strong financial plan developed with Kent Accounting.

Job Satisfaction

When you’re employed by a large company, sometimes you feel like just a number. You spend hours working, and yet the majority of the rewards go to executives and/or shareholders. Working for yourself is infinitely more satisfying – the hours of hard work and relationship building pay off exponentially when, as a small business owner, you secure a new client or project. With each new partnership secured, you will feel a pride of ownership and increased confidence in your abilities and your decision. Whether it is bookkeeping or long-term financial strategies, Kent Accounting can help keep your job satisfaction high with stress-free financial planning.


Challenges

While it may seem like owning your company is exciting and liberating (both financially and personally), there are some drawbacks that must be considered before taking the next step.

Upfront Costs

There are costs to starting a business that you will have to pay for before you even begin operating. Paying for the physical aspects of starting your business, like leasing space and buying inventory, supplies and computers, can be large investments. If you do not currently have enough capital saved to pay for these upfront expenses, there are avenues to borrow money to fund these startup costs. However, it is important to remember that these funds are borrowed – you do have to pay them back. Contact Kent Accounting to learn more about start-up funding opportunities and the realities of borrowing money to start your business.

Unsteady Pay Cheques

As a small business owner, you are the last person to get paid. Your suppliers, employees, and creditors all have to be paid before you are, so it is not always realistic to expect that your pay cheque will be reliable until you are well established. Even if you have a substantial project or client list, with a steady monthly net income, remember that in Alberta, your customers will often take 90 days to pay an invoice, so your cash flow can become an issue. It can take up to a year for small business owners to start seeing regular pay cheques, and sometimes longer for those pay cheques to be equal to those you might have been receiving as an employee. We recommend that you have at least 6 months living costs saved up in order to keep financial stressors manageable. Kent Accounting can help you build a monthly cash flow spreadsheet to ensure you are netting enough income to pay your bills.

Uncertainty

If uncertainty is an emotion that you are not comfortable with, then starting your company might not be the best decision for you. How would you feel if your company lost $10,000 in a single month and you had to use your savings to cover it? It is normal for a company to have a bad month and lose that much, or more, periodically throughout its operations. As a small business owner, sometimes it can be challenging to see the forest through the trees and balance new client acquisition (i.e. activities that keep new money coming in) with running your business (i.e. activities that get you paid today). You aren’t alone in growing your business – Kent Accounting can help you build a financial strategy to keep the stress of uncertainty at bay.


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 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.