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Tax Season is Here: How to Properly Get Your Finances in Order Before You File

The new year is also the start of tax season, so it’s time for your small business to get organized, file business expenses correctly, and ensure you are getting the correct refund. The details of how to accomplish this depend, in part, on how your business is organized: sole proprietorship, partnership, LLC or corporation. Yet the ways you go about calculating your taxable business income are pretty much the same however you’re organized. Here are the basic steps you’ll need to file your taxes properly.

Collect your business records: Hopefully, you have a computer and/or file drawer that is carefully organized to maintain all your raw paperwork, such as invoices, receipts, tax documents, bank statements, business diaries, etc. But we know that some folks are in the habit of piling all their papers into a heap on a desk. Well, now is the time to attack those records, get them sorted and entered onto a spreadsheet or accounting package. If you use software like Quicken or QuickBooks, you can go through your transactions, flag tax-related items and associate them with the appropriate IRS tax forms and lines. Once complete, you can then import the data into tax preparation software and it will automatically prefill many of your forms and schedules. 

Resurrect missing information: If you are somewhat disorganized, you may not have done a 100 percent perfect job of preserving your receipts. For example, you know you went on a business trip last year, but can’t seem to locate any of the receipts for travel, lodging, meals, taxis and so forth. Unless you paid for everything in cash, you can resurrect the missing information by combing through your credit card and bank statements. In fact, it’s a good idea to scour the entire 12 months of these statements to make sure you haven’t missed any deductible expenses. If you operate on a cash basis, remember that tax-related events occur when money is collected or disbursed. Accrual-based businesses must instead use the dates on which income is earned and expenses are incurred.

Find the correct forms: The IRS is pretty picky on which forms you use to file your taxes – they want you to use the right If you are a sole proprietor or run a one-person LLC, this means you’ll be getting intimate with Schedule C of Form 1040. A corporation must instead file Form 1120 separately from your personal return. Partnerships have separate forms as well. Your tax software can quickly ascertain which forms it will use to collect and report your information.

Make 401(k) payment: Your tax software will keep a running total of your refund or taxes due as you fill in the required data. If it turns out you owe the IRS money and you file on Schedule C, remember that you can fund your personal 401(k) up until the tax filing deadline and deduct the contribution from last year’s income. For 2016, that contribution can be as much as $59,000, depending on your age and income.

File on time: If you need an extension, remember that only buys you time for filing, not for paying. You still must pay what you think you owe by the April 15 deadline. Note that if you file Form 1120S as a Subchapter S corporation, the deadline is March 15. If your fiscal year doesn’t coincide with the calendar year, adjust your dates accordingly.

Should you find yourself short of cash at tax filing time, it’s good to know that IOU Financial can lend you up to $150,000 in as little as 24 hours.

Business Budget Basics: 5 Things you MUST be Doing to Ensure Success

Whether you are a startup or a seasoned company, small businesses rely on cash flow to stay in operation. Budgeting is the primary weapon a business owner has to control cash flow and predict possible shortfalls. If you want long-term success, you must maintain a budget and adjust your operations when budget tracking indicates the need to do so.

A budget that both estimates and matches expenses and revenues helps a small business forecast its cash position in the short and medium term. You need a cash forecast to ensure you can operate as planned, expand the business if the opportunity exists and verify that you can generate enough earnings to pay yourself a viable income.

What to Do

Don’t worry too much about how to do a budget. You can use an online spreadsheet, such as the IOU Financial Business Budget Smart Sheet, to make all the entries and generate reports. It’s more important to concentrate on what you must do to get the most from your budget. Here are five tips that you’ll find useful.

Check out industry standards: Every industry has its own characteristics regarding how much of your revenue you’ll have to allocate to various cost groupings. Retailing is quite different from refining, and you need to know the right numbers to use when constructing your budget. You can glean this kind of information from several sources, including the IRS website, the library, and other local business owners. You don’t have to be too precise, because small businesses tend to be volatile – what’s important here is to understand the industry averages.

Leave some slack: It’s great to budget, but it can be self-defeating if you aim for precision down to the nickel. Predictions are often unreliable and the future is uncertain. Bearing this in mind, it’s better to underestimate revenues and revenue growth relative to expenses when projecting the next three to 12 months. Better to have some extra cash on hand then to be caught short unexpectedly.

Sharpen your pencil: That’s old bookkeeper lingo for finding ways to cut costs. To do so, you’ll need to identify budgeted expenses that you can control. Fixed expenses like rent and insurance usually can’t be changed in the short run, but other items can, including non-critical maintenance, adjustments to labor usage, discretionary purchases and so forth. Remember to take advantage of your suppliers’ payment terms. In some cases, you might be able to reduce retirement plan contributions for the current year.

Review your budget frequently: Big businesses often work on an annual budget cycle. That makes sense, since their size requires a complex and time-consuming budget process. You, on the other hand, need to review your budget at least every month. A small business doesn’t have the kind of resources that the big ones use to smooth out surprises in the company’s cash flows. The more volatile your environment, the more frequently you will need to review and update your budget.

Comparison shop: It’s your responsibility to conserve your cash, and one of the best strategies is to shop around for new suppliers and service providers. There is never a bad time to do this, but the start of a new budget cycle is a natural point to comparison shop. It’s also important to do this when you are planning a change in operations.

In sum, budgeting is an essential part of running a business. A cash crunch can kill a small business, so stay ahead of the curve by tracking your budget closely and revising estimates as you gather new information. Finally, establish a relationship with a lender so that you can borrow money when you need it, whether budgeted or not.

DIY or Hire an Accountant?

Many owners of small business do their own accounting, usually with the help of a software package such as QuickBooks. This can make sense if you run a one- or few-person operation, are familiar with basic accounting, and have the time and inclination to take on the work yourself. For you DIYers out there, we recommend our IOU Financial Business Budget Smart Sheet to establish and track your budget.

For some, the question of hiring an accountant is confusing. Here are nine signs that indicate you should go ahead and hire one: 

  1. Knowledge: If you aren’t familiar with accounting terms, financial statements or report creation, you might need an accountant, at least in the beginning, to teach you what you need to know. If you don’t think you have the time to study the subject, you can keep the accountant on as long as needed.
  2. Taxes: Tax law is complicated, and one of the worst mistakes a business can make is to overpay its taxes. But even worse is to underpay and get caught, because then you’ll be hit by penalties and interest. Use an accountant if you don’t understand which deductions and tax credits to take, and/or if you don’t want to file your tax return on your own.
  3. Time: Let’s face it, bookkeeping can eat up your time and divert you from more important tasks. You need to operate the business, make staff decisions, market your offerings and troubleshoot problems. It shouldn’t be surprising that bookkeeping would be low on your priority list. You can hire a bookkeeper who knows how to do other accounting tasks – they usually charge less than full-blown accountants.
  4. Growth: Congratulations, your business is experiencing rapid growth. However, that also means you have more customers to attend to, more staff to hire, more vendors to negotiate with, and so forth. These activities require more paper pushing, number crunching and meeting time. With these management challenges, why not let an accountant lift some work off your shoulders?
  5. Profit margin: It’s nice when revenues grow, but less nice if profits don’t follow. The reason is invariably that your costs are too high. You could use an accountant with a sharp pencil to evaluate your overhead costs and suggest ways to save money. The savings could easily pay the accountant’s salary and hopefully a lot more.
  6. Investors: Have you grown to the point that you have investors? Well, they’re going to want to see professional reports that lay out the current financial condition of the business. Professional financial reports are also useful in recruiting new investors. An accountant can produce the reports you need and make them look professional – that will help keep investors happy.
  7. Expansion: If you are thinking about expanding into a new state, an accountant will help you meet the regional reporting requirements for payroll tax, income and sales. Expansion to a new state may include opening new locations, creating new distribution logistics and hiring new staff. An accountant can help you track the costs of these moves.
  8. Merger/acquisition: If you are looking to buy or sell your business, you’ll need an accountant to evaluate the entities involved and how to structure the transaction in order to minimize taxes.
  9. Audit: If the IRS has signaled that it wants to audit you, a CPA or other qualified accountant will be able to represent you to the IRS. This can help prevent you from making mistakes as well as lower your stress level. Generally, you don’t want to face the IRS on your own.

Get Your Finances Straight for 2017

With 2017 upon us, it’s an important time for taking stock of your business’ finances and setting right whatever issues are unresolved. Here are 9 tips you can execute right now to get your finances straight:

  1. Update your business plan: Several sections may need updating. What was the last time you analyzed your competitors or reevaluated your marketing plan? It’s easy to let these things slip, but important to bring them up to date. You will, of course, want to also recast your financial projections and budgets for 2017 in light of current conditions. Check out our Business Budget Smart Sheet to help you whip your budget into shape.
  2. Stay informed about health care: Donald Trump has promised to repeal Obamacare. This will have unpredictable repercussions for companies with employee health plans. It would be wise to anticipate the worst, which is health insurance costs rising substantially. On the other hand, you may no longer need to provide health insurance, which might save you a ton of money. The best advice is to stay informed.
  3. Reassess your capital structure: Do you have enough capital to fund your operation and expansion in 2017. If you plan to grow your business at the start of the year, now would be an excellent time to line up a commercial loan from IOU Financial. Our streamlined process can provide loans of up to $150,000 in as little as one business day. Whether you plan to move to bigger quarters, increase your inventory or add another shift, an IOU Financial business loan can get you ready for 2017 with the capital you need, quickly and hassle-free.
  4. Set aside contingency funds: An excellent 2017 resolution would be to earmark some of your profits for a contingency fund to handle unexpected cash crunches. A proper emergency fund should be able to keep your business afloat for three to six months. You can, of course, supplement your contingency fund with a quick loan from IOU Financial. Unlike a bank, we respond to emergencies immediately with fast funding.
  5. Review your insurance policies: You should review at least once a year your liability insurance, key-person life insurance, health insurance and so forth. The insurance market is quite dynamic, and it’s always a good idea to find out whether money-saving policies are available.
  6. Stay informed about 2017 tax changes: We already mentioned the Obamacare changes that are brewing. Mr. Trump has also promised a giant tax cut for businesses and a relaxation of regulations, all of which could have a major impact on your business finances. If necessary, confer with a tax specialist to ensure you understand the latest rules.
  7. Check the latest salary guide: Every year, several publishers put out the latest industry salary guides. See how your pay structure compares to your industry statistics – you may need to modify you pay structure if you are looking to recruit good people.
  8. Use cash accounting to advantage: Many small businesses use cash accounting, in which income is recognized at collection and expenses realized at disbursement. To lower your 2016 tax bill, prepay expenses and delay collections. This will shift some profits into tax year 2017, giving you an extra year to hold onto them, when tax rates might be lower.
  9. Evaluate your offerings: Depending on what type of business you run, it might be a good idea to look at the products and services you offer and see whether some changes are in order. If you are a merchandiser, you can look at your mix of products and eliminate the weakest performers, and/or extend your range of merchandise to new areas.

One last thing: Happy New Year from your friends at IOU Financial!

Let’s Talk Money: 5 Ways Businesses Can Maintain Financial Transparency with Employees

Talking about money with friends, colleagues, family, or any other relationship that exists is usually topic that is avoided. When running a business, this trend also seems to remain true. Businesses are often reserved when it comes to sharing the company financials with its employees for a variety of fear-based reasons. While every business has the choice of who they share what numbers with, the businesses that choose to share with employees can navigate this hard-to-discuss topic with clear direction. In this post we will review the 5 correct ways your business can maintain financial transparency with your employees. Let’s take a look!

Share the Information on a Consistent Basis: Good and Bad

While good news is much easier to share, if you are committing to sharing the financial status of your company’s transactions with your employees, you should embrace sharing the information on a consistent basis, whether the numbers are good or bad. Sharing on a set schedule demonstrates that the company will remain transparent, regardless of the color the company is heading into. Good, bad, or indifferent, remaining on a set quarterly, monthly, or even weekly sharing basis will help with the commitment to being transparent with your employees.

Explain the Numbers: Help Employees Understand the Breakdown

Graphs, projections, charts, oh my. Sharing the financial status with employees is more than just arrows up or down. Sharing takes explaining what it all means. When reviewing financials, help employees understand the numbers they are seeing. Are the projections on track for making the growth expected? Does the company see their value in those numbers? Do you even know what the numbers mean? Sharing and explaining what each dollar in and dollar out means for the company can demonstrate the value of your employees in every transaction.

Review Tough Questions Ahead of Time

Make sure you’re ready to answer the tough questions that your employees may ask. Consider what the employee may see when the numbers come through and be prepared to explain what the company is doing, thinking, or considering when they see the same numbers. Reviewing some potential questions in advance of the numbers will help navigate a potential onslaught of “what does this mean?” question session.

Share in Person

Timing is everything. Companies usually have the time they share news to the team down to a day and time of the week. That usually is paired with a nicely worded email, newsletter, or some form of typed-out document. When it comes to sharing the fiscal information, companies should consider doing this in person when possible. Sharing in person can help reduce office chatter about what the numbers “really mean”, or reduce the misunderstanding of one “0” in the fancy pie chart. Sharing in person allows allows real questions in real time. If a company can find a way to share and provide a follow-up meeting or offer in person reviews, it will ensure staff morale stays high around the company’s financial transparency and communication with its employees.

Demonstrate the Employee Connection in Financial Goals and Reviews

People work harder when they see their value in the end product. Highlight the employee’s contribution to the numbers they see. By demonstrating the connection each employee has to every dollar, they will be encouraged to take ownership of that dollar. By highlighting where an employee fits in the grand scheme, it will help define purpose, passion, and projections to shoot for. The employee paycheck should not be the only financial connection they see to a company.

By sharing and remaining transparent with your company’s financial statements, employees can find increased value and connection to the company that they work hard for. By following these five ways to maintain your business’s financial transparency, employers can reduce the fear that goes into sharing their finances with others. While these methods may not make dinner party discussion about how much or how little one makes easier, it can help the employee, company, and its operating managers feel better prepared to use the company numbers to their advantage.

Small Business Finances 101: How to Profit

We finish this introduction to business finances by discussing the payoff for all your hard work – profit! In particular, we dive into how to use your business’ profits to get paid. Unless you’re independently wealthy, you probably need to extract profit from your company to pay your bills and live your life. Like many of the important things in life, you have options. In this case, you have to decide how to structure your business and how to tap into profit while creating the smallest tax obligation. Your particular circumstances will help determine the best type of business entity to use, and you should, of course, seek formal advice from a trusted accountant or lawyer.

Structuring Your Business

Your choice of the type of business entity to adopt will greatly influence the amount of time and work you’ll have to expend administering the business. A small business set up as a sole proprietorship is certainly easier to run than a limited liability company (LLC) or C-Corporation, but the latter give you all sorts of protections or tax breaks not otherwise available.

The five most popular business structures are:

  1. Sole proprietorship: A simple structure in which you are the sole owner of your small business. You file your taxes on your personal return, as there is no separation between you and your business. That means you have unlimited personal liability for your business’ debts, putting your personal assets are at risk. It’s also harder to get a business loan for a sole proprietorship.
  2. Partnership: This is much like a sole proprietorship, except it involves at least two owners. Once again, you file your taxes on a personal return and you have unlimited personal liability. You share the business’ profits proportionally with your partners, so it’s a good idea to ensure they are trustworthy.
  3. LLC: A separate entity that provides liability protection but not separate tax filings unless you chose to file as a corporation. It is easier to set up and run than is a C-Corp. However, it’s harder to get investors, since you can’t sell shares. Also, you can’t pay yourself a salary, although there are other ways to get money out of the LLC.
  4. S-Corp: Recognized in most states, its similar to an LLC except it can issue shares and can pay wages to shareholders while avoiding corporate taxation. The S-Corp requires more paperwork than does the LLC, and you are limited to 100 shareholders.
  5. C-Corp: A corporation is the most difficult to set up, as it requires its own set of books and separate tax filings. It’s the most professional approach to business, with limited liability and no limits on the number of shareholders. C-Corps provide many tax deductions and benefits not available elsewhere.

Extracting Money

Assuming you are running your business in order to make a profit, the question remains how to extract money from the business to pay yourself for your time and effort. Here are several options:

  1. Salary: You fill out a W-2 and pay yourself a salary, minus any withholding taxes. It’s simple, but not tax-efficient for a corporate entity.
  2. Dividend: A corporation can pay a dividend to shareholders. Any part of the dividend that is a return of capital, rather than profit, is not taxable. The IRS looks dimly on huge dividends.
  3. Shareholder loan: You can borrow money from your company, but if it’s at a below-market interest rate, you might be liable for gift or dividend taxes.
  4. Owner’s draw: Cash available only to sole proprietors or partners, this money is not taxed at the company level. The money must eventually be repaid to the company.

Clearly, the way you structure your business has profound implications for your after-tax wealth. Consult with a professional before deciding the best ways to take advantage of your business profits. If you need tools to grow profits through a maintained budget, check out our Business Budget Smart Sheet. This tool helps you stay on track so you can reach profitability sooner!

Small Business Finances 101: Understanding Income

Income is the life source of your business. All your planning and strategies aren’t going to mean much unless you generate enough income to eventually make a profit. There are two types of income your business needs to track. Gross income is the money you receive from selling your products or services minus the costs of goods or services sold. Net income is your profit after you subtract all your expenses and losses.

As a small business owner, you need to know the most reliable ways to collect the income you owed, and how to properly report the income you receive.

Collecting Payments

  • Extending credit: While it’s nice to extend credit to customers, it can also be a money-losing proposition. People who pay with cash or payment card (debit, credit or gift) are your best customers. The only risk they pose is counterfeited bills or cards, which is a pretty small risk. When you get into checks and merchant accounts, you have to be more careful.
  • Credit cards: Many small businesses (55 percent in 2013) do not accept credit cards because of the steep fees and the possibility of disputes. If you sell online, you have no choice but to accept credit cards and pay the fees. Remember that if you don’t accept chip-embedded (EMV) credit cards, you are liable for the costs of fraud, a source of friction between merchants and card issuers.
  • Merchant accounts are business-to-business (B2B) credit arrangements with clients and suppliers. A 2014 U.S. study of B2B invoices found that a troubling 42.5 percent were paid late and that 5.6 percent were still uncollected after 90 days, which is the usual definition of a default.
  • Checks are not desirable, as too many things can go wrong. This is especially true if you have customers living abroad. It can take forever for a mailed check to reach you. Then there are the problems of stolen or overdrawn checks. Unless you have a long relationship with a customer, it’s best to avoid being paid by check.
  • Direct deposits via automated clearing house, transfers and electronic transfers are quick and safe for domestic payments. International transfers take longer. The only problem is getting your client to agree to make direct deposits.
  • Collections: If you are owed money, you can try to collect it yourself, hand debt collection off to an agency, or write-off the debt. In any event, late payments have a negative effect on your income.

Accounting for Income

Accounting is essential knowledge for your business. Keep your books up to date because delays can cause mistakes that might end up hurting your business and getting you audited by the IRS. You can hire a bookkeeper if you have enough activity to make it worthwhile. Many small businesses use software such as QuickBooks to perform bookkeeping. It’s up to you to evaluate the time you need to spend on using software versus paying a professional to do the work for you.

If you operate on a cash basis, you acknowledge income when it is collected. However, if you use accrual accounting, you report income when it is earned, which is usually before it is collected. Whether you use cash or accrual accounting, you need to keep accurate and timely records. This is especially important for figuring net income, which is the amount you are taxed on. To calculate net income, you must account for all expenses, costs and losses. If you miss some deductions, you’ll pay more tax than necessary.

If you need to stabilize your cash flow, hire a bookkeeper, or expand your inventory to bring in more income, IOU Financial offers convenient, low-interest rate commercial loans to help your business grow. Visit our loan calculator to get started!

Small Business Finances 101: Making Payments

We’ll admit that its more pleasing to collect payments rather than make them, but you can organize your business to optimize how you make payments so that you minimize their impact. There are two ways you can optimize your payments – when you pay them and how you pay them.

Timing Your Payments

A good rule of thumb for timing your payments to minimize impact to your cash flow is this: Delay payments to vendors and suppliers until they are due, unless you can receive a discount for early vendor payment.

Many suppliers offer terms like 2/10 net 30, which means you get a two percent discount if you pay the bill within 10 days, and that in any event you have to cough up the money within 30 days. A two percent discount might not seem like much, but don’t forget that you earn it by accelerating a payment by only 20 days. That works out to a colossal annual percentage rate (APR) of 36.7 percent, which means you can cut your vendor cash outflow by more than one-third simply by taking advantage of this discount. Where else are you going to make a return like that?

Payment Methods – Business Checking Accounts

You set up a business checking account, or at least you should have, when you launched your business. There are three ways to pay from your checking account, and they each work best for different situations:

  1. Paper checks: You can write checks manually if the volume is small, but let’s assume you are running your business using some sort of software support, such as QuickBooks or an accounting system with accounts payable (A/P). In these types of programs, you set up all your payee classes, such as vendors, employees, customer refunds, tax payments and so forth. The system will prompt you to write checks when due, but more importantly, it will print the checks on your local printer. You’re too busy to write checks by hand, so printing them is a must. If you are a larger company, you might use a bookkeeper who will perform this function for you. You can also have the system print and mail checks to your payees from the cloud, so that you never have to physically deal with paper checks. QuickBooks supports regular and one-off auto payments this way.
  2. Debit card: You might use a debit card when making certain types of purchases, such as office supplies, business travel and entertainment, or even tax payments. The card is handy for both online and in-person payments, and there is usually no fee for using it. The only warning is to make sure your checking account doesn’t become overdrawn, causing the debit transaction to fail and even cost you penalty fees. (The same precaution applies to checks you write). Debit cards can be linked to electronic wallets, so that you can make a debit payment from your smartphone without having to whip out the plastic card.
  3. ACH electronic payments: You can authorize automated clearing house (ACH) electronic payments from your checking account, either on an individual basis or by setting up an auto-payment schedule with a payee. The latter is appropriate for monthly expenses such as rent, insurance and so forth. It’s also regularly used to pay employees electronically. On the payment date, the money is wired from your checking account to that of your payee’s. No checks are involved. You can set up ACH payments to push them out at your discretion, or to have recurring payees pull them from your checking account.

Other Payment Methods

Although you’ll handle most of your major business payments with your checking account, you can also optimize your other payment methods to make sure you’re using your money wisely.

  • Cash: Stay away from cash for everything except petty purchases. It’s a hassle to account for and creates problems when doing your taxes since you have to provide evidence for payment of your deductible expenses.
  • Credit card: A business credit card is useful, especially if money is tight and you have to spread out payments. Be aware that interest rates can be high, and that credit cards aren’t appropriate for some types of payees, such as employees.
  • Loans and lines of credit: When you need extra money, a loan or line of credit makes a lot of sense. One advantage of a commercial loan from IOU Financial is that you repay the loan in small daily installments via automatic ACH payments. Not only is this convenient, it means you don’t have to contend with large monthly payments.

If you’d like to learn more about making payments and other basic aspects of running a business, download the e-book “Cold Hard Truth on Small Businesses and Money,” written by Kevin O’Leary, star of ABC’s Shark Tank. There is no one better to answer questions about your small business payments than the small business expert himself!

The Benefits of Good Budgeting for Your Business

If you’ve been managing your budget on the back of an envelope, you are denying yourself a powerful tool that can make the difference between your small business’ success or failure. A proper expense budget not only serves as a roadmap for how you will be disbursing funds, but it also functions as a reality check by tracking your actual cash outflows against your projections. Good budgeting lets you objectively gauge whether your business strategy is working and highlights areas that need improvement.

Budgeting and Tracking Expenses

For the typical small merchandiser or manufacturer, the first step in creating a proper expense budget is to tease apart the costs of goods sold from your other operating expenses:

  • Costs of Goods Sold (COGS): These are the costs that are directly related to the items you sell. They include the payroll costs of direct labor, purchases of raw goods and/or inventory, purchases of directly related non-inventory items (like lubricants and packing materials), outside services used to help produce or sell your product, as well as other direct costs. Most of these costs are fixed, but the inventory purchases will obviously vary from month to month.
  • Operating Expenses: All the expenses that didn’t go into COGs are budgeted and tracked as operating expenses. These include the payroll for administrative and support staff, non-inventory materials not directly related to the production of goods (such as office supplies), outside administrative services, rent, utilities, travel & entertainment, and loan Everything except utilities can be considered a fixed cost.

The difference between your sales revenue and COGS is your gross income, whereas you have to subtract your operating expenses and taxes to figure your net profit.

Benefits of Tracking Expenses

Here are four good reasons to adopt proper budget tracking:

  1. Streamline areas of overspending: By tracking your actual expenses, you know immediately whether you are busting your budget with overspending, and if so, by how much. You then have two options. The first is to revamp your operations so as to streamline your overspending. This might mean changes to the sources and amounts of inventory and non-inventory items you purchase each month, as well as the size of your payroll, your use of outside services, and the amount you spend on travel & entertainment. The second option is to increase your budget for items that can’t be streamlined. Most businesses use both of these strategies to keep spending in check.
  2. See how your cash flow is affected with fixed vs. variable costs: You have immediate control over your variable costs, but fixed costs take time to change. If you see a lot of cash flying out the door due to high fixed costs, you can start planning ways to lower those costs. For example, you might want to find ways to cut your rent or your payroll. When too much money is being spent on variable costs, you can take steps to cut costs right away.
  3. Analyze spending patterns over time: Budget tracking helps you recognize trends. For example, inflation may increase the cost of your raw materials in a steady, predictable way. If that’s the case, you can incorporate this information into your budget going forward. Budgets also help you recognize seasonal spending patterns, which are extremely important in planning how much cash you’ll need on hand for the upcoming period.
  4. Realize areas of new opportunity for investing time and money: You might find that buying inventory in larger batches lowers your price per unit, but that you’ll need to enlarge your storage facilities to take advantage of this cost break. A budget will help you discover and plan for this and many other opportunities to lower your costs and/or increase your revenues. It can also show you when it makes sense to borrow money to finance your business’ growth.

Convinced? IOU Financial is making it easier to create and track your expenses by offering our free Business Budget Smart Sheet. Simply fill out the short form to download the planner, which is extremely adaptable and easy to use. Don’t delay, because the sooner you organize your budget, the sooner your business will reap the many benefits of tracking your spending!

Expensive Small Business Credit and How to Avoid It

The longer you’ve been in business, the more likely you are to know that credit is necessary for a small business to operate. It allows for expansion, improves profitability and increases operational efficiencies. It also makes it possible for smaller businesses without big bank accounts to meet their daily expenses when they have a cash crunch. While credit is essential to a small business’s operations; it is equally important for small businesses owners to consider the cost of their credit. (You didn’t think the cost of credit was the same for everyone, did you?)

One of the important factors that affect the cost of credit, is time. Many small businesses need quick credit decisions, and they often don’t have a long credit history or major assets to use as collateral to receive credit. As a result, they end up paying more than they should to access secure funds when needed.

 

The Cost of Expensive Credit

While credit is necessary for small business growth, expensive credit isn’t worth using. Paying excess interest and fees to access credit can counteract the benefits achieved from obtaining credit, and can actually ruin a small business’ financial position rather than improve it.  The common credit options available to small businesses include merchant cash advances, credit cards, lines of credit, and loans. Merchant cash advances, credit cards, and lines of credit may be more accessible to small businesses, but they have major pitfalls: they are prime examples of expensive credit.

 

Types of Credit for Small Businesses

A merchant cash advance is a quick way for a small business to get desperately needed cash, particularly by those with bad credit or lack of a credit history. While merchant cash advances are beneficial in that approval is somewhat easy, the fees on these cash advances can be astronomical, and can even continue to cost you money after your balance is paid. They should only be used when a company is in a major bind.

Another option for obtaining credit is using business credit cards. These are not ideal for making larger purchases, because they commonly have high interest rates, but are instrumental in establishing credit that isn’t tied to your personal accounts. Credit card debt can serve up a double whammy when it comes to costs because if you don’t pay off the balance each month, the interest compounds. For example, if you charge $5,000 on a credit card with a 20% interest rate and make a $100 per month payment, it will take you 100 months to pay off the debt and you will end up paying back $10,900!*

Another, slightly better option than the already discussed options is a line of credit. A business line of credit provides you with capital to draw upon to meet a variety of business needs. However, it is harder to gain approval for a line of credit than a high interest credit card, and definitely more difficult to access than a merchant cash advance. With a business line of credit, you can draw it down as needed to access more capital. Lines of credit are meant for short-term expenses, and are not intended to be used to fund large one-time purchases, because interest and fees need to be paid based on the amount that has been accessed. Paying off these (typically) large monthly sums immediately after receiving your line of credit can put a strain on the business owner who is trying to manage daily cash flows. Usually the term on a line of credit is shorter than a conventional loan and the interest rates are higher.

For small businesses (in terms of cost) a bank loan is one of the best sources of financing. However, two major downfalls of a bank loan is convenience and accessibility. Big banks often take a long time, sometimes many months, to evaluate a business’s loan application. This can include weeks or months of preparation for the business owner to submit the documents required by the application process. For small businesses, even after waiting all of this time their loan request can still be denied due to lack of credit history, not enough revenue, or imperfect credit. If the loan application is eventually approved, the funds often arrive too late to be used for what the business originally intended. Fortunately, there are other options for small businesses.

 

Finding Faster, More Affordable Sources of Funds

For businesses that are seeking a faster application process, affordable payments in smaller increments, and with a more flexible set of requirements, is a small business loan from a company that specializes in lending to small businesses. At IOU Financial, we specialize in small business loans, and offer a no risk application, instant pre-approval, and easy daily payments. We understand how important the speed of credit decisions can be and that you may not have perfect credit or a long history to back up your request. We will look each business’ unique situation, make a full decision in under 24 hours.

 

*interest calculation https://www.creditkarma.com/calculators/debtrepayment