The Accounting Blog
Smart accounting for growing companies

• Rules Regarding Independent Contractors
  

  In today’s free market world, more and more companies are hiring people as independent contractors rather than as employees. The big reasons? To save payroll taxes and benefit costs, which together can add an extra 20% to the cost of having an employee. If you’re considering using this strategy, keep in mind that the IRS has criteria for determining independent contractors vs. employees and that penalties can result if you don’t follow the rules. The following three criteria are generally considered to be the most important:

  1) Behavior Control. Who decides when, where and how the work is performed? Who decides what tools/equipment to use? If additional staff is needed to help with the job, who hires them? If the worker has control over these decisions, then he/she may be considered an independent contractor. (Example: a case involving carpet installers found that they were independent contractors because they, not the flooring services company, determined the manner and sequence in which jobs were completed. They also used their own tools and hired their own “helper” work force.)

  2) Financial Control. Who pays the operating expenses for the work to be performed (i.e. supplies, computer, travel expenses)? Is the worker free to perform services for other companies and/or the public? If the worker controls these decisions, then he/she may be considered an independent contractor. (Example: the carpet installers mentioned above were considered independent contractors because they purchased their own supplies, held the risk of profit or loss on their jobs, and were free to work without penalty for other companies.)

  3) Relationship Factor. Who determines the working relationship of the parties? Is the worker provided with employee-type benefits such as insurance, vacation pay or sick pay? Obviously, these types of benefits are only paid to employees, not contractors.

  As you can see, the rules are complex and leave some room for interpretation. If you want to increase your chances of convincing the IRS that a worker is in fact an independent contractor, you can take the following steps:

  1) Create a simple contract documenting the independent contractor relationship (you can purchase a blank form from Nolo Press). You may wish to specify in the contract that the worker is responsible for his/her own insurance (including workers’ compensation).
  2) Pay for work by the job instead of by the hour, the week or the month.
  3) Have all workers submit invoices for work before paying them.
  4) Don’t forget to complete IRS Form W-9 (Request for Taxpayer Identification Number) when you first start working with a contractor (you’ll need this info. for your year-end tax filings).

  (Sources: IRS, American Express Small Business, Quickfinders)

• Business Dashboards
  

  How would it feel if you could turn on your computer every morning and immediately have a complete, real-time picture of your company’s financial performance? Not only that, but what if the information was presented in an easy-to-understand, visual manner (i.e. gauges and graphs) as opposed to the usual bunch of lifeless numbers? That is the basic idea behind business dashboards, a promising management tool that is gaining more attention in the business world these days.

  In the realm of online accounting, NetSuite is leading the charge with a customizable dashboard that allows managers to view things like sales, new orders, even your daily calendar (part of the company’s mantra: One System, No Limits). Of course, you have to be a NetSuite customer to use it. If you are an accountant, Principa offers a powerful and easy-to-use dashboard that can help your customers monitor how they are performing against targets and cash flow projections, perform simple “what-if” analyses, and more. (Note: if you are a business owner and would like to learn more about this service, you can contact the ultra-friendly folks at Principa and they will be happy to help you find a member of their organization.)

  Whether or not you have a business dashboard on your computer, the important thing to remember is this: the best way to improve your company's financial performance is to sit down and establish some basic financial targets, then consistently measure and monitor your progress toward those goals. That right there is the simple principle behind the dashboard concept. You don't necessarily need a computer program to do this, but you do need a disciplined approach. In our experience, approximately 90% of businesses never follow this basic "measure and monitor" strategy (either because they're too busy or because they don't know how). The 10% that do tend to be the companies that consistently outperform their peers in the same industry (i.e. the star performers).

• Advice For Selling Your Business
  

  Thinking of selling your business? One of the first things you should know is that the process is far from a precise science. For example, business valuations can vary greatly depending upon the type of business, the valuation method used (there are several), and a variety of financial factors (which generally boil down to three things: assets, profits and/or cash flow). As if that weren’t enough, sometimes the most important factor in a company’s sale has nothing to do with the numbers- instead, it relates to the buyer’s motivation. (Case in point: eBay just paid $2.6 billion for Skype, the free internet phone service that has revenues around $60 million and isn’t expected to break even until the end of 2006. Why? The folks at eBay plan to use it to make buying and selling easier for their 157 million users.)

  Although the process may seem bewildering at the outset, all in all it’s a lot less confusing and stressful than the experience of starting a business in the first place. If you survived that, you can definitely handle this. As with many things in life, the first step is to focus on the big picture. To help you get started, here are a few simple suggestions:

  1) Start early. If you can, start the process three years ahead of time. Business brokers report that 99% of the businesses they list for sale are not properly prepared to be sold. Starting early will give you time to fix problem areas (outdated inventory, unprofitable product lines, poor staffing, etc.) and clean up any possible tax/legal/ownership issues.
  

  2) Systemize your business. A company with an owner’s manual (i.e. a well-documented set of systems and procedures) will always get a higher price than a company without one. Furthermore, a systemized business is less dependent upon the personal involvement of the owner(s) and thus more attractive to potential buyers.
  3) Optimize your financial performance. When somebody buys a business, they’re basically buying a stream of earnings. Obviously, the numbers are an important part of the overall story. Make as many financial improvements as you can leading up to the sale and you’ll be able to paint a much better picture for potential buyers.
  4) Think of business valuation as a starting point. It’s rare that buyers and sellers come up with the same figure for a company. Naturally, the buyer wants a lower price and the seller wants a higher one. Your goal should be to come up with a ballpark figure that can be used as a starting point for negotiation. The ultimate goal: to come up with a price that both sides can live with.
  

• Overview of Types of Financing
  

  One of the biggest challenges that successful entrepreneurs face is: how to find money so that you can keep growing. For example, if you are a growing retailer you may need additional capital to open new stores or bring on new product lines. For companies who are just getting started, here is a basic overview of the different types of business financing.

  Bank loan
  What is it? A bank loan is usually the first step for business owners who need additional capital. Bank loans and credit lines are generally the most cost-effective ways to finance a business.
  Getting started: Look for a lender who knows your business, industry and financial needs. Independent community banks are often more approachable than the big national banks. The bank will request a business plan that documents why the company needs the loan and how it will repay it.

  Line of credit
  What is it? A line of credit is a type of loan (often called a revolving line) that allows the borrower to tap into money without having to file a new loan application each time funds are drawn. Credit lines are set for a fixed amount and ma