When should you consider a mid-year change?

I have a friend and neighbor whose lawn and garden always looks outstanding. It’s lush and green and beautiful. It’s the lawn everyone on the street envies.

To get that lush green lawn, he spent years amending the soil. He dug up a patch and showed me one time, and it was nice, loamy soil. As we were talking about his lawn and his process for amending the soil and planting things in his garden, I told him I never know when it’s the right time to do it.

His response? “Do it when you feel like it. If it doesn’t bloom this year, it’ll bloom next year.”

The same is true for your bookkeeping. Want to change your reporting method? Messed up your chart of accounts and need to make a fresh start? If you need to do it, then do it. You’ll be happy you made the choice and changed it.

People often think they need to wait until the first of the year to make any changes to their bookkeeping, but that’s not necessary for most small businesses. And let’s face it, there’s a lot of other things happening in January for any business, so you might not actually want to implement a new system then.

You don’t have to wait for the first of the year to do it. You can do it now.

Yes, making a mid-year correction to your process or your books might mean that pulling together information for your tax return next year is a little more complicated, but most bookkeepers and accountants are used to that happening sometimes. Check with your bookkeeper or CPA in advance and get their professional advice about the situation, then make the change if it’s necessary. In some cases, not making the change will create more problems than making it.

Sometimes in business, things don’t go as planned. You have a budget and a business plan, and it all looks great on paper. But then the real world happens. Maybe you recorded a deposit incorrectly or messed up your chart of accounts, but you know what happened to cause the problem. If you know what happened, that’s okay. If you don’t know why it happened, that’s a problem.

If something happens in your bookkeeping or in your business, you should document it, especially in small businesses with only a couple of people involved. When you’re looking at your books two years from now, you may not remember the specifics or the person who resolved the issue may not work with you anymore. Be sure to document any changes you make to your process or errors that occur in your bookkeeping-it’ll save you time and headaches later.

Seven common QuickBooks mistakes

QuickBooks is an incredibly powerful tool for small businesses, but like any tool with lots of options, it can get confusing and create problems if not used properly.

Here are seven common mistakes I see small businesses make in QuickBooks and the right way to do it instead.

1. Creating an invoice but not applying the payment to it

This is one of the most common mistakes I see in QuickBooks. When you create an invoice for a customer and then later receive that check, you need to enter it as money received against the invoice. If you will receive multiple checks before going to the bank, it’s best to enter them as undeposited funds first but also record them as money received against the invoice. That way, all six or eight checks show up as one deposit, which is how it looks at the bank also.

2. Not reconciling accounts regularly (or at all)

For many small business owners, bookkeeping may not top the list of their favorite tasks, so it’s common for people to fall behind on reconciling their accounts. The problem is, the longer you wait to do it, the more work it is. And you could be missing mistakes in the mean time.

If your statements come monthly, you should reconcile your account monthly as well. If some statements come quarterly, reconcile your account whenever you get the statement. It may depend on volume though. If you only have six total transactions in a month, you could probably wait a couple months and it would be fine. But if you’re writing 50 checks a month, running a debit card, and have payments on autopay, you absolutely need to reconcile every month.

3. Letting outstanding items go for too long

When you’re reconciling your accounts, it’s good to keep an eye on anything that’s outstanding. As a general rule of thumb, if something’s outstanding more than three months, it’s probably a good idea to reach out and ask them to deposit that check. Life happens, so a gentle nudge may help in case the check got buried in a stack of mail or something else.

Some other outstanding checks may be data entry errors, so it’s good to clear those up as well. If a check’s been outstanding more than six months, go ahead and stop payment so you can fully reconcile the account. If the person contacts you about the check later, you can write another one.

4. Not adding enough information to vendor and customer records

For new customers or vendors, be sure to add as much information as you can to their record. In QuickBooks, you want to focus on the information that will be needed related to billing and accounting. For customers, you want their billing address and phone numbers for key contacts. For vendors, you want the address where you’ll need to remit payment and the right contact for billing questions. If you have multiple contacts and numbers, enter multiples. And then keep that information current as contact people, phone numbers, or addresses change.

5. Failing to keep sales tax numbers updated

QuickBooks does a great job of managing sales tax requirements if you use it appropriately. The best approach is to use tiered taxes so that you enter city, state, or county tax rates separately. When you invoice, those will roll up into one sales tax rate for your customers. If something changes with one of those tax rates, it’s easy to change it in one place with the tiered approach.

6. Creating chart of account categories that are too broad

When it comes to your chart of accounts, it’s easier to add things together than break things apart. If you create extremely broad categories and put lots of expenses in them, it takes a lot of effort to sort those into more detail. But if you create more categories than you need, it’s much easier to add two categories together at a later date. If in doubt, go ahead and add that extra category. You can always change it later if you don’t really need it.

7. Having too many vendors in the vendor list

When recording expenses, you don’t need to enter every single restaurant, gas station, and hotel in your vendor list. If you have some large vendors with whom you do a lot of business, it might make sense to specify those vendors. But otherwise, I recommend approaching vendors on more of a category approach, which means creating a vendor list that includes airlines, auto maintenance, food vendor, gas station, hotel/lodging, etc. Then, as you record a specific expense, you can list it under the appropriate vendor category and use the vendor name in the Ref field to make reconciliations easier.

Ethics and bookkeeping

What should a bookkeeper consider when it comes to gray areas? Doing the right thing is something every industry deals with, but bookkeeping can be somewhat unique. We are exposed to information and risks nobody else in the company is, aside from the directors and owners.

It comes down to a combination of doing what’s right and risk management, both for myself and my client.

There are a couple different situations I can be in as a bookkeeper where ethics and risk management come into play.

First, there may be a case where I think my client is in somewhat of a gray area on what they’ve asked me to do.

Everyone has their own sense of right and wrong. When my client has asked for something in a gray area, it comes down to risk management. In those cases, it can be easy for me to say, “If you can defend this in front of the IRS, then do it. If you can’t, then don’t.”

Second, there may be a case where I think something my client is asking me to do isn’t ethical.

Even in cases where I don’t have legal responsibility to the IRS because I didn’t make the actual decision, I still may have ethical responsibility in the situation.

Of course, I can decide that’s a client I don’t want to work with any longer. Usually one unethical request like that means more may be coming in the future.

And who ends up getting blamed? The bookkeeper. My clients are just as susceptible to human nature as anyone else, and people in a crunch situation tend to forget who made the actual decision.

Fortunately, I’ve never had a client audited where that was the situation. In fact, I’ve only had one client audited. They were working with a CPA as well, so the CPA handled everything. And we already had everything in order, so it wasn’t an issue.

But when difficult decisions come up, I have to consider both the ethical responsibility and the legal obligation. I have to do what’s best for both my client and myself.

Tracking and paying use tax

When it comes to use tax, businesses generally fall into one of three categories: those who have no idea what it is, those who know what it is but don't pay it consistently (or at all), and those who have a system for tracking and paying it.

What exactly is a use tax?

It's similar to sales tax, but it's specifically applied to items you purchase from an out-of-state vendor where no sales tax is applied at the time of purchase. The purchaser of such items is responsible for tracking the items they purchase that are subject to use tax and submitting payments to the state of Oklahoma.

Some people view use taxes as a voluntary payment or think the state won't catch them if they fail to pay. But if you undergo a sales tax audit, which can happen to any business, you'll end up paying both the original use tax plus penalties and interest. And, more importantly, paying the use tax is simply the right thing to do.

How should you track use tax?

Whether you're using a bookkeeping software or basic spreadsheets, you can track use tax at the time you enter your purchase.

The use tax is calculated on the price of the product and not on shipping or other fees. So if your item costs $100 and you paid $10 in shipping, calculate the use tax on only the base price of $100 using the use tax rate for the zip code where the product was shipped. You can find use taxes by zip code online using the Oklahoma Tax Commission's online rate locator.

The first thing I do is write "use tax" on the top of the receipt and write my calculations directly on the receipt so I have the hard copy record.

Enter the total of the product cost, shipping, and use tax amount as an expense in your bookkeeping system. In this case, the total might be $118.50 after use tax is applied to the $110 you paid for the product plus shipping. Then enter a credit for that same item in the amount of the use tax, or $8.50 in this case. File your hard copy receipt in a specific folder for items subject to use tax so you'll have everything you need to file and pay use taxes.

How often should I submit use taxes to the state?

For most businesses, I recommend submitting the appropriate form and payment to the state on a monthly basis. That way it's simply part of your monthly bookkeeping routine and not something you're likely to forget. If you don't have any use tax to pay during a specific month, you don't need to file the form.

What else should I know about use tax?

At one point in time, all online purchases through Amazon were subject to use tax. That changed when the state of Oklahoma worked with Amazon to start collecting sales tax on purchases. However, some smaller sellers who use Amazon's platform to sell goods may not be collecting sales tax, so it's still important to keep an eye on your receipts and submit use tax for any items that were not charged sales tax.

For businesses that keep an inventory of products, such as an IT company with extra hard drives, those purchases may not be subject to sales tax at the time of purchase. However, if the inventory is put into use at the company, then use tax applies.

Businesses with inventory or questions about use tax may contact a CPA or a bookkeeper for more information about what products are subject to use tax.

Yes, you need a receipt

It’s that time of year... tax season is upon us! For many small business owners, that means it’s time to gather receipts from the various places you may have stashed receipts throughout the year. Trust me when I say that bookkeepers and tax preparers have seen it all, from the highly organized and fully documented receipt files to the completely unorganized box full of relevant and irrelevant papers.

Why do receipts matter so much? If you’re deducting expenses for your business, your chances of being audited automatically increase. While the overall chance of being audited is relatively small, the chances increase based on specific criteria, such as sole proprietors who file a Schedule C with their tax return.

Receipts are your proof that a valid, deductible business expense occurred. Your credit card statement isn’t enough, as it doesn’t provide all the necessary information. In fact, even the receipt alone isn’t enough if audited-you also need documentation of who you met with, the purpose of the meeting, and so on.

Whether you’re gathering receipts for your 2017 tax return or documenting them along the way for 2018, here are important things to document for each business expense.

Date and time

Date and time seems pretty simple to capture from a receipt, but it’s not always listed on every receipt. When you incur a business expense, check the receipt to ensure the date and time are printed on the receipt. If not, write it on the receipt before filing the receipt or submitting it to your bookkeeper.

People involved

The IRS has very specific rules surrounding meals and entertainment expenses for business deductions. If your expense involves a meal or other entertainment (such as sporting event), it’s critical to document who attended the meeting or event.

And no, setting up shop at the local Panera and working for a few hours while you eat breakfast doesn’t count as a deductible business expense. It can be an expense the company pays for, but it isn’t one you can deduct on your taxes.

Purpose of meeting or expense

It’s also important to document the purpose of the expense. Why did you need 100 pens? What business topics were discussed at that lunch meeting? How much business did you conduct on that trip to Florida? If audited, the IRS will expect documentation on what business topics were discussed or how other items were used for your business.

The best practice for all business owners is to write these details on the back of a receipt at the time of purchase and then file them in a specific place so they’re easy to find come tax time next year. You’ll need the receipts to enter into your bookkeeping software, but you’ll also need to store them for several years in case of an audit. The more organized you are with your receipts, the easier it will be to prepare taxes and respond to an audit.

Three tips for working with a bookkeeper

There are many different ways we work with clients, and the same is likely true of many accounting or bookkeeping companies. I’ve often had companies ask me if I can provide a specific level of service, but they don’t realize that there’s still some level of involvement or input required on their part.

For small businesses looking to outsource their books, here are some important things to keep in mind as you start working with a bookkeeper.

Identify the desired level of support

Over the years, I’ve worked with some clients who simply needed periodic consulting about their bookkeeping setup. I might meet with them a couple of times to work through an issue, and then I might not consult with them again for six months to a year.

But the more common scenario is either a client who wants some monthly support with entering expenses and income, and keeping the books on track, or one who wants even the day-to-day bookkeeping tasks handled for them, such as making deposits and paying bills.

And sometimes, clients need a complete overhaul. I once had a client who had two different systems for tracking their accounts, and the two pieces together didn’t add up to 100%. Sometimes in those situations, the best course of action is to start fresh, but your bookkeeping consultant can advise you on that.

Recognize your role in the process

Even for those clients who ask me to handle all the details, the client still has to be involved in the process. After all, it’s their business!

The extent to which a business owner is involved will vary a bit depending on their history with bookkeeping and what program and process they use. But even those with a great track record for keeping things current will still need to communicate with their bookkeeping or accounting partner.

Find a consultant you trust

You’re handing over significant details about your business, so it’s important to find a partner that you trust. For most people in the field, numbers are numbers, whether it’s a $20,000 business or a $5 million business. But for the business owner, those numbers can be very personal, and it may be hard to give someone the level of access needed to help.

Before you contract with a bookkeeping consultant, have some honest conversations about your current situation and how you want them to help. If your books are out of control and you need someone to get them in order, expect to spend time answering questions and adapting to new processes. Keep in mind that a good bookkeeper is going to nag you for receipts-it’s their job!

No entrepreneur woke up and decided to go into business so he or she could do bookkeeping on the weekends after providing a product or service all week. It’s not uncommon for small businesses to get behind, but hiring a professional to help with your books can keep you on track and in business.

The best way to give gifts to your employees

Showing appreciation to your employees for their dedication and hard work is vital within a company. It’s a key factor in employee morale, which is important for the ongoing success of your organization.

But how does an employer know whether a gift to an employee is taxable? This is where de minimis comes in to play, which roughly translates to “about minimal things.” Under this concept, an employer can do something for an employee-such as a small gesture of appreciation-without it being taxable.

For instance, if you gave $5 Sonic gift cards for the first three people who made a suggestion on improving the parking lot, that likely would not be taxable. It’s a small way to show appreciation and have fun, but it’s not considered a cash equivalent.

However, using larger or frequent cash gifts can get you into trouble quickly. Giving out cash to employees adds up, and the total amount must be tracked and taxed. For instance, I had one experience where a boss wanted to give all employees cash to buy their turkey for the holidays. The company made the wise decisions to instead buy the turkeys and hand them out. Although that took more time, giving the employees cash would require completing a W2.

If you’re debating whether to give a tangible gift versus cash, you’re usually best to go with the actual gift and not the cash.

Gym memberships are another place where the question of taxable income comes into play. It’s not a traditional gift, but it is an employee perk. An on-site fitness center can be a huge benefit for employees, and a lot of larger companies are offering that as an option. If the gym is on-site and available for all to use, it counts as a company expense. In contrast, if you paid for an outside gym membership for employees, then it becomes taxable income.

Some other things that are included in de minimus are:

  • Occasional use of the photocopier
  • Occasional snacks, coffee, doughnuts, etc.
  • Occasional tickets for entertainment
  • Holiday gifts
  • Flowers, fruit, books, etc., under special circumstance

The idea is to take care of your employees who work hard for the company and keep morale up while being financially responsible for the well-being of the company. Make sure you think ahead about employee gifts and the potential tax impact.

Why your company needs a CEO and CFO

When talking about the difference between CEOs (chief executive officer) and CFOs (chief financial officer), it’s often about the details. A lot of times it is harder for a CEO to catch smaller details.

Now, in their defense, they are coming up with strategic methods to sustain the growth and well being of the company, which includes everything from administration to sales. That in itself is a huge job, which is why they are the CEO.

CFOs report directly to the CEO and typically handle any financial happenings within the company. Their responsibilities include tracking revenue and expenses, analyzing financial data, and looking at the markets. Also a huge job, but the two jobs are very different.

The CEOs job is to see the big picture. Which means they can sometimes miss the importance of smaller details. For instance, it may not occur to the CEO to keep receipts. And believe me, the IRS wants receipts. They will not just take statements.

Those smaller financial details that really add up in the end are where the CFO shines. CFOs generally have a better understanding of details because they oversee budgets and expenses and also play a role in filing taxes.

For them, the i’s have to be dotted and the t’s must be crossed. The main responsibility they hold is the stability of the finances and implementing financial strategies to grow the company.

A CEO should generally have some knowledge of those details to understand the bigger picture of the business. And a CFO should look at the broader picture to better understand the details. A successful business needs both perspectives.

Although different, both a CEO and CFO carry the responsibility to maintain and improve the company. It reminds me of a leadership quote by Peter F. Drucker: “Management is doing things right, leadership is doing the right things.”

Both the CEO and CFO perform critical functions that require working in synergy to create a thriving and financially solid company.

I messed up, now what?

Most business owners have had that moment when they realize they messed up, whether it’s a small oversight or a big issue.

My title here is “accounting crisis manager” so believe me, I see this a lot. You are not alone- everyone makes mistakes. It’s how we recover that is important.

There is no shame in making mistakes. We just need to take a deep breath and switch gears into recovery mode to move onward and upward.

One issue I see quite often that can get businesses in financial trouble is not outsourcing the work or outsourcing the work to the wrong people. In other words, just because your cousin can handle checks doesn’t mean you need to give them the job. On the other hand, if you have a professional bookkeeper, you should trust them to do their job but still maintain oversight.

People tend to feel a sense of shame for not understanding every part of their business. Just remember that to build a successful business, you will need to lean on other people. When an owner gets busy, and they will, shortcuts tend to be taken. This is where I see clients get into trouble, and it’s why outsourcing is so important.

Businesses can go through ups and downs for numerous reasons. Recessions, decreased demand of the products, and high unemployment rates can all affect the company’s revenue.
If you’ve hit tough times financially, some of these steps could help you bounce back.

  • Charge more for the product
  • Add fees, especially in service industry
  • Sell any assets you are no longer using
  • Reduce expenses
  • Get advice from a professional
  • Keep moving forward
  • Be flexible

I don’t mean to sound like a pessimist, but you really do want to plan for the worst as a business owner. It’s important to understand that potential loss and disaster are looming, and the better you prepare, the faster you will bounce back.

You can prepare and help strengthen your business with these steps.

  • Take a complete inventory of your business regularly
  • Ensure bookkeeping is up to date and correct
  • Back up your data and use up-to-date software

Remind yourself that those who have experienced great success have also experienced great failure, too. Find a solid and trusting support system, plan your course of action, and be prepared to build yourself and the business up again.

Helpful steps when starting a new business

When starting a new business, many questions arise. One I often hear is, "Where do I start?"

Well, start with giving yourself a pat on the back. You are braving the entrepreneur world, and that alone is a lot to be proud of! But going back to the question... where do you start?

Picking a name for your business can be not only fun, but also a way to reach the consumer. Pick a name that is direct and that appeals to the market.

If you want to be taken seriously in the business world, you will need to start with getting a tax ID number. This first step will establish the company and help guide the future of your business.

It's also important to decide what kind of business you are. This can always change as your business demands it, but think about where you are now and where you want to be in five years. Are you a sole proprietor or do you plan to partner with another person? Are you the only employee, or do you plan to hire a team?

Forming an LLC is a smart decision, regardless of the size or structure of your business. This gives the business a level of protection between your company and your personal assets. Nothing is 100% guaranteed, but it gives you a safety net.
With all of that complete, you should set up a bank account using the tax ID number and the company name. It's important to keep your business finances separate from your personal finances, and an established business checking account is a critical piece.

Also be sure to look into local laws and apply for any required licenses or permits. Commercial insurance is a good idea for most businesses as well, and a requirement for some fields.

The next logical step is everyone's favorite-bookkeeping! In reality this can be difficult and time consuming for many business owners. Quickbooks is a great software for managing business finances. With assets, liabilities, owners equity, income, and expenses being thrown at you, it's a lot to keep straight. Creating categories and sub-categories within your financial software will benefit the company in the long run. Organization is your friend!

Last, but certainly not least, find others who have ventured before you in the business world. Lean on these people, seek advice, find out what mistakes they have made, and what they did right. With an open mind, these people will guide you into the business owner you want to b