Good Business Practices

Transcription

1 Gd Business Practices Tw (2) Cntinuing Educatin Hur Curse #BP202 Apprved Cntinuing Educatin fr Licensed Prfessinal Engineers

2 Gd Business Practices Table f Cntents Gd Business Practices Business Structures... 1 Sle Prprietrships... 1 Partnerships... 2 Crpratins... 3 S Crpratins... 4 Limited Liability Cmpany (LLC)... 6 Financial Management... 7 Budgeting... 8 Bkkeeping... 8 Cash Flw... 8 Prfit And Lss (P&L) Statement... 9 Time Management Time Management Plan Priritizing Tasks Allcating Time Wrk Yur Plan Review & Update Yur Plan Fur Key Pints T Remember Quiz Questins References 13

3 Gd Business Practices Gd Business Practices LEARNING OBJECTIVES Upn cmpletin f this curse the student will be able t: 1. Learn abut the different types f business structures and find the ne best suited fr their business. 2. Explain the cncept f time management and why is it imprtant t their business 3. Learn and apply time management tls & techniques t increase their time efficiency 4. Explain the cncept f financial management and why it is imprtant t a small business 5. Understand the imprtance and use f budgeting, bkkeeping, cash flw analysis, and prfit & lss statements Intrductin This curse examines the basics f perating a small engineering cntracting business and prvides essential tips fr engineers and cntracting businesses f all sizes. This curse is brken int three infrmatinal sectins that discuss the fllwing: the legal structures f businesses, financial management, & time management. BUSINESS STRUCTURES When beginning a business, yu must decide what frm f business entity t establish. Yur frm f business determines which incme tax return frm yu have t file. The mst cmmn frms f business are the sle prprietrship, partnership, crpratin, and S crpratin. A Limited Liability Cmpany (LLC) is a business structure allwed by state statute. Legal and tax cnsideratins enter int selecting a business structure. SOLE PROPRIETORSHIPS A sle prprietrship is the simplest and mst cmmn structure chsen t start a business. It is an unincrprated business wned and run by ne individual with n distinctin between the business and yu, the wner. Yu are entitled t all prfits and are respnsible fr all yur business s debts, lsses and liabilities. Frming a Sle Prprietrship Yu d nt have t take any frmal actin t frm a sle prprietrship. As lng as yu are the nly wner, this status autmatically cmes frm yur business activities. In fact, yu may already wn ne withut knwing it. If yu are a freelance writer, fr example, yu are a sle prprietr. But like all businesses, yu need t btain the necessary licenses and permits. Regulatins vary by industry, state and lcality. Use the Licensing & Permits tl t find a listing f federal, state and lcal permits, licenses and registratins yu'll need t run a business. If yu chse t perate under a name different than yur wn, yu will mst likely have t file a fictitius name (als knwn as an assumed name, trade name, r DBA name, shrt fr "ding business as"). Yu must chse an riginal name; it cannt already be claimed by anther business. Sle Prprietr Taxes Because yu and yur business are ne and the same, the business itself is nt taxed separatelythe sle prprietrship incme is yur incme. Yu reprt incme and/r lsses and expenses with a Schedule C and the standard Frm The bttm-line amunt frm Schedule C transfers t yur persnal tax return. It s yur respnsibility t withhld and pay all incme taxes, including self-emplyment and estimated taxes. Yu can find mre infrmatin abut sle prprietrship taxes and ther frms at IRS.gv. Advantages f a Sle Prprietrship Easy and inexpensive t frm: A sle prprietrship is the simplest and least expensive business structure t establish. Csts are minimal, with legal csts limited t btaining the necessary license r permits. 1 P age

4 Gd Business Practices Cmplete cntrl. Because yu are the sle wner f the business, yu have cmplete cntrl ver all decisins. Yu aren t required t cnsult with anyne else when yu need t make decisins r want t make changes. Easy tax preparatin. Yur business is nt taxed separately, s it s easy t fulfill the tax reprting requirements fr a sle prprietrship. The tax rates are als the lwest f the business structures. Disadvantages f a Sle Prprietrship Unlimited persnal liability. Because there is n legal separatin between yu and yur business, yu can be held persnally liable fr the debts and bligatins f the business. This risk extends t any liabilities incurred as a result f emplyee actins. Hard t raise mney. Sle prprietrs ften face challenges when trying t raise mney. Because yu can t sell stck in the business, investrs wn't ften invest. Banks are als hesitant t lend t a sle prprietrship because f a perceived lack f credibility when it cmes t repayment if the business fails. Heavy burden. The flipside f cmplete cntrl is the burden and pressure it can impse. Yu alne are ultimately respnsible fr the successes and failures f yur business. PARTNERSHIPS A partnership is a single business where tw r mre peple share wnership. Each partner cntributes t all aspects f the business, including mney, prperty, labr r skill. In return, each partner shares in the prfits and lsses f the business. Because partnerships entail mre than ne persn in the decisin-making prcess, it s imprtant t discuss a wide variety f issues up frnt and develp a legal partnership agreement. This agreement shuld dcument hw future business decisins will be made, including hw the partners will divide prfits, reslve disputes, change wnership (bring in new partners r buy ut current partners) and hw t disslve the partnership. Althugh partnership agreements are nt legally required, they are strngly recmmended and it is cnsidered extremely risky t perate withut ne. Types f Partnerships There are three general types f partnership arrangements: General Partnerships assume that prfits, liability and management duties are divided equally amng partners. If yu pt fr an unequal distributin, the percentages assigned t each partner must be dcumented in the partnership agreement. Limited Partnerships (als knwn as a partnership with limited liability) are mre cmplex than general partnerships. Limited partnerships allw partners t have limited liability as well as limited input with management decisins. These limits depend n the extent f each partner s investment percentage. Limited partnerships are attractive t investrs f shrtterm prjects. Jint Ventures act as general partnership, but fr nly a limited perid f time r fr a single prject. Partners in a jint venture can be recgnized as an nging partnership if they cntinue the venture, but they must file as such. Frming a Partnership T frm a partnership, yu must register yur business with yur state, a prcess generally dne thrugh yur Secretary f State s ffice. Yu ll als need t establish yur business name. Fr partnerships, yur legal name is the name given in yur partnership agreement r the last names f the partners. If yu chse t perate under a name different than the fficially registered name, yu will mst likely have t file a fictitius name (als knwn as an assumed name, trade name, r DBA name, shrt fr "ding business as"). Once yur business is registered, yu must btain business licenses and permits. Regulatins vary by industry, state and lcality. Use ur Licensing & Permits tl t find a listing f federal, state and lcal permits, licenses and registratins yu'll need t run a business. If yu are hiring emplyees, read mre abut federal and state regulatins fr emplyers. Partnership Taxes Mst businesses will need t register with the IRS, register with state and lcal revenue agencies, and btain a tax ID number r permit. 2 P age

5 Gd Business Practices A partnership must file an annual infrmatin return t reprt the incme, deductins, gains and lsses frm the business s peratins, but the business itself des nt pay incme tax. Instead, the business "passes thrugh" any prfits r lsses t its partners. Partners include their respective share f the partnership's incme r lss n their persnal tax returns. Partnership taxes generally include: Annual Return f Incme Emplyment Taxes Excise Taxes Partners in the partnership are respnsible fr several additinal taxes, including: Incme Tax Self-Emplyment Tax Estimated Tax Filing infrmatin fr partnerships: Partnerships must furnish cpies f their Schedule K-1 (Frm 1065) t all partners by the date Frm 1065 is required t be filed, including extensins. Partners are nt emplyees and shuld nt be issued a Frm W-2. Advantages f a Partnership Easy and Inexpensive. Partnerships are generally an inexpensive and easily frmed business structure. The majrity f time spent starting a partnership ften fcuses n develping the partnership agreement. Shared Financial Cmmitment. In a partnership, each partner is equally invested in the success f the business. Partnerships have the advantage f pling resurces t btain capital. This culd be beneficial in terms f securing credit, r by simply dubling yur seed mney. Cmplementary Skills. A gd partnership shuld reap the benefits f being able t utilize the strengths, resurces and expertise f each partner. Partnership Incentives fr Emplyees. Partnerships have an emplyment advantage ver ther entities if they ffer emplyees the pprtunity t becme a partner. Partnership incentives ften attract highly mtivated and qualified emplyees. Disadvantages f a Partnership Jint and Individual Liability. Similar t sle prprietrships, partnerships retain full, shared liability amng the wners. Partners are nt nly liable fr their wn actins, but als fr the business debts and decisins made by ther partners. In additin, the persnal assets f all partners can be used t satisfy the partnership s debt. Disagreements Amng Partners. With multiple partners, there are bund t be disagreements Partners shuld cnsult each ther n all decisins, make cmprmises, and reslve disputes as amicably as pssible. Shared Prfits. Because partnerships are jintly wned, each partner must share the successes and prfits f their business with the ther partners. An unequal cntributin f time, effrt, r resurces can cause discrd amng partners. CORPORATIONS A crpratin (smetimes referred t as a C crpratin) is an independent legal entity wned by sharehlders. This means that the crpratin itself, nt the sharehlders that wn it, is held legally liable fr the actins and debts the business incurs. Crpratins are mre cmplex than ther business structures because they tend t have cstly administrative fees and cmplex tax and legal requirements. Because f these issues, crpratins are generally suggested fr established, larger cmpanies with multiple emplyees. Fr businesses in that psitin, crpratins ffer the ability t sell wnership shares in the business thrugh stck fferings. Ging public thrugh an initial public ffering (IPO) is a majr selling pint in attracting investment capital and high quality emplyees. Frming a Crpratin A crpratin is frmed under the laws f the state in which it is registered. T frm a crpratin yu ll need t establish yur business name and register yur legal name with yur state gvernment. If yu chse t perate under a name different than the fficially registered name, yu ll mst likely have t file a fictitius name (als knwn as an assumed name, trade name, r DBA 3 P age

6 Gd Business Practices name, shrt fr "ding business as"). State laws vary, but generally crpratins must include a crprate designatin (Crpratin, Incrprated, Limited) at the end f the business name. T register yur business as a crpratin, yu need t file certain dcuments, typically articles f incrpratin, with yur state s Secretary f State ffice. Sme states require crpratins t establish directrs and issue stck certificates t initial sharehlders in the registratin prcess. Cntact yur state business entity registratin ffice t find ut abut specific filing requirements in the state where yu frm yur business. Once yur business is registered, yu must btain business licenses and permits. Regulatins vary by industry, state and lcality. Use ur Licensing & Permits tl t find a listing f federal, state and lcal permits, licenses and registratins yu'll need t run a business. If yu are hiring emplyees, read mre abut federal and state regulatins fr emplyers. Crpratin Taxes Crpratins are required t pay federal, state, and in sme cases, lcal taxes. Mst businesses must register with the IRS and state and lcal revenue agencies, and receive a tax ID number r permit. When yu frm a crpratin, yu create a separate tax-paying entity. Regular crpratins are called C crpratins because Subchapter C f Chapter 1 f the Internal Revenue Cde is where yu find general tax rules affecting crpratins and their sharehlders. Unlike sle prprietrs and partnerships, crpratins pay incme tax n their prfits. In sme cases, crpratins are taxed twice - first, when the cmpany makes a prfit, and again when dividends are paid t sharehlders n their persnal tax returns. Crpratins use IRS Frm 1120 r 1120-A, U.S. Crpratin Incme Tax Return t reprt revenue t the federal gvernment. Sharehlders wh are als emplyees pay incme tax n their wages. The crpratin and the emplyee each pay ne half f the Scial Security and Medicare taxes, but this is usually a deductible business expense. Advantages f a Crpratin Limited Liability. When it cmes t taking respnsibility fr business debts and actins f a crpratin, sharehlders persnal assets are prtected. Sharehlders can generally nly be held accuntable fr their investment in stck f the cmpany. Ability t Generate Capital. Crpratins have an advantage when it cmes t raising capital fr their business - the ability t raise funds thrugh the sale f stck. Crprate Tax Treatment. Crpratins file taxes separately frm their wners. Owners f a crpratin nly pay taxes n crprate prfits paid t them in the frm f salaries, bnuses, and dividends, while any additinal prfits are awarded a crprate tax rate, which is usually lwer than a persnal incme tax rate. Attractive t Ptential Emplyees. Crpratins are generally able t attract and hire high-quality and mtivated emplyees because they ffer cmpetitive benefits and the ptential fr partial wnership thrugh stck ptins. Disadvantages f a Crpratin Time and Mney. Crpratins are cstly and time-cnsuming ventures t start and perate. Incrprating requires start-up, perating and tax csts that mst ther structures d nt require. Duble Taxing. In sme cases, crpratins are taxed twice - first, when the cmpany makes a prfit, and again when dividends are paid t sharehlders. Additinal Paperwrk. Because crpratins are highly regulated by federal, state, and in sme cases lcal agencies, there are increased paperwrk and recrdkeeping burdens assciated with this entity S CORPORATIONS An S crpratin (smetimes referred t as an S Crp) is a special type f crpratin created thrugh an IRS tax electin. An eligible dmestic crpratin can avid duble taxatin (nce t the crpratin and again t the sharehlders) by electing t be treated as an S crpratin. An S crp is a crpratin with the Subchapter S designatin frm the IRS. T be cnsidered an S crp, yu must first charter a business as a crpratin in the state where it is headquartered. 4 P age

7 Gd Business Practices Accrding t the IRS, S crpratins are "cnsidered by law t be a unique entity, separate and apart frm thse wh wn it." This limits the financial liability fr which yu (the wner, r "sharehlder") are respnsible. Nevertheless, liability prtectin is limited - S crps d nt necessarily shield yu frm all litigatin such as an emplyee s trt actins as a result f a wrkplace incident. What makes the S crp different frm a traditinal crpratin (C crp) is that prfits and lsses can pass thrugh t yur persnal tax return. Cnsequently, the business is nt taxed itself. Only the sharehlders are taxed. There is an imprtant caveat, hwever: any sharehlder wh wrks fr the cmpany must pay him r herself "reasnable cmpensatin." Basically, the sharehlder must be paid fair market value, r the IRS might reclassify any additinal crprate earnings as "wages." Frming an S Crpratin Befre yu frm an S Crpratin, determine if yur business will qualify under the IRS stipulatins T file as an S Crpratin, yu must first file as a crpratin. After yu are cnsidered a crpratin, all sharehlders must sign and file Frm 2553 t elect yur crpratin t becme an S Crpratin. Once yur business is registered, yu must btain business licenses and permits. Regulatins vary by industry, state and lcality. Use the Licensing & Permits tl t find a listing f federal, state and lcal permits, licenses, and registratins yu'll need t run a business. If yu are hiring emplyees, read mre abut federal and state regulatins fr emplyers. Cmbining the Benefits f an LLC with an S Crp There is always the pssibility f requesting S Crp status fr yur LLC. Yur attrney can advise yu n the prs and cns. Yu'll have t make a special electin with the IRS t have the LLC taxed as an S crp using Frm And yu must file it befre the first tw mnths and fifteen days f the beginning f the tax year in which the electin is t take effect. The LLC remains a limited liability cmpany frm a legal standpint, but fr tax purpses it's treated as an S crp. Be sure t cntact yur state's incme tax agency where yu will file the electin frm t learn abut tax requirements. S Crpratin Taxes Mst businesses need t register with the IRS, register with state and lcal revenue agencies, and btain a tax ID number r permit. All states d nt tax S crps equally. Mst recgnize them similarly t the federal gvernment and tax the sharehlders accrdingly. Hwever, sme states (like Massachusetts) tax S crps n prfits abve a specified limit. Other states dn't recgnize the S crp electin and treat the business as a C crp with all f the tax ramificatins. Sme states (like New Yrk and New Jersey) tax bth the S crps prfits and the sharehlder's prprtinal shares f the prfits. Yur crpratin must file the Frm 2553 t elect "S" status within tw mnths and 15 days after the beginning f the tax year r any time befre the tax year fr the status t be in effect. Advantages f an S Crpratin Tax Savings. One f the best features f the S Crp is the tax savings fr yu and yur business. While members f an LLC are subject t emplyment tax n the entire net incme f the business, nly the wages f the S Crp sharehlder wh is an emplyee are subject t emplyment tax. The remaining incme is paid t the wner as a "distributin," which is taxed at a lwer rate, if at all. Business Expense Tax Credits. Sme expenses that sharehlder/emplyees incur can be written ff as business expenses. Nevertheless, if such an emplyee wns 2% r mre shares, then benefits like health and life insurance are deemed taxable incme. Independent Life. An S crp designatin als allws a business t have an independent life, separate frm its sharehlders. If a sharehlder leaves the cmpany, r sells his r her shares, the S crp can cntinue ding business relatively undisturbed. Maintaining the business as a distinct crprate entity defines clear lines between the sharehlders and the business that imprve the prtectin f the sharehlders. Disadvantages f an S Crpratin 5 P age

8 Gd Business Practices Stricter Operatinal Prcesses. As a separate structure, S crps require scheduled directr and sharehlder meetings, minutes frm thse meetings, adptin and updates t by-laws, stck transfers and recrds maintenance. Sharehlder Cmpensatin Requirements. A sharehlder must receive reasnable cmpensatin. The IRS takes ntice f sharehlder red flags like lw salary/high distributin cmbinatins, and may reclassify yur distributins as wages. Yu culd pay a higher emplyment tax because f an audit with these results. LIMITED LIABILITY COMPANY (LLC) A limited liability cmpany is a hybrid type f legal structure that prvides the limited liability features f a crpratin and the tax efficiencies and peratinal flexibility f a partnership. The "wners" f an LLC are referred t as "members." Depending n the state, the members can cnsist f a single individual (ne wner), tw r mre individuals, crpratins r ther LLCs. Unlike sharehlders in a crpratin, LLCs are nt taxed as a separate business entity. Instead, all prfits and lsses are "passed thrugh" the business t each member f the LLC. LLC members reprt prfits and lsses n their persnal federal tax returns, just like the wners f a partnership wuld. Frming an LLC While each state has slight variatins t frming an LLC, they all adhere t sme general principles: Chse a Business Name. There are 3 rules that yur LLC name needs t fllw: (1) it must be different frm an existing LLC in yur state, (2) it must indicate that it's an LLC (such as "LLC" r Limited Cmpany") and (3) it must nt include wrds restricted by yur state (such as "bank" and "insurance"). Yur business name is autmatically registered with yur state when yu register yur business, s yu d nt have t g thrugh a separate prcess. Read mre here abut chsing a business name. File the Articles f Organizatin. The "articles f rganizatin" is a simple dcument that legitimizes yur LLC and includes infrmatin like yur business name, address, and the names f its members. Fr mst states, yu file with the Secretary f State. Hwever, ther states may require that yu file with a different ffice such as the State Crpratin Cmmissin, Department f Cmmerce and Cnsumer Affairs, Department f Cnsumer and Regulatry Affairs, r the Divisin f Crpratins & Cmmercial Cde. Nte: there may be an assciated filing fee. Create an Operating Agreement. Mst states d nt require perating agreements. Hwever, an perating agreement is highly recmmended fr multi-member LLCs because it structures yur LLC's finances and rganizatin, and prvides rules and regulatins fr smth peratin. The perating agreement usually includes percentage f interests, allcatin f prfits and lsses, member's rights and respnsibilities and ther prvisins. Obtain Licenses and Permits. Once yur business is registered, yu must btain business licenses and permits. Regulatins vary by industry, state and lcality. Use the Licensing & Permits tl t find a listing f federal, state and lcal permits, licenses and registratins yu'll need t run a business. Hiring Emplyees. If yu are hiring emplyees, read mre abut federal and state regulatins fr emplyers. Annunce Yur Business. Sme states, including Arizna and New Yrk, require the extra step f publishing a statement in yur lcal newspaper abut yur LLC frmatin. Check with yur state's business filing ffice fr requirements in yur area. LLC Taxes In the eyes f the federal gvernment, an LLC is nt a separate tax entity, s the business itself is nt taxed. Instead, all federal incme taxes are passed n t the LLC's members and are paid thrugh their persnal incme tax. While the federal gvernment des nt tax incme n an LLC, sme states d, s check with yur state's incme tax agency. Since the federal gvernment des nt recgnize LLC as a business entity fr taxatin purpses, all LLCs must file as a crpratin, partnership, r sle prprietrship tax return. Certain LLCs are autmatically classified and taxed as a crpratin by federal tax law. Fr guidelines abut hw t classify an LLC, visit IRS.gv. LLCs that are nt autmatically classified as a crpratin can chse their business entity 6 P age

9 Gd Business Practices classificatin. T elect a classificatin, an LLC must file Frm This frm is als used if an LLC wishes t change its classificatin status. Read mre abut filing as a crpratin r partnership and filing as a single member LLC at IRS.gv. Yu shuld file the fllwing tax frms depending n yur classificatin: Single Member LLC. A single-member LLC files Frm 1040 Schedule C like a sle prprietr. Partners in an LLC. Partners in an LLC file a Frm 1065 partnership tax return like wners in a traditinal partnership. LLC filing as a Crpratin. An LLC designated as a crpratin files Frm 1120, the crpratin incme tax return. Cmbining the Benefits f an LLC with an S-Crp There is always the pssibility f requesting S- Crp status fr yur LLC. An attrney can advise yu n the prs and cns. Yu'll have t make a special electin with the IRS t have the LLC taxed as an S-Crp using Frm Yu must file prir t the first tw mnths and fifteen days f the beginning f the tax year in which the electin is t take effect. Fr mre infrmatin abut S- Crp status, visit IRS.gv r read Shuld My Cmpany be an LLC, an S-Crp r Bth? The LLC remains a limited liability cmpany frm a legal standpint, but fr tax purpses it can be treated as an S-Crp. Be sure t cntact the state's incme tax agency where yu plan t file yur electin frm. Ask abut the tax requirements and if they recgnize electins f ther entities (such as the S-Crp). Advantages f an LLC Limited Liability. Members are prtected frm persnal liability fr business decisins r actins f the LLC. This means that if the LLC incurs debt r is sued, members' persnal assets are usually exempt. This is similar t the liability prtectins affrded t sharehlders f a crpratin. Keep in mind that limited liability means "limited" liability - members are nt necessarily shielded frm wrngful acts, including thse f their emplyees. Less Recrdkeeping. An LLC's peratinal ease is ne f its greatest advantages. Cmpared t an S-Crpratin, there is less registratin paperwrk and there are smaller start-up csts. Sharing f Prfits. There are fewer restrictins n prfit sharing within an LLC, as members distribute prfits as they see fit. Members might cntribute different prprtins f capital and sweat equity. Cnsequently, it's up t the members themselves t decide wh has earned what percentage f the prfits r lsses. Disadvantages f an LLC Limited Life. In many states, when a member leaves an LLC, the business is disslved and the members must fulfill all remaining legal and business bligatins t clse the business. The remaining members can decide if they want t start a new LLC r part ways. Hwever, yu can include prvisins in yur perating agreement t prlng the life f the LLC if a member decides t leave the business. Self-Emplyment Taxes. Members f an LLC are cnsidered self-emplyed and must pay the self-emplyment tax cntributins twards Medicare and Scial Security. The entire net incme f the LLC is subject t this tax FINANCIAL MANAGEMENT Benefits f Financial Management Quality financial management ffers many benefits t yu as a business wner. Financial management includes bkkeeping, prjectins, financial statements, and financing, which frms the fundatin fr reaching yur gals thrugh sund business decisins. Financial management is ne f yur main avenues t success as a business wner. Financial management is the way yu knw if yu are making a prfit. Financial management helps yu decide what yu can affrd in terms f stre r ffice lcatin, inventry purchases, emplyees, and equipment. Yu need sund financial infrmatin t set yur prices and select yur vendrs. Financial management gives yu the tls t plan fr verall business grwth, fr diversificatin f yur prduct lines, r fr reaching new markets. Financial management helps yu decide which prducts, services, and markets are prfitable. Effective financial management gives yu tls t chart yur curse int the future, adjust yur directin when needed, 7 P age

10 Gd Business Practices and help yu find yur way thrugh challenging times. If yur business grwth requires financing (lans), financial management prvides the infrmatin t knw hw much yu can affrd fr yur business. Financial management gives yu nt nly the dcumentatin needed fr a lan applicatin, but als helps yu discuss yur business circumstances with a lender in terms that imprve yur ability t qualify fr the lan. BUDGETING Creating a budget is the first place t start with yur financial management practice. A budget is a list f all yur (mnthly r yearly) expenses, rganized by categries. A budget is a tl that helps yu: Track all yur business expenses Plan fr the future Ecnmize when yu need t Plan fr expansin Make a prfit Once yu create a budget, use it t cmpare what yu ve budgeted with yur actual expenditures. BOOKKEEPING Bkkeeping is the rganized prcess f tracking all incme and expense transactins. Bkkeeping is a critical cmpnent f financial management, which leads t better business decisins regarding financing, taxes, wner s draw, and retirement. Here are eleven basic bkkeeping steps: 1. Obtain business accunting sftware. Prper sftware selectin is critical fr success. 2. Open a separate business checking accunt. D nt mix business and persnal checking accunts. 3. Recncile yur checking accunt. Each mnth, recncile yur accunt using business accunting sftware r a clud cmputing recnciliatin prcess. 4. Track sales. Create an airtight system fr tracking sales using tls such as a register tape, invices, and a sales bk. Always use this sales tracking system. 5. Depsit all sales. Using the duplicating depsit slips, depsit all sales in yur business checking accunt. Ttal sales shuld equal ttal depsits. D nt spend cash sales. Link all frms f sales dcumentatin (such as invices, cash register tapes, and sales bks) with a specific depsit. 6. Write business checks fr all business expenses (r use a business check card). Dn t use a petty cash system until yu are experienced at bkkeeping. 7. Obtain a separate business credit card. If yu plan t use a credit card fr business expenses, cnsider btaining a card in yur cmpany s name. Ding s will help yu keep track f business expenses. 8. Pay business expenses first. Mst businesses start ut as a sle prprietrship. In sle prprietrships, yu, the wner, d nt get a salary; rather yu take an wner s draw. A cmmn questin is hw much draw t take? Here s a rule f thumb: Sales pays fr business expenses first, persnal expenses secnd (step 10, belw). 9. Run a prfit and lss (P&L) statement. A checking accunt balance is nt a gd indicatin f hw much prfit the business has made r what amunt is available fr wner s draw. A P&L statement can prvide a better picture f the financial health f the rganizatin. 10. Pay yurself with wner s draw. Owners shuld pay themselves by writing a check r making an electrnic transfer frm the business accunt t a persnal accunt. If yu are a sle prprietr, assign thse draw checks t an equity accunt called Draws. CASH FLOW Develping a Cash Flw Analysis Fr small businesses, cash is king. Yu need it t start, perate, and expand yur peratins, but many small business wners ften have truble managing and maintaining cash. Inaccurate cash flw analysis - r lack f available cash - can affect the everyday peratins f yur business and yur eligibility t receive a lan. Cash flw is the mvement f mney in and ut f yur business. The prcess includes: 8 P age

11 Gd Business Practices Inflw which cmes frm peratins such as the sale f gds and services, lans, lines f credit, and asset sales. Outflw which ccurs during peratins such as business expenditures, lan payments, and business purchases. It's crucial t balance these tw figures and maintain a reasnable balance f cash at all times. An effective cash flw system will help yu manage funds t cver peratinal csts and bills and help yu fresee ptential prblems in the future. Prfit and lss statements and incme statements can be used t determine prjectins fr future cash flw trends f yur business. These financial dcuments are instrumental in making cash flw prjectins. Hwever, a cash flw statement serves an imprtant and independent purpse - it accunts fr nn-cash items and expenses t adjust prfit figures. Cash flw analysis statements display nt nly changes ver time, but als available net cash. Cash flw analysis statements are generally separated int three parts: Operating activities: This sectin evaluates net incme and lses f a business. By assessing sales and business expenditures, all incme frm nn-cash items is adjusted t incrprate inflws and utflws f cash transactins t determine a net figure. Investment activities: This sectin reprts inflws and utflws frm purchases and sales f lng-term business investments such as prperty, assets, equipment, and securities. Fr example - if yur cnstructin business purchases an additinal industrial generatr, this wuld be cnsidered an investment and accunted fr as an utflw f cash. If yur business then sld equipment that was n lnger needed, this wuld be cnsidered an inflw f cash. Financing activities: This sectin accunts fr the cash flw trends f all mney that is related t financing yur business. Fr example: if yu received a lan fr yur small business, the lan itself wuld be cnsidered an inflw f cash. Lan payments wuld be cnsidered an utflw f cash, and bth wuld be recrded in this part f the cash flw analysis statement. Cash Flw Prjectin A cash flw prjectin is a financial statement that tries t shw hw cash is expected t flw in and ut f a business ver a future perid f time. A cash flw prjectin is used t see if prjected cash receipts (in flws) will be sufficient t cver prjected cash disbursements (ut flws). A business can be prfitable and still run ut f cash. As an investment banker might say, Cash flw prjectins prvide the visibility needed t avid liquidity prblems. In ther wrds, a cash flw prjectin is a tl t help yu manage yur cash s yu can pay yur bills n a timely basis and keep the drs f yur business pen. A cash flw prjectin is a great tl fr setting sales gals and fr planning fr expenses t supprt thse sales. A related use fr a prjectin is t determine yur breakeven pint during a start-up r expansin phase. If yu need t plan fr a large expenditure, such as an equipment purchase r mve t a new lcatin, a cash flw prjectin is the perfect tl. Similarly, if yu have a seasnal business with large inventry purchases, a prjectin can help yu have the cash n hand t make a large inventry investment when yu need it. A P&L statement can mask cash shrtages if yu use accrual accunting. A cash flw prjectin helps yu see the cash status f yur business nw and plan int the future. A cash flw prjectin is a gd way t prepare and plan fr yur financing needs and is ften a required part f a business lan applicatin. PROFIT AND LOSS (P&L) STATEMENT The P&L statement is the best tl fr knwing if yur business is prfitable. A P&L statement measures revenue (als called sales r incme) and expenses ver a mnth, quarter r year. With it yu knw if yu have made a prfit (and hw much) r if yu have incurred a lss. The mst imprtant financial management reprt is the P&L statement. A P&L statement will reflect yur business decisins n the basic buying and selling prcess. A P&L will tell yu hw well yu are managing yur business and prvide infrmatin n hw t grw yur business. Basic Frmula fr P&L Statement + Sales Cst f Gds Sld = Grss Prfit 9 P age

12 Gd Business Practices Overhead = Net Prfit Sales (als called Incme r Revenue): Ttal amunt frm selling yur prduct r service during a certain time perid. Cst f Gds Sld: Ttal expenditure fr inventry items which custmers buy. Cst f Gds Sld cnsists f the cst f purchasing the items, freight, manufacturing csts, mdificatin csts, and packaging. Fr services, this is the cst f prviding the services, including labr, material used, and transprtatin. Grss Prfit: Sales less Cst f Gds Sld. Overhead: Expenses assciated with yur nging business peratin, such as rent r utilities. Net Prfit: Grss Prfit less Overhead. Net Prfit is what remains t pay fr expansin, equipment, lan repayment, incme taxes and wner s draw. Cmpiling a P&L Statement All quality business accunting sftware prgrams cmpile a P&L statement at the push f a buttn. The accuracy f yur P&L statement will depend n hw it is set up fr yur cmpany and yur input data. Print ut yur P&L regularly t track yur business prgress. Use yur P&L statement as the basis fr building a cash flw prjectin. FOUR KEY POINTS TO REMEMBER 1. Start financial management with a budget. 3. Sund bkkeeping is the basis fr all financial management. 4. Cash flw prjectins will help yu t see cash shrtages even when accrual accunting may mask these shrtages. 5. A Prfit & Lss (P&L) statement is the best tl fr knwing if yur business is prfitable. TIME MANAGEMENT Imprtance f Time Management Is the saying, Time is mney, true? If yur business runs ut f mney, yu always have the pprtunity t get mre. Mre mney is simply a jb away. On the ther hand, nce time is past yu can never get that time back nr can yu add mre hurs t a day. Yes, pr time management can cst yu and yur business tremendus amunts f mney. Realize, hwever, that the better yu manage yur time the mre mney yu can earn. With time management, business wners maximize hw much they get dne each wrking day. Having a written time management plan serves as a guide fr wrking smarter instead f harder. TIME MANAGEMENT PLAN The first step t better time management is a time management plan. A gd time management plan must be in writing, cntaining a list f priritized tasks, n a daily, weekly, and mnthly basis, fr achieving yur gals. Then, use the time management plan t help yu priritize yur wrk. A time management plan will keep yu fcused and n target t cmplete the mst imprtant needs in the day. Prper gal setting starts with knwing what yu want t accmplish. Try t write yur gals using the fllwing SMART frmat: Specific state the gal precisely. Measurable gd measures allw yu knw when a gal is cmpleted. Attainable resurces needed t cmplete the gal are within yur reach. Relevant the gal is applicable t yur business. Time Bund the gal has a cmpletin date r timeframe fr being achieved. Key Element 1: Clearly Defined Written Gals Start yur time management plan with clearly defined gals. What d yu want t d? What d yu want t be? What d yu want t have? Yur time management plan will be derived frm these stated gals. When writing yur gals, identify each f them as a shrt-term (quarterly), mid-term (12 mnths), r lng-term tw t five years) gal. Key Element 2: Detailed List f Tasks Breakdwn each gal int a set f clearly defined tasks that need t be cmpleted t accmplish the gal. Gals d nt get accmplished n their 10 P age

13 Gd Business Practices wn. Breaking dwn gals int written tasks allws yu t see and understand what actins are required. The task list will als help yu t see what resurces are needed and hw t allcate them. Yu may see areas where resurces are lacking. Use the task list t start identifying ways t get the tasks dne in a timely manner. Key Element 3: Priritizatin f the Tasks With any task r t-d list, sme items n the list will be mre imprtant than thers. Always try t cmplete the mst imprtant tasks first because these tasks will usually have the greatest impact n yur gals and, by extensin, yur bttm line. Hwever, sme less imprtant tasks may becme critically urgent. Fr example, if yu have an nging task t pay all yur bills n the 15th f each mnth and yu frget t pay the electric bill, the unpaid bill will becme a high pririty t avid an interruptin in service. Key Element 4: List f Imprtant Onging Business Functins Many times, imprtant nging business functins are nt directly related t a gal and are nt listed as steps r tasks. Hwever, these functins abslutely must be cmpleted t cntinue business peratins. A cmplete list f key cmpnents f yur business peratins may nt be attached t a gal but needs t be included in yur time management plan. T start, here are examples f tasks that yu might need t perfrm n a daily, weekly, r mnthly basis. Key Element 5: Built in Flexibility Each day has nly 24 hurs. Yur time is limited. By assigning a time estimate t cmplete each priritized task, yu can plan yur day such that the mst imprtant tasks are always cmpleted in a timely manner. When scheduling, avid filling every hur f the day with tasks. Leave plenty f unscheduled time fr flexibility. PRIORITIZING TASKS Small business wners are usually juggling many pririties and respnsibilities. The key element t making yur time management plan wrk mst efficiently is t priritize yur tasks. Yur tasks will range in imprtance frm being extremely critical t success, t smething that wuld be nice t have dne, t an actin that wuld nt matter much even if the actin never gt dne. Paret Analysis The Paret principle, upn which Paret analysis is based, is ften referred t as the 80/20 rule, which states that 20 percent f a persn s effrt will prduce 80 percent f the result. Fr example, if yur gal is $100,000 in sales, 20 percent f yur effrt tward this gal will result in $80,000 in sales. The remaining 80 percent f what yu d will nly result in the remaining $20,000. Use Paret analysis t priritize yur time n tasks that prduce the best verall result. Small business wners need t understand the Paret principle because they are usually juggling many pririties. ABC Methd Anther cmmn methd fr priritizing tasks is the ABC methd, which ranks each task with the letter A, B, r C. The mst imprtant tasks n yur time management plan are given the letter A, less imprtant tasks the letter B, and the least imprtant tasks the letter C. Once each task is assigned a letter, the subtasks fr each task (A, B, and C) are further priritized by number (1, 2, and 3). A task identified as A-1 is cmpleted befre task A-2, which is cmpleted befre task B-1, and s n thrugh all the tasks. The ABC methd can be cmbined with Paret analysis. Eisenhwer Methd The Eisenhwer methd is named after President Dwight D. Eisenhwer, wh said, What is imprtant is seldm urgent and what is urgent is seldm imprtant. T use the Eisenhwer methd, take the tasks created frm yur gals, alng with yur nging business peratinal needs, and srt them int fur categries: 1. Urgent and imprtant d these tasks immediately. 2. Imprtant but nt urgent put these tasks n yur calendar fr at a later time. 3. Urgent but nt imprtant delegate these tasks t smene r assign the tasks t the lwest pririty. 4. Nt imprtant and nt urgent these tasks may never get dne because tasks in the ther three categries will take pririty. 11 P age

14 Gd Business Practices Priritize by Organizing, Streamlining, Ecnmizing, and Cntributing (POSEC) Methd The POSEC methd assumes that t accmplish a gal, attentin must be fcused n daily respnsibilities. Starting with priritize, yu mve thrugh each cmpnent f the POSEC methd. The details f the POSEC methd f time management are: Priritize arrange yur tasks in rder f imprtance based n yur gals and available amunt f time. Organize prvide a structure fr yur mst basic tasks, especially thse that are perfrmed n a daily basis. Streamline simplify nuisance tasks, such as thse tasks that are required fr peratins but are yur least preferred tasks. Ecnmize achieve thse things yu wuld like t d but fall lw n yur list f pririties. Cntribute ccurs when tasks are cmpleted and yu are able t give back t sciety r t thse wh are in need f yur help. ALLOCATING TIME After priritizing yur tasks fr each day f yur wrk week, estimate the amunt f time needed t cmplete each task n each day. Yu knw hw many hurs yu have t wrk n yur business each day. If yu wrk a full-time jb and are a part-time business wner, yu may nly have fur hurs; a full-time cnsulting business wner may have eight hurs; while a full-time retail stre wner may have twelve hurs. The amunt f available time may als vary due t family cmmitments such as children r aging parents. As yu estimate the amunt f time needed t wrk n tasks each day, d nt fill up every minute f every day. Allcate abut 75 percent f yur wrk day t tasks listed in yur weekly time management plan. The remaining 25 percent prvides time fr breaks and fr any unexpected issues. On days that g accrding plan, use the extra 25 percent f yur time fr things such as additinal netwrking, business develpment, handling lwer pririty tasks, rganizing yur wrk area, r research. WORK YOUR PLAN Gals d nt get achieved by wishful thinking nr des yur business succeed with just hpes and dreams. Yur time management plan must wrk. T make yur plan wrk, yu must wrk yur plan. D nt put yur time management plan n a shelf t gather dust. Actin is what mves items frm being thughts, ideas, and gals int reality. T help make yur plan wrk, use a timer r cell phne alarm t alert yu when the alltted time fr a task has ended. Remember t cmplete deadline and highest pririty tasks first t get the mst impactful, and smetimes mst stressful, items ff yur plate early. D nt wrk n any ther tasks until yur greatest pririties fr the day are finished. Include 15 t 30 minutes in yur schedule each day t manage yur business. Als include 10 t 15 minutes at the end f each day t review the tasks fr the next day in yur time management plan. On the last business day f yur wrk week, allcate at least an hur t write and priritize yur five-day weekly plan fr the fllwing week. Daily REVIEW & UPDATE YOUR PLAN As each task is cmpleted, crss it ff yur list. Understand that critical tasks may nt get dne in yur spare time, s allcate time t cmplete these tasks first. Weekly On the last day f yur wrk week, allcate at least an hur t write and priritize yur five-day weekly time management plan fr the fllwing week. Befre writing yur next weeks time management plan, lk at any utstanding tasks frm the current week, including tasks that ppped up as the week prgressed. As yu reflect back ver yur week, ask yurself: Have I prperly inviced everyne based upn their activities? Hw did I d with time management and prductivity this week? What culd I d differently? D I need t allcate my time differently? Hw well did I manage distractins? Priritize any utstanding tasks frm the current week and add them t the time management plan 12 P age

15 Gd Business Practices fr next week, based n where the tasks fit int the list f priritized tasks fr next week. When preparing yur time management plan fr next week, yu shuld assess hw accurate yur estimates f time were fr the preceding week. Als assess if the number f tasks included in daily and weekly plans shuld be reduced, increased, r left as is. T much stress may mean yu may have t many tasks in yur plan. Evaluate whether yur highest pririty tasks are apprpriately ranked. Mnthly Yur weekly time management plans cmbine t determine yur prgress fr the mnth. At the end f the third week f the mnth, assess yur prgress tward yur mnthly and quarterly gals. Ask yurself: Hw am I ding tward my mnthly and quarterly gals? What adjustments, if any, d I need t make in my time management plan fr the last week f this mnth t achieve my mnthly and quarterly gals? Yearly Yur five-day weekly time management plan lists everything that needs t be dne every day f the week t achieve yur gals, cmplete prjects efficiently and n time, and effectively handle all activities necessary t run yur day-t-day business. This priritized list becmes yur rad map r guide fr each week. The weeks cmbine t guide yu thrugh a mnth, and the mnths cmbine t guide yu thrugh the year. FOUR KEY POINTS TO REMEMBER 1. An effective time management plan has 5 imprtant elements: 1. Clearly defined written gals 2. Detailed list f tasks 3. Priritizatin f the tasks 5. Built in flexibility 2. Use written SMART gals with steps and tasks t create clarity f fcus. The frmat shuld be: Specific The gal states exactly what is t be dne Measurable The pint at which yu knw yu cmpleted the gal Attainable Yu already have, r have the ability t get, the resurces needed t cmplete the gal Relevant What yu have stated yu will accmplish is within the true realm f pssibility Time Bund The cmpletin date r timeframe fr achieving yur gal 3. The fur ways t priritize tasks fr writing yur time management plan are: 1. Paret analysis 2. ABC methd 3. Eisenhwer methd 4. POSEC methd 4. Update time management plans daily and weekly. REFERENCES IRS.gv: Business Structures: &-Self-Emplyed/Business-Structures SBA.gv: Managing a Small Business: SBA.gv: Time Management fr Small Business: ICIPANT_GUIDE_TIME_MANAGEMENT.pdf SBA.gv: Learning Center : 4. List f the imprtant nging business functins 13 P age

16 Quiz Questins 1. What is the simplest and mst cmmn structure chsen t start a business? Limited Liability Cmpany Sle Prprietrship Partnership S Crpratin 2. Sle Prprietr business uses what tax frms? Schedule C Frm 1040 Nne f the abve Bth A and B 3. What are sme f the Advantages f a Sle Prprietrship? Easy and inexpensive t frm Cmplete Cntrl Easy tax preparatin All f the abve 4. What tl wuld yu use t find a listing f federal, state and lcal permits, licenses and registratins t help run a business? Obtain business accunting sftware IRS.gv Secretary f State ffice Licensing and Permits tl 5. What is cnsidered a Partnership business? A single business where ne persn has wnership A single business where tw r mre peple share wnership 14 P age

17 A crpratin created thrugh an IRS tax electin Independent legal entity wned by sharehlders 6. A partnership must file t reprt the incme, deductins, gains and lsses frm the business s peratins. Schedule C Annual infrmatin return Frm 1065 Frm W-2 7. Wh is held legally liable fr the actins and debts the business incurs in a crpratin? The crpratin The custmers The banks The share hlders 8. Crpratins are required t pay? Federal tax State tax Lcal tax All f the abve 9. True r False. Unlike sle prprietrs and partnerships, crpratins pay incme tax n their prfits. True False 10. What is ne f the disadvantages f a crpratin? Crprate tax treatment Limited liability Duble taxing Nne f the abve 15 P age

18 11. What crpratin wuld yu pen t avid duble taxatin? Limited Liability Crpratin C Crpratin Partnership S Crpratin 12. What is the articles f rganizatin? Defines clear lines between the sharehlders and the business that imprve the prtectin f the sharehlders An perating agreement that structures yur LLC s finances Is a simple dcument that legitimizes yur LLC and includes yur business name, address and member s names Nne f the abve 13. What makes the S Crp different frm a C Crp? Prfits and lsses can pass thrugh t yur persnal tax return IRS cnsiders it t be a unique entity, separate and apart frm thse wh wn it Only the sharehlders are taxed nt the business All f the abve 14. True r False. Members f an LLC are cnsidered self-emplyed and d nt have t pay the self- emplyment tax cntributins twards Medicare and Scial Security. True False 15. What are the benefits f financial management? Let s yu knw if yu are making a prfit Helps yu decide what yu can affrd in all aspects f the business Gives yu the tls t plan fr verall business grwth All f the abve 16 P age