What is a Profit and Loss Statement?

There are 3 main financial measures that provide you, the business owner, with the financial health of your company: 

  1. Profit and Loss
  2. Balance Sheet
  3. Cash Flow Statement

Income Statement 

Today we are going to take a deeper look at the Profit and Loss, otherwise known as the Income Statement. In a nutshell, the Profit and Loss shows you if your business is making money or not. The Profit and Loss shows you the summary of your revenue or income in relation to your expenses over a period of time.

Your income for your business is the money you are making from your clients. You are charging your clients for a product or a service that your business provides. Maybe you are providing ski lessons and charging your clients for your expertise. Maybe you are making delicious cookies and selling cookies to your clients. Either way, the money you are generating is your income or otherwise known as your revenue.

On the flip side, your business is spending money. You have to purchase your raw materials or pay for software. Maybe you are buying chocolate chips for cookies. Maybe you need software so that clients can book a lesson. You will have insurance for your business. You might have utilities or rent. Perhaps you are paying for labor. Whatever those expenses might be, it is important to know what you are spending, especially in relation to your revenue.

Net Profit

Your net profit is the difference between your income/revenue and your expenses. Your business is profitable…in other words, you are MAKING money if your income is more than your expenses. This is where you want to be. On the other hand, you are at a LOSS if your expenses are more than your income. You won’t know if you are in that position unless you are keeping an accurate set of books. 

As a business owner, you MUST know this about your business. You have to know if you are profitable or not in order to make decisions about your business. 

The Profit and Loss is a measure of your business over time. We can look at your Profit and Loss for a month at a time, a quarter at a time, or for a full year. Larger periods of time give you important big-picture information. Smaller periods of time might show you that in April your expenses are very high compared to your income. Maybe you have software subscriptions that get renewed in April. Or you might see that in October your revenue drops. No one is skiing in October. Can you figure out how to make some passive income in October or offer specials for the upcoming season? Those types of analytics help you make changes or adjustments in your business so that you can cover seasonality or patterns.

Now let’s talk a little more in-depth about the types of revenue and expenses.  

Categorize Revenue and Expenses

For a small business, the revenue is typically fairly easy to categorize. You might be an electrician so you are providing a service and selling parts. You can group all of your sales into one category and simply call it sales. Or you might want to break it into two categories: 

  • Services
  • Sales of Product

This would give you additional detail about how your business is making money. These should be big-picture categories.  

Expenses are a little more complicated because you need to categorize these based on tax rules in order to consider them deductions.

These categories can include items like: 

  • rent
  • insurance
  • subscriptions
  • utilities
  • payroll/labor
  • gas
  • raw material costs
  • cost of goods
  • etc.  

These must be carefully categorized to fully take advantage of your allowed deductions…a topic for another day but just remember, categorizing your expenses will save you in taxes.

Remember, regardless of how many categories you have, your total INCOME/REVENUE minus your total EXPENSES will determine your profitability.

Make Good Business Decisions

In a nutshell, are you making money? Is your business in the red or in the black? I like to tell my clients, while you might love what you’re doing if you’re not making money, then this is just a hobby. You better REALLY love your hobby if you’re willing to lose money! It is important that you know if you are making money or not. If you’re losing money, you might throw in the towel and read a good book…

If you are making money, how can you maximize your revenue? How can you minimize the time you spend working in the business by hiring appropriately? How can you determine when you should buy that new piece of equipment your business needs?  

Your profit and loss or income statement can help you steer your company into a path of success. Questions? Feel free to contact us!

Tips for Avoiding an Audit

No one wants to go through an audit. Just the word “audit” forms a pit in your stomach and causes you to cringe. Audits are time-consuming and costly.

Avoiding an audit should be a concern of any business owner. While there’s no way to guarantee you won’t be audited, there are steps you can take to avoid triggering an audit.

9 Things to Do to Avoid an Audit

1. First and foremost, PAY YOUR TAXES!

Make quarterly estimated tax payments and always be sure to pay your payroll taxes. File your annual taxes on time and make your tax payments.

2. Issue 1099s and W2s on time.

These are both required to be filed and remitted to employees/contractors no later than January 31. Filing these late is a red flag to the IRS.

3. Don’t mix business and personal.

Many small business owners try to deduct travel, vehicles, cell phones, etc that are not truly business. While some of these might be legitimate business deductions, be sure you understand the rules surrounding these “fuzzy” deductions.  

4. Pay officers/owners a reasonable salary.

Do not inflate salaries for officers or owners of small businesses. Inflated salaries will trigger the IRS to take a closer look. On the flip side, low salaries for business owners are also a red flag. The IRS requires that business owners pay themselves a “reasonable” salary for their work in the business. Your CPA should help you decide what “reasonable” looks like for your business. 

5. Be very careful of travel and meals.

Only true business travel and meals should be deducted.  This is a hot topic for the IRS. Excessiveness in this area will trigger an audit.

6. Only deduct your home office if you meet the criteria.

This is a particular topic that the IRS will focus on. Remember that your home office must be a dedicated space that is used exclusively for business. A dining room table does not qualify. 

7. Do not show a loss year after year. 

This becomes a yellow flag if you continue to show a loss for multiple years in a row.

8. Be very careful of treating labor as a contractor vs. an employee.

If you are paying people with 1099 wages as a contractor but they should be considered an employee, you are sending flags to the IRS and to your State tax agencies.

9. Keep a clear, accurate, and timely set of books.

Use bookkeeping software and ideally, a professional bookkeeping and financial services provider.

While there is NO guarantee that you will not be audited, following the above guidelines will help. Keep your business running smoothly by taking steps to avoid the disruption of an audit.

7 Financial Must-Dos for Small Businesses

If you own a business or are planning to start a small business, these are the essential practices to ensure that you are financially responsible. These steps will set your business up for success.

1.  Obtain an EIN number:

An EIN number is essentially a social security number for your business. By obtaining an EIN number, you are creating a level of separation between you personally and your business. You will need to provide your EIN number to others as you do business. This way, you are protecting your Social Security number and preventing identity theft.You can contact a professional to help you, or if you are comfortable, you can set this up by navigating the IRS website.

2. Open a bank account in the business name

Open a business bank account. Deposit all your income into this account and pay for all of your expenses from the business bank account. This will ensure that your bookkeeping is simple and accurate. It legitimizes your business. It captures your income and expenses for tracking profitability and preparing for taxes.

3. Form relationships with professionals

Every small business should have relationships with professionals who will help ensure the success of the business. These relationships include: lawyer, CPA, bookkeeper and insurance agent at the very least. You will likely also need an IT specialist and a banker. Forming these relationships and hiring the right professionals will foster the growth and success of your business.

4. Do your books

We cannot stress that you must have a bookkeeping system in place. You need to do your books yourself in a timely and accurate manner OR outsource your bookkeeping. This is the core measure of the financial stability of your business. It will help you make decisions about your company. Without an accurate set of books, you cannot file taxes, cannot obtain business financing, and you cannot make informed decisions about your business. We recommend that you use a professional.  You might want to do this yourself as a business owner and you might have the skills to do so.  As a business owner, you will wear many hats, you will be pulled in a lot of directions and books tend to be put to the bottom of your to do list.  Outsourcing them is a great option.

5. Pay your estimated taxes/payroll taxes

Stay on the good side of the IRS by paying your taxes. Keep yourself out of trouble with the IRS and prevent yourself from needing to come up with a lump sum when you file your taxes. It is difficult. We get it. Cash flow is an issue and paying taxes is the last thing anyone wants to do. But you won’t do yourself any favors by skipping these payments. You will need an accurate set of books to determine how much to pay on a quarterly basis.

6. Track your profit

You may have started your business because you have a hobby that you’ve turned into a business. But to stay in business, you must be profitable. Track your profitability by having a bookkeeping process in place and operating. 

7. Keep your receipts

You must keep your receipts. Many business owners believe that your bank/credit card statement is sufficient. It is not. If you are audited, the IRS will want to see actual receipts or electronic copies of receipts.  We recommend that you store receipts electronically.

Follow these practices to help ensure the financial health of your small business. Bookkeeping and Financial Service Providers such as Incline Business Essentials can help you with these steps. 

New Colorado Employer Requirements: Colorado Secure Savings and Family and Medical Leave

There are two very important Colorado requirements that will be affecting EVERY business owner with payroll. Please note, we are NOT HR experts. The purpose of this article is to give you a brief overview of these requirements and how it will affect your business.

Colorado Secure Savings Program:  

  1. This program was voted into legislation in 2020. This is a way for employers to provide a platform for employees to save for their future. Employers will be required to provide a savings program such as an IRA OR employers will be required to offer the savings program through the state run Colorado SecureSavings platform. This particular program is for companies with five or more employees. As of Jan 1, 2022, you will be required to comply.
  2. Colorado has very few details available for this program as they are in the process of working out the fine print. We DO know that this will be an “Opt Out” program meaning employees will be AUTOMATICALLY signed up and will need to “Opt Out” if they do not wish to participate.  
  3. From our understanding, Employers will not need to match the savings. However, employers are REQUIRED to facilitate the operations. Employers will withhold funds from the employee paycheck and will remit those funds to the Colorado SecureSavings account or IRA/retirement account.

If you prefer to set up an IRA or 401K plan for your employees (rather than using the state run Colorado SecureSavings program), we recommend that you do so VERY SOON. We have relationships with several brokers who can help you with this. Contact us if you are interested.

Family and Medical Leave Insurance Program:

  1. This program applies to ALL employers regardless of the amount of employees you have. If you have employees, you need to understand these requirements.
  2. This is designed to help you employees receive pay when sick or other medically allowed life events as defined by the state of Colorado.
  3. Employers and their employees are both responsible for funding the program and may split the cost 50/50. The premiums are set to 0.9% of the employee’s wage, with 0.45% paid by the employer and 0.45% paid by the employee. Employers may also elect to pay the full amount if they choose to offer this as an added perk for their employees.
  4. Businesses with nine or fewer employees do not have to contribute to the program but do need to remit their employees’ share (0.45%) of the premium on behalf of employees each quarter. This can be done through a simple payroll deduction. Employers are required to begin these premium deductions on January 1, 2023. All employers, regardless of size, will be required to register with the FAMLI Division before the first premium payment is due at the end of the first quarter of 2023. Benefits will become available to workers starting in January 2024.

The team at Incline Business Essentials is becoming familiar with the requirements and will help you facilitate through your payroll process. We will help you every step of the way BUT you will have to be involved as the owner of the business. Please note that this will be additional work on our end and we will be billing accordingly. As the State requires additional layers to your responsibilities, it is our goal to assist you in every way possible.

Be Ready for Q4 2022

Can it truly be?  It is almost the final quarter of 2022.  Wow. 

As we approach this quarter, please be aware of the bookkeeping and financial items that will need to be completed:

  1. We will be meeting with you to get through any questions we have about your books.
  2. If you are a business owner who needs to run payroll for yourself, this will need to happen in the next couple of months.  If you haven’t been running a regular payroll, you may need to pay a chunk of change to the IRS/State before the middle of December. Start saving!
  3. We will be gathering W9s to be prepared to issue 1099s in January. We will reach out as needed.
  4. If you need to do some financial planning with your CPA, this should be done October/November.  We can provide your CPA with current financials so that your CPA can: recommend payroll, recommend tax payments that need to be completed before the end of the year, make recommendations for large purchases such as a new vehicle, etc.  

Be ready as we start reaching out to fine tune the books and be as prepared as possible to close your books early in 2022.

Why You Need Bookkeeping

If you run a business, the act of bookkeeping is essential. Let’s start by defining bookkeeping. What exactly is “Bookkeeping?”

Bookkeeping is the process of recording the financial transactions of your company. Bookkeeping categorizes the money coming into your business as income. Expenses refer to money that your business spends in order to operate. The act of bookkeeping organizes your expenses into categories that are used to file your taxes.

Now let’s talk about why this matters.  

File Your Taxes

As a business owner, you will likely hire a CPA to file your taxes. You will need to provide the CPA with your income and your expenses. Your taxes cannot be filed without this information. This leads to the next important reason for keeping an accurate set of books.  

Pay Fewer Taxes

This is probably the most attractive reason to have a bookkeeping system in place. Bookkeeping identifies all of your transactions so that nothing slips through the cracks. You must categorize each and every transaction that goes through your bank account. By keeping an accurate set of books, you will know exactly what you spend on gas or office supplies, or advertising. When you are gathering your data at the end of the year, you aren’t trying to remember how much you spent on that new computer or which client you took to lunch in May. Without a clear bookkeeping system, you will invariably miss out on deductions. You must have a plan and a process to ensure that deductions are captured.

Your expenses must be organized into categories approved by the IRS in order to be considered “deductions”. Without deductions, you will pay taxes on the entire income of your business. With deductions, you will rightfully cut this tax bill thereby saving you and your business money. For example, if your business brings in $100,000 without deductions, you might pay the IRS upwards of $25,000. But, if you can clearly show business expenses of $60,000, you might pay $10,000. This is a tax savings of $15K — not just nickels and dimes!

Track Your Profit

Profit is a key indicator of your business’s success. You can only determine your profitability if you are tracking your income and expenses.

Make Decisions About Your Business

Bookkeeping can help you make decisions about your business. Is it a good time to hire? Should you be increasing your prices? Are you spending too much on utilities? These decisions are guided by your business’s financial health.

Financing

In order to get financing for your business, you will need to provide the lender a set of books showing your income and expenses. Banks will require you to show your expenses vs. your revenue, otherwise known as your Income Statement or Profit and Loss. Bookkeeping will provide this report.

Catch Mistakes

Were you overcharged or charged twice for a service? Are you paying for a subscription that you are no longer using? You will catch these transactions through your bookkeeping because you are looking closely at every transaction.

Where Is Your Money Going?

Through bookkeeping, you will understand where your money is going.  This will help you budget and plan cash flow for the development of your business.

Bookkeeping will save you money by saving on taxes, cutting down on mistakes, guiding you through financial decisions, and improving your cash flow.  Business owners often want to do this on their own. Sometimes this works. But often the books are the piece of the business that well-intentioned owners plan to do and just don’t have enough time in the day.  

Bookkeeping is essential but it does take time, pulling you away from your actual business and preventing you from focusing on your clients.  As a business owner, you wear so many hats.  This is one that you can easily outsource with confidence. Reach out for a complementary consultation to see if our services would be a good fit for your business.

Subcontractor Compliance and 1099s

This is the time of year that we start preparing for 1099s and Insurance Audits.1099s must be issued in January for all appropriate subcontractors. Insurance Audits apply only to those of you whose insurance companies require the annual audit. You know who you are!

Our Incline Team will be working together to facilitate this process. You may be hearing from an unfamiliar team member. Please know that this is our team collaborating and assisting one another to efficiently handle this process.  

Subcontractors and 1099s

As a business, you are required to issue 1099s to any individual OR unincorporated business that you pay more than $600 for a service within the fiscal year. For example, if you pay someone $800 to install shelving in your office, you must issue a 1099 to that individual. If you pay a web design company $3000 to update your website, you must issue a 1099 to that company if they are not a corporation. If you pay rent over $600 each year, you must issue a 1099 to your landlord. There are additional nuances but you get the picture. We will be running vendor reports to determine who needs to be issued a 1099 and will be helping to collect the required W9 from the individual or company. This means we will be contacting your vendors on your behalf.  

Subcontractors and Insurance Audits

Depending on your industry, you may have an annual insurance audit. Typically, this is your insurance company wanting proof that your subcontractors have their own insurance. This is very common in the construction industry although we are seeing this branch out into a variety of industries. We will determine who should be providing proof of insurance and will reach out to collect the insurance certificates. When you audit year cycles, will complete the audit paperwork on your behalf.  

Through all of these processes, we do our best to handle as much as possible ourselves. That being said, we may need contact information from your vendors. We may need clarification about exactly what you are paying the vendors for. We may have a vendor who is not completing the necessary paperwork and will contact you to step in.  

We are starting this process now so that we will be prepared for the January deadline and for insurance audit deadlines. Just know that we are working behind the scenes to ensure that all necessary paperwork is collected to comply with these requirements.

Separate Business Finances from Personal Finances

As a business owner, it is important that you follow basic business practices for the health, security and longevity of your business.  It is extremely important that business financials be separated from your personal finances. 

3 reasons to keep your business finances separate from your personal finances

1.     Avoid Audits

The IRS frown upon the co-mingling of business and personal funds.  You are expected to have a business account. Expenses related to the business should be made out of the business account. Income from your clients should be directly deposited into your business account. This creates a clean and clear money trail which is what the IRS would like to see. 

2.     Protect yourself from liability

If your business is ever in legal trouble or is sued, you want a clear distinction that separates you personally from your business. If you co-mingle funds, you are not “behaving” like a business should. This can lead to you personally being liable for legal issues that should be covered under your business.

3.     Efficient bookkeeping

Keeping your business and personal finances separate ensures that you capture all of your business expenses. Having a separate business bank account streamlines your bookkeeping thereby reducing your bookkeeping costs.

How can you accomplish separating business expenses from personal expenses?

The single most effective way to separate business from personal is to have a dedicated business bank account. Pay for your business expenses out of this account. Deposit money from your clients into this bank account. Contact your local banker to set up your business account. They can walk you through this process. And let us know if you have any questions or need any help.

Colorado Sales Tax – Oh boy, oh boy, oh boy.

sales tax updates in colorado

Yes, we hear you. It’s always something in the State of Colorado. If you have sales tax, please read this!

First of all, this will affect ALL businesses who deliver taxable products in the State of Colorado. If you sell taxable products but DO NOT deliver the products, you can skip to the last section.

Retail Delivery Fee

If you deliver, you must now impose a $0.27 Retail Delivery Fee for every shipment. You will need to collect this $0.27 per delivery and remit this amount to the State of Colorado through your Revenue Online portal.  This fee must be listed on your invoice as a separate line item called “Retail Delivery Fees.”  

Incline Business Essentials is working with Quickbooks to determine how best to track this. If you are going to need to participate in this new requirement, it will complicate your sales tax, and we will be adjusting our prices accordingly. This is a new filing in addition to your current sales tax filing. Stay tuned for additional information.

For additional information, click here or contact the state of Colorado at (303) 238-7378. 

Retailers Who Do Not Deliver

The State is going to automatically sign ALL retailers up for this new Retail Delivery Fee. They have announced that you will have to manually “Opt Out”. If you do not “opt out”, you will receive notices from the State reminding you to remit IF you are required to.  

New Management Software

We’ve come a long way! Your Incline Business Essentials team is committed to providing you with the most excellent service possible. We are continually increasing our knowledge and use of technology to provide efficient services. We are excited to be launching a new software tool, Karbon, that will help us collect information from you and send financial reports to you in a timely manner. 

Karbon helps us track important deadlines and ensures that we complete thorough book reviews on a regular basis. Quality control is essential, and we firmly believe that Karbon will elevate our level of quality and service.

What this means to you: NOT MUCH! 

The change you will see is that when we request information, we will send you a checklist. You can upload documents easily through this request.  Then, you should check-off your task. Checking off your task, notifies us that your task is complete. 

We have tested this with several clients, and so far, so good!  The system is easy to use. Please be aware that when you reply and/or upload documents, this is a fully encrypted and secure system.  

We know that change is hard.  Thank you for your willingness to use this system. Rest assured that it is easy. We appreciate you so much and sincerely thank you for your business!

Contact us if you have any questions about Karbon!

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