THE LUMIERE BLOG
How To Grow Your Business Leveraging the Power of Outsourced Services
In an era where efficiency, agility, and strategic focus are paramount, businesses are increasingly turning to outsourced services to unlock their full potential. Outsourcing offers a dynamic solution for companies looking to optimize operations, reduce costs, and enhance their overall competitiveness. In this blog post, we'll delve into the myriad ways businesses can harness the power of outsourced services to propel their growth and success.
Focus on Core Competencies: Outsourcing non-core functions allows businesses to redirect their valuable time and resources towards core competencies. By entrusting routine tasks to specialized service providers, organizations can sharpen their focus on strategic activities that directly contribute to their unique value proposition and competitive advantage.
Cost Savings and Operational Efficiency: Outsourcing offers a cost-effective alternative to hiring and training in-house staff for specific functions. Businesses can benefit from the expertise of skilled professionals without the overhead costs associated with maintaining an extensive in-house team. This not only results in immediate cost savings but also enhances operational efficiency.
Access to Global Talent Pool: Outsourcing transcends geographical boundaries, providing businesses with access to a diverse and global talent pool. This allows companies to tap into specialized skills and knowledge that may not be readily available in their local labor market, fostering innovation and competitiveness on a global scale.
Scalability and Flexibility: Outsourced services offer scalability and flexibility to adapt to changing business needs. Whether facing seasonal fluctuations or sudden growth, businesses can easily adjust the scope of outsourced services without the complexities of hiring, training, or downsizing an in-house team.
Risk Mitigation: Sharing certain business functions with trusted outsourcing partners helps distribute risks. Outsourced service providers often assume responsibility for compliance, technology updates, and other operational risks, allowing businesses to navigate uncertainties more effectively.
Enhanced Technology and Innovation: Outsourced service providers often invest in state-of-the-art technologies and stay abreast of industry innovations. By leveraging their technological infrastructure, businesses can access cutting-edge tools and solutions without the need for significant upfront investments, enhancing their competitiveness in a rapidly evolving market.
Focus on Customer Satisfaction: Outsourcing allows businesses to channel their energies towards customer-centric activities. Whether it's improving product quality, refining customer service, or enhancing the overall customer experience, businesses can elevate customer satisfaction levels by concentrating on what truly matters to their clientele.
Agile Business Operations: In a dynamic business environment, agility is a key differentiator. Outsourcing provides businesses with the agility to respond quickly to market changes, regulatory requirements, and customer demands, positioning them for sustained growth and adaptability.
The power of leveraging outsourced services extends far beyond mere cost reduction. It empowers businesses to refocus on their core strengths, tap into global expertise, and navigate the complexities of today's business landscape with resilience and innovation. By strategically integrating outsourced services into their operations, businesses can unlock new levels of efficiency, flexibility, and growth, ultimately propelling them towards long-term success in a competitive marketplace.
Exploring 401(k) Options for Small Businesses: A Comprehensive Guide
Running a small business comes with a myriad of responsibilities, and one key aspect often overlooked is providing retirement benefits for employees. A 401(k) plan is an excellent way to help your team save for the future while attracting and retaining top talent. In this blog post, we'll explore the various options available for small businesses looking to implement 401(k) plans.
Traditional 401(k) Plans: Traditional 401(k) plans are the most common retirement savings vehicles. They allow employees to contribute a portion of their pre-tax income, reducing their taxable income for the year. Employers can also choose to match a percentage of employee contributions, providing an additional incentive for participation.
Safe Harbor 401(k) Plans: Safe Harbor plans are designed to automatically pass non-discrimination testing, making them an attractive option for businesses aiming to avoid compliance issues. With Safe Harbor, employers are required to make contributions to employees' accounts, either through matching contributions or non-elective contributions.
Simple 401(k) Plans: Simple 401(k) plans are specifically tailored for small businesses with fewer than 100 employees. They offer lower administrative costs and simplified procedures for both employers and employees. While employer contributions are optional, employees can make salary deferral contributions, and employers have the flexibility to either match contributions or make non-elective contributions.
Professional Employer Organizations (PEOs): Small businesses can explore the option of joining a PEO to gain access to retirement plans offered by the PEO. PEOs aggregate employees from multiple small businesses, potentially providing cost savings, administrative efficiency, and access to a broader range of retirement benefits.
Choosing the right 401(k) plan for your small business involves considering factors such as the number of employees, budget constraints, and the level of administrative involvement you desire. By carefully assessing your needs and exploring the options outlined above, you can provide a valuable employee benefit that not only supports your team's financial future but also contributes to the overall success and competitiveness of your business. Remember, a well-structured 401(k) plan not only benefits your employees but can also be a strategic tool for attracting and retaining top talent in the competitive business landscape.
Mastering Third-Party Delivery: How Restaurants Can Maximize Value
In recent years, the rise of third-party delivery services has transformed the restaurant industry, offering convenience and accessibility to customers while presenting new opportunities and challenges for restaurant owners. While partnering with third-party delivery platforms can expand your restaurant's reach and increase sales, it's essential to approach these partnerships strategically to maximize their value. In this blog post, we'll explore the best ways for restaurants to harness the power of third-party delivery services and drive success.
Choose the Right Partners: Not all third-party delivery platforms are created equal. Research and evaluate different providers based on factors such as their reach, commission rates, delivery fees, and customer service reputation. Choose partners that align with your restaurant's brand values and business objectives.
Optimize Your Menu: Tailor your menu offerings specifically for delivery to ensure that items travel well and maintain their quality during transit. Consider streamlining your menu to focus on popular and profitable dishes that are well-suited for delivery. Clearly communicate any modifications or special instructions to third-party delivery drivers to minimize errors and enhance the customer experience.
Set Competitive Pricing: Determine pricing strategies that strike a balance between profitability and competitiveness in the delivery market. While it's essential to cover costs associated with third-party commissions and delivery fees, avoid overpricing your menu items, as this may deter customers from ordering. Offer promotions, discounts, or exclusive deals to incentivize customers to choose your restaurant over competitors.
Invest in Packaging: Invest in high-quality packaging that preserves the freshness and presentation of your food during delivery. Use sturdy containers, seals, and insulation materials to prevent spills, leaks, or temperature fluctuations. Branded packaging can also reinforce your restaurant's identity and leave a lasting impression on customers.
Provide Accurate Delivery Estimates: Communicate realistic delivery estimates to customers to manage their expectations and prevent dissatisfaction. Use data analytics and tracking technology to monitor delivery times, optimize routes, and minimize delays. Transparency and reliability are crucial for building trust and loyalty with customers.
Optimize Operations for Efficiency: Streamline your kitchen operations and workflow to accommodate the increased volume of delivery orders. Train your staff to prioritize efficiency, accuracy, and timeliness when preparing and packaging delivery orders. Allocate dedicated resources, such as kitchen space, equipment, and personnel, to fulfill delivery orders without compromising the in-house dining experience.
Leverage Marketing and Promotion: Collaborate with third-party delivery platforms to leverage their marketing and promotional capabilities. Take advantage of sponsored placements, targeted advertising, and featured listings to increase your restaurant's visibility and attract new customers. Utilize social media, email marketing, and other digital channels to promote special offers, exclusive discounts, and loyalty programs for delivery customers.
Collect and Analyze Data: Harness data analytics tools provided by third-party delivery platforms to gain insights into customer behavior, preferences, and ordering patterns. Use this data to refine your menu offerings, pricing strategies, and promotional efforts. Identify trends, opportunities, and areas for improvement to optimize your delivery operations and drive long-term success.
By following these strategies, restaurants can effectively maximize the value of third-party delivery services and capitalize on the growing demand for convenience and flexibility among customers. By delivering exceptional experiences both in-house and through delivery channels, restaurants can expand their reach, increase revenue, and thrive in an increasingly competitive marketplace.
Strengthening Nonprofit Impact: The Benefits of Outsourced Accounting Services
Nonprofit organizations play a vital role in addressing societal challenges, and effective financial management is crucial for their sustained impact. In this blog post, we'll explore how outsourcing accounting services can be a game-changer for nonprofits, particularly in managing financials, donation reporting, and external audits. Let's delve into the transformative benefits that outsourcing can bring to the nonprofit sector.
Financial Management Expertise: Outsourcing accounting services enables nonprofits to access the expertise of professionals with a deep understanding of nonprofit financial management. These experts are well-versed in the unique accounting and reporting requirements specific to the nonprofit sector, ensuring accurate and compliant financial records.
Cost Efficiency and Budget Optimization: Nonprofits often operate on tight budgets, and outsourcing accounting functions can be a cost-effective solution. By eliminating the need for an in-house accounting team, nonprofits can allocate more resources directly toward their mission, ensuring that every dollar is utilized efficiently.
Timely and Accurate Financial Reporting: Outsourced accounting firms specialize in providing timely and accurate financial reports. This is crucial for nonprofits in demonstrating transparency to stakeholders, including donors, board members, and regulatory authorities. Outsourced professionals can streamline the reporting process, delivering comprehensive financial insights on a regular basis.
Donation Reporting and Tracking: Donations are the lifeblood of nonprofits, and accurate tracking and reporting of donations are essential for maintaining donor trust. Outsourced accounting services can implement robust systems for tracking donations, ensuring that each contribution is properly recorded and reported. This transparency strengthens donor relations and facilitates compliance with reporting standards.
Compliance with Regulatory Requirements: Nonprofits are subject to specific regulatory and reporting requirements that vary by jurisdiction. Outsourced accounting professionals are well-versed in navigating these complexities, ensuring that nonprofits remain compliant with tax regulations, reporting standards, and other legal requirements.
Enhanced Donor Confidence: Outsourced accounting services contribute to increased donor confidence by providing transparent and accurate financial information. When donors have assurance in the organization's financial management, they are more likely to continue supporting the nonprofit's mission and even increase their contributions over time.
Streamlined External Audits: External audits are a necessary process to verify financial accuracy and compliance. Outsourced accounting services can help nonprofits prepare for external audits by maintaining meticulous financial records, ensuring all documentation is in order, and acting as a liaison between the nonprofit and auditors. This streamlines the audit process and increases the likelihood of a successful outcome.
Strategic Financial Planning: Outsourced accounting professionals offer valuable insights into financial planning and budgeting. By analyzing financial data, they can assist nonprofits in developing strategic financial plans that align with their mission and goals, enabling better resource allocation and long-term sustainability.
Outsourced accounting services offer nonprofits a strategic advantage in navigating the financial complexities unique to their sector. From accurate financial reporting and donation tracking to ensuring compliance and facilitating external audits, outsourcing empowers nonprofits to focus on their mission with confidence and efficiency. By partnering with experienced accounting professionals, nonprofits can strengthen their financial foundation, enhance donor trust, and ultimately amplify their positive impact on the communities they serve.
Lumiere's Guide to Implementing Payroll
There are a number of things you should do before making your first hire – some are legal and regulatory, while others are just best practices. Here is a short checklist of things you need to do before you make your first hire.
Things to consider before you make your first hire.
Congratulations! Your business is growing and you’ve decided to hire your first employee. You have found the perfect person and agreed on compensation but where do you go from there?
You must now tackle onboarding, establishing benefits, becoming compliant, and configuring and running a payroll platform. This may sound overwhelming, but don’t worry, we’re here to help. In this guide, Lumiere will step you through our process for hiring your first employee so that, right from day one, they’ll be ready to contribute to your business’ success.
Here is our guide to getting started.
1. File for Your EIN (Employer Identification Number)
Your EIN is also known as your Employer Tax ID, and you’ll use this for filing your employment and other taxes with state and federal governments. Before applying for a federal employer identification number (EIN) you should have already formed an entity. Most business owners elect to establish a structure beyond a sole-proprietor to establish liability protection. The most common corporate entity types for small businesses are S Corporations and LLCs:
S Corp
An S Corporation (“S Corp”) is a popular choice for many businesses because profits, losses and other tax items pass through the corporation to the shareholders. Although they can be more complicated legally, they can provide significant tax savings. S Corp owners who perform more than minor services for the organization are required to be reasonably compensated as employees as well as owners.
LLC
A Limited Liability Corporation (“LLC”) is a lightweight alternative to incorporating your business and is similar to an S Corp as it provides the pass-through benefits of the S Corp entity. LLCs are generally less complicated legally with fewer state-imposed annual compliance requirements.
See also the U.S. Small Business Association Guide to Business Structures
After you determine your corporate identity, you’ll need to apply for an EIN directly through the IRS. (Note: sole proprietorships do not need a EIN, but partnerships do). The IRS also has an helpful guide to Establishing Your EIN.
Check which EIN state requirements are applicable to you. While you are at it, you should also Enroll in EFTPS to see what payments your payroll company is making on your behalf
2. Register With the Relevant State Departments
You will need to register your company with the compliance department for every state you employee people in. Some states can have up to three departments that handle compliance with state tax collection, unemployment, disability, etc..
In California, the Employment Development Department (EDD) handles both tax collection and labor and workforce laws like unemployment. To register as a new employer in California you will need to complete the following:
Enroll as a New User through e-Services for Business at the EDD site.
After you have enrolled, access your e-Services account to apply for an Employer Payroll Tax Account Number.
Complete the registration process. You will be asked for information about your business and its operations in California including your California Secretary of State number. You can search for it here.
The EDD may take up to 3 business days to complete processing.
3. Establish Insurance
Caring for your team by offering health, retirement and other benefits helps employees and their families stay healthy and financially secure. As a small business owner, there are a number of types of insurance you must have and a number you also should have.
Workers Comp - A state-regulated program that covers job-related injuries and illnesses including wage replacement if they’re unable to return to work. Premiums vary by industry and job classifications. Every state has its own set of workers’ compensation rules. See the National Federation of Independent Business (NFIB) summary of each state’s policy.
Disability Insurance - Provides short-term Disability Insurance (DI) and Paid Family Leave (PFL) wage replacement benefits to eligible workers who need time off work due to illness or injury, pregnancy, or childbirth or to care for a seriously ill family member or to bond with a new child. California provides this through the California State Disability (SDI) program.
Employment practices liability insurance (EPLI) - Provides coverage to employers against claims made by employees alleging discrimination, wrongful termination, harassment, or other employment-related issues.
4. Document Employees
To protect themselves from potential litigation and avoid confusion, companies should utilize Job Descriptions, Offer Letters, Employment Agreements and Employee Handbooks. These will help establish policies and details of the role, compensation, and other legal ramifications of the position when hiring an employee or contractor including:
Wage and hour including overtime
Leave including vacation, pregnancy, paid family leave, etc.
Harassment and discrimination
Fringe benefits (commuter, meals, etc.)
5. Collect and Maintain Employee Information
Maintaining accurate and up-to-date profiles for your employees is crucial. For each new hire, besides the basic name, date of birth and address, be sure you keep the following data available and secure:
Employment start date.
Compensation details in writing to prevent later disputes (including any changes to compensation or responsibilities).
An I-9 Form to verify employees’ eligibility for employment in the US, and the verification documents.
See Also Doing Business In California - A Guide for Employers
6. Classify Employees
You need to know if your employees are exempt or non-exempt from overtime pay, and if you will be withholding taxes or paying them as a independent contractor. The federal guidelines for exempt employees can be complicated, and mistakes can be expensive. Before you make this important staffing decision you need to fully understand both types of workers and the importance of classifying them correctly. Failing to do so could cost your business.
Here are some general guidelines:
If you are still unclear, complete IRS Form SS-8 and they’ll give you a final determination of the worker’s status. It could take 6 months for a decision, but it will give you peace of mind to continue running your business.
Check out Lumiere’s Guide - Employee vs Contractor, Exempt vs Non-exempt - Determining Worker Classification for more information.
7. Pick and Implement a Payroll Platform
Pick a platform that is scalable and meets your particular business needs. Payroll is no place to take shortcuts, the penalties and difficulties that come with errors and poor timing are too high.
Every platform handles general payroll management tasks (direct deposit, multiple wage rates, garnishment payments, PTO, etc.) Some other things to considering when selecting a payroll platform:
Employee self-enrollment: Will the solution allow your employees to provide their onboarding information, view pay stubs and pull tax forms on their own?
Integrations: Does the solution integrate directly with your accounting software, automatically coding to account and department?
Tax liability management: As an employer, you need to withhold, report and remit Federal Withholding, State Withholding, Local Withholding, Federal unemployment (FUTA), and State unemployment (SUTA). The IRS created a guide. One of the benefits of a payroll solution is they automatically file and remit your payroll tax liabilities for you.
You should also consider implementing a solution for the following
Tracking employee’s hours, PTO, and sick time
401K employee contributions or employer matching
Expense reimbursements, commissions, bonuses, etc.
There are dozens of options for payroll software, and selecting yours means finding the one with the features you need at a price that works. Lumiere has experience working with many of the top recommended platforms.
Finally - Address Backups and Disaster Recovery
Not only is it a best practice to have backups and copies of important records in the event of a disaster, the IRS requires you provide evidence to substantiate entries, deductions, and statements made on your tax returns. You must be able to prove certain elements of expenses to deduct them and for most businesses payroll is their largest expense. It is also important to have I-9 forms, W-2s, new hire forms, and copies of all your filed tax forms (Form 941, Form 940, and state tax forms) available.
Lumiere Guide to Selecting and Implementing Time and Attendance Solutions
Time and attendance solutions are critical to most businesses, helping facilitate payroll processing, client invoicing, and can provide insights into your business’s profitability that leads to better decisions and efficient resource management.
Efficient tracking of time and attendance is critical to managing most businesses. Besides helping facilitate efficient payroll processing and client invoicing, time and attendance solutions can provide insights into your business’s profitability that leads to better decisions and efficient management of your human resources.
Lumiere has helped our clients adopt time and attendance solutions resulting in significant benefits, including:
Profitability Analysis
Project costing and profitability insight
Streamlined client invoicing for service industries
Departmental costing reporting
Resource Management
Efficient integration into payroll solutions
Improved resource management and expenditure control
Employee tracking through geolocation and geofencing
Compliant management of paid time off (PTO) policies
Before You Get Started - Involve the Stakeholders
The first step to determining the best software solution is to understand your requirements are. The best way to do this is to work with internal resources and stakeholders that would benefit from or interact with the platform. Start by answering the following questions from resources in the following areas:
Finance - Are analytics the finance department performs to track departmental or project costs or other critical metrics for profitability?
Operations - What workflows involve scheduling, forecasting, or reporting needs?
Payroll - What are the requirement of the existing or proposed payroll platform?
Technology - Are there management, hosting, integration considerations for the new system?
This collaboration also helps deliver stakeholder buy-in and better adoption of the implemented solution. The requirements gathering phase is also an excellent opportunity to evaluate, propose, and implement changes to your current workflows, policies, and procedures.
Make your Selection
Lumiere recommends you evaluate the following features in a time and attendance solution:
Usability - The interface should be intuitive and easy to use
Configuration - Should be straightforward and rule or macro-driven
Integration - Choose a solution that has integrates with the existing solutions
Compliance - Management of compliance rules should be automatic and proactive
Auditable - Transparent and accessible logs of who did what and when are critical
Comprehensive - Your solution should cover all your time and attendance related needs
Solutions to evaluate
For our own utilization and our clients’ benefit, Lumiere is always evaluating the best-of-breed cloud-based time and attendance solutions available for companies managing groups of employees. Here are a few of our favorites.
TSheets - Easily integrated into Quickbooks. Enables resources to track time on multiple devices and managers to see who's working, where, and on what, all in real-time
Harvest - Simple online time-tracking software that allows the tracking of resources and projects and the efficient creation of client invoices
Deputy - Platform that supports numerous industries and allows for budget based scheduling
Zenefits - Allows resources to record their time from any device and managers to approve time submissions in seconds. Syncs employee hours directly to payroll
Homebase - Assists with employee onboarding, schedule creation, and forecasting. Great for service-based industries
Ximble - Web-based time tracking solution that delivers IP restricted and GPS time clocking through text or phone, a mobile app with GPS tagging and geofencing
FreshBooks - Helps track hours spent on clients or projects for accurate billing and job-costing
Run powered by ADP - Offers small businesses the HR and payroll services they need to run their business, every day and every step of the way
Ensure success
Following our guide by establishing solution requirements, involving key stakeholders, and selecting a solution that integrates well into your existing business will go a long way towards a successful implementation. By following strong project management methodologies, leveraging your vendors’ implementation support, and providing training to your users will also contribute to your efforts’ success.
Every period of your company’s growth can bring both challenges and opportunities. Growing your business to the point that time and attendance solutions are required is strong evidence of your firm’s success. Take advantage of the contributions time and attendance solutions will provide to your business and continue your success.
Employee vs Contractor, Exempt vs Non-exempt - Determining Worker Classification
Determining whether members of your workforce should be classified as employees or independent contractors can be difficult. The rules both the IRS and the states have established to determine their status are confusing and if you classify them incorrectly, there can be significant fines. Additionally, once a worker is established as being an employee, they are further designated as being exempt or nonexempt as it applies to the ability to receive overtime pay and other employee benefits.
Lumiere has put together the following guide to help answer many of the questions you might have when classifying your resources.
Independent Contractor (Self-Employed) or Employee?
One of the most critical distinctions a business owner will have to make is whether their resources are independent contractors or employees. Besides the compliance issues, this designation determines who pays the employer taxes which are almost 8% (6.2% for social security is 6.2% and 1.45% for Medicare)
Some key differences that establish a resource as a contractor:
They determine their schedule, time frame for completing, work location.
They do not participate in employee benefits from the employer.
They are ineligible for unemployment in the event of a layoff or termination.
There are some downsides for workers that are classified as contractors
They are responsible for all expenses incurred while completing the job.
They are not protected by anti-discrimination and workplace safety laws
Unless a contract states otherwise, they can be terminated at any time, for any reason.
In determining the categorization of a worker, at question is the degree of control the company holds over the resource and level of independence the resource has across three factors :
Behavioral: Who determines what the worker does and how the worker does his or her job?
Financial: Who controls the economic aspects of the resources job? How is the worker paid, are expenses reimbursed, do they provide their own tools/supplies, etc?
Relationship: Do contracts exist between the worker and company, does the worker have other clients, are there any employee benefits ( pension, insurance, vacation, etc.) for their work?
Companies should weigh all of these factors when determining whether a worker is an employee or independent contractor. While some factors may indicate that the worker is an employee, other factors can indicate they are an independent contractor. There is no “magic” or set a number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Form SS-8
If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.
Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).
Misclassification of Employees
There are significant consequences of treating an employee as an independent contractor. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes (withholding and social security) for that worker See Internal Revenue Code section 3509 for more information.
Use this chart to help you properly categorize your workers:
Exempt vs. Nonexempt
After you have determined that your workers are employees, you will need to determine if they qualify for overtime wages when they work over 40 hours per week. The differences between nonexempt and exempt employees have been established by the Fair Labor Standards Act (FLSA). The FLSA sets basic minimum wage and overtime pay standards and regulates the employment of minors. The FLSA does not regulate vacation, holiday, severance, sick pay, holidays off, or holiday pay among other things.
Employees that are classified as exempt typically perform job duties considered professional, executive or administrative. The US Department of Labor has a list of the more commonly used exemptions
California Rules
California also follows the three simple requirements to determine whether a worker is an exempt employee under California law:
Minimum Salary. The employee must be paid a salary that is at least twice the state minimum wage for full-time employment regardless if it is a salary or calculated hourly.
Managerial Duties. The employee’s primary duties must consist of administrative, executive, or professional tasks. Their job title is irrelevant.
Independent Judgment. The employee’s job duties must customarily involve the use of discretion and independent judgment while comparing and evaluating possible courses of action and making a decision after considering various possibilities.
If these three requirements are met, the employee will usually be classified as exempt from overtime, minimum wage, and rest break requirements (but not meal break requirements). There are, however, many caveats to this test. Some jobs that are subject to a different test altogether and some employees are only partially exempt; meaning, they are protected by certain labor laws, but not others. The State of California Department of Industrial Relations has provided guidance for exemptions from the overtime laws.
Take Employee Classification Seriously
Misclassification is one of the most common causes of lawsuits against employers, and it is not surprising to learn that regardless of the employer’s size, many have had to pay large amounts of money for misclassifying employees.
Lumiere’s recommends that employees treat worker classification seriously. Employers who maintain a cavalier attitude when addressing employee/contractor and exempt/non-exempt classifications could find themselves burdened with liabilities for fines, unpaid wages, interest, penalties, and most likely - attorney fees.
Getting Your Financial House In Order - 5 Things You Must Do Now
About The Author - Randy Katz is a Cofounder of Synesis Advisors, a San Francisco based firm that works with clients in marketing, selling and purchasing privately held businesses that are traditionally underserved by investment banks.
In a business sale, the hardest barrier for the seller to overcome is often the ability to let go after 20/30/40 years in business. I’ve seen many more instances of Seller’s remorse than Buyer’s remorse in my handling of M&A. Yet even though business is humming and you’re ready to move on, the business may not be ready to be shown in the best light.
Just as you would stage a house for sale, a business should be staged. I’m not referring to cleaning the office when a potential buyer comes for a meeting (though you should do that too), but rather being able to show the true profitability of your operation. The more explanation it takes for a buyer to understand your financials and the higher amount of adjustments it takes to normalize your income, the higher probability that a buyer will discount your valuation. Think of it this way….if I don’t understand your financials or don’t believe an adjustment that you are making, I will perceive the endeavor as riskier. If I am willing to accept the risk, I will require a higher rate of return; hence offer a lower price.
Below are common issues that I consistently see when analyzing financials, though this list is certainly not comprehensive.
Multiple businesses units or locations with consolidated financials:
I have seen a number of scenarios where a business owner has several franchises, multiple retail locations, multiple business divisions, or even disparate businesses all under one tax return and P&L.This is problematic when you are only selling one location, division, or franchise unit. Oftentimes, the revenue of each component is broken out, but the expenses are all lumped together. This makes it difficult to impossible to identify what percent of gross profit and cash flow is generated from each component of the business. If a buyer is unclear of the economics of what they are purchasing, it will be difficult to come up with an appropriate valuation and get through due diligence. Additionally, banks will have a difficult time underwriting loans, meaning sellers will likely receive less cash up front in their deal. In these instances, the minimum a seller should do is create separate P&Ls that are representative of the independent entities and divisions, noting how shared corporate overhead expenses are allocated. Depending on which issue above you’re solving, multiple business entities and tax returns should also be considered.
Not taking end of year inventory
Businesses with a large number of SKUs or several hundred thousand dollars in inventory know the pain. It’s difficult to close the business for the day or assign the team with the mundane task of counting everything in the warehouse. The problem arises that you lose the ability to accurately calculate your Cost of Goods Sold (COGS). Let’s suppose that you finished the year with $200,000 more inventory than you started. It’s normal for a business owner to use their purchases as the COGS number, but in this instance, you have overstated your COGS by $200,000 and understated your income by the same amount. Additionally, there is a higher likelihood that your COGS as a percentage of sales will swing. These false swings will cause confusions regarding both your pricing power and the strength of your vendor relationships. It also makes it difficult for both the business owner and buyer to understand the amount of working capital needed to operate the business. For business owners who don’t want to spend the time, there are inventory counting services who can handle your inventory counts for you.
Reclassifying expense items
It’s not uncommon to change CPA’s, bookkeepers, or decide on one’s own that one line item may be better classified somewhere else. I’ve seen scenarios where variable cost field labor is considered a cost of goods sold one year and included in salaries and wages in future years. One’s CPA can be classified under professional services or accounting. You may break out worker’s comp insurance as a separate line item from your liability insurance in one return and consolidate them as a single insurance line item the following year. Any one reclassification can usually be easily explained and is not cause for concern. However, multiple changes year after year may ultimately require the hiring of a forensic accountant to unwind the confusion, which can be costly. Additionally, multiple changes will raise a red flag. Consider what a buyer will think…if you don’t pay attention to managing one of the most important aspects of your business, what else are you failing to pay attention to?
Personal expenses run through business
It’s a common saying with a wink and a nod… “I have certain benefits as a business owner in addition to my income.” While tax avoidance or deferral are legitimate methods to reduce ones tax liability and improve cash flow, tax evasion is another story. Personal expenses such as one’s Mercedes lease, travel and entertainment expenses, or child on the payroll that does not work in the business, may all seem like easy things to explain to a buyer. However, consider what a buyer will think when you begin the discussion about how your personal expenses will go away once they own the business…. “You’re okay being dishonest with the IRS when it benefits you financially. Now, you’re asking me to take your word for something when we’re entering into a negotiation that will benefit you financially.” In addition to the concern this brings to the buyer, banks that are often the source of capital for business transactions will usually not give you credit for these types of expenses. This could create a situation where the price is lowered or you are asked to carry a larger promissory note. For my normal disclaimer, please recognize that there are times you can have the best of both worlds. You may be able to justify financial adjustments that benefit your taxes in the short run and your sale in the long run. However, there are many instances that you may save 30 cents on the dollar in the near term, only to give up $3 for every dollar of incremental profit on the backend. Make sure you are working with your CPA and M&A advisor to understand which category your discretionary items fall into.
Lack of a Balance Sheet
Just because your P&L shows net income, it does not mean that you are making money. That’s right, your balance sheet tells a story too. For example, your business is on cash accounting, meaning that you recognize income when the cash is received. You have $500,000 in accounts receivable that should have been paid in December 2013. However, the client did not pay you until February 2014. During 2014, your business truly operated at a loss of $250,000, however when you add in $500,000 of cash received, it appears you made $250,000. Let’s consider a scenario that makes your financials look worse on the surface….you have a huge tax bill coming, so you pre-pay expenses for the following year. In that instance, the business will look less profitable than it should. These types of items can only be seen and understood when you keep an accurate balance sheet.
Remember that buyers are typically looking at 3 years of financial statements, as are the banks who are lending money. When you’re thinking about going to market, give yourself three years to get your financial house in order.
Understanding Your Balance Sheet's Impact on a Transaction
About The Author - Randy Katz is a Cofounder of Synesis Advisors, a San Francisco based firm that works with clients in marketing, selling and purchasing privately held businesses that are traditionally underserved by investment banks.
When evaluating companies, owners typically have a good sense of their profit and loss statement and want to make it a focal point of conversation. However, they don’t seem to grasp the importance of the company’s balance sheet.
The lack of understanding of one’s balance sheet and the poor quality of the information on balance sheets is cause for concern and can dramatically impact a transaction. Below, I explore several issues that can occur in a deal if the balance sheet is ignored by a business owner
Too Much Working Capital in Deal
When buyers make an offer on a business, it identifies the assets and liabilities that are being assumed in the transaction. An informed buyer will make an offer that includes enough working capital (current assets – current liabilities) that allows the business to continue operating without disruption. If the business has not historically managed its working capital correctly, a buyer may believe that the business needs more working capital than it does in reality. An example of this may be a business keeping more inventory than necessary in stock, or letting accounts receivable remain outstanding for longer than agreed upon terms. Should a buyer negotiate excess working capital in a transaction, money is being left on the table for the seller.
Net Income is Opinion. Cash Flow is Fact
The income that a business generates is not necessarily indicative of its performance. For example, a business using cash accounting may be increasing Y/Y, but if accounts receivable is increasing, revenue may be understated (on an accrual basis), or if accounts payable decreases, expenses may be overstated (on an accrual basis). The balance sheet is the best indicator of the cash generation ability of the business because it allows the business owner to measure the changes in business performance from one period to another.
Not Taking End of Year Inventory
Many balance sheets I look at have an inventory that is constant from one period to the next. Of course, it’s laborious to take inventory in a 20,000 foot warehouse or when a business has thousands of SKUs. However, the end of year inventory number is a key determinant in a company’s cost of goods sold. Should a buyer make an offer and find that inventory is overstated on a balance sheet, that implies that cost of goods sold is understated on a profit and loss statement, thus a business is making less money than the seller is portraying. It’s an awful experience for a seller to have a deal fall apart in diligence because the buyer made an offer and later renegotiates or reneges due to incorrect information being provided.
Rebate of Prepaid Expenses and Prepaid Revenue
The closing of every transaction has adjustments. Some bills are prepaid and the benefit is going to be gained by the buyer. This prepaid expense should be an asset on the balance sheet. Some clients pay cash before a project has started and the buyer will need to perform a service. This prepaid revenue should be a liability on the balance sheet. When negotiating a transaction, the buyer and seller need to identify the flow of prepaids to make sure they are negotiated, and ultimately need a mechanism to measure them upon the closing of a transaction so that each party is recognizing the revenue and expenses that belong to them.
Tax Consequences in a Resale
When a business is sold, the total purchase price is split up into categories, i.e., furniture, fixtures & equipment, goodwill, covenant not to compete, etc. This process is known as the allocation of purchase price. Each category is taxed differently, so optimizing the allocation can potentially result in significant tax savings to the seller. However, just because a tax rate in one category is higher than another does not mean that category is bad if the seller already has a tax basis in the category. A seller’s tax basis is changing continuously as assets are purchased, depreciated, and amortized, and the best way to keep track of the basis for each category is on the balance sheet. Remember, it’s not just important to maximize what you get, but what you keep.
In Stock Deal, the Buyer is Purchasing Balance Sheet
If you recall from prior articles, buyers are often structuring their transactions as asset deals, whereby they are acquiring all assets of the business, but not the corporate entity itself. Thus, they are not acquiring your balance sheet. However, for deals that are structured as stock transactions, the entity continues to operate as if nothing changed, such that the balance sheet is acquired. Buyers are weary of purchasing unknown liabilities and will use heavy legal representations to protect themselves if agreements are structured this way. The cleaner and more accurate the balance sheet, the higher probability a buyer will consider this deal structure and that a seller will keep from breaching legal representations.
There are numerous other issues that might exist, but this should underscore the importance of an often ignored element of your financials. For more information or to discuss your own situation, reach out to Synesis Advisors, your CPA or Lumiere for guidance.