What to Do When an Employee Is Terminated

Every company should have a strict process to follow when an employee leaves the company, no matter what type of termination it is – voluntary or involuntary. Here’s a checklist you can use to compare to your own process so that you can either confirm you’re on the right track or add some ideas to improve your current methods.

1. Collect the resignation letter.

While so many things are remote these days, you MUST get the employee’s resignation letter in writing and signed by them. If they don’t supply one, create a form they can sign that includes the reason for termination.

If you initiated the termination, have the employee sign the notice of dismissal.

This is not only important for general human relations records, it’s also important this year for any Paycheck Protection Program forgiveness documentation if the employee turned down a hire-back request. There may also be a requirement to submit the paperwork to your state’s unemployment office.

2. Handle legal and benefits issues.

Collect any company advances owed by the employee.
Ask the employee if they have any final expense reports to file.
Remind the employee that certain legal requirements, such as confidentiality clauses and noncompete agreements must be upheld after employment.
Review insurance options such as COBRA.
Let the employee know how to access their 401(k) and other benefit plans.

3. Update the payroll system and cut the final paycheck.

Compute PTO and vacation balances due the employee. Calculate severance pay. Cut the final paycheck, incorporating those items.

Review the paycheck amounts with the employee, and ask them for a forwarding address.

4. Collect company property.

The employee should turn over their computer equipment, including laptops, monitors, mice, keyboards, PCs, Macs, phones, beepers, printers, drives, and scanners. Don’t forget to ask for keys, business cards, name badges, security badges, gate and garage door openers, uniforms, and tools. Oh, and company cars or trucks.

5. Revoke computer access.

Any user accounts held in the employee’s name should be revoked. Many passwords may need to be changed. Their email address should either be forwarded to someone else who can answer the emails, updated with an autoresponder, or revoked altogether.

Voice mail and their phone extension should also be re-routed. Take the employee’s name off of any internal distribution list and remove them from the About page of your website.

6. Hold an exit interview.

The business owner should hold an exit interview with the employee if they are leaving voluntarily. Ask questions such as these:

Why did you decide to start searching for a new job?
Was there anything we could have done to keep you employed here?
If you could change one thing about your job, what would it be?
Could you describe your relationship with your direct supervisor?
Would you consider working here again?

7. Communicate this change to your staff and customers.

Let your staff know immediately after the employee leaves that they will not be coming back. Don’t go into detail about the termination; that information is private.

If the employee was involuntarily terminated, assure your staff that their jobs are safe (if they are) so they don’t ruminate or spread false rumors.

If the employee worked with customers, each customer should be notified and given the name of the new staff member that will be handling their issues.

Follow these steps to protect your company when an employee is terminated.

Six Fun Ideas to Bring into Your Marketing

The purpose of marketing is, in part, about creating relationships with customers and prospects. While traditional advertising is a standard way of letting prospects know more about you, it’s not always the most creative way to connect.

To spice up your marketing, let’s explore six unusual ways to connect with customers.

1. Celebrate an obscure or fun holiday.

For example, August 27 is National Just Because Day. It’s a day to do random things, which can be pretty easily tied to whatever your service or product is.

You can do something as small as send an email or as big as hosting a live event on the holiday you choose.

2. Feature a customer or staff member.

A great way for customers to get to know your team and for your team to get to know your customers is to feature them in a short writeup that you post or send out.

Make this fun by sharing things like favorite ice cream, activity they would love to do, country they want to visit most, most fun responsibility they have at work, favorite purchase from you, and more.

3. Highlight community work.

Does your organization have a favorite charity? If so, share experiences with your customers. Many customers value and prefer to support businesses that make community contributions.

Go as far as holding a volunteer day or do as little as a writeup for donations in your newsletter.

4. Take a survey.

When is the last time you’ve been asked a “deep” question? Send a survey that asks your colleagues and customers a question like what inspires them. Then share the results, with their permission, of course.

This type of activity can lead to meaningful conversations and a deeper connection with your customers. It may also provide great insight into how you can connect with what’s important to your clients.

5. Provide a gift guide.

Is it close to Christmas or another holiday where gifts are exchanged? If so, your customer might benefit from a gift guide you can put together.

You don’t have to own a retail store to benefit from this idea. Service organizations can provide gift certificate and other ideas in their gift guides. And you don’t always have to list only your own items. Add your customers’ and suppliers’ items and make it one big “business family” affair.

6. Tell people a story.

Do you remember your first sale? Write a story about your first sale, the first day you opened your new location, your first hire, or another fun business milestone.

People love hearing stories about how others got started. Don’t be so private that you miss out on this wonderful way to connect with clients.

Try these six fresh marketing ideas to create a meaningful connection with your customers and prospects, and watch your relationships blossom.

Watch Out for These Five Common Accounts Payable Errors

Paying bills is never fun, but paying bills you shouldn’t pay in the first place is even worse. There are many risks that can part a small business owner with their hard-earned cash, and here are five to watch out for when it comes to your bill-paying process.

1. Fraudulent invoices

Some companies will send marketing documents disguised as invoices to businesses. You may have to read the fine print to notice it’s not really an invoice. In some cases, it’s simply outright fraud, trying to get you to pay something that is not owed.

Many times, these invoices look official, similar to legal filing requirements, but don’t be fooled. Examination of the fine print can save you a lot of money.

Set up procedures to catch these types of invoices. Managers should be careful not to approve these invoices for payment. Bookkeepers should be trained to question their supervisors about these invoices.

2. Item(s) not received

Three-way matching can prevent paying an invoice for which the goods were never received. Put into place a couple of procedures to prevent this accounts-payable error:

Have warehouse staff match the shipping receipt to what’s in the shipment when it arrives.
Have accounts payable staff match the marked-up shipping receipt to the invoice when it comes in. If the invoice shows that more items were billed for than received, a call to the vendor to correct the invoice is in order. The invoice amount should be adjusted on the books and a check can be cut for the reduced amount.

3. Wrong amount

Sometimes the wrong price can be listed on the invoice. If this happens, there may have been a misunderstanding during the sales process. A call to the vendor is needed in this case as well so that a corrected invoice can be issued.

4. Math error

This hardly happens in these days of computers, but it can. All invoices should be reviewed for reasonableness. If it doesn’t make sense that something should cost so much, it probably shouldn’t. In rare cases, a price may have been entered wrong or a computer bug could have occurred.

Spot-checking the invoice’s math can save money if an error has been made.

5. Duplicate invoice

This happens way too often. We may get an emailed invoice; then the same invoice comes in the mail. We need procedures in place to keep it from being paid twice.

Many accounting systems do this automatically, but if one character is off related to vendor name, the system could break down. Review a list of disbursements monthly to make sure payments don’t get duplicated.

Procedures are the answer to reducing accounts payable errors and making sure you pay only the invoices that are truly due.

Five Expenses to Cut During Tough Times

If revenue hasn’t come back as fast as you expected it to, it may be time to review your budget and determine if some planned expenses can be cut. Here are five places to look to do just that.

1. Travel

Since most events have been moved online or cancelled altogether, you can likely redirect any money you’ve budgeted for travel this year to other more urgent expenses. And if you have prepaid these items, you may be able to get a refund. Hotels have flexible refunds up to the date of the stay unless you took a prepaid deal. And airlines have begrudgingly provided refunds, although in some cases, it did take time to get them.

Now that so many employees are familiar with Zoom and other videoconferencing tools, you may want to rethink any future travel requirements that could easily be accomplished virtually with a much lower budget.

2. Training

While it’s never a good idea to cut training, there may be ways to deliver it more affordably. You may be able to purchase subscriptions to online courses that include an “all-you-can-eat” component to them. A good example is Lynda.com, now owned by LinkedIn.

Any unnecessary training that can be delayed is another way to free up funds.

3. Dues and Subscriptions

If money is tight, evaluating your memberships is one area where you may be able to free up money. Especially since many in-person events have been cancelled, this might be a good time cancel any renewals you are not able to fully utilize.

Subscriptions are also something you can review. Can any of these be cancelled to free up cash? You can always re-subscribe when things get better.

4. Employee Perks

If you provide your employees with benefits and times are extremely lean, cutting them is an option to keep from laying off workers. Some of the options might be:

Eliminating perks like movie day, free car washes, or onsite chair massages
Stopping coverage of paid volunteer hours
Cutting education expenses if you are paying college tuition for some employees
Cancelling employees’ memberships and subscriptions as described above
Slashing training budgets as described above
Converting event attendance and sales meetings to online versions
Disallowing overtime work
Holding off on employee bonuses
Reducing vacation or holiday pay
Cutting down on health care options such as vision and dental plans
Reducing 401(k) matches on a temporary basis (watch out for plan requirements, though)
Cutting regular hours

All of these are steps you can take to avoid having to reduce your workforce.

5. Layoffs

One painful place to look for more cash is your workforce. If work has slowed due to demand, you can raise cash by furloughing or laying off workers. Unfortunately, many businesses have already had to do this.

By looking deeply at all of your business expenses, you can find places to cut spending so that you will be in a better position for the future.

How to Reduce Stress Around Money

Many families and small business owners have seen decreases in income over the last several months. Money struggles can cause us to experience stress and worry, and none of us need that right now. Instead we need to boost our immune systems and decrease stress.

Here are some tips on how we can take back control of our finances and reduce our stress around money.

1. Assess your situation.

Take an inventory of your bank accounts, credit cards, and other financial accounts. This helps you to see the entire picture. You can be financially healthy in different ways. For example, you might be low on income coming in but if you have healthy savings or plenty of assets, you might be just fine.

2. Track your spending.

When you can see where the money is going, you can make good decisions about what changes you need to make. Use tracking software like Quicken® or simply a spreadsheet so you can see how much you really need for things like the rent or mortgage, food, utilities, and other necessities.

3. Make any changes that you need to.

If you have more expenses than income, here are several ways to get back in balance:

Cut any unnecessary spending. For example, trade the expensive $100+ cable bill for a $15 Netflix subscription, at least for a while.
File your taxes early, especially if you have a refund coming.
Avoid temptation spending if you don’t have enough for the basics. Remember what’s important and find the will to curb impulses.
Sell some of the items you own that you no longer need to raise money.
Get a second job.
Get support from local nonprofits that can help you if you qualify.
If you must, dip into your savings or 401(k).
Ask family members to help.

4. Build a budget and stick with it.

Making a plan helps some people reduce their stress a great deal. They feel good that they now have goals and can develop new habits that will work for their lifestyle.

In your software or spreadsheet, commit to monthly spending limits for each major category: housing and utilities, food, transportation, clothing, entertainment, savings, paying off debt, and other.

Each month, track how you did by comparing your actual spending with your planned spending. Give yourself a grade on how you did, and either reward yourself or make the changes you need to.

5. Pay off debt.

If you have debt, make a plan to pay it off systematically. Here are some ways you can speed that up:

Pay down the debt that has the highest interest rates. You might even be able to consolidate and refinance your debt to a lower rate.
Make a payment every single month, even if it’s small.
See a credit counselor for more ideas on how to get out of debt faster.

6. Build a cushion for the future.

If your spending and income is balanced, but you don’t have a savings cushion, that can also be stressful. You need a safety net to fall back on for times just like these.

Decide on an amount that you can put away for a “rainy day” fund, and stick to it. It’s also never too early to start saving for your retirement years. The younger you start, the more your money will grow into a significant nest egg, providing comfort and flexibility in your final years.

7. Identify any other stressors related to money.

Perhaps a relative constantly asks you for money, and this causes you stress. In this case, you may have to make a “tough love” decision to reduce your stress while maintaining family relationships. These are very personal, individual decisions that include factors far beyond finance. But if they are causing stress, some kind of action should be taken.

8. Make your accounts work for you.

If possible, select credit cards that give cash back, miles, or other perks. Keep you bank balance high enough so that you don’t get charged a monthly fee, and try to get an account that pays interest. You won’t get rich from these things, but they are fun perks that help you save.

9. Invest wisely so you can sleep at night no matter what happens.

Understand your risk tolerance level when it comes to investments, and avoid investments that are too risky. You’ll sleep better at night knowing your money is safe.

Hopefully, these tips will help you decrease your money stress and improve your control over your finances.

3 Essential Metrics for a Smarter Marketing Spend

The only way to get smarter about how to invest your marketing dollars is to document and measure what’s happening now in your business. What you’ve measured, you can then improve.

Marketing Spend

The first step to measuring what you spend on marketing is to aggregate all of the costs. They may be in one account or several. Some of the places to look for marketing expenses include:

Advertising – for online or print ads, trade shows, sponsorships, and other advertising costs
Dues and subscriptions – for membership fees to networking and professional associations
Education – for marketing training
Marketing – for obvious reasons
Office supplies – for graphics subscriptions and fees
Payroll, salaries, and wages – for allocation of employee time spent on marketing projects
Printing and postage – for flyers and direct mail
Professional fees – for marketing consultants, coaches, designers, and writers
Software/Technology – for marketing software and apps
Travel – for trade show or conference attendance

Once you have aggregated all of these costs, you’ll have a good idea of what you’re spending on marketing and you can calculate the first metric, marketing spend. The formula is:

Total marketing costs / total gross revenue = Marketing spend

This gives you a percentage.

Most companies spend five to ten percent on marketing. Higher growth companies will spend close to ten percent, and stable growth or slow growth companies will spend close to five percent. Large companies will spend more, from nine to 12 percent of gross revenues, than small companies.

CAC – Cost to Acquire Customer

Probably the most important metric for marketing is how much it costs on average to acquire one customer. To compute this, count the number of new customers for any period of time, and use this number in the following formula:

Total marketing costs / number of new customers = CAC

A more granular version of CAC is CPA, cost per acquisition. Unlike CAC, CPA is measured by campaign or marketing channel, or the source of how the customer was acquired. Example marketing channels include email marketing, social media, and paid ads, to name a few.

Revenue per Customer

Revenue per customer is a good measure in many companies. It can tell you how much, on average, a customer will spend at your company over a period of time, adding up all of the orders, projects, visits, or engagements for that customer. The formula is simple:

Total revenue for a period / total number of customers for the same period = Revenue per customer

A similar metric that’s valuable is how much a customer will spend at your company in their lifetime. That’s called CLV or customer lifetime value. Use the same formula above but compute it based on the longest period of time you have records for.

When you can compare revenue per customer or CLV with CAC, you can determine how much you can afford to spend to acquire new clients.

Let us know if we can help you calculate these metrics so you can become wiser about how to invest your marketing dollars.

How Liquid Is Your Business?

Liquidity in business has nothing to do with water, milk, or juice! It describes how quickly you can sell an asset and convert it into cash. Cash is the most liquid asset of all. Real estate, in contrast, is not quite as liquid because it could take months to sell it to a new owner.

Liquidity is important to all businesses. It affects your credit score and how much you can borrow. It’s a measure of whether you can pay your bills on time. It’s also one of many measures of the overall financial health of your business.

If your business sells items that take a long time to produce, liquidity can be extremely challenging and should be carefully managed. Examples include farms, wineries, breweries, automobile manufacturers, and biotech researchers.

Liquidity Ratios

A couple of financial metrics can quantify your business’s liquidity. The current ratio is computed as follows:

Current Ratio = Current Assets / Current Liabilities

The largest components of current assets include cash, cash equivalents, accounts receivable, and any other asset that is expected to be converted to cash within one year. The largest components of current liabilities include credit card balances, accounts payable, bills due, interest payable, and the amount of any loan due within one year. You can find both current assets and current liabilities on your balance sheet.

Companies with a current ratio of less than 2:1 are considered less liquid, while companies with a current ratio of more than 2:1 are more liquid. However, current ratio values and whether they are “good” or “bad” vary by industry, so before you panic, check out your industry benchmarks.

Another measure of liquidity is the quick ratio. It measures how equipped a business is to meet its short-term obligations by taking its most liquid assets, cash equivalents, and using them to pay down current debt. Its formula is:

Quick Ratio = (Cash + Cash Equivalents + A/R) / Current Liabilities

This ratio’s value should typically be 1:1.

Emergency Fund

A good common-sense measure you can use to stay on top of your business’s liquidity is to build a healthy emergency fund. To calculate how much you need, determine how much you typically spend each month. You can get that number by reviewing a bank statement and summing all of the withdrawals including checks paid and online withdrawals. Do this for each bank account you have and include other accounts such as PayPal if you use them for disbursements.

This should give you your total spend per month. Go back a few months to calculate an average spend per month. The farther you go back, the more accurate your average will be, especially if you have a lot of large annual payments throughout the year.

Now that you have your average spend per month, your emergency fund should be a multiple of that spend. Three months’ worth should be the minimum amount in your emergency fund. If you spend $50,000 per month on average, your emergency fund should be $150,000 at a minimum.

An emergency fund will not only make your business more liquid; it will protect you if disaster strikes. According to FEMA, 90 percent of small businesses that experience a disaster will fail within a year unless they can resume operations within five days. Having an emergency fund will increase the odds of your business continuing in spite of any hardship that may occur.

If you have questions for us about your business’s liquidity or starting an emergency fund, please feel free to reach out any time.

18 Small Business Opportunities in 2020

Deciding on the kind of business you want to start is a very big decision. Some require specialized skills that either the owner or employees will need. Others require a substantial initial capital outlay. In any case, it’s always a good idea to consider the health of the industry you’ll be entering in.

While we are not giving any kind of investment advice in this article, we thought it’d be fun to list the business ideas that will be recession-proof in 2020, many of which were also fast-growing in 2019. They are not in any particular order.

1. Bicycle shops

Demand for bikes ramped up this year when people started staying at home due to shelter-in-place orders. They saw the need to exercise close to home, and a bike is the perfect accessory to get people out of the house safely.

2. Building services

This group includes businesses that provide services like office and home cleaning, landscaping, and pest control. New demands in cleaning will continue for some time.

3. Software development

Businesses with skilled developers are in demand as other businesses look to automate more and more of their processes. Workers with skills in artificial intelligence and virtual reality are in very high demand. In 2020, we added a huge demand for video conferencing tools, and other tech tools we need to work from home.

4. Online publishers

While the traditional print media such as book publishers and newspapers are declining in growth, online publishers are thriving. This category includes bloggers as well as the internet stars on YouTube that are making great money through online ads and product endorsements. The fast pace of the news in 2020 has simply accelerated this trend.

5. Building finishers

This category includes construction companies that provide drywall, painting, and flooring to finish out a building or house. Th need will continue in 2020 as offices, shops, and other businesses remodel to meet social distancing and other safety rules.

6. Outpatient care

An alternative to going to the hospital emergency room, these care facilities are growing fast. For patients, they are less hassle than making an appointment with a doctor and far less expensive than ER bills. Once tests and treatments for COVID-19 become universal, these places will become good alternative for people with mild symptoms.

7. Administrative services

There’s a growing need for businesses that need additional administrative support beyond what employees can provide. Virtual assistants are included in this category as well as staffing companies that provide temporary clerical workers onsite.

8. Physicians

If you’ve ever been in a doctor’s office waiting room full of people, you know that this area is in demand. This include offices of physicians of all specialties.

9. Professional drivers

Professional drivers fall into two categories: truck drivers and delivery/taxi services. The demand for truck drivers is always increasing as online orders and ecommerce steadily grows. Many of these drivers are independent and own their own rigs as well as their own businesses.

Uber, Lyft, GrubHub, and DoorDash, to name a few, have increased the demand for professional drivers who can deliver food, medicine, or people to where they need to go.

10. Data processing

The demand for data hosting, server farms, and data processing continues to grow as our appetite for technology increases.

11. Warehousing and storage

Places like self-storage facilities will be in demand for a couple of reasons. Families have more stuff than they have room for. And as families continue to be mobile, they will need temporary storage space. All you have to do is look on your street at all the cars that don’t fit in their garages to see the demand in this type of business.

On the commercial side, increased ecommerce demand and the need for pickup and delivery services has increased the need for warehouses for businesses in the distribution space.

12. Construction

In most places, construction is booming, so there is a demand for general contractors, subcontractors, architects, engineers, and businesses that support construction.

Architects should be busy re-designing spaces, such as offices, restaurants, nursing homes, day care centers, and jails, to name a few, to keep people safer.

13. Medical and diagnostic laboratories

Even before COVID-19 came on the scene, this type of business was growing fast for several reasons beyond standard medical test ordered by doctors. People are getting DNA tests on their own, and nutritionists are doing more testing as people realize diet is a huge factor in health and personal energy.

Now that COVID-19 diagnosis and treatment require a variety of tests, these labs will be busy for a long time in the future.

14. Ecommerce wholesalers

There is a growing number of people who sell items on ecommerce platforms such as eBay and Amazon. While a few source these items through agreements with manufacturers, many visit flea markets, donation centers, and resell shops to make their purchases and repurpose the items.

Smart wholesalers that have their systems set up can help brick-and-mortar shops without an ecommerce presence sell their items while they are shuttered.

15. Professional services

Fields that are fastest-growing include technology and marketing consultants. An interesting new type of security consultant is one that trains groups on how to deal with violence in the workplace and schools.

Attorneys are busy helping individuals update their estate plans and will likely be busy with divorce filings after COVID-19 has let up some. Accountants have new laws to communicate to their clients, and many small businesses want their books caught up now.

16. Educational services

This broad group include elementary and secondary schools and junior colleges. It also includes adult career education, including businesses that teach trades skills, computer skills, and business skills.

Companies that provide an online component to learning will be in demand for quite a while.

17. Real estate agents

Competitive, yes. But the average home sells twice as fast as it did eight years ago, so the number of transactions have doubled, increasing demand.

18. Personal services

While a broad category, the areas seeing growth include personal trainers, personal nutritionists, and wedding planners, to name a few.

If your business falls into one of these categories, congratulations. If you’re considering starting a business and you have the skills needed to start one of the businesses above, what are you waiting for?

5 Signs You Need to Upgrade Your Accounting System

To maximize profits in your business, all of your business functions need to run smoothly, including your accounting department. Your accounting system is at the core of your accounting function. If it is old or lacks the features you need, your business may suffer. Here are five warning signs you can look for to determine if it’s time to upgrade or replace your current accounting system with something more cost-effective.

1. Not enough users

If your current system limits the number of users you can have in the system at any one time, this could be a major enough reason in itself to switch to a larger option. Luckily, most accounting software companies include an accountant user for free, so at least this type of user doesn’t have to count toward your total requirements.

If you’re not sure how many users you currently have a license for, we can help you check on that. It might be as easy as buying more licenses if you’re not at the maximum capacity. But if you are at maximum, it may be time to look for a better accounting system with room for you and your business to grow.

2. Outdated

If your accounting system runs on desktop-based software that’s upgraded every year and you have not paid for or installed the upgrades, then your system is outdated. If it’s been sunsetted, that means the software vendor no longer supports the software. You are at major risk for the software crashing, getting buggy, getting hacked, or worse, permanently breaking.

The cost of getting the system current may be better spent looking for a new alternative, or moving to a cloud-based system where updates occur automatically.

3. Lack of functionality or scale

It is commonly the case that your business has grown so much that it’s outgrown your original accounting solution. That’s good news! It’s time to find a solution that will scale better for your business.

You might be missing important features that are costing you more time and money than if you were on a system that offered those features. Common time-wasting activities in accounting include too much time spent on data entry and/or Excel spreadsheets to make up for what the accounting system can’t do.

4. Lack of reporting and analytics

If you’re unable to receive the reports and analytics you want to run your business better from your current accounting system, it may be time to switch. With better data comes better decision-making and if lack of data is costing you money, then it’s time to find a more robust system.

5. Lack of integrations

Thousands of apps exist to expand accounting systems’ core functionality. If your current accounting system lacks integration capabilities or does not have apps that are built to integrate with it, you may be missing out on additional functionality. This include mobile apps; it’s quite common now to do much of your accounting work from your mobile phone.

Does your current accounting system have any of these red flags? If so, please reach out. We can help you find a best fit for your accounting needs.

How Business Owners Get Paid

At first glance, this article topic might seem too simple. After all, to get paid, don’t you just take money out of your business? Well, yes, but there is much more to it in the long run as well as from an accounting side. Let’s take a look.

The Traditional Paycheck

If you’ve ever worked for someone else, you probably received a paycheck every few weeks. It took care of three major things:

Your regular pay that you live off of from day to day
Taxes you owe to the federal and state government
Benefits. Depending on the employer, you might have received health care, retirement contributions, and vacation and holiday pay.

The employer took care of the needs you have today as well as some of your future needs.

Your Business Pay

Now that you’re the employer – of yourself, your business has to cover all of the items mentioned above. How it does that depends on the type of entity you chose when your business was formed.

Sole Proprietors

If you are doing business as a sole proprietor, you take draws from your business instead of paychecks. A draw is simply a cash withdrawal that reduces the ownership investment you have made in your company. The draws do not include any kind of taxes, including self-employment taxes; these need to be deposited separately, usually through quarterly estimated tax deposits to the IRS and to any relevant state agency.

As a sole proprietor, you’ll likely need to find your own health insurance. And the most important thing you’ll need to do is plan for your retirement by investing in IRAs or otherwise saving money that is earmarked for your retirement.

From an accounting standpoint, owner’s draws are shown in the equity portion of the balance sheet as a reduction to the owner’s capital account.

Corporations

If your business is formed as a C Corporation or an S Corporation, you will most likely receive a paycheck just like you did when you were employed by someone else. You will also be responsible for making the payroll tax deposit, funding the retirement plan, and paying for health care insurance.

Owners can also take money out of the business over and above their paychecks.

From an accounting standpoint, corporate payroll, taxes, and benefits are all considered expenses and are shown on the income statement. Any money taken out additionally is a reduction to the owner’s capital account, and this is shown in the equity section of the balance sheet.

Partnerships

If your business is formed as a partnership, each partner will be paid distributions based on the partnership agreement. Typically, that means receiving a base salary and a portion of the profits. You can also take money out of the partnership. Taxes are not included; you are responsible for making your quarterly estimated payments. Plus, you will also be responsible for paying self-employment taxes.

For benefits like retirement plans, partners can be eligible, but the tax treatment of these and other benefits is not necessarily the same as it is for a W-2 employee. The rules are complex for deductibility, so it’s best to contact a tax professional to find out more.

Evaluating Company Profits

It’s critical to understand where your wages show up on your books so that you can truly understand your business’s profitability. With corporations, the salaries are included in the expenses, so net income is after, or net of, salaries and payroll taxes.

With sole proprietors and partnerships, the net income figure on the income statement does not include owner salaries because there aren’t any. Instead, only the equity section is impacted. Net income for partnerships and sole proprietors should always be high enough to at least “cover” an amount equivalent to a “so-called salary” for all of the active, participating owners.

If you have questions or need help understanding how business owners get paid, please feel free to reach out any time.