Huge problem facing most businesses? Routinely falling into a cash crunch.
The good news is it’s easily avoidable.
Here are 11 ways to turn your cash-hog company into a profit fountain:
First, understand the basic principle:
The less time it takes to convert resources to cash, the healthier the business.
Not only does that mean the business is easier to run, but buyers will pay a premium for businesses with great cash conversion.
Here’s how to do it:
#1 Shorten sales cycle
The longer your sales cycle, the longer between spending money and resources on generating the lead and collecting cash.
#2 Reduce inventory
Inventory is money tied up in “stuff.” When you see inventory, see dollars trapped, yearning to be free. Reduce inventory and decrease cash you have tied up.
Related Slideshow: Home businesses tax deductions to take as a small business owner
Small business owners take on a considerable amount of responsibility. Beyond serving clients, they must also take care of all the minutiae of running a business, including keeping track of expenses they can deduct as a small business owner.
Fortunately, small business owners and entrepreneurs who use their home for work can benefit from various home business tax deductions that help them reduce their taxable business income. Common deductions include office supplies, software and internet access, but deductions can vary widely depending on the type of home business you run.
- Who qualifies for home business tax deductions?
- 25 home business tax deductions for your small business
- How to write off home business expenses
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If you run your business out of your home, you may be able to deduct expenses for the use of your residence on your taxes for your small business. The home office deduction can be utilized by homeowners and renters, and any type of residence can qualify (single-family home, condominium, manufactured housing, etc.).
To qualify for the home office deduction, your home business activities must meet the following criteria:
- Regular and exclusive use. According to the IRS, you must “regularly use part of your home exclusively for conducting business.” In other words, you must have a space in your home that you use only for business purposes, such as a home office or extra room that is used only for business and never for personal use.
- Principal place of business. To qualify for the home office deduction, your home also must be the principal place your business operates from, although there are exceptions. The IRS reported that you may qualify for the home office deduction if you also have a business location outside of your home, provided you use your home for a substantial component of your business. For instance, if you conduct business in another location but have meetings with clients or patients in your home, the IRS allows you to deduct expenses for the part of your home that you use “exclusively and regularly” for business purposes.
There are some exceptions to these rules, including for those who run a home daycare. If your small business involves watching children in your home, then it would be impossible to meet the “exclusive use” criteria if you’re watching children in your own living area. To qualify for this exception to the exclusive use rule, you must provide daycare for children, persons age 65 or older or persons who are unable to care for themselves. Additionally, you must have “applied for, been granted or be exempt from having a license, certification, registration or approval as a daycare center or as a family or group daycare home under state law,” noted the IRS.
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If you’re eager to reduce your taxable income this year, figuring out which home business tax deductions you can take is a smart first step. Here are 25 common deductions you may be able to qualify for.
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Business supplies and office expenses, such as office furniture, printer paper, pens, calculators and business cards, are deductible provided they are for business use. According to the IRS, business expenses must be both ordinary and necessary, meaning they are “common and accepted in your trade” and “helpful and appropriate,” though not necessarily indispensable.
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Small business computers and software you need to purchase for your business, including small business accounting software, should be tax-deductible business expenses provided these purchases are ordinary and necessary for your business to remain in operation.
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You may also be able to deduct home repairs and maintenance performed on your place of residence, but only for the part of your residence that is used exclusively for business purposes. According to the IRS, an example could include “painting or repairs only in the area used for business,” like a new coat of paint or replacement flooring in your home office.
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You can deduct the business portion of your rent as an expense if the property you rent is for use in your trade or business. However, you cannot deduct rent as a business expense if you have or will receive equity in or a title to said property. Per the IRS, rent is defined as “any amount you pay for the use of property you do not own.”
In terms of depreciation, the IRS said that you can typically deduct depreciation on the business use portion of your home as well, in an amount up to the gross income limitation over a 39-year period.
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If you have a home office, your house utilities will also be required for your business. As a result, you can deduct a portion of your utility bills, such as gas and electric bills. However, you can only deduct a portion of these expenses since, obviously, part of your utility bills are for personal use.
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If you use your car for business purposes, you can deduct auto-related expenses for the business use of a car. The IRS also reported that, if you use your car for both personal and business use, you must divide your car expenses based on the mileage you drive for personal and business purposes.
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You can also deduct mileage for all travel related to business. The IRS offers a table of standard mileage rates and mileage deduction rules you can refer to for the last several years, including mileage expenses for 2020.
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You can also write off employees’ pay as a small business owner. This is true even if you operate your business out of a home office.
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You can also deduct contributions to retirement plans, including tax-advantaged retirement plans for the self-employed or small business owners, such as an SEP IRA or a solo 401(k).
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If your business is paying interest on a credit card or loan that you borrowed for business activities, you should also be able to deduct this interest as a business expense.
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According to the IRS, you may be able to deduct various federal, state, local or foreign taxes that are directly related to your trade or business.
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You can typically deduct the cost of business-related insurance products you pay for, provided they are applicable to your trade or profession.
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If your business creates products or purchases them for resale, you can typically deduct the cost of these products or the costs involved in manufacturing them. This can include the cost of raw materials, freight, shipping, storage, direct labor and more.
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Thanks to the Tax Cuts and Jobs Act of 2017, you may be able to deduct up to 20% of your qualified business income on your taxes. This deduction does have limitations based on your trade or business as well as how much you earn, however. Specifically, joint tax filers with incomes below $315,000 and other filers with incomes below $157,000 can claim this deduction in full provided they work in a qualifying industry. For 2018, joint tax filers with incomes between $315,000 and $415,000 and individuals with incomes between $157,000 and $207,500 were subject to phase-outs.
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If you use your home for business purposes, you can generally deduct cleaning services and supplies that you purchase for the business-related portion of your home.
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If you own your home and have a home mortgage, you can deduct a portion of your mortgage interest on your business taxes. Deductions are based on the percentage of your home that you use for your business. If your lender requires mortgage insurance, part of that can be deducted as well.
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Business-related travel expenses can also be taken as a business expense. This could include travel to meet with clients or to professional education or training events.
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If you pay for professional services, such as legal advice or tax preparation, these expenses can be deducted as business expenses.
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If you pay for marketing help or a business coach, these expenses can be deductible from your business income.
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If you ship items for business purposes, shipping costs can be deductible on your taxes. The same is true for postage when used for business purposes.
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A security system that protects the doors and windows in your home from intruders can also be partially deductible as a business expense, provided part of your home is used for business purposes.
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Professional memberships you pay for and subscriptions to business-related publications can also be tax-deductible.
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The IRS said that while the first local telephone landline in your home is not a deductible business expense, “charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses.”
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Health insurance for yourself and your family is deductible as a business expense when you’re self-employed, although you do not have to have a home office to qualify for this deduction.
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If you pay for or reimburse education expenses for an employee, you can deduct the expenses if they are part of a qualified educational assistance program, per IRS rules.
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If you’re feeling overwhelmed by all of the home office business expenses you might have to keep track of, you should know that the IRS also offers a standardized home office deduction that requires less legwork upfront. Here are the two options you have when it comes to how to write off home office business expenses this year:
- Simplified home office deduction: Since the 2013 tax year, taxpayers have been able to access a simplified option for computing the home office deduction. This option lets you determine a standard deduction based on the square footage of your home office space, thus letting you avoid tracking and reporting all of your individual home office expenses. Of course, the simplified method isn’t perfect since you can’t take some deductions like depreciation. You also cannot carry over a loss from a previous year, which is a departure from the regular method.
- Regular method: If you keep excellent records and prefer to deduct business expenses the old-fashioned way, you are still able to do so. With this method, you would need to keep detailed records of all your actual expenses for your home office including mortgage interest, utilities, depreciation and more. From there, your deduction will still be determined based on the percentage of your home used for business purposes.
If you’re using the regular method, you should plan on using IRS Form 8829 for certain business-related tax deductions when you file your taxes. But be aware that some business expenses don’t fall under the home office deduction, so they would be deductible within other areas of your taxes, such as Schedule C or F. Examples include telephone expenses, dues and salaries.
Also note that if you use the simplified method and itemize deductions, you can deduct some expenses for your home that are otherwise deductible, including mortgage interest and property taxes, as itemized deductions using Form 1040 or 1040-SR, Schedule A.
When choosing which method to use for your home office deduction, keep in mind that both options have pros and cons. The regular method requires a lot more work, but you have the potential for a larger deduction if you have a lot of qualified expenses within a year. The simplified method is easier, but not necessarily ideal if you want to recapture depreciation when you sell your home, or if you want to be able to carry over losses. Make sure you understand each method and its limitations so you can make an informed decision.
This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.
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#3 Right-Size Delivery Staff
If you have a service business, think of delivery staff as inventory. Right size your delivery staff for the forecasted jobs. You’ll never get it 100% right, but too many mouths to feed and not enough paying work isn’t good for anyone.
#4 Reduce delivery cycle
Longer delivery cycles tie up resources that could be servicing new customers (and generating cash). If you’re only getting paid after delivery, then a long cycle is between you and cash collected.
#5 Collect upfront
The most obvious one here. If you can, collect up front and your cash position is immediately better.
#6 Invoice promptly
Way too many businesses end up invoicing 60 or 90 days later than they could. Combine that with a net 30 invoice, and customers getting a 30-60 day grace period after that, and you’re getting paid in half a year(!)
#7 Don’t Extend Terms
So about that net 30. If you can’t collect up front, why not net 15? Tell your customers: you’re not a bank. You’re in the business of providing X, not lending money.
#8 Stretch AP
On the other hand, get super long terms for vendors you pay. The longer you hold onto cash before it goes out the door, the better your cash position will be. Get long terms, pay just down payments, etc. Do exactly the opposite for your vendors as you’re doing.
#9 Lease, Don’t Buy
Unless something is mission-critical, consider leasing it. Just like inventory, that truck, machine, or whatever is just a chunk of depreciating cash… Which could be better deployed elsewhere.
#10 Outsource
If it’s not core to your business, consider outsourcing it – and get a rock-solid Service Level Agreement. Let a specialized company focus on efficiencies that aren’t core to your business. Oh, and stretch their payments too.
#11 Consider Factoring
Invoice factoring is selling accounts receivable invoices at a discount in exchange for immediate cash. It’s not for everyone, but sometimes it’s a great bridge as you work on your cash cycle doing the 11 steps above can more than double cash on hand.
This article originally appeared on RajJha.com
https://rajjha.com/how-to-avoid-cash-crunches/
and was syndicated by MediaFeed.org.
More from MediaFeed:
5 tips for organic business growth
It’s no secret that startups have a prodigious failure rate. In fact, according to a recent Entrepreneur.com study, the four-year survival rate for a startup is just 49%.
With demoralizing stats like this in mind, entrepreneurs may be tempted to grow their profits through any means necessary, including inorganic strategies like acquisitions or mergers. However, the truth is that business owners can achieve impressive growth through organic strategies as well, allowing them to retain control of the companies they built from the ground up.
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Also known as “true growth,” organic growth refers to the process of growing a business by reducing costs and increasing sales, either by finding more customers or enhancing output to current clients. On the other hand, inorganic growth occurs when a company merges with or is acquired by a second business. Entrepreneurs should take the time to familiarize themselves with the advantages of organic and inorganic growth, as well as some of the top strategies for execution, so they can decide which is the best choice for their business.
As a new business owner, you’ll likely want to increase profits as quickly as possible. By employing inorganic strategies like mergers and acquisitions, startups can grow their businesses more quickly while taking advantage of resources such as stronger credit lines and expanded market resources. Additionally, joining with another company lets you take advantage of its expertise and experience in the industry to develop your own brand.
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By merging with another business, you agree to hand over some of your control and equity to another company. Not only can your initial vision become diluted, but you may also be forced to take on new business and managerial challenges before you’re truly ready. In some cases, you may have to rush to grow your staff and production capabilities to keep up with demand.
On the other hand, organic growth techniques allow you to grow your business on your own timeline. Because you aren’t sharing control with another company, you can hire employees and expand sales at your own pace. Additionally, entrepreneurs who maintain their autonomy now can sell for a larger profit later when the company is fully developed.
While retaining control of your company offers many advantages over the long haul, it can make business growth challenging in the short term. Some entrepreneurs struggle to grow beyond their current marketplace, while others find themselves cut down by the competition. Additionally, new businesses must often fight to make ends meet from month to month. Fortunately, strategies exist to help startups grow their profits without handing over control to partners or investors.
Here are just a few of those strategies to help you grow your business organically:
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Want to grow a business that will feed your family and employees for years to come? The first step on the road to entrepreneurial success is starting the right kind of company.
With home-based and e-commerce businesses, you can avoid expenses like rent and commuting during the early, lean years of your company. As an added bonus, working out of the home lets you write off parts of your mortgage and electric bill. You can then invest these savings back into the business to help you grow in the long term.
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A common conundrum for new business owners is whether to take your full cut of the profits or invest the money back into your company. While you may be tempted to keep some of those hard-earned dollars for yourself, you should aim to reinvest gross profits whenever possible to help your business grow. Investing your own money shows prospective clients and lenders that you are confident in your company’s long-term potential.
Not sure where to put profits? When in doubt, invest in marketing, SEO and other tactics likely to generate more business for your startup. If your income permits it, you may also want to invest in employee training and technological improvements, as these can yield large profits down the line for your company.
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No matter how happy your current clients are with your offerings, you will have trouble growing your business organically if you don’t put effort into finding new sales channels. If you don’t currently sell your goods online, you should definitely consider starting a website to expand your reach to other regions. Additionally, you can introduce new products, cross-market services to your existing clients and expand to different markets. For example, a company that specializes in SEO may want to expand its services to include social media and search engine marketing.
Finally, business owners should employ market segmentation to customize their strategies according to the specific channels they are leveraging and the specific markets they are trying to reach. This way, you can create unique campaigns based on customer location and demographics and watch your sales rates skyrocket.
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As a new business owner, you may feel the urge to micromanage everything that happens at your company. However, the truth is that macro-management is a far more effective way of enabling organic growth for your startup.
To keep your company moving forward, you should train top employees to take over some of your daily responsibilities. While you may be tempted to keep costs down by hiring employees who will work for less, in the long run these staff members could end up costing you more if their efforts aren’t up to par. Find people you can trust to get the job done—even when you’re not around—so you can focus on growing and developing your business in the years to come.
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From minimizing spending, to reinvesting profits back into the business, organic growth strategies help ensure that you will retain control of the company you worked so hard to build. Do your research, and consider all the growth strategies available in order to give your business the best shot at success.
Do you know how sales taxes are impacting your bottom line? Check out our sales tax calculator.
This article originally appeared in the QuickBooks Resource Center and was syndicated by MediaFeed.org.
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Featured Image Credit: AndreyPopov/iStock.
