You’re Not Too Sophisticated for Cash

It seems as though nobody uses cash anymore, but why should you? Smart people use credit cards and pay the bill at the end of the month so they can earn points, build credit, and have additional time to pay for their purchases, also known as “float.” But is it really that smart to use a credit card or check card to make all of your purchases, such as groceries, gas, dining, etc.?

What exactly are the benefits of using old-fashioned cash? I’ll give you a few:

  1. Easier Budgeting: No one likes to budget, which is why almost no one does this. But with cash, you can easily set aside a certain amount that you need each week for variable expenses, such as groceries. Once you start using cash you will become more aware of how you spend your money as it’s more tangible than swiping a card.
  2. You Will Spend Less: It’s easy to whip out your card a make purchases without even realizing how much you are spending. I’ve heard statistics that say that you tend to spend between 10% to 50% more on purchases when using a credit card or check card versus using cash. If your variable expenses are $50,000, then a 10% savings would equal $5,000, which is greater than any credit card rewards or possible float.

Watching your spending is one of the ways of becoming wealthy or at least financially stronger. I have witnessed this habit over the years, although it would be considered a small sample size and not an actual study, but there is a great book that espouses frugality called “The Millionaire Next Door” by Thomas J. Stanley.

As a caveat, I do not recommend using cash for business expenses as it creates an accounting nightmare.

How a 10% Productivity Increase Can Increase Profits by 35%

A simple way to increase the profits of a business is to increase employee productivity. Each business and industry is unique, and here are several simplified illustrations to show the impact. The assumption is that if productivity increases by 10%, then sales will also increase by 10% due to extra capacity as long as there is demand for services.

Example #1: A service business that also has product costs, such as a tradesman, landscaper or other service provider that also sells products to a customer.

Example 1
 Current 10% Increase Diff %
Sales          1,000,000          1,100,000          100,000 10.0%
COGS              350,000              385,000            35,000 10.0%
Gross Profit              650,000              715,000            65,000 10.0%
Expenses              500,000              512,500            12,500 2.5%
Net Profit              150,000              202,500            52,500 35.0%


Example #2: A professional services business such as a consultant or architect, that does not sell products.

Example 2
 Current 10% Increase Diff %
Sales              750,000              825,000            75,000 10.0%
Expenses              450,000              461,250            11,250 2.5%
Net Profit              300,000              363,750            63,750 21.3%

The big question to ask is how can this be accomplished? Here are 3 ways:

  1. Having the Right Employees: Making sure that an employee is a good fit for your business is crucial. There are traits beyond technical capabilities that you should look for, such as attitude, ethics, loyalty, and energy levels.
  2. Training: A highly trained employee will be much more productive because they will know what to do and how to do it correctly. Mistakes and lack of training cost time and money.
  3. Better Scheduling: Virtually every business needs to schedule their jobs, appointments, meetings, work, etc. Proper scheduling can easily be implemented and yield a very high return with usually little to no cost.

6 Ways to Cut One of Your Largest Expenses – The Grocery Bill

I’ve had a conversation about the grocery bill with several clients recently and thought it would be helpful to share some ideas to both save time and money while shopping for groceries. As most of you know, we have quite a few mouths to feed! Unless you eat out every single meal, then this article applies to you.

  1. Only Go Food Shopping Once a Week: Every time you go to the grocery store you make impulse purchases, which can significantly increase how much you spend. Also, is there ever a short line at the grocery store?
  2. Plan Your Meals for the Week or Month: If you know what you are going to eat ahead of time, then you can coordinate your food shopping with your meals. You can also see which meals make sense to cook on certain days to coordinate with your activities or work schedule.
  3. Make a List: This will make your trips more efficient, and will help to reduce the waste of throwing out food that you do not need. An advanced technique, if you are Excel savvy, is to make a list that you can reprint and then check off the items that you need. It will take a short time investment, but will save time and money after it is set up. Less waste = more money saved.
  4. Use the Freezer: When meat or other perishable items are on sale, then buy in bulk and freeze what you can’t use right away. To thaw, you can place the meat in the refrigerator a day or two before you need to use it and it will defrost slowly. This doesn’t always work well with fish, though. You can also use the freezer to cook double batches or meals, which will also save cooking time.
  5. Look at the Flyer and Stock Up: Once you get used to using the flyer, it only takes minutes to looks for deals, and then when you do find them make sure to stock up with as much as you can without the food going bad.
  6. Try the Store Brands: Many times the store brands are much less expensive than the name brands and the quality/taste are pretty good, but you have to try for yourself. A good example of this is cereal.

Other tips that are probably not worth the time and savings:

  1. Excessive Coupon Clipping: Spending more than a few minutes is enough time and will produce some savings. More than that and you should probably be on a reality show.
  2. Multiple Stores: If you are going to shop at multiple stores than you will use up a lot of time shopping and planning to save just a few bucks.

The IRS Called Me Yesterday

That’s not strange because as a CPA I speak to the IRS quite often. However, they called my cell phone and left a prerecorded message about tax fraud. It was a scam of course, and I am posting this to warn you that the IRS does not call taxpayers initially without sending a notice, nor do they threaten you with an arrest. If you have received a phone call like this and are not sure if it is legitimate, then please contact our office.

Here is the message:

“Hello, this call is officially a final notice from IRS, Internal Revenue Service. The reason of this call is to inform you that IRS is filing a lawsuit on your name because you had tried to do a fraud with the IRS, Internal Revenue Service, and we are taking a legal action and we are issuing an arrest warrant on your name. To get more information regarding this case just call us back on our department number 202xxxxxxx. I will repeat it 202xxxxxxx. Thank you.”

By the way, the IRS will not ask you for credit card numbers over the phone or ask you to purchase a prepaid debit card.

Business Structure Issues – Key Differences Between an LLC, S-Corp, C-Corp and Sole Proprietor

Business owners have several choices of how they can operate a business. The decision should be well thought out and be able to meet their objectives. Here are some of the pros and cons of each structure:

Sole Proprietor: The easiest form of operating your business is as a sole proprietor. A sole proprietor has a much lighter administrative burden because you account for your business activity on your individual tax return. You may not need to file quarterly payroll tax returns, and may not need worker’s comp insurance. The downside to operating as a sole proprietor is unlimited legal liability, high self-employment taxes, and a much, much greater potential to be audited by the IRS than other taxpayers.

Limited Liability Company: A limited liability company, usually referred to as an LLC, offers greater legal protection than a sole proprietor, and is also extremely flexible. Depending upon various factors and elections, an LLC may be taxed as a sole proprietor, partnership, C-corporation, or S-corporation. In practice, we usually see single-member LLC’s that are taxed as sole proprietors, which means that they have the same downsides as well.

C-Corporation: A C-corporation offers legal protection like an LLC. The drawback is that you have to abide by more legal formalities, including paying yourself reasonable wages, hold annual meetings and take minutes, and also pay additional corporate taxes.  When you want to distribute the corporate’s profits, you will pay taxes yet again as they are considered dividends. C-corporations have their place, but are generally suitable for larger corporations.

S-Corporation: A variation of the C-corporation is the S-corporation. An S-corporation operates just like a C-corporation, but avoids the corporate level tax by taxing profits on the owner’s individual tax return, and has the potential to save employment taxes. The downside to an S-corporation is a higher administrative burden.

As you can see there are many pros and cons to each business structure and the decision should not be taken lightly. If you are thinking about choosing or changing your business structure, then you need to speak to a CPA or attorney who is very experienced with these matters.

What I Learned as a Paperboy

When I was 11 years old up until age 13 I was a paperboy. As far as I know they don’t exist anymore in North Jersey, and I was one of the last paperboys to deliver The Record until they replaced us all with adults. It wasn’t until I owned my own CPA firm that I realized how many business lessons and good habits I learned during that time.

Customer Relationships: I had pretty good relationships with my customers even though most of them never met me before I delivered their newspapers. Most paperboys in my area delivered newspapers on the same two small streets where they lived. Mine was three and four blocks away, which seemed liked miles when you were a kid. Whether my customers liked their newspapers under their mat, on their mat, in their door, or in the railing – I delivered it according to their preference. I remember one customer that wanted their newspaper inside their front door and once I opened the door a cloud of cigarette smoke combined with warm air would come rushing towards me. Their house was so warm that there was condensation on their storm door.

Getting Paid: Most small business owners, and especially service-based businesses and professionals know how painful it can be to ask customers for money, especially when their account is overdue. Every Friday night I would make my rounds to my customers and collect what they owed and would hopefully receive a tip. If my memory is correct, Sunday only delivery was $1 and every day customers were $2. If I received more than $.50 in tips from a customer, then that was a big deal. The best time was during Christmas when the tips were much bigger and I earned more than the $25 weekly average. For the first Christmas, my customers didn’t know me too well, but I still made about $75 in extra tips, but during the next Christmas I made about $300!

Connecting with People: I really liked my customers and each was unique. I remember one family that was kind of quiet, but realized that they had lizards as pets. Once we started to talk more (I owned an iguana), the relationship changed. It’s not all about the money, and connecting with people gives your business much more meaning.

You Can’t do it Alone: The Sunday newspaper was a really large paper back then, almost like a large encyclopedia.  Since my route was several blocks away, and I could only fit a few of the Sunday papers in my newspaper bag, which was hung on my bike, I had the help of my mom on Sunday mornings. We would load up the newspapers in the back of her old Buick station wagon and I would deliver them right from the car and walk or run to each house. I am sure that my mom’s station wagon used up more gas than what I earned for the day. I think that I was half asleep, but my mom would encourage me to “speed it up.” We all need people to help us out and to encourage us.

Being a paperboy was such a rewarding experience, and I wonder how many of my old paper route customers are still living on those same streets. I’m sure most aren’t around anymore, but I will always remember them.

Choose Your Business Partner Wisely

Running your own business is challenging enough, and you don’t want the added burden of having to worry about your business partner. When choosing a business partner you should keep in mind that this decision can make or break your business. Here are a few things to look for and some things to avoid:

What to Look For:

Synergy: Everyone has their strengths and of course their weaknesses. You want to make certain that your partner’s strengths offset your weaknesses and vice versa so that 1 + 1 = 3. For example, one partner may be good at bringing in business and the other at managing the operations of the business. Together the two of you should thrive.

Work Ethic: You want someone who is willing to go all in as opposed to testing the waters and holding back. Your partner should also be willing to go the extra mile to get things done, and have a sense of personal accountability.

Experience: Ideally, your partner should have experience in your industry. Also, experience as a successful business owner is a plus.

What to Avoid:

Financial, Tax or Legal Problems: If your partner has financial problems, then this may be a sign that they will mismanage your business too. Additionally, you don’t want to have their problems become your problems.

Instability: This can mean someone who is currently experiencing personal problems, such as marital problems or family health issues. It’s better to have your potential partner work out their problems first so that they can fully focus on the business.

You will most likely spend enormous amounts of time with your business partner, and both of you will share in the success or failure of your business. Choose your partner wisely.

Municipal Bond Investing Mistakes

Investing in municipal bonds can be a benefit due to the fact that the interest income they provide is generally tax-exempt. In order to realize the full tax benefits of municipal bonds, you have to be careful not to make the following mistakes.

Low Interest Rates: Interest income from municipal bonds is usually much lower than corporate bonds, but since municipal bond interest is generally tax-exempt, your returns may be higher when factoring in taxes. The problem arises when you would have received a greater return by investing in corporate bonds than municipal bonds when factoring in taxes. Generally, if you are in a low tax bracket, then municipal bonds may not make sense.

Purchasing Out of State Bonds: Municipal bonds are not subject to either Federal or state taxes if you purchase bonds from your home state. If you live in a high income tax state, such as California, New York, or New Jersey, then you should consider purchasing a bond from your state to reduce the overall tax exemption.

Alternative Minimum Tax: This dreaded tax, also known as the AMT, may make your tax-exempt municipal bonds taxable. If a bond is considered a private activity bond, then you may end up paying taxes on the bond interest.

You must be careful when selecting municipal bonds by doing your research. Otherwise, in your quest for tax-exempt income, you may end up overpaying taxes or unnecessarily receive a low interest rate.

Don’t Be a Co-Signer Unless You Want to Pay Someone Else’s Debts

Your friend, child, brother, or parent can’t get a mortgage or a car loan so they ask you to be a co-signer. Of course you will be a hero and co-sign for your loved one! But beware of the dangers before doing so.

In reality, the lender is assuming that the odds are fairly high that there will be a default on the loan, otherwise, why would they need someone else to co-sign on the loan? There are certainly many situations that the loan never goes bad, but why take such a chance? Consider this:

If the borrower defaults on the loan, then your credit will take a hit because you are personally responsible for the loan. The lender may also come after you for payments on a loan that you never benefited from. Actually, you had almost all of the risk without any real benefit.

If you are familiar with Murphy’s law, then you know that what can happen will happen. So, what if you are ready to obtain a mortgage or finance a car and then find out that the loan you co-signed went bad? You may not qualify for the loan for yourself or the terms may not be as favorable as they were originally.

One last item to consider is the damage to the relationship once a co-signed loan goes bad. As Polonius said over 400 years ago in Shakespeare’s Hamlet, “Neither a borrower nor a lender be; For loan oft loses both itself and friend . . .” Even thousands of years before Shakespeare numerous bible versus were also written to warn against co-signing such as Proverbs 22:26-27 and Sirach 29:16-18.

Simplify Your Home Office Deduction

The home office deduction is used by both small businesses and employees, which allows a deduction for using part of your home exclusively and regularly for business purposes. This allows a percentage of certain expenses to become tax deductible or at least more tax favorable such as mortgage interest, property taxes, rent, utilities, homeowners insurance, repairs and maintenance, and depreciation. The downside is that it can be both complex and time-consuming when taking this deduction.

The good news is that the you can use a simplified method for deducting home office expenses. This method allows taxpayers to deduct $5 per square foot of business use up to a maximum of 300 square feet for a total deduction of $1,500, as opposed to having to figure out all of your expenses.

Although this new method is simplified, you need to determine if it makes sense to use the simplified form or the traditional method of calculating home office expenses. You also want to make sure that you meet the criteria for having a qualified home office. Additionally, the rules for employees using a home office are more complex and need to be followed strictly.