Today’s small business owners are incredibly lucky to have easy-to-use accounting tools like Wave at their fingertips. Throughout the year Wave does so much of the work for you, like importing bank and credit card transactions, it makes it easier than ever to get your financials organized for tax deadlines.
For some, their Wave records may need some attention before the balance sheet and income statement reports are complete and ready for income tax purposes.
Don’t worry – you’re not alone. Here are four easy steps to getting your balance sheet and income statement reports in tip-top shape!
A big time saving benefit of using Wave is the ability to import your online banking, credit card and payment transaction data. Once the information for your business accounts are imported, all you need to ensure is that Wave matches your account statements and transactions are present in both places.
The best way to start this process is using the ‘reconciliation tool’ found on the transactions page.
Amongst the filters, choose a payment account to reconcile and the date filters for the period you want to reconcile and then the reconciliation tool begins to work.
Once done, simply check mark each transaction to verify and the reconciliation tool will add the transaction balances.
Now you can determine if the balance found on your account statement and Wave match.
It’s important to review your transactions to ensure they all pertain to your business. While doing this, you can also categorize each transaction. Two birds, one stone – everyone’s favourite!
To do this, simply click on the down arrow next to the transaction description. In the column under ‘category’, you can choose form your chart of accounts to categorize the transaction.
Handy Tip #1: Clean up double transactions, for the same transaction. When money comes out of one account i.e. chequing and is applied against another account i.e. credit card, you end up with two transactions in Wave. One will be an uncategorized income and the other will be an uncategorized expense.
To create a transfer and link these two transactions you’ll need to click on the small square box far left of each transaction. At the top of the transactions list click ‘transfer’, this will categorize the transaction as a transfer and will no longer be income or expenses transactions.
Handy Tip #2: Avoid doubling your revenue. If you use Invoice and Payments by Wave, the amount of sales revenue indicated on these invoices accumulates in sales revenue on the income statement report.
When this invoice income is deposited, it also appears as an uncategorized income transaction. To avoid double counting revenue, simply select the down arrow next to the transaction and choose ‘create invoice payment’. This will provide a menu of open invoices you can apply the payment towards.
Not all Wave users need to capture VATs for each transaction. Some countries have VATs for which the small business owner can recover the amount they spend in the year on VATs.
Handy Tip #3: It’s always a time saver to set up your VAT on the sales taxes page in Wave.
However, in Canada our VATs are GST or HST depending on the province. To capture the VAT on expenses simply click on the transaction to show details. A white box will appear, and then you can choose the VAT to apply to that transaction.
Once you have reconciled and categorized all your transactions, you can now confidentially use your small business financial reports.
Two key reports to use during tax season are the balance sheet and income statement.
On the balance sheet, double check the date is set to the last day of your fiscal accounting period and then review. The balances showing should match your account statements for the same time period. If they don’t match, take another look in your transactions for further reconciliation.
On the income statement, also double check the date is set for the first day to the last day of your accounting fiscal period. Now you can see if all the amounts listed are categorized and that no uncategorized income amounts or expenses remain. If some amounts and expenses remain uncategorized, revisit your transactions page to categorize.
By following these 4 easy steps, you’ll have accurate and reliable reports you can proudly use to help complete your income tax submission before the deadline. Or happily provide to your accountant for further value this tax season.
If you’re already kicking off 2015 in high gear, it’s easy to find a Wave Pro that can help you get your records up to speed and ready for income tax filing.
Wave Pros have helped tens of thousands of Wave users get set up properly for the current fiscal year providing assistance with your small business tax and financial planning, forecasting and goal setting.
Follow these 5 tips to preserve the financial health of your company:
S Corp vs LLC Illustration
For example, in 2012, your income was $200,000 and expenses were $100,000. This will result in a net income of $100,000. Under the LLC tax structure, you will pay tax on your taxable income (all business and personal income) and self-employment tax of 15.3% on your net income. The formula is Net income x .9235 x 15.3%. Your self employment tax will be $14,130. The only difference between an S Corp and an LLC is that you will not pay self-employment tax under the S Corp tax structure. Although there is no self-employment tax under the S Corp, you are still required to pay a reasonable salary (payroll taxes will be paid under a salary) if you are profitable. As a general rule, it is a good idea to pay a reasonable salary of 40% of your net income. In the scenario of the company with $100,000 in net income. The company would pay the owner a salary of $40,000. This will result in payroll taxes of $6,120. Typically you would pay approximately another $200 for state unemployment tax and $56 for federal unemployment tax. As a result the total tax paid by the S Corp would be $6,376.
The end result is a tax savings of $7,754.00
In conclusion, surround yourself with a good solid network of professional advisors, including a CPA, attorney and financial advisor. A CPA will provide several services related to tax and accounting, including tax prep, tax planning, bookkeeping, budgeting, entity restructuring and offering general business advice. An attorney will prepare and review all of your contracts and some attorneys specialize in setting up trusts for asset protection. A financial advisor will help you invest your money through short-term, mid-term investments as well as set you up with a retirement plan. Retirement plans are a good way to not only save for the future, but can provide you with significant tax savings for your business. These professional advisors often work together to accomplish the same goal in mind in protecting you and your business, discovering ways to reduce your tax liability and in preserving and growing your wealth.
Thanks to guest blogger Mike Michalowicz for sharing his advice with the Wave community. Mike is the entrepreneur behind three multi-million dollar companies and he is also the co-founder of Profit First Professionals, an organization that certifies accountants and bookkeepers in the Profit First method. If you're a Wave Pro, be sure to join this awesome group to help your small business clients put the Profit First method into practice. A big thanks to Mike for the work he does to educate and liberate business owners around the globe.
The Simple Method To Make Any Business More Profitable, Permanently
by Mike Michalowicz
The formula for profitability has been established for ages. Every business owner, CEO, freelancer and entrepreneur knows it. It is even required, in the US by Generally Accepted Accounting Principles (GAAP), which in turn is enforced by the SEC in the United States and the International Accounting Standards Board internationally.
Using GAAP or not, the fundamental profit formula is the same:
Sales – Expenses = Profit
There is just one problem… The formula doesn’t generate profits. There is a reason that 21 million out of 28 million small businesses in the US are surviving check to check. It’s not that 21 million people are smart enough to start and build a business, yet not smart enough to turn a profit – its that they are relying on a flawed formula. Sales – Expenses = Profit is a lie. The formula prohibits profit.
Logically, of course, the formula is sound. A business must first sell in order to generate inbound cash flow. Then the business deducts the expenses utilized to deliver its product or service and to run its operations. What remains is profit. Profit, effectively, is a leftover.
While the GAAP formula makes logical sense, it ignores the fact that it is managed by people. We are, first and foremost, emotional beings, prone to ignore (or even defy) logic.
Cyril Northcote Parkinson, in his famous bestseller Parkinson’s Law, proposed that “work expands so as to fill the time available for its completion.” His theory has been generalized to state “The demand upon a resource tends to expand to match the supply of the resource.”
Arguably, money is the ultimate resource. In GAAP’s “Sales – Expenses = Profit” formula, the business owner sees the cumulative deposits (resource) from sales and has a propensity to conclude that all the money is available for expenses (the demand expands to match the supply). The new equipment purchase is justified because the money is there. A new hire starts, because the money is there. Profit? It is an afterthought. Therefore, there rarely is any.
Now consider a new formula, where a business takes profit first:
Sales – Profit = Expenses
Mathematically the formula is identical to GAAP’s. But from the perspective of human behavior, the Profit First formula is radically different. In the Profit First formula a preset percentage of deposits generated through sales are first allocated to profit. The remainder is used to pay expenses.
In practice, as deposits from sales come in a predetermined percentage, for example 15%, is immediately transferred to a separate profit account. The remainder is available for the business leader to run business as usual. The business owner will see his available cash (which has had the profit already deducted) and make decisions accordingly. The new equipment purchase may be delayed, or a more cost effective alternative may be found. A new hire won’t be made because the money is not there, and perhaps the entrepreneur will conclude was unnecessary in the first place.
While I have co-founded, built and sold two multi-million dollar technology service firms, admittedly they were never truly profitable. Every increase in revenue seemed to be matched with an even greater increase in expenses. Every day I checked (and still do) my bank balances. As the balances would climb and fall, so would my confidence and my spending. I lavishly incurred new, unnecessary expenses when my bank account was fat. I panicked when it was thin.
This behavior, I have found, is not unique to me. In fact, of the hundreds of entrepreneurs and business owners I have asked, the vast majority also do “bank balance accounting.” It was with this realization that I started doing Profit First for myself five years ago. That is when I applied the “pay yourself first” principle to the operations of my businesses. I became my own guinea pig for Profit First.
Every quarter since, I have posted a profit. Every business I have invited to flip the GAAP formula, has also posted a profit or, unfortunately in some cases, decided to give up the system because it put “too much downward pressure on expenses.”
GAAP offers so much more in business insights than most entrepreneurs could imagine, but it does fall short on working with an entrepreneurs “bank balance” habit. I have become an advocate for the Profit First approach to cash management, because of the one thing it does do extremely well. It works with the natural habit of business owners. And, it functions as a “plug-in” to all the GAAP accounting systems and processes I have place. It doesn’t change GAAP, it simply sits on top.
Profit First has transformed my own businesses for the better (if you consider consistent profits, better). Admittedly, Profit First is not the panacea to all cash flow problems, but it surely makes profit a habit.
We had such a great year in 2014! Accounting and bookkeeping professionals have embraced the cloud, adopting new products and taking on new challenges. Now that functions like bank reconciliation and journal entries can be cloud-based and data entry can be automated, a paperless workflow is the new norm.
Wave has been around for more than four years, but our goals remain the same: to liberate small business owners and to help them succeed. We would not be able to do this without the incredible accountants and bookkeepers who help our customers every day. This past year, there was one Wave Pro in particular who really stood out, an individual who lives and breathes Wave's values. He took on new obstacles and offered an immense amount of his time to Wave customers who wanted to manage their finances more efficiently. It is my pleasure to announce our Wave Pro of 2014: Mr. James Krener and his team at Krener Bookkeeping & Tax!
James welcomes all small business owners to learn more about their accounting system. A small business owner himself, he built his practice from the ground up with Wave. If you want to mix flexibility, generosity, and fun with accounting, KB&T has what you are looking for.
The quote in the picture below resides in James’ office and represents KB&T’s ultimate vision: to help small business owners rise above their accounting, bookkeeping, and tax with easy and affordable resources.
If you're a brand new small business owner, it can be tough to focus on accounting and bookkeeping with so many other things on the go. You've probably questioned the idea of bringing on a professional but you're not sure what services you need this early in the game.
The team members at Madan Chatered Accountants are experts at helping small business owners succeed on Wave and they were generous enough to share some knowledge.
Here are 3 things they think you should consider:
Hiring the right bookkeeper is essential for making and maintaining a successful business. One of their main jobs is to create a budget for your company. A budget is a forecast of a company’s expenditures and revenues over a time period in the future (e.g. 3 months, 6 months, 1 year, etc.).
It’s important for business owners to prepare budgets periodically in order to:
1) Better manage cash-flow
2) Plan for any short-falls in cash (e.g. through bank financing)
3) Help allocate company resources
4) Set goals for revenue and profit
In addition to preparing a budget, you as a business owner, should review your company’s actual results against the budget to see if financial goals have been achieved and if there is room for improvement.
It’s important to review the financial performance (i.e. profitability) of your business at least quarterly with your bookkeeper so that you can:
1) Quantify the business’ profits or losses.
2) Identify areas for improvement in sales.
3) Proactively look for cost savings opportunities.
4) Measure your financial results against your competitors.
5) Track your company’s financial performance against your goals.
This sounds great, but why should you care about accounting if your business has a healthy cash balance? Well, you should care because accounting will help you know if you’re profits are declining, whether there are signs of a sales slump in the future, and whether your cash will run out shortly.
Wave is a 100% free program that allows small business owners to virtually keep track of expenses and cash flow with a cloud-based accounting software that will make your bookkeeping simple and easy. The program allows you to connect your bank account to their secure system which will essentially eliminate manual data entry. It has the ability to create transactions automatically and place those transactions into categories based on your business’s preferences. The categories are divided into income and expenses. They have a pre-set list of categories if you want basic bookkeeping, or you can create your own categories for a more advanced way to keep track of your records.
Wave helps you connect with accounting firms in your area that they think will help you out the most when the tax season comes around. The program they offer for this is called the Wave Pro Network where small businesses can search for accountants in the areas of expertise that they need to expand their business.
Furthermore, Wave is a great way to organize your income and expenses so it is easier for your accountant to file your corporate tax return. You do not need to rely on spreadsheets and word documents any more to try to organize your tax information.
Wave is not only great for bookkeeping, it is also seamlessly integrated with invoicing, credit card processing, receipt scanning, reports and payroll.
For free online videos on how to use Wave to complete your company’s books, see Madan CA's bookkeeping tutorials.
Allan Madan is a Chartered Accountant, Chartered Professional Accountant and Tax Expert who enjoys working with business owners, individuals and entrepreneurs. He has over 14 years of experience in public accounting. Prior to founding Madan Chartered Accountant in Mississauga, he worked for the prestigious firm Deloitte for six years, where he held the position of International Tax Manager.