Corporate Tax Time Is Here

When you are a C corporation in the U.S. and your fiscal year is the same as the calendar year, March 15 is your deadline to file your 1120.  And here it is the 7th of March, so there is no time like the present to talk about filing your 1120.  Unlike personal taxes, the 1120 is not really all that bad.  You generally copy over your profit and loss statement into the boxes.  Anything that doesn’t have a box, you add up and put in the other deductions field.  Then you do a little arithmetic, or just copy your totals from the P&L, and you have your net income.  You can now include your net loss from prior years against your income, then you have your income for taxes.

The amount of taxes is figured based on a table, or a straight 35% if you are a personal services corporation.  There is a lot of other information on these forms and in the instructions, so make sure to go over them or have an accountant look over your numbers.  Or better yet, have an accountant prepare them.  I am kind of a do-it-yourself’er and I want to know how to file my 1120, so I do it myself.  I spend a lot of time in the instructions and comparing to last year’s forms, so although it’s fairly straight forward, there are also a lot of gotchas to watch out for.

My thing this year is that I have to pay money on profit that is tied up in accounts receivable.  I have to file as a personal services corporation so they take 35% of my net income.  I mean, I am trying to be profitable and build up my cash reserves, then I am punished by having to pay taxes on it.  Having to file by the 15th and pay may be a bit of a challenge this year also as I am waiting on some payments from my client.  I guess we’ll see how it all works out.

I should be ready with my forms for the Federal Government and the state of Illinois by the 15th at least.  I just had to get over my fear of doing these taxes.  Or just the problem with being so busy right now, having just filed my personal returns, and now having to file my corporate returns.  Just one of those things I guess.

Do you fill out an 1120 every year and how do you take care of it?  Do you do it yourself or do you have an accountant do it?  If you have an S corporation, how is it different for taxes?

Being CFO As Well As CEO

I am a lone wolf in my company at the moment.  I am not just the CEO, I am also the CFO.  CFO stands for Chief Financial Officer and it is a position with an extreme amount of responsibility.  As the CEO, I can have a vision for my company, a grand and glorious one, and I can work with my “Senior Staff” to see if it will work and decide how to implement it.

As I sit in the conference room with the senior members of my staff, my CFO, CIO, and several Senior Vice Presidents I explain in detail what my vision is.  My CFO speaks up and says that it sounds like an expensive idea.  He would have to crunch the numbers but we might have to come up with several thousand dollars beyond what we have coming in as income.  Where will we get the money?

Now of course I am the CFO, so I have to play both parts: The CEO and CFO, which often have conflicting rolls.  The CEO is dreamy and exciting, the CFO is down to earth and realistic.  And how does a corporation get money it doesn’t have?

Well the corporation can do one of the following:

1. Increase income
2. Borrow money from the bank
3. Sell shares of stock
4. Sell bonds
5. Sell assets

Included in these options is the possibility that the CEO will purchase shares of stock from the corporation, if he or she has some extra cash to invest.

Often the CFO doesn’t have the choice to say “No, let’s not do that”.  Sometimes the corporation goes from profit to loss, and although adjustments will be made to plug the leak, there will be near term losses to deal with.  Sometimes the CFO will have to choose whether to try to make a go of it by juggling receivables, payables, and any other asset or liability, or if he wants to try to raise outside money somehow.  There may actually not be a choice here either, as the board of directors may prevent selling new shares of stock or borrowing money.

The CFO may also have to deal with tax consequences of his money management.  For instance, I found myself with a pretty big profit this year, so I took action to push my profit into 2011.  The problem with trying to do this is that I don’t have a whole lot of cash to work with and could not raise outside money, except from myself, by directive of my board of directors.  In other words I could not sell shares of stock to non-family members.  I also could not borrow money from the bank.  So, I bought shares of my own stock and did my best to increase my accounts payable float.  By the way, I had cash flow issues because my accounts receivable is pretty big and my accounts payable is pretty small.  No problem getting paid, it just takes a while.

Once I am on the other side of 2011, as we are today, I can take action to pump up my profits and worry about the tax issues at the end of the year.  With any luck I will have tax issues, and maybe I’ll just book them in 2011.

If you wonder how I “push profits into 2011”, generally this involves investing in such as way to create an expense in 2010 and new income in 2011.  I did this by advertising right at the end of the year.  My advertising is an expense against income, but my advertising will produce income, hopefully, after a few months.  There are probably many other ways to do this, although many investments are expensed over time, such as equipment or buildings, so you have to use the right investments.

Work At Home

I work at home.  I work at home all the time.  I used to work at home when I was employed, for my employer.  With technology these days you can do many jobs for an employer at home.  Or you can work for yourself at home.  So the first question is: Are you looking for a job or for a business?  Personally, I have been self employed now for four months and am very happy being self employed.

My self employment is consulting mostly, which is still selling time for money.  So it’s kind of like employment.  I work three days at the client and two days at home per week typically, not counting the time I’m working on the weekend.  If I work after hours it is typically at home.  I also have quite a bit of administrative work to do since I don’t have employees.  So I am creating my time sheets and status reports, keeping track of expenses, and ordering office supplies I need.  Stuff like that.

You can start a business at home if you like, and long term this makes the most sense assuming you are successful.  The game you have to play in business is about getting the most from your initial investment.  So you constantly have to work at saving money or getting more for the money you do spend.  Still, you are most likely going to spend more than you’re taking in when you first start a business, and will perhaps lack profits for 2, 3, or 5 years.  So you need to be able to handle the losses as you start out.

Many people start out part time in their business pursuits and work a full time job so that they can have an income while they are starting out.  This creates a time crunch especially if you have a family, so you often have to sacrifice things like TV time.  The last couple of weeks I’ve had a hard time even working out, so it can get kind of busy.  And if you do it right, your business will make you more busy than you expect.  Note that your business should drive you not the other way around.  The trick is to generate buzz or somehow have a constant inflow of customers.  Advertising is a good way to do this (free is best).

If you want to go the other route and work from home for an employer, you have to be aware that you are only saving yourself drive time typically.  You will still have to do the work.  If you have distractions around the house you may find that really difficult.  You should look for employment with some flexibility as to when you will work, so you can work after the kids go to bed for example.

Good luck to you and let me know how it goes…

More About Being A Bean Counter

Last week we talked about calculating a return on investment (ROI) from your recruiting costs, whether you are recruiting customers for your product or resellers.  Of course our return on investment calculation is just an estimate based on less than all the facts.  It is still an important calculation, though, and worth the exercise even if ultimately it is way off.  Why?  Because ultimately you want to know what your real return on investment is and you can’t wait for all the facts to come in.  So, you make an estimate based on what you believe, then you revise your number as reality sets in.

Why do you even care what return on investment is?  Return on investment is an important measurement for deciding if you time and money are being spent in the right way.  As a rule of thumb, a 20% return on investment is good for investments with substantial risks.  You can consider a business investment a substantial risk because there will be good times and bad times, and you might now be in a good time (in fact I think now is a great time).  So today your real ROI may be 20% and tomorrow it might be -5%.  So 20% is a good rule of thumb for ROI.

You might want to adjust this ROI for your risk level.  Let’s say that your ROI for new resellers is 18% but it’s likely their business will grow.  So 18% may be a very good ROI.  If your ROI is 8% instead, it might be a good ROI if your investment is US Treasuries that will always pay 8% (i.e. ultra safe).  But it would be an extremely poor ROI if your investment had any risk at all.  So risk is a factor in whether your ROI is a good number or not.

Your ROI is an important number to determine how much money you’ll need before your business begins making a profit.  For instance, you invest $100 per month for a year and your ROI is 20%, meaning you’ll make $20 per month or so.  It will take 5 years to begin making a profit if you never increase your investment.  If instead you sink your profits back into your business, you will earn $100 in revenue before hitting the 5 year mark but you’ll always lose $1200 per year.  You’ll need to back off on your investment to earn a profit.

If you do want to invest $100 per month in your business and reinvest the revenues for 5 years, how much money will you need?  $1200 per year X 5 years or $6000.  Do you have $6000 or can you get it over 5 years?  If not, you will need to borrow the money or find investors.  So the ROI is also important to determine if you’ll do it all by yourself or if you’ll need to seek help from others.  It’ll do this before you actually need the money, giving you time to work with your bank or pitching your relatives on your new business (to drum up investors).

So your return on investment number is important to estimate, then correct, as you initially grow your business.  What other calculations are important?

Reasons To Take Credit Cards

If you sell your product directly to customers, taking cash and cashier’s checks are the safest way to insure you get paid. They are also quick to get your money, usually they are available funds right away when you deposit them in your bank, and you can spend the cash without depositing it. Although depositing all of your receipts does give you a record of the revenue for later when it’s time to fill out your tax forms.

The problem with taking only cash or cash-equivalent payments is that it is inconvenient for the customer.  They have to make a visit to their bank or ATM to get money to pay you, as often people carry very little cash.  You can accept your customer’s personal check to improve the convenience a bit, but ultimately you are going to have to be as flexible as possible so that it’s easy to do business with you.  Accepting all means of payment possible is the best choice, which means accepting credit cards.

Credit cards have fees associated with them, but your customer’s payment will be in your bank account in about 3 days.  For remote orders, either internet or telephone, accepting credit cards reduces accounts receivable significantly, as you don’t have to send out a bill and wait for payment.  You just take the numbers over the phone and run the credit card right then.  You can imagine this is a much safer way to take payment remotely also, as you know you are going to get paid.

One other major advantage of taking credit cards that you may not know is that many people will balk at making a $50 purchase, but putting a $50 on their credit card is not as big a deal.  For some reason people don’t associate a credit card payment with spending money.  For this reason they are likely to spend more.

In our business, we did everything we could to avoid taking credit cards but one thing made it unavoidable: Our business ramped up quickly and we could not afford to wait for money from our customers, often for 30 days or more.  We were selling around $10,000 per week to customers so our accounts receivable was around $50,000, which was unbearable.  I carried a very large balance on my American Express and was fearful of the day I couldn’t pay it.

To take credit cards, you must contact a company that specializes in merchant services.  You fill out some paperwork, get a credit card machine or software for your computer, or connect with your provider through your website, a little set up and then you’re taking credit cards.  Make sure you price your products so that you can afford the fees… they can vary so you may want to shop around a bit.

Do you accept credit cards in your business?  What have you found the advantages to be?

Introduction To Valuing Stock

I have always wanted to write an article about valuing stock.  Even though I know somewhat how to find a value, the process is very subjective.  You may have a different opinion about one of the variables from another person, and you can debate the pros and cons of each side for days.  So lets find a simple way to assess the value, and then we’ll look at an even simpler way.

For the purposes of this article, we’ll assume you are buying shares of stock for personal ownership, not as a company trying to acquire another company or something.  A share of stock is a partial ownership of a company.  The value of a share of stock is equal to whatever somebody else is willing to pay for it, period.  That would be the market value of a share of stock.  Any other value really is trying to second guess the market, assuming that the market is acting in an irrational way, which may value the stock higher or lower than it is truly worth.  The truth, though, is that if you figure a share of stock should be valued at $60 and the market value is $40, it’s worth $40.

Determining Actual Worth

Ok, so you think you can out value the market?  Well then, let’s try to find a method of doing this.  Let’s say there’s a corporation with 100 shares of stock outstanding and it has assets totalling $1000.  Is a share of stock worth $10 then?  Nope.  Asset value has no relevance, unless you are going to liquidate the company and are able to actually get $1000 for the assets after expenses.  A better method is to look at yearly earnings per share or yearly dividends per share.

Yearly earnings is the profit the company makes.  Profit is revenue minus expenses.  Revenue is the total amount of money the company takes in and expenses are all expenses of the company.  For instance, if the company purchases an item for $1 and sells it for $2, revenue is $2 and expenses is $1, making earnings of $1.  There may be other expenses involved, but let’s keep it simple.

Dividends is simply the amount of money the company chooses to pay out to their shareholders.  Notice the word chooses, because this amount may be more or less than earnings.  For instance, say the company has a regular dividend of $1 per share but only has earnings of 50 cents during this period, resulting in paying out more than earnings in dividends.  Most of the time though, dividends will be less than earnings.

Neither earnings or dividends are a perfect method to gauge value because one could say that earnings have no value to the shareholder until dividends are paid, but paying out less dividends than earnings results in a build of company assets, probably cash, which could be paid out at a later date or invested in a project which will create more profit for the company.  So growth in earnings may result by reinvesting earnings.

So how to value a share of stock based on earnings or dividends?  Let’s use dividends for this example.  Let’s say that a company pays out 5% of the market value of it’s stock as dividends.  Is this good or bad?  Well it is more than investing in a savings account at 1% and a little more than investing in a 30 year treasury bond.  So it could be good.  It really depends on how much risk is involved.

Determining Risk

If a company is stable and is expected to have similar earnings, good times or bad, into the foreseeable future, we would expect to have a yearly dividend comparable to a short-term U.S. Treasury Bond, because there is no risk involved.  Generally, though, this is impossible to say about a company because so many things could influence the performance of the company, even to the point where the company would need to reduce it’s dividend.  And the more likely it is to be impacted by adverse circumstances, the greater the risk.

Usually the greater the risk of the investment, the more of a risk premium we would want to be paid.  So a very risky company might have a 15% dividend or higher.  It is really up to the judgement of the shareholder (or analyst) what the risk is, and hence what the risk premium should be.

Valuing Companies With No Dividends

Companies with no dividend at all would represent a very high risk typically because the share would seem to be valueless.  People do pay good money for shares of stock with no dividends, though, so how do you figure a value?  You might use earnings per share to determine value, with a very high risk premium.  If the company is reasonably stable and growing rapidly, you might accept less of a risk premium.  It’s really up to your own judgement.

What to do with your value

You now have a value per share.  How did you get it?  You know that dividend / value = rate, and you’ve determined the rate you’d be willing to accept based on risk.  You should also know the dollars dividend per share.  So we can switch around the formula and get value = dividend / rate.  So lets say the rate is 10% and the dividend is $1 per year.  The value is $1/.10 or $10 per share.  If the current share price is $8, it might be a buy.

Market Pricing is Perfect Pricing

If you bought your share of stock for $8, could you turn around and sell it for $10?  Nope.  The market is willing to pay $8 so you can sell it for $8.  And why is it $8 when you think it should be $10?  Because the market, for some reason, thinks the risk is greater than you do.  Perhaps there is information you haven’t taken into consideration.  Maybe there’s turmoil in the world.  Maybe management at the company has just changed.  It could be anything, or it could be nothing.

If market pricing is perfect, as the theory goes, then why could the reason be nothing?  You have a lot of great people who think about the value of stock, then buy and sell based on their value.  Others will simply buy what they like or sell if the market’s going down, or do many other irrational things.  So the perfect market pricing theory is a little true and a little false.

If you want to believe that market pricing is perfect, that’s great.  Then the price the market is willing to pay today is the value of the share of stock.  Then you would buy a stock just to be invested, catch the share price growth or dividend growth if there is any.  And truthfully, it really could go either way.

A basket full of stocks

As the theory goes, the more different shares of stock you have, the more you have diversified the risk.  In other words, it’s more risky to own $10,000 worth of one stock than owning $10,000 evenly split between 50 stocks.  The overall market will go up and down, but mostly up over time, but an individual stock could soar or go out of business.  You really don’t know for sure.  But buying many stocks virtually eliminates the risk of a big loss because of a bad company.


Valuing stocks is a tough job for a novice investor.  It is sometimes best to buy good diversified mutual funds rather than invest in individual stocks.  But if you can have a diversified portfolio of stocks, your risks are reduced and you will pay less in fees than owning a mutual fund.  However, you really need to understand what you are doing before you jump in with both feet.  Invest with a small sum of money for a while.

This is the longest article I’ve ever written on any subject and I hope it was informative.  I tried to keep it as simple as possible.  If I got something wrong, I do apologize, I am not a stock analyst by trade.  I am just trying to provide basic information.

How do you choose what shares of stock to buy?

So You Have No Money To Start A Business?

When people think of starting a business, they think of investing money and time for a future return. Is it possible to start a business with no money at all? Anything is possible with a little imagination.

Imagine that you are going to get a job. You interview for the job and get it. Then you start your job and you get your paycheck a little later. This is classic business. You are selling your time for money. You can also sell your time for money in a business. This is called temping or consulting. You find a person or company with a need and you sell them your services: time in return for money.

What kind of services can you sell? Think like a teenager for a moment.  You could deliver papers. You could mow lawns. You could babysit. Now think about what special skills you have. Can you paint? Build furniture or walls? Fix small electronics? Do you have computer skills you can teach people? You are only really limited by your imagination.

Maybe you could sell things you own to raise money. Rather than starting without money, you could sell some of your belongings to raise money.  Do you own bonds?  Do you collect coins?  Do you have an LP collection?  Do you have musical instruments you don’t use?  Do you have unused sports equipment?

You can drop ship or sell on consignment. Many companies allow individuals to sell their products and drop ship to the customer, or even loan goods out to be sold.  Some companies have catalogs you can show customers and then order with their credit card, or get paid first then order.

You can market online for free. You can often get free web space and free advertising on the internet, then market as an affiliate for other companies.  You probably will not make a lot of money right away but you can make money with just your time, a computer, and an internet connection.  If you have no computer or internet connect, you are probably not reading this.  However, the library does offer computers with internet if you are lacking.

That’s about all I can think of at this moment, but there are probably other avenues you can follow.  Just use your imagination and who knows what you can come up with.

The Basics Of Cash Flow

If you have a checking or savings account, you deal with cash flow on a personal level. Start a small business, open a checking account, and now you are dealing with business cash flow. When you are just starting a business, the game is easy. Spend as little as possible and make as much as possible. Usually the latter is a little more sluggish than you would like it to be, so not spending money on silly things is very important. If you cannot do business without spending money on something, by all means come up with the money and spend it. But there are so many opportunities out there to spend money for your business, and not for things to build your business, that you will find yourself broke very quick if you do not watch it.

After your business has grown (and always), cash flow is important to monitor as it may not be as straight forward as it was early in the business.  There may be accounts receivable and accounts payable to work with, as well as just managing a basic checking account.  In other words, there are many more moving parts to cash flow and it is easy to find yourself having a difficult time meeting all of your obligations.  So having a forecast of cash flow is very important.

Most business software, such as Quickbooks, have cash flow reports and forecasts that can be used to figure out what your spending looked like and what things look like in the future.  You can also do it on paper yourself, but you can make better use of your time with good software.

Please review the following resources for more information:

Raising Capital For Your Business

The only real experience I have with raising capital is when I sold shares of stock to myself and when I went to the bank to ask for a loan.  Both cases are easy, especially when you can prove how much money your business makes and how much inventory you have.  Now if you want to go off and borrow money by selling shares to other people or selling off a portion of your business in another way, I am not really an expert.  I do know that you typically have to prove a market for your product by having a decent amount of sales or commitments for orders, and you have to be able to present a good business and marketing plan.  This is a good place to start.  I can tell you that if you have proof your business will work, you will be able to find people to invest.

Here are some resources on raising capital that may be useful to you:

Living Like A Millionaire And Applying It To Your Business

I like the book “The Millionaire Next Door”.  It is a book that everyone should read.  And if you want to act like a millionaire truly acts, you’ll check it out from the library.  However, I’ve included a link to the book here in case you would like a permanent copy.  It is one of those books that you might want a permanent copy to study over and over again.

I am not going to go into great detail about what the book says, but generally millionaires live frugal lives because being a millionaire is about having a high net worth, not just having a big income.  Many millionaires make six figure incomes and more but spend very little of it, which contributes to their net worth.  They also avoid taxes by deferring their compensation when they can.  For instance, they contribute heavily to retirement plans such as 401k’s and IRA’s.

Millionaires can teach us a lesson about how to approach our business.  Mainly we want to get as much as we can and spend as little as we can.  There are all sorts of opportunities for business people to spend money out there, but the frugal business leader finds the same services for little or nothing.  For instance, you can buy time on an email server or you can use gmail, which is free.  You can get business cards for next to nothing if you accept an advertisement on the back.  You can have a website for free.  Yes, free.  Look at for blogs or for web pages, or do your own search for free web sites.

New business people can fall into a trap of thinking they need stuff to do business.  What do you actually need? Business cards maybe.  Do you need stationary with company letterhead?  Find a friend with an ink jet printer.  Do you need coffee mugs (or other promos) with your company information?  I don’t think so.  Do you need catalogs, samples, or other stuff from your MLM company?  My opinion is that you don’t need them until you need them.  Wait until you have a request for a catalog.  Buy one instead of 50 if possible.  Or better yet, send the the customer to the company website to look at your product.

The objective is to find ways to do business for less.  At first you may have a hard time keeping your costs down but over time you will find cheaper ways of doing things.  Just keep working in that direction.  The reason we want to keep our costs down is so that we don’t run out of money before the business starts making us money.

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