Tuesday, May 15, 2007

“Cash” Basis or “Accrual” Basis. Which is Best for Retailers?

This article was written by Dick Ginnaty, CPA

When a business starts, one of the decisions that needs to be made is whether to report your business for tax purposes on the “cash” basis or on the “accrual” basis. This choice is indicated on the first tax return that is filed for the business. This choice should be made with the thought of maximizing the tax benefit of the choice.

Under the cash basis, revenues are reported when received, and expenses are recorded when paid. Under the accrual basis, revenues are recorded when earned, and expenses are recorded when incurred. Under the accrual method, your receivables count as taxable income, and your expenses that are not yet paid (i.e. accounts payable) are deductible.

Many times beginning businesses will chose the cash basis of reporting because they get to delay paying taxes on their open receivables until they have been paid. This may work for many businesses but it may not be the best choice for retailers, and web based e-commerce sellers.

For many of those they don’t have any receivables. They get paid at the time of purchase, or even prepaid, but they do have expenses that haven’t been paid yet that relate to the period (i.e. utility bills, telephone bills, wages, commissions etc.). For these businesses the accrual method is better because under the accrual method they won’t recognize any more income (they have already received all they are going to get) and yet they can deduct some expenses that they haven’t paid for yet. It is the very best possible position.

So think hard about your situation, and good luck. By the way, if you already have selected the cash method of reporting, a change is possible but it requires the approval of the IRS commissioner. Luckily, the change from cash to accrual accounting is one qualifying for “automatic consent”, but it still requires an application using Form 3115 following the steps outlined in Revenue Procedure 2002-9.

Good luck and here’s hoping it “all adds up” for you.

(If there is any area in accounting or tax that you think needs to be addressed in this newsletter please e-mail Dick at Ginnatycpa@aol.com and if it is of general interest, he will address it in future articles)

Talent Pool or Talent Puddle

This article was written by Larry Tucker, SCORE Orange County Management Counselor

“I don’t have the time to search for the best employees for my new company. It’s all I can do just to get product out the door.”

Sound familiar?

My cousin Mario

So we fall into the “my cousin Mario” trap. “The guy’s looking for a job, so I’m going to hire him.”   

Stop! What are the odds that out of the 200,000 people who live and work near your business, this guy is the right fit? One in 200,000, I guess. You have to reduce those odds. The time, energy and dollars you spend turning over one employee after another will drain your time and focus you on the wrong priorities.

Plan…just a little

What are the characteristics of a successful employee for this role? You probably have time to list those behaviors as you’re taking your shower in the morning. Consider these behaviors in two categories:

Minimum standards: A waitperson, for example, must present herself well, know food and beverage, and be able to handle the check.

My value differentiator: But my restaurant, for example, will cater to people who enjoy gourmet food, so “knowledge of food” or “ability to learn quickly” becomes key characteristics. You will likely have a list of 5 or ten characteristics, each with its own priority.

If you’re expecting your company to grow, today’s hires may be tomorrow’s managers. This expectation may add a few more characteristics to your list.

The talent puddle

“It’s not a talent pool; it’s a talent puddle. I’m thrilled just to get someone to answer my ad.” You might be surprised. Advertising for employees has many similarities to selling products. Whether you advertise on Monster.com or in the local paper, consider including these elements in your ad:

Tell them about your company, why it’s different, what you’re trying to be. (If you’ve got a website, referring to it in the ad is the best way to communicate this information.)

Make it clear what behaviors/talents/expertise you are looking for.

Explain why your company may be a better place to work than somewhere else. The ad should reflect well on your company.

Interviewing for behaviors

“An interview is where I tell them what they are expected to do in this job, right?” Yes, but that’s only a small portion of the interview. Experts say that if you spend more than 20% of the interview talking, you probably haven’t done a very good job of interviewing. Interview for your list of characteristics by asking behavioral questions. Looking for a multi-tasker? “Give me an example of a time when you had two or more top priorities and how you handled that situation.” A team player? “Tell me about the last time you worked or played in a team and how you handled it.”

There will be a significant return on investment for the time you spend hiring the right employee the first time out. Of course, the success rate is never 100%, but if you can reduce your chances from one in 200,000 to one in 2, you’ll have time to focus on building a successful business.