Today I’m working on my weekly financial update to a client CEO. It’s a good way to keep important things on our radar, things like strategic initiatives that require attention every week, emerging trends, and essentials like cash flow and business development.

Over the years I’ve settled on a report that includes text, tables, and charts. I don’t dwell on perfect formatting; I cut and paste screen shots (I use SnagIt) into a word processing doc, then PDF it.

Keep the information flowing to stakeholders in the company…

Continuing my response to the reader feeling clobbered by taxes, I would add that a big part of effective tax strategy is to figure out how to generate from your business discretionary profit that you can shelter in productive investments.

By “discretionary profit” I mean profit in excess of:

• debt service, working cap, and a long-term investment fund
• what the business’ shareholders withdraw to support their lifestyle.

“What does a CFO do?” people sometimes ask.

One way I explain it is that we try to improve shareholder value through a combination of offense and defense.

On offense we forecast sales, help target customer segments, and use a number of data tools to increase top line growth.

On defense we help businesses hold on to the money they earn: cost control, financial controls, risk management, tax planning, and the like.

But recently I added a third leg to what we do: customer service. You could say this relates to both offense and defense, but I think it deserves its own category — providing customer service both internally (employees) and externally (customers, vendors).

You can go broke over-servicing, but in line with the company’s financial resources providing excellent customer service goes a long way toward a healthier, more profitable integration of finance and the other parts of a business.

Call me paranoid, but as much as my clients and I have embraced the cloud, I feel a lot better having a local backup of our cloud data.

Let’s put it this way, if Google has a big hiccup today and all our data there vanished, I’d feel pretty silly not having prepared for the scenario.

What’s the risk? Probability times consequence. Probability might be low but consequence is high. So backup your online data. Especially the important stuff.

This blog post by Jeff Miller that shows you how to backup your Google Docs (and Google Calendar) very quickly.

A reader asks…

For the amount of money I actually take home I feel like I get clobbered with taxes (who doesn’t, right?). How do I determine if there is a better structure for my business, i.e. S corp? Currently I operate as a sole proprietorship. Any advice is appreciated.

Running your business as an S Corporation can help you save thousands of dollars in Social Security and Medicare payroll taxes.  The trick is to make enough profit in your business to generate tax savings in excess of the cost to set up and run the new entity.

S Corporation owners usually take profit out of the business in two ways: 1) as  W-2 wages and 2) as shareholder distributions. The latter are not subject to Social Security and Medicare payroll taxes, so you save approximately 13% on the first $106,800 in distributions (in 2011), and approximately 3% on distributions above that.

The calculations are more complicated than that, but your tax preparer should be able to affordably run scenarios for you on his/her tax software.

Ask your CPA for guidance if you want to explore this path, because there are some caveats, such as:

• Don’t take shareholder distributions if you have negative basis in your S corporation (or you might actually INCREASE your tax liability)
• Certain types of businesses (e.g. doctors, lawyers) are not eligible for S Corp tax treatment
• You’re supposed to pay yourself a market-rate salary. So if you take too little in regular W-2 wages and take too much in shareholder distributions you expose yourself to audit risk.

What are the costs to run an S Corporation versus a sole proprietorship? Several, including these:

• Legal fees to set up the corporation
• Legal fees for annual corporate compliance (minimal)
• CPA fees to prepare the corporation’s annual income tax return
• State S Corporation tax (in California it’s the greater of $800 or 1.5% of taxable income).

Run a few scenarios to estimate how much money you’ll save over several years.

When switching legal entities, consider the following as well:

• Long-term tax planning. For example, compared to a C Corp, S Corps receive favorable treatment if you sell your business in the future. And the tax code changes, which adds an element of uncertainty.
• Does the entity offer you the liability protection you seek?
• Does the entity allow you to share ownership with other individuals or businesses, and what type (domestic, foreign, etc.).

This shouldn’t be a determining factor whether to establish a new legal entity, but prepare for significant administrative time to be spent on re-establishing relationships under your company’s new tax ID numbers (clients, vendors, payroll, income tax, city business tax, sales tax, etc.).

Many small business owners run S Corporations and  save tens if not hundreds of thousands of dollars in taxes. It’s worth looking into.

Lots of opportunities to improve your QuickBooks skills in the San Francisco Bay Area. For instance here’s a link to the Hilliard Management Group’s class schedule.

When negotiating compensation for individuals, or planning company-wide, keep in mind your many options.

Don’t fixate prematurely on one number (salary); look at the entire package.

Here are different elements to consider:

1. Base salary (or hourly wage)
2. Bonus
3. Retirement plan
4. Health benefits (insurance, HSA, FSA, etc.)
5. Dental
6. Vision
7. Life insurance
8. Disability
9. Holidays
10. Paid time off (PTO) – sick, vacation, personal days
11. Flex-time
12. Remote work (not in office)
13. Paid learning (professional development opportunities)
14. On the job training (learning new skills)
15. Equity or phantom stock

The big annual tax deadline has come and gone – how’d you do? Here are a few questions to help you evaluate your small business tax approach:

Did you file your returns on time? Two good reasons NOT to file on time: 1) for cash flow reasons you want to defer paying an employer retirement plan contribution; and 2) you’re waiting on a third party to provide you with essential data. Otherwise, try to file both your entity and personal tax returns on time. At a bare minimum, file your extensions and estimated payments on time to avoid penalties and interest.

Were you surprised by how you much owed? Hopefully not. If you were, it means there’s a hiccup in your tax planning system. Talk with your CPA and bookkeeper about it.

Will you get a very large refund? If you overpaid substantially, you’re giving the IRS an interest-free loan – there are probably better ways to deploy that capital. Although getting a big refund is usually better than paying late and incurring penalties and interest.

Did you optimize the tax reduction tactics available to you? Multi-year, proactive, consistent tax planning with your CPA generates a “yes” answer to this question.

Did you make your first estimated tax payment of 2011 on time? If not, you’ve probably got a cash flow or tax planning problem.

Have you worked your 2011 tax payments into your 13-month cash flow forecast? These payments can disrupt day-to-day operations if not planned for. Look ahead 13 months to capture a full year’s tax cycle.

Related article: CLICK HERE.

Thank you! A recent article by Mark Kohler explains why it doesn’t make sense for most small businesses to incorporate in Nevada or Delaware.

Several times over the last 15 years, entrepreneurs have told me that they were about to or just did incorporate in one of those states, and the benefits never materialized.

In his article, Mark punctures the mythical advantages: tax, liability, privacy, and administrative costs. It’s a quick read, and well worth if you’re about to incorporate.

A reminder that sales tax rates in 15 California cities and districts go up today. Some will be as high as 10.25%.

Make sure your QuickBooks, NetSuite, or other accounting/POS software conforms to the new rates.

Click here for the California State Board of Equalization (BOE) announcement:

California BOE April 1 2011 sales tax rate increases.

Click here for a complete list of California sales and use tax rates, by city or county:

http://www.boe.ca.gov/cgi-bin/rates.cgi.