financial statement accuracy

How To Review Financial Statements For Accuracy: 5 Timely Tips

As a business owner, you make a lot of decisions based on your financial statements. You track revenue and plan expenses, often to decide how much take-home pay makes sense for you or whether you can afford more inventory or equipment upgrades.

Your financial statements must be accurate to rely on them. We’re going to walk you through how to review financial statements for accuracy.

Keep Up with Your Financial Statements

One of the best ways to ensure your financial statements are accurate is to keep up with them regularly. While creating an annual balance sheet or income statement is a good start, developing monthly updates to your financial statements is much better.

Creating and reviewing financial statements will help you pinpoint concern areas before they cause problems. Being familiar with your balance sheet, for example, will help you determine if something looks a little off. Without that familiarity, you might not realize when something has been misapplied or forgotten altogether. In some cases this can lead to trouble with the CRA when filing.

Review Your Balance Sheet for Red Flags

Your balance sheet provides a snapshot of your business at a specific point in time. Being familiar with your balance sheet will help you spot red flags. Some of the most common concern areas include the following:

  • Misapplied Payments. If you received a payment from a customer but applied it to the wrong account (or something similar), your balance sheet on an individual customer account is going to look a little off. Look at individual customer accounts for negative balances to help correct this type of error.
  • Increasing Debt-to-Credit Ratios. A debt-to-credit ratio shows how much debt you have compared to the amount of assets you have. While a rising debt-to-credit ratio might not always signify a mistake, it can give you an indication of the health of your overall company. Huge fluctuations in this ratio can indicate something was not recorded correctly.
  • The Balance Sheet Doesn’t Balance. Perhaps the biggest red flag is that the balance sheet simply doesn’t balance. In fact, that is the purpose of the balance sheet—to ensure that assets equal liabilities plus net worth.

Review Your Income Statement With Your Cash Flow Statement

While your income statement and cash flow statement report different information, they can and should be reviewed together. Having a high-profit number on your income statement with a low cash flow statement doesn’t really make sense. When these numbers are not in sync, that could indicate a problem with the earnings that are being reported.

How to review financial statements for accuracy
Income statements and cash flow statements should be reviewed together.

Unpredictable Reports

Your reports really should be somewhat similar from month to month. When there are huge, unexplainable swings from month to month, there are likely errors that you need to address. Finding them can be difficult, but having month-sized portions to review rather than entire years can be very helpful to start this process.

Get an Accountant and Work With Them Regularly

Having a third party review your books and records can be extremely valuable. An accountant will be able to take a hard look at patterns and reported numbers to determine where there might be concerns. In addition, if you have your own in-house bookkeeping, having an outside accountant review everything provides a valuable second set of eyes to help spot mistakes.

Need help ensuring your financial statement are accurate? Speak with an Avisar advisor or consider one of our packages with coaching.

Ready to learn more about how to review financial statements for accuracy? Read our free guide How to Read Financial Statements: A Guide for Business Owners.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Audit Firms in Canada

Top 3 Things to Look at in Financial Statements for Judging a Business’ Health

Judging how well (or poorly) a business is doing requires a robust understanding of the business’s financials. In a previous post we looked at the three different types of financial statements. In this post we’re going to show you what to look for in your financial statements to know if your business is successful or at risk.

Learn more about how to read and understand financial statements in How to Read Financial Statements: A Guide for Business Owners.

1. Balance Sheet

A balance sheet is essentially a snapshot of a business’s financial situation at a specific point in time. It shows assets, liabilities, and owner equity as they currently stand.

From these figures, you can determine whether a business owns or owes more. Although a single balance sheet provides an accounting at only one moment in time, the financial direction of a business becomes evident if you compare balance sheets across months, quarters, or years.

To see how solvent a business currently is, check its most recent balance sheets’ listed assets and liabilities. The business has positive equity if the assets are greater than the liabilities and has a negative balance if the liabilities are greater. (Owner equity should also be checked but is less commonly an issue.)

You can also see whether current assets (e.g., cash) are sufficient to cover current liabilities (usually due within one year). If they aren’t, the business could have cash flow issues in the coming months.

To see how a business is trending, compare its balance sheet to a previous one (e.g., a quarter or year ago). Asset growth shows that a business is either growing or investing in growth. You likewise can see whether liabilities are declining or increasing.

2. Profit & Loss Statement

An income statement (or profit and loss statement (P&L)) summarizes revenues and expenses over a period of time, usually a month, quarter, or year. Revenues are tabulated and expenses deducted, and the resulting balance reveals whether a business made or lost money during the period.

In the reporting, revenues and expenses are typically broken down into categories. Listing separate categories makes it easier to assess where a business has growth opportunities and/or is spending most of its money. Categories could include online sales, brick and mortar sales, types of products/services, facility costs, wages, inventory costs, and anything else that’s also relevant.

First, look at the overall P&L to assess a business’s general performance. For decision-making, however, check the revenues and expenses of specific categories. You can see whether they’re declining, stable or growing, and you can also see correlations between certain ones. For example, a growth in sales might necessitate higher employee compensation to meet the increased volume.

3. Cash Flow Statement

A cash flow statement converts the profit shown on the P&L to the actual cash generated (or used) from operations. It also shows the cash provided for or used from investing and financing activities.

For example, your P&L may include $100,000 in invoices not collected yet, including in accounts receivable.  On the Cash Flow Statement, this will be adjusted as a reduction of $100,000 from the profit shown on the P&L to reflect the actual cash earned.

Cross-reference the cash flow statement with the P&L. The trends of the P&L should continue on a cash flow statement, or there should be a good reason for a difference.

Assess a Business’s Financials

With these three reports, you can accurately assess a business’s financial situation. Compile the reports to check how your own business is doing, or request them as you evaluate one that you’re considering investing in.

It’s also important to be aware that these reports are only useful if all accounts are reconciled and they have been properly prepared considering accruals like revenue and A/P, and non-cash adjustments like amortization and tax expenses.

If you want help examining your financial statements, book a free consultation and we’d be happy to show you what your financial statements are telling you about your business.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

small business accountant Vancouver

Federal Budget 2022: Business Measures

Small Business Deduction

Canadian-controlled private corporations (CCPCs) benefit from the small business deduction (SBD), a reduced corporate tax rate on active business income from the 15% general rate to 9% federally. Each province also has an SBD regime. A “business limit” of $500,000 of annual income (shared between associated corporations) limits eligibility to the SBD federally, and in all provinces except Saskatchewan, which has a $600,000 provincial business limit.

The business limit is reduced for corporations or associated groups which have “taxable capital” in excess of $10 million, with the business limit reduced by $1 for every additional $10 of taxable capital over the $10 million threshold, until it is eliminated where taxable capital equals or exceeds $15 million.

Budget 2022 proposes to reduce the business limit by $1 for every $80 of taxable capital in excess of $10 million, such that the limit will be more gradually reduced, and only eliminated where taxable capital equals or exceeds $50 million. This measure is proposed to apply for corporate taxation years beginning on or after April 7, 2022.

No changes are proposed to the parallel reduction to the business limit where adjusted aggregate investment income exceeds $50,000.

Anti-Avoidance Measures – Corporate Investment Income

In addition to being ineligible for the SBD, investment income (such as interest, royalties, rent and taxable capital gains) earned by CCPCs is subject to a significantly higher corporate tax rate of 38 2/3% (plus provincial tax which, in most provinces, results in a combined tax rate of over 50%). A similar regime (Part IV Tax) applies to portfolio dividends received by CCPCs. This is intended to result in corporate taxes similar to the top personal tax rates.

A portion of this tax is refundable when taxable dividends are paid by the corporation to its shareholders, so that the combined corporate taxes after this refund and personal tax paid by the ultimate individual shareholders is comparable to the tax that would have been paid if the investments had been made personally, rather than corporately.

As these special rules apply only to CCPCs, some planning strategies have been developed where corporations are structured to fall outside CCPC status. These include the use of corporations governed by a foreign country’s corporate legislation, or the issuance of options or voting shares to non-Canadians. A number of taxpayers who have implemented such strategies have been challenged by CRA, with appeals to be heard by the Tax Court of Canada, however such challenges are both time-consuming and costly for the government.

Budget 2022 proposes that private corporations which are not CCPCs, but are factually controlled by one or more Canadian persons, be subject to the same investment income rules as a CCPC. An anti-avoidance rule will also apply this treatment to any corporation falling outside the technical rules, where it is reasonable to consider that one or more transactions were undertaken to avoid these rules. This measure will generally apply to taxation years that end on or after April 7, 2022, with possible deferral where an arm’s length sale pursuant to a written purchase and sale agreement was entered into prior to that date.

Intergenerational Business Transfers

A complex anti-avoidance rule prevents the sale of shares of closely-held corporations by individual shareholders to related corporations from resulting in capital gains, instead causing the seller to realize dividends. In addition to attracting higher taxes than capital gains, dividends are not eligible for the lifetime capital gains exemption (LCGE).

This provision has been a source of frustration for business owners wishing to transition a family business to the next generation, denying them access to the LCGE which would have been available on a similar sale to unrelated parties. On June 29, 2021, legislation (Bill C-208) exempting sales of shares of small business corporations or family farm or fishing corporations from parents to corporations controlled by their children from this provision, allowing the realization of capital gains potentially eligible for the LCGE, was passed into law.

The government had indicated that they were concerned that this legislation could permit transfers beyond genuine intergenerational business successions to benefit from this lower tax cost, a practice commonly referred to as “surplus stripping,” and that further amendments would be made to limit these transactions to their intended purpose.

Budget 2022 reiterates the government’s intention to amend the legislation to restrict these transactions to genuine intergenerational business transfers, while continuing to facilitate legitimate business successions. It announces a consultation by the Department of Finance, with specific mention of the agriculture sector, to close on June 17, 2022. Comments can be sent to intergenerational-transfers-transfertsintergenerationnels@fin.gc.ca. The government indicated that amending legislation would be included in a bill to be tabled in the fall after the conclusion of the consultation process.

Flow-through Shares

Flow-through share agreements allow corporations to renounce or “flow through” specified expenses to investors, who can deduct the expenses in calculating their taxable income. These are common in the resource sector, where they allow certain resource pools to be claimed by investors, rather than the corporations incurring the costs. A Mineral Exploration Tax Credit equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors also applies to some flow-through shares.

Increased Credit for Critical Minerals

Budget 2022 proposes to introduce a new 30% Critical Mineral Exploration Tax Credit for specified minerals, specifically copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium. These minerals are used in the production of batteries and permanent magnets, both of which are used in zero-emission vehicles, or are necessary in the production and processing of advanced materials, clean technology, or semi-conductors. This will effectively double the credit for exploration expenditures related to such minerals.

This enhanced credit would apply to expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022 and on or before March 31, 2027.

Elimination of Flow-through Shares for Oil, Gas and Coal

Budget 2022 proposes to eliminate the flow-through share regime for oil, gas and coal activities. Such expenditures would not be permitted to be renounced to share purchasers under flow-through share agreements entered into after March 31, 2023.

Other Business Measures

Several business measures proposed in Budget 2022 target specific sectors. These include the following:

Real Estate

  • Budget 2022 announces a federal review of housing as an asset class, including the examination of potential changes to the tax treatment of large corporate players that invest in residential real estate. Further details on the review will be released later in 2022, with potential early actions to be announced before the end of the year.
  • Budget 2022 announces that anti-money laundering and anti-terrorist financing requirements will be extended to all businesses conducting mortgage lending in Canada.

Green Economy

  • Budget 2022 proposes to launch a new purchase incentive program for medium- and heavy-duty Zero-Emission Vehicles (ZEVs). Transport Canada will work with provinces and territories to develop and harmonize regulations and to conduct safety testing for long-haul zero-emission trucks. Natural Resources Canada will expand the Green Freight Assessment Program, which will be renamed the Green Freight Program, to support assessments and retrofits of more vehicles and a greater diversity of fleet and vehicle types.
  • Budget 2022 announces a consultation with experts to establish an investment tax credit of up to 30%, focused on net-zero technologies, battery storage solutions and clean hydrogen. Further details will be announced in the 2022 fall economic and fiscal update.
  • Air-source heat pumps primarily used for space or water heating acquired and becoming available for use on or after April 7, 2022 will be eligible for inclusion in Class 43.1 or 43.2, special accelerated CCA classes for investments in specified clean energy generation and energy conservation equipment. In addition, the manufacturing of such air-source heat pumps will be included in the definition of eligible zero-emission technology manufacturing or processing activities, eligible for reduced federal tax rates (halved rates for taxation years beginning in 2022 to 2028, then gradually increased to the standard rates, with no reduction for years beginning in 2032 or later).
  • A refundable tax credit for the cost of purchasing and installing eligible equipment used in an eligible carbon capture, utilization and storage (CCUS) project will be implemented. Eligible expenses incurred after 2021 until 2030 would benefit from credits ranging from 37.5% to 60%, with expenditures incurred until 2040 eligible for credits at half of these rates. New capital cost allowance classes at rates of 8% and 20% are also proposed for certain CCUS equipment.

Business Investment Initiatives

  • Budget 2022 proposes to create the Employee Ownership Trust, a new type of trust to support employee ownership. The government will engage with stakeholders to develop rules for these trusts.
  • Budget 2022 proposes the Canada Growth Fund, an independent public investment vehicle that will invest using a broad suite of financial instruments, with the goal that every dollar invested will attract at least three dollars of private capital. Further details will be announced in the 2022 fall economic and fiscal update.

Encouraging Innovation

  • Budget 2022 announces an independent federal innovation and investment agency, with further consultation later this year. Support delivered through the innovation and investment agency is expected to enable innovation and growth within the Canadian defence sector and boost investments in Canadian defence manufacturing. Further details will be announced in the 2022 fall economic and fiscal update.
  • Budget 2022 announces a review of the Scientific Research and Experimental Development (SR&ED) program, to assess its effectiveness in encouraging R&D that benefits Canada, and to explore opportunities to modernize and simplify the program. As part of this review, the government will also consider whether the tax system can encourage the development and retention of intellectual property, including seeking views on the suitability of adopting a patent box regime.

Financial Sector

  • Budget 2022 announces the government’s intention to launch a financial sector legislative review focused on the digitalization of money and maintaining financial sector stability and security. The first phase of the review will be directed at digital currencies, including cryptocurrencies and stablecoins.
  • A one-time 15% tax on bank and life insurance groups, based on taxable income in excess of $1 billion for taxation years ended in 2021, would be imposed for the 2022 taxation year and payable over five years. For subsequent years, a 1.5% additional tax would apply to income of such corporate groups in excess of $100 million.
  • A new accounting policy requirement, IFRS 17, will require insurers to defer recognition of contract service margins (CSMs) for accounting purposes commencing on January 1, 2023. Budget 2022 proposes that this deferral will not be permitted for income tax purposes. The timing of income inclusions for CSMs for income tax purposes will be set by legislation.
  • Proposed anti-avoidance measures will impact certain hedging and short-selling transactions undertaken by Canadian financial institutions and registered securities dealers.

Combatting Aggressive Tax Planning

  • Budget 2022 proposes to provide $1.2 billion over five years for CRA to expand audits of larger entities and non-residents engaged in aggressive tax planning; increase both the investigation and prosecution of those engaged in criminal tax evasion; and to expand its educational outreach.
  • The General Anti-avoidance Rule (GAAR) is proposed to be amended to allow CRA to challenge transactions that affect tax attributes (e.g. asset costs, losses carried forward, paid-up capital, capital dividend account) that have not yet become relevant to the computation of tax. This specific measure overrides a 2018 Federal Court of Appeal decision that held that GAAR could only be applied when the tax attribute was utilized to reduce income taxes.

Federal Budget 2022: Previously Announced Measures

Budget 2022 confirms the government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:

  • Legislative proposals relating to the Select Luxury Items Tax Act (a tax on certain automobiles, boats and aircrafts) released on March 11, 2022.
  • Legislative proposals released on February 4, 2022 in respect of the following measures:
  • electronic filing and certification of tax and information returns;
  • immediate expensing;
  • the Disability Tax Credit;
  • a technical fix related to the GST Credit top-up;
  • the rate reduction for zero-emission technology manufacturers;
  • film or video production tax credits;
  • postdoctoral fellowship income;
  • fixing contribution errors in registered pension plans;
  • a technical fix related to the revocation tax applicable to charities;
  • capital cost allowance for clean energy equipment;
  • enhanced reporting requirements for certain trusts;
  • allocation to redeemers methodology for mutual fund trusts;
  • mandatory disclosure rules;
  • avoidance of tax debts;
  • taxes applicable to registered investments;
  • audit authorities;
  • interest deductibility limits; and
  • crypto asset mining.
  • Legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act.
  • Legislative proposals released on December 3, 2021 with respect to Climate Action Incentive payments.
  • The income tax measure announced in Budget 2021 with respect to Hybrid Mismatch Arrangements.
  • The transfer pricing consultation announced in Budget 2021.
  • The anti-avoidance rules consultation announced on November 30, 2020 in the Fall Economic Statement, with an expected paper for consultation over the summer of 2022, and legislative proposals tabled by the end of 2022.
  • The income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletes trusts maturing in 2019 by one year, from eight years to nine years.
  • Measures confirmed in Budget 2016 relating to the GST/HST joint venture election.

Budget 2022 reiterates the government’s intention to return a portion of the proceeds from the price on pollution to small and medium-sized businesses through new federal programming in backstop jurisdictions (Alberta, Saskatchewan, Manitoba and Ontario). Budget 2022 proposes to provide funds, starting in 2022-23, to Environment and Climate Change Canada to administer direct payments to support emission-intensive, trade-exposed small and medium-sized enterprises in those jurisdictions.

Budget 2022 also reaffirms the government’s intention to revise the Employment Insurance (EI) system, including its support for experienced workers transitioning to a new career and coverage for seasonal, self-employed and gig workers. A long-term plan for the future of EI will be released after consultations conclude. As an interim measure, Budget 2022 proposes to extend previous expansions to EI coverage for seasonal workers.

measuring customer profitability

Measuring Customer Profitability: 3 Tips Businesses Should Know

If you’re a business owner, you know how valuable a good customer can be—as well as how draining a bad one can be. How can small businesses measure and identify their most profitable customers to attract more of them? Below, we’ll discuss some tips and tricks for measuring customer profitability and how you can use these metrics to grow your business.

What Is Customer Profitability?

You may assume that your most profitable customers are simply those who spend the most money with you. However, this isn’t all that goes into profit—you’ll also need to consider the costs associated with the customer relationship. When measuring customer profitability, consider customers who are high-maintenance and use a disproportionate amount of your employees’ time or who tend to return items more often than other customers. They may be less profitable than lower-maintenance customers who spend a bit less. Some particularly difficult customers may even be costing you money. 

There are a variety of software programs designed to help assess profitability based on your business’s unique metrics. A Chartered Professional Accountant (CPA) can help you evaluate the data these programs generate giving you insights on the allocation of resources and productivity; however, there are some slightly lower-tech ways to measure customer profitability, which we’ll discuss below.

Measuring Customer Profitability: Three Tips

Identify Your Customer Contact Channels

Before you can see what’s working and what isn’t, you’ll need to identify each of the potential ways in which a customer can interact with your company. Do you have a website? Social media pages? A public email address? Storefronts? A call centre? Unless you’re tracking the levels of engagement through all of these potential customer interaction channels, you could be missing key pieces of data that may inform your customer profitability analysis.

Once you’ve identified these channels, you can then evaluate the costs associated with each. These can include: 

  • Advertising and marketing costs
  • Infrastructure expenses (rent, utilities, real estate taxes)
  • Shipping costs
  • Return, refund, and restocking costs

Define Your Customer Categories

Many businesses tend to have customer segments that are clearly defined. For example, there are few daycare customers who aren’t parents of young children—but assessing customer categories for retail and department stores can be trickier, as these tend to attract a much broader range of demographics. 

However, business owners are uniquely positioned to define their customer categories, as you have first-hand knowledge of your business, your products, and your general impressions of who’s spending money (and who isn’t) at your business. Some questions to ask yourself include:

  • What types of customers do you see? 
  • Is your “typical customer” different at different times of the day? (For example, some businesses tend to see more students in the afternoon and early evening, while retirees may make up the bulk of customers from 9 to 5 on weekdays.) 
  • What motivates your customers to purchase from you?
  • Who is your competition? Do your customers tend to be loyal to one business or simply patronize whoever is most convenient at the time?
  • Which categories of customers tend to interact with your staff the most?

With this information in hand, you can begin to do some calculations for measuring customer profitability. 

Begin Tracking and Logging Key Performance Indicators (KPIs) 

Some profitability KPIs you’ll want to measure and track when measuring customer profitability can include: 

  • Average revenue per user (ARPU), calculated by dividing the total revenue by the total number of customers or subscribers.
  • Customer lifetime value (CLV), which projects the entire net profit that will be generated from a customer over the course of their relationship with your business. You can calculate CLV by multiplying the annual profit per customer by the average number of years they’ll stay a customer, then subtracting the initial cost of acquiring this customer. 
  • Customer acquisition cost. Your customer acquisition cost (CAC) is quite simply how much money it costs you to acquire a new customer. It typically includes the cost of your sales and marketing activities. If you want to be accurate when measuring customer profitability, you need to know this number. The formula to calculate CAC is: (Cost of Sales + Cost of Marketing & Advertising) / New Customers Acquired

Some of this data may not be readily accessible. But by thinking about these calculations, you can brainstorm ways to collect and track this information, whether this means investing in some marketing tools or creating an employee loyalty program that can track spending patterns.

Partnering with a CPA can give you access to an even broader range of potential KPI tools for measuring customer profitability approach. For more tips on measuring profitability download The Ultimate Small Business Profitability Checklist, our free guide to help you measure and manage the profitability of your business.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

create a marketing strategy for a small business

How to Create a Marketing Strategy for a Small Business

According to a study of US small businesses, 50% of them are operating with no marketing plan. There are no comparable Canadian stats that I could find, but I suspect it’s similar. That means that one out of every two small businesses has no plan for how they will grow their business, which could explain why 60% of small businesses fail within their first three years and many more never realize their potential.

Consistent growth rarely happens by accident and in this blog we’re going to show how to create a marketing strategy for a small business so you can avoid becoming a statistic.

Always Start with Strategy

This probably sounds a little strange to say always start with strategy when creating a marketing strategy for a small business, but here me out.

Too often, when companies think about creating a marketing strategy, they tend to start to cobble together a bunch of tactics.

  • I need to run Facebook ads
  • I need to find a way to get more leads from social media
  • I have to redesign my website
  • I should be on LinkedIn

Maybe. But none of those, or even all of those together is a strategy. And throwing money at a series of tactics that you read about, or someone recommended, is a sure-fire way to waste money.

Know Your Target

When you set out to create a marketing strategy for a small business, the first thing you need to know is where you are and where you are going. This means having targets you measure your progress against.

Your targets may be revenue based. Or you may be trying to grow into a new market. Or increase profitability. Whatever it is, be sure you quantify it, have a target, and know how you will measure progress.

If profitability is your goal, or how you’ll measure progress towards your goal, the Ultimate Small Business Profitability Checklist provides details on how to calculate five key indicators of profitability to help. You can download it here.

Find Your Ideal Customer

Most small businesses are built to perfectly serve a fairly narrow type of customer. Trying to attract and serve too broad of a market can actually hurt a business sometimes. That’s why it’s so important to define your ideal client as you create a marketing strategy for a small business.

  • Identify your most profitable customers (see the Ultimate Small Business Profitability Checklist for some tips on analyzing that)
  • From that group, identify the ones who refer you the most business
  • Take that group and try to identify some common characteristics (demographic and psychographic)
  • Use that list of common characteristics to create what’s called in marketing a “customer persona”; a profile of your ideal customer

Find Your Unique Value Proposition

Once you have a list of your current ideal customers it’s time to talk to them and find out why they chose you. Get on the phone and call them up. Ask them what they like about doing business with you. Why they chose you over all the other options they had.

If you collect testimonials and online reviews, also review those. What you’re looking for in all of this are common themes that show what your customers think makes you stand out. Be aware, this is often different from what you think it is.

Use what you find to develop some bullet point key messages that represent why they chose you/why someone like them should choose you.

Map the buyer’s journey

The next step to create a marketing strategy for a small business is to map out all the ways you might come into contact with your ideal customer as they progress through their buyer’s journey.

Everyone who has ever purchased from you has gone through a journey. They went from knowing nothing about you, to knowing you exist, acknowledging you might be able to solve their problem, to trusting you, to making a purchase. Hopefully, they then went on to re-purchase and refer you to others as well.

Take those stages and do a little brainstorming about how you might show up to people at those various stages. Here are some examples:

  • Getting to know you – search engines, ads, referrals
  • Trusting you – testimonials, reviews, blogs, discovery calls
  • Purchasing – sales people, website, physical store
  • Repeat purchase – email reminders, mailers, subscriptions
  • Referrals – referral cards, email, champion programs

You can even work some questions about this into your customer interviews you may be doing to help define your ideal customer profile.

Putting It All Together

The final step to create a marketing strategy for a small business is to put all these pieces together. By now you have:

  • A profile of your ideal customer
  • Your core message or unique value proposition that speaks to this person
  • The channels and platforms where you need to show up to reach your ideal customer

Now your task is to put it together.

If your ideal customer is most likely to get to know about you through a Google search, make sure you have optimized your website to show up for what they are searching for and that your page clearly communicates your value proposition in their language.

If reviews are important for them to trust you, put a plan in place to get more reviews and publish them where your prospects will see them.

If referrals are how people find you, focus on a referral program for both customers and strategic partners.

The tactics almost find themselves once you have the core strategic elements sorted out.

If you’d like someone to bounce some ideas off while you create a marketing strategy for a small business, book a consultation (or if you’re a customer, give us a call). We’ve worked with dozens of businesses and not-for-profits to better define their growth strategy and we’d love to help you.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

small business growth

The 5 Stages of Small Business Growth

While small businesses come in all shapes and sizes, almost every business goes through the same five stages from inception to late-stage growth, according to researchers Neil Churchill and Virginia Lewis. In analyzing the lifecycle of businesses, the two researchers uncovered a pattern showing small businesses go through five stages as they mature and grow.

While the length of time a small business stays in any one phase changes business-to-business, within each stage, organizations show remarkable similarities and characteristics that allow them to move to the next stage. Understanding the stages can help you identify where your business is and what to do to move up the ladder. Let’s explore.

SMALL BUSINESS GROWTH STAGE I: EXISTENCE

The small business growth journey begins at its inception. As small businesses come into existence, their focus is primarily on attracting customers and delivering the goods or services to fulfill transactions.

Organizations at this stage are fairly loose and simple. The owner or founders typically do a bit of everything and supervise subordinates directly. While there may be a formal business plan, the strategy aims to generate enough revenue to be viable.

Quality, production, and processes may be unstable until those in the business start to gain experience. With most small businesses, the owner is the company and drives both strategy and execution.

20% of small businesses never get past this stage and fail within the first year of existence. Another 30% close their doors by the end of the second year. Those that survive evolve into the second stage: survival.

SMALL BUSINESS GROWTH STAGE II: SURVIVAL

As small businesses enter the second stage, they have demonstrated viability. It is attracting and retaining enough customers and generating enough cash flow to survive in the short term.

The organization remains small, although there may now be a few managers focusing on sales or operations at the direction of the owner or founder. The owner still makes nearly every key decision, and the goal remains survival.

Many companies stall at this point. They may earn marginal returns based on their capital and time investment. Many Mom-and-Pop businesses stay in existence but never thrive beyond the survival stage — eventually closing or selling, often at a loss. Conversely, businesses that grow in profitability and develop a strong cash flow to finance growth move onto the third stage: success.

To ensure your business moves onto the next stage, it’s important to work with an advisor to have a strategic plan in place.

SMALL BUSINESS GROWTH STAGE III: SUCCESS

If your business has reached the third stage, congratulations on your small business growth. There’s a lot to celebrate. There are also important questions to ask. Do you want to:

  • keep the company fairly small with stable and predictable profitability?
  • expand and grow your business for greater profitability (but also at greater risk)?
  • step back and pursue other interests or investments while the business continues?

These are questions you should ask yourself and your accountant or business advisor to ensure you have the right plan in place to achieve your goal.

Companies can remain at the success stage for long periods and earn average or above-average returns. In this stage, businesses are more likely to survive economic downturns or shifting consumer demands.

In this stage, companies typically start to add additional executives or oversight, such as a controller. Middle managers may be necessary to drive operations. Financial, sales, marketing, and production systems run more smoothly and are better defined.

Companies willing to take on additional risk, and additional debt, strive to enter the fourth stage: take off.

SMALL BUSINESS GROWTH STAGE IV: TAKE-OFF

If the business is the fire, financing is the accelerant. To turn a business from success to take-off, owners and founders focus on raising capital and fueling growth. Owners and founders begin to delegate more and allow managers and other executives to begin to take a more active role in strategy and higher-level decision-making.

Organizations often begin to decentralize. Formal organizational charts are developed with clear lines of report and hierarchies.

This is a pivotal stage in the business lifecycle. If leaders rise to the challenge, significant growth can occur. If not, the business can stall at this stage, too. Many companies sell before achieving their take-off goals, although at this stage they usually sell for a profit.

If you’re entering this stage of small business growth, you may want to explore your options to restructure your business or sell your business with a strategic partner.

If take-off happens, it’s time to enter the final stage: resource maturity.

SMALL BUSINESS GROWTH STAGE V: RESOURCE MATURITY

As companies enter the fifth stage of growing a small business, they need to be concerned about control and consolidation of rapid growth. The business may need to expand rapidly to accommodate the growth and meet consumer needs.  The organization may struggle to retain the entrepreneurial spirit that drove growth in the first place.

In this stage, the company has the financial resources to fund detailed strategic and operational planning. Management runs fairly independently and key positions are staffed by experienced workers. Systems are refined and smooth. Owners and founders are often detached from the business both financially and operationally.

As businesses reach resource maturity, profitability may flatten but be sustainable and more predictable. Yet, many businesses will lose sight of their original mission, stray too far outside their product offerings, or take unnecessary risks to chase even larger growth.

A DELICATE BALANCING ACT

Throughout every stage, it’s a delicate balancing act. For those that can move through the stages, the rewards can be great. However, it takes a careful and strategic growth plan at each stage and the ability to evolve and adapt as the business grows.

Ready to talk about where you are on the small business growth chart and how to best position your business for success? Book a free consultation and speak with one of our experts.

We work with businesses across all of these stages, helping them grow to the next stage or stay put, making the most of the stage they are in. It all depends on your priorities. We work hard to understand your business needs and help you manage risk, meet reporting obligations and plan strategically for growth.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Small Business And HR: The Basics

Congratulations – your business is moving along enough that you need to hire employees! Here are some tips to keep you sane as you navigate the human resources side of your business.

As an independent or small business owner, it may have been fairly simple to manage your human resource (HR) needs: meet your payroll, make sure taxes and commissions were paid, manage vacations and slow periods.

Once you hit the threshold of five employees, did you know that you are required to have these items in place:

  • a health and safety policy
  • a related committee made up of both employees and management
  • regular joint health and safety reviews of your workplace and practices

The move to carrying multiple employees can be a significant advantage to helping you meet your customers’ needs, but it can also cause you a few headaches along the way.

Fortunately, there are plenty of free resources available to you. The federal government has a website devoted to helping small businesses succeed. Its Business and Industry website provides links to provincial resources as well.

FULL-TIME OR PART-TIME STAFF?

Depending on your business, both types of employee might be useful to you. If you have a service-based business, or one that has a technical proprietary product or business model, hiring employees rather than contractors is likely the best way to engage more people in your business.

Customers expect consistency in both products and people in order to build trust with a business. You can best achieve this consistency with good training, coaching and oversight of your employees. This doesn’t mean you have to hire all full-time employees. Depending on the type of business, part-time might also be a good choice.

Employees are considered part-time if they work 30 or fewer hours per week. The benefit of having part-time employees is that you can schedule them to work hours that fit your peak work requirements and not have to worry about keeping them busy all the time. You can also give them flexible numbers of hours, which gives you potential to better control your overhead labour costs.

Making a differentiation between full time and part time staff also allows you to plan for future growth by providing things like benefits, different rates of pay, distinguishing pay-per-hour roles instead of salaried roles, and so on. Moving into the realm of hiring staff means that you should spend some time on some organizational planning – think about how you would like to see your organization operate in the future.

You will also want to think about how you will keep track of all the information about your employees. It can be as simple as keeping a file on your computer for every employee with their employment contract and pertinent information (as long as it is very secure!) and manually calculating your payroll for submission. Or, you’ll more likely want to keep most of your employee data in an HR data management system. These systems can be very helpful, even to very small businesses.

EMPLOYEES OR CONTRACTORS?

Perhaps instead of the part-time / full-time prospect, you are considering hiring contractors to help you with your work? Many organizations choose to use contractors to supplement their existing workforce when there is a need to build short-term capacity or to cover existing shortages in staffing due to holidays or special projects. Organizations also consider the cost of hiring a contractor to be less than that of an employee, because it reduces the operating overhead needed to cover the employee. On the other hand, a contractor usually comes with a higher price-per-hour requirement than does an employee.

To better understand some key factors, here’s what you need to consider from the perspective of overall cost.

EMPLOYEES

Your employee will cost you salary and whatever commission, promotion or taxable benefits you would expect to give them. (Taxable benefits are perks you give employees that cost money, but they don’t pay for, such as parking or transit passes, reductions in tuition, or travel points on work-related travel). Your employee will also need physical assets and tools to work with, as well as space in which to work. As well, you’ll need to factor in training, vacations, and additional time for regular labour code-mandated activities such as meal breaks, sick days (see more below), and statutory and/or overtime pay. Of course, you will also need to make employment insurance and CPP contributions.

CONTRACTORS

A contractor, on the other hand, generally brings their expertise and their own tools to conduct their work, and you do not necessarily need to give them a permanent space in your location, saving you overhead costs. Also, there is no expectation that you are going to pay taxes for this employee, as it is their responsibility to handle their own tax situation. You will be paying this person more money per hour, but if it does not exceed your total calculated benefits, salary, overtime, and operating costs, it may be worth considering a contract arrangement.

There are other things to consider however – and this relates to business purpose. Additionally, you need to be sure your expectations of your contractor are not that of an employee. A contractor is usually contracted to do a specific activity or provide a specific service, within a certain timeframe. Expect to have negotiations for this work in terms of total work product, hourly or total compensation, and timeframe.

Also, don’t expect that your contractor is going to exclusively work for you in your own field. Many employees have a “side hustle,” but most don’t do it in their own field or with competitors. This doesn’t hold true for contractors. They also have the ability to sub-contract work to others if they feel it is appropriate, or to substitute their own employees or associates where the need arises. If you require a consistent individual to be in place working on something that may be proprietary, confidential, or highly competitive, you may want to take on an employee instead.

Remember this as well: if you do not want a contractor to work for another organization, you really are hiring an employee, even temporarily, and you may hear from the CRA about it when it comes to tax season. It would be a good idea for you to review the CRA’s policies around contract vs. staff in this very accessible document: www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-16e.pdf

WORK, DISCIPLINE, AND TERMINATION

While your employee is working with you, there are some very specific rules in the labour legislation, as well as within employment law, that you need to abide by. Examples of this include meal times, pay equity, overtime calculations, sick days, and employee discipline.

You are required to provide a meal break of 30 minutes for your employees, but you do not have to give other breaks. That said, most employers do. It is up to you to determine how you will work breaks into your employees’ working time. Regular breaks promote better attention paid to detail, so it is a good idea to consider how best to provide them.

In BC, there is no legal requirement for an employer to provide paid sick days, however, this is not the case in all provinces.  In Ontario, the legal requirement is currently three days of paid sick leave per year.  You should check with your province to determine what is required for you. Generally, paid sick days can be applied to their own sickness or that of their family members. Always keep in mind, sick employees in the workplace will reduce your overall productivity and may spread illness within your other staff – and have an even greater effect on your productivity!

Vacation pay is calculated as a percentage of the gross wages an employee earns annually. During the first five years of employment, employees are entitled to 4% of their total salary as vacation pay. After completing six years of continuous employment with the same employer, the entitlement increases to 6% of their total salary.  Vacation pay can be calculated and paid with each paycheque or can be accrued and paid to employees when they take equivalent time off. This is a consideration based on your business model and the employee’s workload.

The amount you pay your employees cannot be differentiated based on gender, orientation, marital status or age. Paying employees the same means that, if they literally have the same job (salesperson, dentist, manager), they must be paid the same in a way that is commensurate with their experience, responsibility in the workplace and activity. This is also true when it comes to similar but different types of work as well.

There is also a requirement called pay equity (not equality), to pay people within similar “bands” of pay based on multiple factors including but not limited to:

  • level of decision making
  • impact on business
  • customer contact
  • exposure to physical, mental or social situations that cause individual difficulty (this covers everything from dusty workplaces to noise exposure in nightclubs)

If you have individual employees doing different tasks, you might want to look into pay equity in order to help you make decisions on what to pay and why.

PROVIDE TRAINING WHEN THEY START

Not every employee works out. People quit, sure, but when it comes to disciplining or terminating an employee, you need to be careful to be fair and provide enough notice that there is no recourse to you through the courts. A clear job description and expectation of performance are a good start to making sure an employee can be confident in doing their work and in your satisfaction of work done.

When an employee is new, it is important to coach and teach the employee to ensure the work is being done to your satisfaction. As the employee gains more experience, it is important to provide ongoing feedback as appropriate to make sure you are both calibrated to the success of the work. A monthly, quarterly or at least regular review of the work is important to ensure no one is surprised if work is slipping or not going well. You do this with your business numbers and sales, so do it with your people too; they are an asset to your business and need regular review.

AND PREPARE IN CASE THEY DON’T WORK OUT

Discipline may require you to write them about any issue and have them acknowledge that it is a serious matter needing attention. Treat this the same as with a supplier. If your supplier didn’t follow through with their contract, you would talk to them, then write them, then formally issue a “last chance” warning, then terminate the contract. Do the same with your employee (where appropriate) so that everyone is clear.

It may be that you need to terminate with severance, payout their vacation entitlement if you have been accruing it for them, or pay out an agreed-upon expense. In BC, the amount of written notice and/or termination pay is based on how long an employee has been employed.  To calculate the required amounts, use the formula provided HERE.  Each province and territory set their own employment standards so be sure to use the appropriate formula for your calculations.  

Expanding your business to better serve your customers and impact your business world is an exciting time and you can successfully get more help through either hiring employees or contractors. Be careful and thoughtful about your business intentions and goals – and your decisions around bringing on staff will be just as successful as you already are!

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Top 5 Small Business Legal Mistakes To Avoid

Small businesses face many of the same legal issues as their larger counterparts, but often without the cost structure to support engaging legal counsel. If you own a small business, it’s important to understand when saving legal costs up-front can end up costing your business more in the long run.

All businesses – small, medium or large – make legal mistakes. However, a small business may not be as capable of weathering the storm. The effect of a legal mistake on a small business’s bottom line can be so disastrous that it may threaten its very survival. Accordingly, small businesses must pay extra attention to avoid certain legal mistakes up-front.

Below are the top five legal mistakes small businesses make and how to avoid them.

CHOOSE THE RIGHT BUSINESS STRUCTURE

Many small businesses are sole proprietorships, which means there is no legal distinction between the business and the owner. The owner assumes all the liability of the business. Accordingly, the personal assets of the small business owner (e.g., house, car, investments etc.) may be seized to pay the debts of the business.

While there is a level of simplicity to operating a sole proprietorship, there are many advantages to incorporation that are worth considering. One of the main advantages is that the business becomes a separate entity under the law. This means that, if the business incurs a large debt or liability, the business’s assets may be seized to satisfy that debt or liability, but the owner’s personal assets are protected.

Another big advantage is the potential to minimize the owner’s overall tax liability. By incorporating, the owner has three opportunities to reduce their overall owings:

  • Defer paying personal taxes on business earnings by leaving the earnings in the corporation and paying the lower corporate tax rate.
  • Pay itself dividends instead of a salary and pay the lower dividend tax rate.
  • In certain situations, income split by having the business owner’s spouse and children become shareholders of the business and paying them dividends from the business’ earnings.

By minimizing tax liabilities, the owner of a small business may free up more capital to invest in the business’s future.

PUT KEY AGREEMENTS IN WRITING

All of the small business’s key agreements should be in writing. Verbal agreements are very difficult to enforce and often leave the business with no recourse for compensation or legal action.

Every small business should ensure that its key agreements are properly drafted. This means clearly spelling out each party’s roles and responsibilities, providing the business with the protection it needs against future liability and apportioning risk appropriately. This not only helps ensure everyone is on the same page going forward; if something does go wrong, having the agreement in writing will also help prove the other party’s fault.

In addition, given many small businesses may not have sufficient personnel and working capital to engage in traditional litigation, the parties can agree up-front on a different way to resolve any future disputes that may arise. For example, they could stipulate in the agreement that any disputes be submitted to binding arbitration, which results in a more timely and cost-effective dispute resolution mechanism than litigation.

MAKE SURE THERE ARE ADEQUATE EMPLOYMENT AGREEMENTS

Similarly, it is important for every small business to have properly-drafted employment agreements in place. These serve as the foundation of the business’s relationship with its employees. Common terms include whether the arrangement is permanent or temporary, whether the individual is an employee in the traditional sense or an independent contractor, an outline of the duties and responsibilities, and the rights and restrictions upon termination.

Not having a written employment agreement in place may expose the small business to unnecessary liability in future that could have easily been avoided. For example, if the relationship was not properly documented and managed, a small business that intends to hire an independent contractor may find itself liable for large common law termination and severance amounts once the relationship ends.

REGISTER INTELLECTUAL PROPERTY RIGHTS

Intellectual property is the legal right to ideas, inventions and creations in the industrial, scientific, literary and artistic fields. It also covers symbols, names, images, designs and models used in business.[1] In Canada, there are four types of intellectual property rights:

  • copyrights
  • trademarks
  • patents
  • industrial designs

Intellectual property is a valuable business asset and it comes with legal rights. Small businesses may be creating valuable intellectual property assets – sometimes without even realizing it – that should be legally protected. If properly protected, the small business has, among other benefits, the ability to prevent competitors from copying or closely imitating its products and services. Without adequate protection, a small business is vulnerable to being driven out of business by a more savvy competitor.

HIRE A GOOD LAWYER TO HELP AVOID MISTAKES

Every small business faces issues that require the expertise of good legal counsel. Unfortunately, in a misguided effort to minimize costs, many owners of small businesses ignore legal issues altogether or try to handle the issues themselves. This results in legal mistakes that may end up costing the business more in the long run and, in certain circumstances, threatening its very survival. Accordingly, it is important for small businesses to engage good legal counsel in key areas of the business to help avoid mistakes.

Like the other four tips provided here, if you own a small business, think of this not as an unnecessary expense, but as a necessary investment in the future of your business.

[1]      “What is intellectual property?” Innovation, Science and Economic Development Canada. Available at : https://canadabusiness.ca/ government/copyright-and-intellectual-property/what-is-intellectual-property

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.