Latest / The Money Part / Ep 7 | Studio Series: Closing Out the Year While Your Season Heats Up

Transcript

Ep 7 | Studio Series: Closing Out the Year While Your Season Heats Up · The Money Part

• 0:01
  SPEAKER_01: Hello, I'm Barb Fisher, and I'm here today with Juliana Vivrelli.
• 0:07
  SPEAKER_01: She's our chief of staff and she always helps us keep this conversation moving where we talk about your business and the money part, the part of the business that they didn't train you about in school, but becomes hauntingly important.
• 0:19
  SPEAKER_01: And today we are going to do our once-a-month series where we talk about dance studios.
• 0:24
  SPEAKER_01: Here at Dance in Profit and Fisher Business, we have a niche that's dance studios.
• 0:29
  SPEAKER_01: These are the studios that have students during the academic year, and we have a bunch of them and we like to talk about their books more specifically.
• 0:38
  SPEAKER_01: So today's topic is going to talk about the problem that happens in a dance studio when the academic year gets rolling right as the tax year needs to get closing.
• 0:49
  SPEAKER_01: So that sounds about right, Juliana.
• 0:52
  SPEAKER_00: Yeah, that's right.
• 0:54
  SPEAKER_00: I love that you use the word haunted because we are getting into fall and I can see the leaves dropping outside my window.
• 1:01
  SPEAKER_00: I'm really appreciating that.
• 1:03
  SPEAKER_00: But this is a really tough time, like you were starting to talk about.
• 1:06
  SPEAKER_00: What are some of the challenges other than just coinciding with the start of school?
• 1:11
  SPEAKER_00: Often new class series are starting in the fall.
• 1:15
  SPEAKER_00: Um, but it's also a critical time to start prepping for tax season and for getting everything buttoned up by the end of the year.
• 1:22
  SPEAKER_00: What are what are all the challenges that are happening this time of year for dance studios?
• 1:27
  SPEAKER_01: Sure.
• 1:27
  SPEAKER_01: Uh let's I'm gonna take this in a couple parts.
• 1:30
  SPEAKER_01: So, you know, for most of our clients, most businesses, your tax year coincides with your calendar year.
• 1:35
  SPEAKER_01: So your taxes aren't really due until March.
• 1:38
  SPEAKER_01: But as we all know in the dance studio world, the seasonality of dance, dance studios is that the spring is bananas, right?
• 1:46
  SPEAKER_01: You've got recitals going on, the travel and the competitions are going strong, and it's just hard to do a lot.
• 1:52
  SPEAKER_01: So we try to have our dance studios and really all of our clients close, do what we call a soft close in the fall to help get ready for closing in the spring.
• 2:01
  SPEAKER_01: And it's really just a way to relieve that labor burden off yourself and get the conversations flowing.
• 2:07
  SPEAKER_01: So an example might be we had a dance studio that we did a soft close for.
• 2:11
  SPEAKER_01: And what that means is we had them set a meeting with their CPA so they could have a specific conversation about tax preparation.
• 2:19
  SPEAKER_01: And we closed the books pretty well through September.
• 2:22
  SPEAKER_01: They met with their tax person to be able to find out like what is our anticipated tax burden based on what's going on now.
• 2:30
  SPEAKER_01: And, you know, the nice part about doing it through September in a dance studio is those September numbers will have some new tuition prices.
• 2:37
  SPEAKER_01: If you raised your price for the new year, they'll have your, you know, your new enrollment numbers on this new year.
• 2:41
  SPEAKER_01: So you can kind of use September to extrapolate how October, November, December will go and be able to do some predictions about tax, which is nice.
• 2:50
  SPEAKER_01: So then, you know, the the studio that just lately met with their CPA has not only the tax account that they've been working on using profit first throughout the year, but that with this tax prediction that they'll do, we can make sure that their allocations are correct, taking them through the end of the year when the tax bill isn't really due until the end of first quarter next year.
• 3:11
  SPEAKER_01: So that point of soft close, I think, is what we're going to focus on today.
• 3:16
  SPEAKER_01: And it really is very helpful for the studio.
• 3:20
  SPEAKER_01: The other challenge that happens, I mean, a lot of businesses have this, is off the slow season.
• 3:24
  SPEAKER_01: So studios often have a very slow season in summer.
• 3:27
  SPEAKER_01: Things are easier.
• 3:27
  SPEAKER_01: You might do a couple of weeks of summer camp, but it's not the grind that the whole school year is.
• 3:32
  SPEAKER_01: It's, you know, a couple of special events.
• 3:34
  SPEAKER_01: And most studio owners I work with, things are just a little quieter in the summer.
• 3:38
  SPEAKER_01: It's it's nice.
• 3:40
  SPEAKER_01: And then you come into this like slam of the wall of like all the kids are here, all the teachers are here.
• 3:47
  SPEAKER_01: We're all figuring out what phrases the kids are saying, what dance they're really into this year, and what classes are overfilling.
• 3:53
  SPEAKER_01: So you might have wait lists that you're managing, you might have new families that you're helping to get smoothed in, you know, all of the new, we'll call it like dramas that might happen with kids in dance, all happening at the same time.
• 4:05
  SPEAKER_01: You're trying to soft close, trying to do this early prep for year end.
• 4:09
  SPEAKER_01: There's just a lot going on.
• 4:10
  SPEAKER_01: And it you sort of slam into it coming off of the summer.
• 4:13
  SPEAKER_01: It just, I think, feels like a bit of a harsh wall of reality.
• 4:19
  SPEAKER_00: Yeah, I like the the idea of um meeting with your CPA early before everything is is closed, extrapolating that Q4, and then also having a conversation about how to minimize your tax bill if that's an option, right?
• 4:35
  SPEAKER_00: So if there are things that you can do in October, November, December to be able to reduce your tax obligation, whether that's buying something or building something or whatever, um, you still have one way to do that versus waiting until after those books have closed December 31st.
• 4:51
  SPEAKER_00: You you miss that opportunity.
• 4:53
  SPEAKER_00: Um, what is important for owners to do between now and then?
• 4:57
  SPEAKER_00: Like what is their job between now and the end of December?
• 5:02
  SPEAKER_01: Between now and the end of December, I mean, I think going back to that.
• 5:05
  SPEAKER_01: So if the books are not in good order, priority one, I think, should be to get the books in good order.
• 5:11
  SPEAKER_01: I I guess priority one should be to make sure you have a tax person.
• 5:13
  SPEAKER_01: You know, in the accounting worlds, I'm just bumping into this a lot lately.
• 5:17
  SPEAKER_01: Uh, a lot of tax people are retiring or they're not making you happy.
• 5:20
  SPEAKER_01: So if you need to find somebody, now is the time.
• 5:23
  SPEAKER_01: Now is a great time to interview tax professionals to figure out who you want in your on your team for the closing of 2026 taxes.
• 5:31
  SPEAKER_01: So I'd say that's number one is if you want to change tax people or you need to change tax people, do that now.
• 5:37
  SPEAKER_01: The next thing is like get your books in order.
• 5:39
  SPEAKER_01: So by that I mean if you run a profit and loss and a balance sheet, is it right?
• 5:44
  SPEAKER_01: Is it up to date?
• 5:46
  SPEAKER_01: Can you do it?
• 5:47
  SPEAKER_01: And if those are both in order, then it's time to do some analysis and put that updated financials in front of that tax person so that you can make some decisions, especially if you have some wishes.
• 5:58
  SPEAKER_01: So uh things I'm bumping into lately is uh this is not in the dance world, but I have a client who has the cash and wants to get a car.
• 6:05
  SPEAKER_01: Should she buy the car this year?
• 6:06
  SPEAKER_01: Should she buy the car next year?
• 6:08
  SPEAKER_01: These are tax strategy questions.
• 6:10
  SPEAKER_01: So she's not coming up with things to buy that she didn't need anyway.
• 6:13
  SPEAKER_01: I'm not suggesting that at all.
• 6:14
  SPEAKER_01: I don't want you to spend money you don't need to spend.
• 6:17
  SPEAKER_01: But should you spend it now in October or should you wait until January, February?
• 6:22
  SPEAKER_01: Those are decisions that I think are really relevant to uh having that discussion with your CPA about if if the cash is there, even if you have to take on debt to do it, if that's your situation.
• 6:32
  SPEAKER_01: Um, it's it's that that couple of month change, you know, switches which tax your things are in.
• 6:38
  SPEAKER_01: And if you have a big tax bill in front of you, it might be helpful to do those things now.
• 6:43
  SPEAKER_01: So you can get if you're doing a small uh remodel, it could be that you get that depreciation this year if you're buying a car.
• 6:49
  SPEAKER_01: These are all depreciable things that you can lower your tax bill by doing them.
• 6:55
  SPEAKER_01: It it will lower the tax bill you have for the year you're that you're in.
• 6:58
  SPEAKER_01: So you might want to do it in the current year.
• 7:00
  SPEAKER_01: If you aren't predicted to have much of a tax bill, you might yield that and do it next year so that you get that tax benefit when your tax bill is in fact higher.
• 7:10
  SPEAKER_00: Yeah, one recommendation I've heard you say is to take 20 minutes every week and look at your transactions or identify maybe open transactions that your bookkeeper hasn't been able to correctly categorize.
• 7:25
  SPEAKER_00: Um, can you talk about some of the habit work that you could do around doing something consistently so that you don't avoid it?
• 7:31
  SPEAKER_01: Sure.
• 7:32
  SPEAKER_01: Yes.
• 7:32
  SPEAKER_01: James Clear has a lot of tricks about doing habit stacking, which is that if you um like for us when we do our profit first allocations is right before we run payroll.
• 7:42
  SPEAKER_01: So in that same vein, if you are do if there are habits you're doing every week, I suggest you stack your bookkeeping chores in there.
• 7:49
  SPEAKER_01: So our clients all have access to a portal.
• 7:52
  SPEAKER_01: We put all of our questions in that portal.
• 7:53
  SPEAKER_01: And if I know that your portal day is Thursdays, then we make sure we put all our questions in there by Wednesday so that when you go in there, we will have your attention, we'll have the questions there to you at the right time, and things can continue flowing.
• 8:07
  SPEAKER_01: Like that habits stacking can be really powerful to help you get through the work in a less painful way.
• 8:14
  SPEAKER_01: You know, sometimes like sometimes it's hard to change gears and do a bunch of different things.
• 8:18
  SPEAKER_01: So if you can figure out a place to stack the habit of working on your books when you need to, so that it's not this giant lift of like getting into your bank and doing all of these things.
• 8:30
  SPEAKER_01: And it's just nice when it flows with all the other stuff you need to do anyway, so that you can get through it without as much pain and you don't have to at the end of the day be like, oh, I did my books.
• 8:40
  SPEAKER_01: Like I'd rather it just flows with you uh in your work for sure.
• 8:44
  SPEAKER_00: Yeah, there's so many things you can do.
• 8:46
  SPEAKER_00: You can literally put it in your calendar, like every Saturday morning, I'm gonna spend 20 minutes.
• 8:52
  SPEAKER_00: You can also incentivize yourself, like, okay, I'm gonna spend 20 minutes and then I'll get a latte, you know, whatever it is that's it.
• 8:57
  SPEAKER_00: Sure.
• 8:58
  SPEAKER_00: The incentives I forgot about that, right?
• 8:59
  SPEAKER_01: That's one of his tricks is to give we bought a latte maker because that is one of my tricks, actually, now that you say that.
• 9:05
  SPEAKER_01: But I would not suggest Saturday morning, actually.
• 9:07
  SPEAKER_01: I would like you to be able to do your work during workday.
• 9:09
  SPEAKER_01: But yes, I agree.
• 9:11
  SPEAKER_01: Like setting, you know, for if you're, you know, when we run payroll on a Wednesday, then maybe we do it right then and we just do our 30 minutes while we're already in the bank.
• 9:19
  SPEAKER_01: We've just done the profit first allocations, we've just processed payroll.
• 9:23
  SPEAKER_01: Oh, look, there's these questions the bookkeeper has.
• 9:25
  SPEAKER_01: Like that works out really well.
• 9:27
  SPEAKER_00: Can you talk a little bit about tuition and studios that handle them uh different ways and how that can get tricky at year end?
• 9:36
  SPEAKER_01: Sure.
• 9:37
  SPEAKER_01: I think where it gets the most tricky at year end is when you have fees that are prepaid for something you're holding.
• 9:44
  SPEAKER_01: So it could be that your whole studio is going to take a trip to Disney.
• 9:48
  SPEAKER_01: So people are paying you for that trip and you have not yet bought the flights or booked the hotels, but you've got this holding money.
• 9:54
  SPEAKER_01: So as you get into year end, I think it's important to make sure that we understand that that money you got is not income.
• 10:01
  SPEAKER_01: It is unearned revenue.
• 10:03
  SPEAKER_01: So we would put it in a different place on your balance sheet.
• 10:05
  SPEAKER_01: But what makes that important is you don't want to pay tax on that when you've gotten the income and not the expense.
• 10:11
  SPEAKER_01: So the way we handle a lot of these holding fees, so this happens for a lot of things, right?
• 10:16
  SPEAKER_01: Recital, competitive day, competitive fees.
• 10:18
  SPEAKER_01: Sometimes people might have a windfall if they have a different kind of job and they might prepay their tuition.
• 10:22
  SPEAKER_01: You might have a bunch of these things that are just prepaid fees that you have not yet incurred the expenses.
• 10:28
  SPEAKER_01: So if you take the income at the time you get the money, it'll kind of jack up your income in that month.
• 10:34
  SPEAKER_01: If you put it in a holding account until such time that you also have the expense, then we put the income and the expense in the same month and it flows through together.
• 10:43
  SPEAKER_01: And you can see how those recital fees affect your PL fully.
• 10:50
  SPEAKER_01: So you'll get more income and you have more expense.
• 10:52
  SPEAKER_01: And hopefully you'll have more profit.
• 10:53
  SPEAKER_01: But it's really helpful to have all those things at once rather than your recital fees or your costume fees paid in September, and then your actual event happened.
• 11:04
  SPEAKER_01: Well, in this case, we'll say it's happening in January.
• 11:06
  SPEAKER_01: So in the next tax year, now you've got this income in 2026 while the expenses are in 2027, and it's messed up two months and in fact two years in that little example.
• 11:17
  SPEAKER_01: I think it's important to use a balance sheet account to have a holding account for those situations.
• 11:23
  SPEAKER_01: If you have, it's and it's totally fine to have multiples.
• 11:26
  SPEAKER_01: Like you might have a tuition holding account and a costume fee holding account.
• 11:30
  SPEAKER_01: We most of our clients, we just use a fee holding account and costume fees and recital fees sort of sit in there together because we can we can we can sort it out easily enough from those things.
• 11:41
  SPEAKER_01: Um, but if if your if your level of detail needs to have multiple accounts, there's no no shame in that game.
• 11:48
  SPEAKER_01: There's no problem no problem with that at all.
• 11:50
  SPEAKER_01: Um, but many banks, it's a hassle to open a bunch more accounts.
• 11:53
  SPEAKER_01: So that's the other thing some of our clients are working to mitigate is that hassle factor.
• 11:58
  SPEAKER_00: So what about end-of-year activities related to costumes and equipment?
• 12:03
  SPEAKER_00: I mean, is that also have a physical inventory component?
• 12:07
  SPEAKER_00: What has to happen at year end to recognize those kinds of things as well?
• 12:11
  SPEAKER_01: So if you're holding the money for costumes at year end, I mean, a lot of people have a lot of our studios have Nutcracker, right?
• 12:17
  SPEAKER_01: So you're gonna be taking those monies in in right now as the school year has started, and you're gonna be spending them out as you get toward December, as you need to buy props and you need to buy costumes and those things.
• 12:28
  SPEAKER_01: So those all happen the same cost in the same fiscal year, but we still would like to have all of it happen probably in December in the month of the event.
• 12:36
  SPEAKER_00: Yeah.
• 12:36
  SPEAKER_00: What about costumes and equipment at year end?
• 12:39
  SPEAKER_00: Do you have to do any sort of physical inventory count?
• 12:41
  SPEAKER_00: I think about my my restaurant days and how we would have to do a physical inventory.
• 12:45
  SPEAKER_01: So I would say most props and costumes don't get inventoried.
• 12:49
  SPEAKER_01: What I'm more exposed to getting inventoried is merch.
• 12:52
  SPEAKER_01: If you are buying merch and then selling it out, so you have like how we have these um merch logos, you might so that inventory, you do need to do account at year end.
• 13:03
  SPEAKER_01: If you have tights and leotards and shoes and things that a lot of a lot of studios have, things students can buy if they have a wardrobe malfunction.
• 13:12
  SPEAKER_01: So they'll have some basics there at the studio.
• 13:15
  SPEAKER_01: That's all merch that you need to inventory at year end.
• 13:18
  SPEAKER_01: So you sell it through the year, you buy it through the year, we add to inventory, you sell it through the year, we add to inventory.
• 13:23
  SPEAKER_01: But right there at the end of the year, we just need to make sure like, is there any that got lost, damaged, you know, whatever thrown out, and we do that correction so that inventory is right at the end of the year.
• 13:34
  SPEAKER_01: I would say most of the times for props and just all the stuff that's randomly in your closet is not inventory.
• 13:40
  SPEAKER_01: That's just supplies that you've and costumes that you've expensed out, and they're just things that sit there.
• 13:46
  SPEAKER_01: And if if some of them are in fact garbage and you need to replace them, it's just like supplies.
• 13:51
  SPEAKER_01: Like if you had a pen that ran out of ink, you don't inventory that pen.
• 13:54
  SPEAKER_01: So I would say the the examples you mentioned, I wouldn't worry about, but there is definitely um an example of merch that happens at most studios for sure.
• 14:06
  SPEAKER_00: Um, I know another big expense for studios is their teacher cost, right?
• 14:10
  SPEAKER_00: So instructors.
• 14:11
  SPEAKER_00: Can you talk a little bit about what to be aware of when you're paying instructors?
• 14:17
  SPEAKER_01: Yeah, so when paying instructors, the big conversation I mostly have is around contractors versus employees.
• 14:24
  SPEAKER_01: So these 1099 laws are widely produced, they're easy to Google, but essentially with the teachers, if they're only working for you and you're telling them when to work and you're telling them what to teach, and they're at your studio, they should be an employee.
• 14:40
  SPEAKER_01: Like they should be a W-2 employee.
• 14:42
  SPEAKER_01: If you are hiring a choreographer or a dance teacher for a specialty event and they have many different customers, even a few different customers, that's that's much easier to get away with paying them as a contractor.
• 14:55
  SPEAKER_01: I think that's probably where you're going with this.
• 14:57
  SPEAKER_01: So is when do you have contractors versus employees?
• 14:59
  SPEAKER_01: And employees really um work in your studio at your direction on your time card that you have figured out.
• 15:06
  SPEAKER_01: That doesn't mean you don't talk to them about availability, but it does mean that fundamentally it's your business, not their business, right?
• 15:14
  SPEAKER_01: I think about the difference.
• 15:15
  SPEAKER_01: Like when you hire us as a bookkeeper, we decide actually when we're gonna do your books.
• 15:19
  SPEAKER_01: We turn them in by a deadline you've set, but whether we're gonna work on them today or tomorrow, that's up to us.
• 15:24
  SPEAKER_01: And we work on our own equipment and we um, even if you pay for your online accounting subscription, like with Zero or QuickBooks, we are still the ones that um go in, work in your stuff on our timetable, and then we actually bring in some expertise where we're telling you like how your balance sheet should look and what your PL should look like, and we do some CFOing.
• 15:44
  SPEAKER_01: So it's very clear that we're a vendor.
• 15:45
  SPEAKER_01: We obviously have multiple customers.
• 15:47
  SPEAKER_01: But when you have a dance teacher that really only works for you and they're wearing your merch in your studio with your kids that you've enrolled at your business on your timeline, then that's they're really yours.
• 15:58
  SPEAKER_01: And if we need to talk about implementing payroll, then that's what we do.
• 16:01
  SPEAKER_01: The other thing that comes up a lot with teachers is uh part of the reason that it is widely encouraged that you raise your tuition rates every year is your teachers would like a raise every year.
• 16:13
  SPEAKER_01: And teacher raises becomes a conversation that happens for us on the CFO side pretty regularly because you know, these a lot of these folks are are not at an income level where they don't need a raise.
• 16:25
  SPEAKER_01: They are at an income level where their rent is going up, the groceries are going up, and they feel it and they need a raise.
• 16:31
  SPEAKER_01: So um that comes up a lot.
• 16:32
  SPEAKER_01: And so I think that's to encourage you to raise your rates each year in order to facilitate those things.
• 16:39
  SPEAKER_01: And then we talk also about like what's a minimum class, right?
• 16:42
  SPEAKER_01: If you if you have a teacher that needs to get a raise each year and their classes are getting a little smaller each year, you don't end up with the revenue to give them that raise.
• 16:49
  SPEAKER_01: So we talk a lot about minimum class viability and how many kids need to be in there in order to pay for that rent space, in order to pay for that teacher, in order to pay for the items that you need in there, the music that you need to buy, all of that stuff.
• 17:02
  SPEAKER_01: So that's mostly what comes up with teachers, I think.
• 17:05
  SPEAKER_00: And if you did if you do determine that this person meets the criteria for contract work, then the other key thing is making sure you're getting that W9 from them up front.
• 17:14
  SPEAKER_00: So you're collecting information.
• 17:16
  SPEAKER_00: Thank you, Juliana.
• 17:18
  SPEAKER_00: I've only lived and breathed that throughout the month of January.
• 17:21
  SPEAKER_00: That's the theme of our love.
• 17:22
  SPEAKER_00: Yeah.
• 17:22
  SPEAKER_00: And actually, while we're here, let's talk about how that has changed for this year.
• 17:26
  SPEAKER_00: It's a biggie I know for us.
• 17:28
  SPEAKER_00: Go ahead and talk a little bit about it.
• 17:30
  SPEAKER_01: Yes, so for many years, it's been the threshold to send a 1099 has been$600 and no cents.
• 17:36
  SPEAKER_01: So if you paid somebody$599.95, you did not have you were not required to send them a$10.99.
• 17:43
  SPEAKER_01: At$600, you did have to send them a$1099 for anything labor related.
• 17:48
  SPEAKER_01: This is not stuff.
• 17:49
  SPEAKER_01: If you bought um reams of paper for$600, you don't have to send anything to Office Depot, obviously.
• 17:56
  SPEAKER_01: So this is uh changing a lot in 2026, which is now in January of 2027, the 1099s we send out for non-employee compensation will be for any amount,$2,000 and no cents.
• 18:10
  SPEAKER_01: So now it'll go up to$1,999.
• 18:17
  SPEAKER_01: So the exceptions to that is if you hired a lawyer, you have to send them a$1099 no matter what.
• 18:22
  SPEAKER_01: And your rent, I don't know anybody who has rent of less than$2,000 a year, but your landlords have to get one no matter what also.
• 18:28
  SPEAKER_01: And then if you buy labor and materials from someone, there's some gray area that for that.
• 18:35
  SPEAKER_01: So we would talk to you about that individually.
• 18:37
  SPEAKER_01: Um, but yeah, if you're hiring a choreographer or a dance teacher to come in and they're a contractor, and over the course of the entire year, so they might come eight or 10 times through the year, or they might come, you know, for a one-week thing and do a big project.
• 18:50
  SPEAKER_01: If you've paid them more than$2,000, we're gonna have to send them a$1099 for sure.
• 18:54
  SPEAKER_01: And that's not just dancing, right?
• 18:55
  SPEAKER_01: So if you had somebody come in to wash the windows, to clean the studio, to, I don't know, paint, to do things where they're not bringing stuff, they're bringing labor to your web designer, all of those people, you need to be prepared for a 1099 for them.
• 19:08
  SPEAKER_01: $2,000 though.
• 19:09
  SPEAKER_01: So it'll be a few less than you had to do last year.
• 19:11
  SPEAKER_00: I really feel like it's gonna cut it in half, the volume of uh 1099.
• 19:15
  SPEAKER_00: So we have to send out that that threshold.
• 19:17
  SPEAKER_00: It's more than double, so it's a big jump.
• 19:19
  SPEAKER_00: Yeah, it's a it's a I I mean, finally, right?
• 19:22
  SPEAKER_01: I mean, 600 just feels like such a low number to do.
• 19:25
  SPEAKER_01: Yeah.
• 19:25
  SPEAKER_00: Right.
• 19:26
  SPEAKER_00: Um, where does the CFO come in?
• 19:29
  SPEAKER_00: What is how what are the what are the roles and responsibilities different for a bookkeeper versus a CFO?
• 19:35
  SPEAKER_01: Oh, I I haven't done this description in a while.
• 19:38
  SPEAKER_01: So I I I talk a lot about the different levels of the financial department.
• 19:41
  SPEAKER_01: So in a financial department, in my opinion, you have bookkeepers, which are at the lowest sort of level, which um we offer this service for people, but they're gonna make sure all the transactions are in and that everything is reconciled.
• 19:52
  SPEAKER_01: That's your bookkeeper or staff accountant.
• 19:55
  SPEAKER_01: Above that, you have a controller.
• 19:56
  SPEAKER_01: Their job is really, in my opinion, sort of cash management based on what we know today.
• 20:00
  SPEAKER_01: So, do we have the money now to make payroll in three days?
• 20:03
  SPEAKER_01: Do we uh is rent paid for this month?
• 20:05
  SPEAKER_01: All of that.
• 20:06
  SPEAKER_01: So the bookkeeper is looking backwards.
• 20:08
  SPEAKER_01: This controller is looking at right now, this month, this week, and your CFO is really looking forward.
• 20:14
  SPEAKER_01: So your CFO is who you want when we want to discuss about uh saving for a build-out.
• 20:19
  SPEAKER_01: Did you charge the right tuition to make sure you can offer raises to your teachers of this amount?
• 20:24
  SPEAKER_01: What is that minimum class viability, that sort of stuff, and looking forward using the data that everybody else has brought to the table.
• 20:30
  SPEAKER_01: But that looking forward, that's your CFO stuff.
• 20:33
  SPEAKER_01: So I actually think those roles are quite different.
• 20:35
  SPEAKER_01: And none of those did we talk about tax.
• 20:37
  SPEAKER_01: Like the tax preparer kind of sits off to the side of that because their values all look backwards, right?
• 20:44
  SPEAKER_01: When you're preparing tax.
• 20:45
  SPEAKER_01: However, the tax strategy is really like your tax preparer and your CFO and you that figures out how to do that.
• 20:53
  SPEAKER_01: Like what things am I going to need next year?
• 20:54
  SPEAKER_01: Should I buy them now?
• 20:56
  SPEAKER_01: Should I buy?
• 20:56
  SPEAKER_01: Should I lease?
• 20:57
  SPEAKER_01: Um, those kinds of questions are what the CFO and the tax preparer do together.
• 21:05
  SPEAKER_00: Great.
• 21:05
  SPEAKER_00: I know we've got a checklist for studios um on our website.
• 21:09
  SPEAKER_00: I printed one and we would talk about it today.
• 21:12
  SPEAKER_01: Excellent.
• 21:12
  SPEAKER_01: I mean, I will say on the website it said color, and I don't have a color.
• 21:16
  SPEAKER_00: Same.
• 21:16
  SPEAKER_00: My printer does not have color either.
• 21:18
  SPEAKER_00: So everything's black and white.
• 21:19
  SPEAKER_00: Not as pretty, but still very functional.
• 21:21
  SPEAKER_00: If anybody wants to go grab that from our website, they are welcome to do that.
• 21:25
  SPEAKER_00: Um, also, we have some questions to ask your bookkeeper this month.
• 21:30
  SPEAKER_00: So I thought we could do a run through of those, and you can just give me your thoughts on some of the questions that we have as our takeaway on that checklist.
• 21:37
  SPEAKER_00: I think um, I think what I'm hoping to learn is what are some of the key questions that I should know about my business that I might not already know?
• 21:43
  SPEAKER_00: So the first one as an example, are we on a cash or accrual basis?
• 21:48
  SPEAKER_00: Like why would you make an determination about one or the other and why is that important?
• 21:53
  SPEAKER_01: Sure.
• 21:54
  SPEAKER_01: Okay, so cash versus accrual.
• 21:55
  SPEAKER_01: We could do a whole episode on cash versus accrual, but the quick answer is.
• 22:00
  SPEAKER_01: That a cash method is when cash leaves the bank and cash comes into the bank.
• 22:05
  SPEAKER_01: So that means if you have invoiced somebody and not gotten money, that's not income.
• 22:10
  SPEAKER_01: And if you have received a bill that you have not paid, that's not an expense yet.
• 22:15
  SPEAKER_01: So it's not quite true, right?
• 22:17
  SPEAKER_01: Because you could have a stack of bills on your desk or you could have a stack of invoices that aren't yet paid that really change your income picture.
• 22:23
  SPEAKER_01: But uh it's really about cash coming and going from your bank or credit card or whatever, but it has to be realized.
• 22:29
  SPEAKER_01: Um accrual is the kind of extreme opposite of that, right?
• 22:34
  SPEAKER_01: So it counts the moment you send an invoice, that's income.
• 22:38
  SPEAKER_01: And then if they never pay their bill, then you take a bad debt expense.
• 22:41
  SPEAKER_01: So it that lack of income would come much later.
• 22:44
  SPEAKER_01: And if you and you enter your bills on the day your bill is due.
• 22:49
  SPEAKER_01: So if you have a stack of bills, it's all already in there as an expense in your books.
• 22:54
  SPEAKER_01: So the way mostly it works is smaller businesses are cash-based.
• 22:58
  SPEAKER_01: And I think the IRS lets you be cash-based up to about$5 million a year.
• 23:03
  SPEAKER_01: And after you have a certain number of years, maybe three out of five years over five million, then you have to be accrual.
• 23:08
  SPEAKER_01: And um, my what I've heard most CPAs say, and I've run with this understanding, is you want to stay cash as long as you can, because cash is really where it's real.
• 23:17
  SPEAKER_01: And it's most of us understand it better, right?
• 23:20
  SPEAKER_01: It's as you can't spend money you don't have.
• 23:22
  SPEAKER_01: So when you're sending out invoices and you have to pay tax on that income, that can feel a little painful, quite frankly.
• 23:27
  SPEAKER_01: Um, so most of our clients are cash because we encourage people, even at the several million a year range, to stay cash as long as they can.
• 23:37
  SPEAKER_00: So uh the other question I have on here is how are you handling prepaid tuition and costume money?
• 23:44
  SPEAKER_00: So we talked about that a little bit already.
• 23:46
  SPEAKER_00: Anything you want to add?
• 23:48
  SPEAKER_01: Nope.
• 23:48
  SPEAKER_01: I I mean I I would like all of our clients' prepaids will be handled with an account that sits on their balance sheet.
• 23:55
  SPEAKER_01: So it essentially says that um you open a separate bank account for it, and then you put if you're getting prepaid money, you literally put it in a different bank account, and then we make sure that that reconciles each month.
• 24:06
  SPEAKER_01: So that's uh in the accounting world, we'd call that unearned revenue, it's just unearned income.
• 24:11
  SPEAKER_01: And then as you earn it, so if they prepaid, so say somebody makes a windfall of money to pay you their whole year's tuition at one time, you would put it in that other bank account, hopefully, and then you would transfer that monthly tuition each month so that you would earn income in the same way the rest of your families are paying each month.
• 24:27
  SPEAKER_01: Now, legally, you a lot of businesses spend unearned income for sure.
• 24:32
  SPEAKER_01: I mean, in construction, it's extremely common that unearned revenue is often used to pay for materials that are gonna be coming in much later.
• 24:40
  SPEAKER_01: Um, but yeah, that costume fee, that's not actually earned revenue yet because you haven't done the work that's in call recall required, like getting the costumes or the recitals and it's gonna happen.
• 24:53
  SPEAKER_00: So I think the other neat question is to ask um, if nothing changes, what will my tax bill look like at the end of the year?
• 25:00
  SPEAKER_00: Is that something a bookkeeper or a CFO could help answer this time of year?
• 25:05
  SPEAKER_01: Yeah, I this is the reason we do a soft close with most of our clients is that you you are trying to predict your tax bill.
• 25:12
  SPEAKER_01: So the clients, so we've had some client, some of our clients this year, things have softened and their sales have actually decreased.
• 25:18
  SPEAKER_01: But we've had their tax allocation at this level that we had from the prior year.
• 25:24
  SPEAKER_01: So now is the time when we ask ourselves, what's that tax bill going to be?
• 25:27
  SPEAKER_01: Which what they're really saying is, do I need to still keep putting money into my tax account?
• 25:33
  SPEAKER_01: Right?
• 25:33
  SPEAKER_01: Is there already enough in there to cover my tax bill?
• 25:36
  SPEAKER_01: And I've had a couple of instances with clients that it is enough.
• 25:39
  SPEAKER_01: Like one moved into a new building.
• 25:41
  SPEAKER_01: So there's tons of depreciation to be had this year.
• 25:44
  SPEAKER_01: So their tax bill, you know, they basically uh the CPA we calculated that if they get sales up to this level, then, you know, they have this much room before they're gonna have any tax bill.
• 25:55
  SPEAKER_01: And especially in these ones where the owner is also on payroll, that there's also a bunch of taxes paid through payroll now and through the rest of the year.
• 26:03
  SPEAKER_01: So I think, yeah, yeah.
• 26:06
  SPEAKER_01: I mean, that's really that that's the question of the hour is what will my tax bill be?
• 26:10
  SPEAKER_01: And trying to the way, the way that we like to mitigate it the best is just put what we expect to be the tax bill in savings and then only do minimal things to actually reduce the tax bill because I want you very profitable, very profitable.
• 26:24
  SPEAKER_01: So I'm not trying to make profit go away.
• 26:27
  SPEAKER_01: I'm I'm just trying to help the tax bill be manageable, meaning you've got the savings sitting there for it, you're happy to pay the tax bill, and we don't, you don't have as much anger about it, I promise, if you have a tax account there and your tax bill is anything less than that tax account.
• 26:43
  SPEAKER_00: So I think we talked about this other one.
• 26:46
  SPEAKER_00: Um, are any of my instructors at risk of being misclassified?
• 26:49
  SPEAKER_00: So that's the the contractor versus the W-2 employee making sure that you have your instructors correctly classified and they're set up properly for either of those classifications.
• 26:59
  SPEAKER_01: Yes.
• 27:00
  SPEAKER_01: And I think if you're in doubt and you have payroll set up, put them on payroll.
• 27:05
  SPEAKER_01: Like you won't get in trouble for putting them on payroll.
• 27:07
  SPEAKER_01: You get in trouble for having them be a contractor when they shouldn't.
• 27:10
  SPEAKER_01: And really the cases come up the most when people become unemployed.
• 27:14
  SPEAKER_01: So if that person's gonna get unemployed and they're gonna go file for unemployment insurance, unemployment's gonna look at where were payroll taxes paid on this person because that's who pays the bill for unemployment.
• 27:24
  SPEAKER_01: And if they feel like they work for you, then you're at risk of being audited because now you've got somebody out there who wants to make a claim on unemployment, but you've paid them as a contractor.
• 27:36
  SPEAKER_01: So, you know, in the same way that when the plumber leaves your house, they're not gonna file an unemployment claim because you didn't hire them anymore.
• 27:42
  SPEAKER_01: But those teachers, if you didn't hire them, would they feel unemployed?
• 27:48
  SPEAKER_01: So I think that's uh a fair way to look at it.
• 27:51
  SPEAKER_01: I mean, the cases, the claims that I hear about are always from claims that happened, which of course a ton happened as COVID rolled in, right?
• 27:57
  SPEAKER_01: Is all these contractors got exposed and it was a it was a problem for employers.
• 28:02
  SPEAKER_01: But of course, a lot of people went under like everything was in chaos for a while.
• 28:05
  SPEAKER_01: But um, yeah, the the cases that come up from that, the way those things get caught is when people go claiming unemployment and they write down that they worked for you and they in fact were self-employed.
• 28:16
  SPEAKER_01: So if that if that is unclear, then they should be an employee.
• 28:20
  SPEAKER_00: Yeah, err on the conservative side, get them on payroll if you've already got a payroll system.
• 28:25
  SPEAKER_01: You know, a lot of people feel like the employer taxes are expensive.
• 28:28
  SPEAKER_01: But if if you think about if somebody makes$1,000, their net check is like$700, right?
• 28:34
  SPEAKER_01: And your bill to the tax bureau might be$400.
• 28:37
  SPEAKER_01: So people feel like the taxes in that were$400, but 300 of that$400 were paid by the employee.
• 28:43
  SPEAKER_01: The employer taxes are quite low.
• 28:46
  SPEAKER_01: I mean, they're they're they're not enough to take a giant risk about.
• 28:51
  SPEAKER_01: Um uh, because nobody that has a gross check, net check makes their, it just doesn't happen that way.
• 28:58
  SPEAKER_01: So most of those taxes that you mail in while you feel it and you're like, that tax deposit was so big, but a lot of that money wasn't actually yours to begin with.
• 29:06
  SPEAKER_01: It was, it was that increment between the gross pay and the net pay of your employees.
• 29:12
  SPEAKER_00: Is it also fair to ask your bookkeeper when your books are going to be ready to hand off to the CPA?
• 29:18
  SPEAKER_00: Do they have a sense of when that's gonna be?
• 29:22
  SPEAKER_01: I mean, I think so.
• 29:23
  SPEAKER_01: We tell people if they don't have payroll, we try to get them done in January.
• 29:27
  SPEAKER_01: So it'll be the latter part of January.
• 29:29
  SPEAKER_01: We need to reconcile all the accounts, we need to get out the 1099s, and then we focus on making sure everything's zipped up, closed up, perfect.
• 29:35
  SPEAKER_01: If they have payroll, we don't get the payroll tax reports until the end of January.
• 29:43
  SPEAKER_01: So we tell people that those books will start going out mid-month uh in February so that we can get through again, all the reconciling of the accounts, uh sending out the 1099s, and then we have to reconcile all the payroll, and then we get that out.
• 29:55
  SPEAKER_01: So if you have payroll, I think you're you're gonna be pushed out uh into February if you have all your stuff in.
• 30:02
  SPEAKER_01: Now, a lot of our clients, we we remind them and we push them, but we don't force them.
• 30:07
  SPEAKER_01: Like we have plenty of clients, we've got plenty of work to do.
• 30:10
  SPEAKER_01: So the ones who go in early generally are motivated.
• 30:15
  SPEAKER_01: And so they're communicating with us and we're communicating with them.
• 30:18
  SPEAKER_01: And then we stay in touch about extensions and what needs to happen.
• 30:21
  SPEAKER_01: Because we the 1099 date does not extend.
• 30:24
  SPEAKER_01: So we are very motivated to get through all the transactions and get through all the reconciliations to make sure all the unreconciled transactions are gone so that we can get 1099s out accurately for everybody that you've paid cash, meaning you didn't pay them a credit card.
• 30:39
  SPEAKER_01: If you've paid cash, we need 1099s.
• 30:41
  SPEAKER_01: So we have gotten through a lot of it by the time we do those.
• 30:44
  SPEAKER_01: And then it's about payroll and then any of the other sort of hanging chads, right?
• 30:49
  SPEAKER_01: If you have reimbursements because you've bought stuff personally, I need that reimbursement information.
• 30:54
  SPEAKER_01: If you have reimbursements for other employees, travel reimbursements, anything else that comes through, I need that.
• 31:00
  SPEAKER_01: I need your inventory closing numbers.
• 31:01
  SPEAKER_01: These are the kinds of things that might hold it up if you don't have those.
• 31:05
  SPEAKER_01: But yeah, I think asking when your books are going to be ready is a great question for sure.
• 31:10
  SPEAKER_01: And what it will take to get it out.
• 31:12
  SPEAKER_01: Like there's some give and take, which is why we're talking about if you do that 20 minutes a week now.
• 31:17
  SPEAKER_01: So if you have employees buying stuff on their own Amazon account and you need to know those, you need those receipts, no reason you can't ask for those now.
• 31:24
  SPEAKER_01: Like ask for those now.
• 31:25
  SPEAKER_01: They're hard to get.
• 31:26
  SPEAKER_01: You have to pull them out of people.
• 31:27
  SPEAKER_01: Everybody does.
• 31:28
  SPEAKER_01: So pull them now so you don't have to pull them in January and then you know, ask them to use your business Amazon account, or those kinds of things are what we're we're having people do now with those 20 minutes.
• 31:39
  SPEAKER_01: Get the W9s from vendors now.
• 31:41
  SPEAKER_01: If you know you're gonna pay them two grand in the year, get them now.
• 31:44
  SPEAKER_00: One last thing to add to your plate um after the the close of the year.
• 31:48
  SPEAKER_00: I think anything you can just go now, pays and pays dividends.
• 31:53
  SPEAKER_01: And it just like then you have more patience, right?
• 31:55
  SPEAKER_01: If you're sending a thing off to your landlord to get your W9, you just email it off.
• 31:58
  SPEAKER_01: And if they'd send it back in two weeks, great.
• 32:00
  SPEAKER_01: If it's the middle of January and you send it, you need it faster than two weeks.
• 32:03
  SPEAKER_01: Like it then all of a sudden everybody's in a hurry.
• 32:05
  SPEAKER_01: So starting that stuff now is really helpful to just be able to be a little bit relaxed about it and not be panicked in any way.
• 32:13
  SPEAKER_00: So yeah, your future self will thank you.
• 32:15
  SPEAKER_01: Your future self will thank you.
• 32:17
  SPEAKER_01: Yes.
• 32:18
  SPEAKER_01: So have it.
• 32:19
  SPEAKER_00: Yeah.
• 32:20
  SPEAKER_00: What's your um what's your one takeaway for this uh this episode?
• 32:23
  SPEAKER_00: What's the uh one thing people can do after listening?
• 32:27
  SPEAKER_01: I I feel like I have a couple.
• 32:28
  SPEAKER_01: So one is uh we have this handy little um checklist, which we've gone through a lot of it here, and they that way somebody could have a piece of paper to actually check things off, which always feels good.
• 32:39
  SPEAKER_01: And I think just work on your books a little bit each month, get caught up, just take it slow, it's fine, it's just chores.
• 32:44
  SPEAKER_01: It's like doing your dishes and then cleaning your sink and then cleaning your counters, like just work your way outward and um things will be closed.
• 32:52
  SPEAKER_01: There's plenty of time to do it.
• 32:54
  SPEAKER_00: Great.
• 32:56
  SPEAKER_01: Thanks for your time.
• 32:57
  SPEAKER_00: This is a good one.
• 32:58
  SPEAKER_01: Thank you.