Businesses

Gross Profit vs Gross Margin: What’s the Difference?

The terms “gross profit” and “gross margin” are often used interchangeably to describe how much a business generates from its activities. Regardless of their size or market, businesses must purchase products and services to conduct their own money-money activities. A retail store, for instance, must purchase inventory from a vendor so that it can resell the products to its customers. While gross profit and gross margin offer insight into a business’s profits, they aren’t necessarily the same. So, what’s the difference between gross profit and gross margin in accounting?

Gross Profit Explained

Gross profit is an accounting metric that shows how much profit a business generates from its activities. It’s calculated by taking the business’s net sales and subtracting that number by its Cost of Goods Sold (COGS). If a business generated $200,000 during a given month and its COGS was $60,000, its gross profit would be $140,000 for that month. Gross profit uses a simple formula to reveal how much profit a business generated during a particular period.

Gross Margin Explained

Also known as gross profit margin, gross margin is another accounting metric that, like gross profit, shows much much profit a business generates from its activities. With that said, it uses a different formula than gross profit. Gross margin is calculated by taking the business’s gross profits and dividing that number by its net sales. Therefore, it uses a slightly different formula that ignores certain expenses.

Differences Between Gross Profit and Gross Margin

The main difference between gross profit and gross margin is that the former takes into account all of the business’s expenses, whereas the latter does not. With gross profit, all expenses associated with a business’s money-money activities are factored into the equation. With gross margin, indirect expenses — advertising, administrative fees, interest, tax, etc. — are ignored. These expenses are ignored when calculating gross margin, so a business’s gross margin is typically smaller than its gross profit for that same period.

You can use gross profit or gross margin to track your business’s financial health and well-being. Gross margin, however, ignores the aforementioned expenses, so it offers a more cloudy and altered representation of your business’s finances. That’s why, in fact, it’s referred to as “gross margin” rather than simply “gross profit.” Hopefully, this gives you a better understanding of how gross profit and gross margin differ.

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5 Accounting Tips for Independent Contractors

Do you work as an independent contractor? You aren’t alone. According to the U.S. Bureau of Labor Statistics (BLS), over 16 million Americans are classified as independent contractors. They are technically still business owners; they just don’t own or work for an incorporated business, such as a limited liability company (LLC) or a corporation. While working as an independent contractor has its perks, you’ll need to keep detailed and transparent records of your business’s financial transactions. Here are five essential accounting tips for independent contractors.

#1) Separate Personal and Business Expenses

The golden rule of accounting is to separate personal and business expenses — a rule that applies to all business entities, including independent contractors. If you only have a single checking account, which you use for personal expenses, open a second checking account so that you can use it for your business’s expenses. With an account for your personal expenses and another account for your business’s expenses, you won’t accidentally or otherwise mix these two expenses.

#2) Use Digital Payments Methods When Possible

When given the option between paying for a business-related expense with cash or a digital method, choose the latter. If you use cash to buy a product or service needed to execute your business’s operations, you won’t have a digital record of it. At best, you’ll have a paper receipt, which are undoubtedly easy to lose. Paying with a credit card or debit card, on the other hand, will create a digital record of the transaction.

#3) Consider Getting an EIN

Independent contractors are distinguished from other business entities because they can operate under their respective Social Security number. With that said, you can still use an Employer Identification Number (EIN). Using an EIN is beneficial as an independent contractor because it protects your Social Security number from unnecessary exposure. Rather than providing your Social Security number to a business, you can give the business your EIN.

#4) Make Quarterly Tax Payments

As an independent contractor, you’ll be responsible for making quarterly tax payments to the Internal Revenue Service (IRS). This involves estimating your business’s income for the following year, after which you can calculate your projected taxes while breaking them into four equal payments. Failure to make quarterly tax payments will result in a penalty.

#5) Use Quickbooks Self-Employed

Quickbooks offers accounting software that’s designed specifically for independent contractors. Known as Quickbooks Self-Employed, it’s a smart investment that can help you keep better financial records. Among other things, Quickbooks Self-Employed will separate your personal and business expenses, ensure maximum deductions and even allow you to prepare estimated quarterly tax payments.

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Beware: 5 Things That Can Hurt Your Business’s Cash Flow

What does your business’s cash flow typically look like? Defined as the net amount of available cash your business has at the end of an accounting period, it’s an important metric that reflects your business’s financial health. While your business’s cash flow will likely fluctuate from month to month, you should beware of the five following things that can hurt its cash flow.

#1) Unpaid Customer Invoices

Not all of your business’s customers will pay their invoices immediately upon reception. Some customers may wait a few days to pay their invoices, whereas others may wait or weeks or even months. The longer it takes a customer to pay his or her invoice, though, the greater the risk of it hurting your business’s cash flow.

#2) Excess Inventory

If your business sells physical products — as opposed to virtual products or services — you should beware of excess inventory. Like unpaid customer invoices, excess inventory can hurt your business’s cash flow. You’ll have to spend money to restock your business’s inventory, resulting in less available cash on hand. Assuming you don’t sell the newly stocked inventory in the same account period during which you purchased it, it will bring down your business’s cash flow.

#3) Interest on Debt

Something else that can hurt your business’s cash flow is interest on debt. Although there are exceptions, most lenders require borrowers to pay interest on debt. If you take out a loan to cover some of your business’s short- or long-term expenses, for example, you’ll have to pay interest on it. Interest payments such as this will lower your business’s cash flow.

#4) High Overhead

You’ll probably encounter overhead expenses when running a business. Overhead, of course, includes all expenses that aren’t directly related to your business’s operations. Common examples include utilities, rent, insurance, office supplies and payroll.

#5) Lack of Sales

Of course, a lack of sales can hurt your business’s cash flow as well. If your business sells few or no products or services during a given accounting period, its cash flow will suffer during that same account period. All businesses experience ups and downs in regard to sales — it’s just something that comes with the territory of operating a commercial business. If your business’s sales remain stagnent for a prolonged length of time, though, it may hurt your business’s cash flow.

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How to Stay Productive When Telecommuting

Have you started telecommuting to work recently? Research shows that around 4% of all workers in the United States either partially or fully telecommute. While working from the comfort of your home offers a myriad of perks, it often comes at the cost of lower productivity. The good news is that you can stay productive when telecommuting by following these five tips.

Follow a Schedule

When telecommuting, you’ll typically have control over when you want to work. Maybe you prefer to work in the morning when it’s quiet, or perhaps you’re a night owl who prefers to work after the sun goes down. If you’re going to telecommute, though, you need to follow a schedule. Working erratic hours will only prevent you from falling into a rhythm that maximizes your productivity.

Block Out Distractions

It’s important to block out distractions when telecommuting. Not surprisingly, distractions are a leading cause of lost productivity for telecommuting workers. When you telecommute, your personal life when seemingly mix with your professional life. The blending of these elements can create distractions that hinder your ability to work in a productive manner. By blocking out distractions, your telecommuting productivity will increase.

Cut Back on Email

You can certainly use email to communicate with your peers, coworkers and other individuals, but you should be conscious of how much time you spend checking your inbox. According to Harvard Business Review (HBR), the average worker checks his or her inbox about once every 37 minutes. If this sounds familiar, you’ll waste an average of 21 minutes each day.

Create a To-Do List

A simple to-do list can improve your telecommuting productivity. With a to-do list, you’ll have a clear understanding of what tasks you need to accomplish and by when. The Ivy Lee method can help you create effective to-do lists. This age-old trick involves making a list of 10 tasks that you need to complete by the end of the following day and ranking those tasks according to importance.

Take Breaks

Overworking yourself will only result in a lower level of productivity. This applies to all types of workplaces, including your home office. Therefore, you should include breaks in your telecommuting schedule. A short 10-minute break every one or two hours will give your body, as well as mind, the opportunity to relax.

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5 Common Myths About Small Business Financing

Are you seeking financing for your small business? In the world business, you need money to make money — and small businesses are no exception. With that said, you can’t believe everything you see or hear about small business financing. Below are five common myths about small business financing that you shouldn’t believe.

#1) You Need Over $100,000

While some small businesses may require $100,00 or more to get up and running, most require a much smaller monetary investment. According to a Wells Fargo study, most small businesses require just $10,000 to start. Other studies have shown similar findings, attesting to the fact that starting a small business isn’t very expensive.

#2) Banks Are the Only Source

Banks, of course, offer a multitude of financing options for small businesses, including loans, credit cards and lines of credit. With that said, there are other ways to finance a small business. Private lenders, for example, offer similar financing solutions but with less-stringent requirements. You can also tap into your personal savings or personal credit cards to finance your small business. The bottom line is that you shouldn’t assume banks are the only option for financing your small business.

#3) Financing Takes Months to Secure

Some forms of small business financing can take months to secure, but this doesn’t apply to all of them. As previously mentioned, there are private lenders who loan money and credit to small businesses. Not only is it easier to obtain financing from a private lender, but it’s typically faster as well. While a bank may take months to approve your request for financing, a private lender may take just a few weeks.

#4) All Financing Requires Collateral

You might be surprised to learn that not all forms of small business financing requires collateral. Financing can be classified as either secured or unsecured. Secured financing requires collateral, whereas unsecured financing does not.

#5) You Can’t Get Financing for a New Small Business

Even if your small business is new and has little or no cash flow, you can still secure financing for it. Depending on the lender’s requirements, though, you may have to sign a personal guarantee. Basically, this means you are personally responsible for repaying the loan. Without a personal guarantee, lenders may feel hesitant to lend your small business money or credit, especially if it’s new and has little or no cash flow.

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Employees vs Independent Contractors: What’s the Difference?

The terms “employees” and “independent contractors” are often used interchangeably describe workers whom a business hires. However, there are some stark differences between them, specifically in regards to how they treated by the Internal Revenue Service (IRS). As a business owner, you might be wondering how exactly employees differ from independent contractors. Below, you’ll learn more about these two classifications of workers and their respective nuances.

What Is an Independent Contractor?

An independent contractor is a non-employee worker who has control over the work he or she performs. The IRS explains that, as a general rule, a worker is considered an independent contractor if he or she can control their work. In other words, independent contractors can choose whether or not to perform a work-related task and when to perform it. His or her employer — known simply as a payer — cannot require the independent contractor to perform ongoing or otherwise pre-scheduled work.

What Is a Employee?

An employee, on the other hand, is a worker who doesn’t have control of his or her work. A worker is considered an employee if his or her employer can dictate their work. Employees typically have little or no say regarding their work schedule. Rather, they are required to perform specific tasks at specific times.

Differences Between Independent Contractors and Employees

Aside from the terminology differences, the IRS treats employees and independent contractors very differently from each other. If you hire an independent contractor, he or she will be responsible for withholding and paying their own income taxes and Social Security. If you hire an employee, however, you must withhold and pay the employee’s income taxes and Social Security.

Furthermore, employees are entitled to certain benefits in the United States that aren’t offered to independent contractors. There’s both a federal minimum wage and state-specific minimum wages that all employers must follow when paying their employees. Independent contractors aren’t subject to these minimum wages. Employers can technically pay them less.

Employees are also eligible for overtime pay. Under the Fair Labor Standards Act (FLSA), all employees who work over 40 hours in a single week are entitled are overtime pay of at least 1.5 times than their standard pay. These are just a few benefits that are only offered to employees. Employers aren’t required to offer these benefits to workers who are classified as independent contractors.

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Tax Audits: 6 Ways to Lower Your Risk

With April right around the corner, you might be wondering how to lower your risk of being audited by the Internal Revenue Service (IRS). Statistics show the IRS audits about 0.5% of all federal tax returns in any given year. The good news is that you can lower your risk of being audited by following these six tips.

#1) File a Return

You can’t outrun Uncle Sam. If you don’t file a tax return — and you had income that was reported to the IRS for that year — you’ll raise a red flag with the IRS. Upon discovering that you didn’t file a tax return, the IRS may audit you. Therefore, you should always file a tax return to minimize your risk of being audited.

#2) Double-Check Your Income and Expenses

Before filing your tax return, double-check all your income and expenses to ensure the information is correct. If the income reported to the IRS doesn’t match the income on your tax return, the agency may audit you.

#3) Form an LLC or Corp

If you currently operate as an independent contractor or a sole proprietorship, consider forming either a limited liability company (LLC) or a corporation. Research shows independent contractors and sole proprietorships have the highest audit rate. By forming an LLC or a corporation, you can lower your risk of being audited.

#4) Choose the Right Tax Preparer

Don’t underestimate the importance of choosing the right tax preparer. There are thousands of tax preparation businesses in the United States that specialize in preparing, as well as filing, tax returns. Unfortunately, though, not all of them are credible or legitimate. If you choose a questionable tax preparer such as this, they may make mistakes with your return that results in an audit from the IRS.

#5) File Online

You might be surprised to learn that filing your tax return online can lower your risk of being audited. According to Intuit, roughly one in five mail-filed returns have an error, compared to just 0.5% with e-filed returns. The IRS’s e-filing system has safeguards in place to protect against common filing errors. If the system detects an error, it will notify you — or the preparer who’s filing your return — so that you can fix it.

#6) Complete All Required Fields

While this may sound like common sense, it’s worth mentioning that you should complete all required fields on your tax return. Leaving just one field blank is often enough to trigger an audit.

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How to Promote Your Small Business on Facebook

Reaching over 2.3 billion people globally, Facebook has become the world’s most popular social media network. In the United States, statistics show two in three adults use it regularly. If you run a small business, you should consider using Facebook as a promotional channel. With so many people using it, it’s safe to assume your small business’s target audience actively uses Facebook as well. However, there’s a wrong way and a right way to promote small businesses on Facebook.

Don’t Use Your Profile

What’s wrong with using your Facebook profile to promote your small business? Well, doing so poses several problems, one of which is the fact that users can’t “like” your small business on the social media network. They can befriend your small business by sending a friend request, but users won’t be able to “like” it if you use a profile. More importantly, Facebook’s terms and conditions prohibit businesses from using a profile.

Use a Page

Rather than a profile, you should use a Facebook Page to promote your small business. Unlike profiles, Pages can be used to promote businesses on Facebook. You can set up a Facebook Page for your small business — it’s free by the way — by following this link.

Post Regularly

You can’t expect users to “like” your small business on Facebook unless you post content to your Page regularly. Without content, there’s really no incentive for users to connect with your small business. For an effective Facebook marketing strategy, you should get into the habit of logging in to your Facebook Page to post new content at least twice a week. Of course, you can post content more frequently, but twice weekly is a good starting point for most small businesses.

Share Trending Content

In addition to posting unique content, consider sharing other users’ content on your small business’s Facebook Page. If a particular post is relevant to your small business’s audience, consider sharing it on your small business’s Facebook Page. You can easily share trending content on Facebook by clicking the “share” button, at which point it will appear on your small business’s Facebook Page.

Paid Ads

You can maximize your small business’s visibility on Facebook using paid ads. The social media network offers a paid advertising service known as Facebook Ads. Using this service, you can create custom ads that target specific users o the social media network.

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The 4 Types of Business Expenses

When running a business, you’ll have to purchase goods and services from other vendors. Known as expenses, they are essential to all businesses’ operations. Whether you run a retail store, a restaurant, a landscaping company or any other business, you’ll incur certain expenses associated to your business’s operations. With that said, there are four different types of business expenses, each of which works in a different way. To learn more about the four types of business expenses, keep reading.

#1) Variable Expenses

A variable expense is a business-related expense that, as the name suggests, can change over time. If you purchase goods or services with a fluctuating, non-static price, you should record those transactions as a variable expense. Production materials, for instance, are considered a variable expense. The cost of production materials often varies depending on the purchase volume, contract length and other factors. Credit card fees can also be considered a variable expense. Since credit card fees fluctuate, you should record them as a variable expense.

#2) Fixed Expenses

A fixed expense, on the other hand, is a business-related expense that does not change over time. Lease payments, for example, are a fixed expense. If you lease a commercial building or office in which to run your business, the monthly lease payments are considered a fixed expense. Equipment leases are another common type of fixed expense. When you lease equipment, you’ll typically pay the same amount each month.

#3) Accrued Expenses

Another type of business-related expense is accrued. Accrued expenses include expenses incurred by your business for which you haven’t paid. Not all vendors require customers to pay for their goods or services upfront. Some allow them to pay at a later date. If you purchase goods or services for your business but don’t immediately pay for them, you should record the transaction as an accrued expense.

#4) Operational Expenses

Finally, an operational expense is a business-related expense that’s not directly linked to your business’s production activities. Instead, it’s incurred as a part of your business’s normal, day-to-day operations. Common examples of operational expenses include marketing and advertising, insurance, research and development and equipment.

To recap, the four primary types of business expenses include variable, fixed, accrued and operational. Variable expenses are characterized by their ability to change over time. Fixed expenses, on the other hand, do not change over time. Accrued expenses are unique because they involve debt, while operational expenses aren’t linked to your business’s production activities.

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5 Ways to Save Money on Shipping Costs

Does your small business ship products directly to customers? Well, you aren’t alone. With the rise of e-commerce, many brick-and-mortar businesses have since taken their operations online. Selling products online allows you to reach a larger audience. The downside, however, is that you’ll have to ship products, which can quickly eat into your operational budget. The good news is that you can save money on your small business’s shipping costs by following these five tips.

#1) Ship Multiple Products Together

If a customer purchases two or more products, consider shipping them together in the same package. Conventional wisdom should lead you to believe that it will cost less to ship one package rather than two packages. You can even pass some of these savings along to the customer, who may feel compelled to leave a positive review for your small business.

#2) Compare Flat Rates vs Standard Rates

Many shipping companies, including the United States Postal Service (USPS), offer both flat rates and standard rates. If you’re shipping a small and lightweight product, you may want to use the standard rate. If you’re shipping a large and heavy product, on the other hand, a flat-rate box may cost less. The only way you’ll know is by comparing the shipping company’s flat rates to its standard rates.

#3) Purchase Insurance Through a Third Party

As a small business owner, you should insure your packages to protect against financial loss. Shipping companies are bound to make mistakes. Maybe they accidentally lose one of your packages, or perhaps they send it to the wrong address. With insurance, you can rest assured knowing that you’ll be financially compensated in cases such as these. Rather than purchasing insurance directly through the shipping company, though, consider using a third-party insurance provider. They typically offer cheaper rates,

#4) Reuse Bubble Wrap and Boxes

To say packaging supplies is expensive would be an understatement. Depending on sales volume, some small businesses spend thousands of dollars on packaging supplies each year. You can cut this cost, however, by reusing bubble wrap and boxes. When you receive a shipment of products from a supplier, save these supplies so that you can reuse them later.

#5) Get Multiple Quotes

Don’t forget to get multiple quotes on shipping costs from different shipping companies. Contrary to what some small business owners believe, the USPS doesn’t always offer the lowest rates. Other shipping companies to consider include UPS, FedEx and DHL. By obtaining multiple quotes, you’ll be able to see firsthand which shipping company offers the lowest rate for your small business.

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