9 Business Moves to Make Before 2020

The first day of the year is an incredible moment to make changes. I’m not talking about changing the phones to VoIP, or getting new chairs for the conference room. You can do those things anytime. 

I’m talking about strategic financial moves, that work best on or before 1/1. This article is a list of 9 such moves.

A couple quick notes about the list:

1. It is intended for companies with 5 to 125 employees. Some points might apply to smaller or larger outfits, but that isn't the target audience.
2. It is not backed by Ivy League research or a top-flight New York or London consultancy. Stop reading if that's your deal!
3. It is backed by hands-on experience working as a contract CFO for companies in this size range. If you like sleeves-rolled-up practicality, read on.

9 Business Moves to Make Before 2020

1. Switch to online accounting software.

It's not 2003 anymore. Questions about security, down time, and functionality have largely been answered. 2018 seemed like the tipping point where software providers of all stripes threw up their hands and embraced online as the future of their products.

Which online accounting software should you switch to? That's the $10,000 to $250,000 question, and really an article itself. You should at least know that software is divided into tiers. Tier 1 is the heavyweights like Oracle and SAP. Tier 3 is the lightweights like QuickBooks and Xero. Tier 2 is in the middle.

Tier 3. I'll just say this: I work with the major online hitters in this space (QuickBooks Online, Xero, and Wave) and have demoed a few others like Zoho and FreshBooks. The most critical features I look for are:

1. Data dissection. Can data be easily tracked and summarized by account type, project, location, and department?
2. Transaction efficiency. How easy it to enter transactions, clean up the financials at month end, and in general get around the software?

I'd say QBO has about 2X more out-of-the-box data dissection depth than Xero, and is around 30% more efficient with transactions. FreshBooks and Wave really aren't players at all in this space.

Tier 2. I'm less familiar with the online options, because most of my Tier 2 clients still use legacy locally-hosted software. If I were helping someone switch, I'd look first at NetSuite, Intaact, and Dynamics 365 Business Central. Word of caution: Don't be fooled by YouTube videos demonstrating the amazing functionality of these platforms. Enter this arena only if you have cash spilling out of your pockets and only after you've fully and completely outgrown Tier 3. Also side note: Start now to be ready by 1/1 of 2021!

2. Start a real estate company.

Wait, do you mean quit selling IT services and get into real estate? No, I mean if your company owns real estate, move it to a separate company.

There are at least two reasons:

1. Taxes. At least for my US readers, rental income is generally treated more favorably than regular business income. Having your main operating company pay rent to a real estate company essentially re-characterizes some of your current business income as rental income.
2. The future. Holding real estate in a separate company is almost always a good thing when it comes to selling your company. It gives you the option of selling only the business, or of selling the business and real estate to different parties.

Standard caveat applies: Always, always talk to your tax advisor before proceeding. Which leads us to Point 3...

3. Quote out your tax services.

I've seen the following scenarios happen quite regularly:

1. A tax accounting firm expands or gets bought out. Their smaller clients no longer receive as much personal attention.
2. A business outgrows the small tax accounting firm it's been with for many years.
3. A tax accounting firm keeps increasing fees over time (often without also increasing value) to the point the fees become unreasonable.

In any of these scenarios, the solution is to get a quote from two or three other tax firms. From each vendor, ask for both 1) a quote on tax prep services, and 2) a brief analysis of opportunities they see in your tax situation. You might be amazed.

It is key to do this before year end, when tax accounting firms still have time to give you a well-thought-out quote and opportunity analysis. After the first of the year, forget it.

4. Reboot your chart of accounts.

If you are like 90% of the entrepreneurial universe: A) you don't know what your chart of accounts even is, and B) it's a mess.

In short, your chart of accounts is the list of "buckets" your bookkeeper or finance team puts transactions into. Generally, your financial statements and your financial budgets can be no more accurate or informative than your chart of accounts.

I'm shocked by how few business people (and even accountants!) grasp the absolute critical nature of this point. While an in-depth explanation is waaay beyond the scope of this article, here is an article that covers this point in more depth.

5. Become an S Corporation.

This is another quick point for my American readers. Briefly - most profitable, mid-sized, privately-held companies in the US are taxed as S Corporations if they can be. If that's you, and you haven't made an S election, talk to your tax advisor today.

6. Sign up for full service payroll.

A surprising number of companies still run their payroll in-house, using the payroll system included with their accounting software. That's because many business owners aren't aware of the full-service options, and switching can be a touchy subject with a lot of bookkeepers and controllers.

With an in-house payroll system, the payroll clerk is responsible to submit payroll taxes to the appropriate government agencies, file payroll tax returns, and issue year end payroll forms to employees. Over the course of a year, this can be surprisingly time-consuming, and even the best bookkeepers seem to occasionally miss deadlines and generate penalties.

With full-service payroll, payroll hours are submitted to an outsourced payroll provider and they take care of the rest. All payroll tax payments and payroll forms are prepared and submitted to government agencies by the outsourced provider.

The advantages of this are many:

1. The payroll provider takes responsibility for any penalties or late fees.
2. If employees start working in a new state or locality, the payroll provider handles the reporting mess.
3. Utilizing a full-service payroll provider lowers the required competency levels of your in-house bookkeeping team.
4. A full-service provider removes pain points from your bookkeeper's schedule (e.g. when end-of-year payroll forms need to go out to employees).

I can't think of anyone who switched to a full-service provider, that later ended up switching back. It's one of those no-brainer decisions.

My top pick among the options is up-and-coming Gusto, but Intuit and ADP are two other big respectable players as well.

7. Take on long-term debt.

Call me cynical, but at the end of the last recession I promised I wouldn't forget the lessons I'd learned. One of those lessons was: Take advantage of long-term debt when it's available.

Right now lenders are falling all over themselves to issue loans. Now is the golden hour to refinance short-term debt (e.g. lines of credit) into long-term. If you don't have any short-term debt, consider financing some of the fixed assets you've purchased with cash.

It's good to have long-term debt on your balance sheet before year end, because banks and investors use year end financials in their analyses. Banks especially, like to see a good current ratio (current assets to current liabilities). The way to improve that ratio is to convert short-term debt to long, and beef up cash. If you follow this advice, and hard times hit 10 months from now, this will be the most powerful point of the article!

8. Make a thoughtful projection.

I've never been a big fan of budgets, but I like projections. A budget attempts to control spending, a projection tries to predict it. To start the year, you should at least have a plan that works on paper. If you can't even get your business to survive on paper, you're probably sunk.

This point ties in with a chart of accounts reboot, because a good projection uses the same income and expense account groups as your financials. For example, it's not wise to break out revenue into 3 categories on your projection (e.g. Sales-Boston, Sales-New York, Sales-Hartford), but only 2 categories on your financials (e.g. Sales-New England, Sales-New York). It will be an exercise in frustration.

Also, cost projections should be percentage-driven based on sales, not fixed. If sales are $1,000,000, cost of sales might be 65%, or $650,000. You want to build your projection so cost of sales is always 65% of sales, not a hard number of $650,000. That way if sales go up or down, you can adjust your projection.

9. Hire a contract CFO for 10 hours.

This is one the best-kept secrets of my profession. The highest value you'll get from even a full-time onsite CFO occurs in the first 5 to 100 hours from when they step in your door. Why not skim off the cream and hire just for that amount of time?

For maybe $5,000-$7,000 you can go on Upwork, Graphite, or Toptal and hire two unconnected contract CFOs to review your company - each for 10 hours. Pick the highest-rated ones you can find. I'd have them interview you for 2 hours, interview two key employees an hour each, and then review your financials for 3 hours. In the remaining 3 hours, each CFO would summarize his or her recommendations.

If your company is complicated, you could expand the scope and hours. You'll be amazed by what you learn.

Conclusion

Did I miss anything? If so, add your comments below. Best wishes for 2020!