Bridging the Gaps in Business

Engaging a Fractional CFO can provide significant advantages for a company, particularly for growing businesses that require financial expertise but do not need a full-time CFO. For more insights into the financial oversight of a business and to understand when you might need CFO support at various stages of your business, please click on https://strawbridgecfo.com/financial-oversight

•  Bookkeeping involves the day-to-day recording of financial transactions like sales, purchases, receipts, and payments. It's the foundation for accounting.
• Accounting involves interpreting, analyzing, and summarizing this data to provide insights and financial statements that are critical for decision-making, tax compliance, and attracting investors.

Accrual accounting is generally preferred for growth companies, especially those seeking investment or bank financing. It matches revenues and expenses to the period in which they are incurred, offering a more accurate picture of financial health. Banks and Investors will want your reporting on accrual method. 

Cash accounting may be simpler but is less reflective of the company’s financial obligations and prospects.  

Recommendation:  We recommend maintaining your books and continuing to report on an accrual basis. However, for tax purposes, you can use a "modified" cash basis. It’s important to understand that while managing on a "modified" cash basis, you must be mindful of tax implications, especially in Q4, until you exceed $25 million in gross receipts over the past three tax years and must convert to accrual basis for tax.

If you elect cash basis for tax purposes, in Q4, you can delay taxes owed by utilizing prepaid expenses (if the cash is spent and the activity is completed within the year) and credit card activities, thus incurring costs without a cash outlay in December. This requires careful cash management as you plan for the next year's budget and forecast cash flow for Q1 business cycles.

 To meet the small business taxpayer exemption, Section 448 (c) provides a gross receipts test that is met if a taxpayer has average annual gross receipts not exceeding $25 million adjusted for inflation for the three prior tax years. 

You will need to be aware that there can be a significant tax liability when moving from Cash to Accrual for tax filings as you have to bank all the Accounts Receivable ("AR") balance to revenue on conversion.  This means if you have AR of $3MM, then you are carrying a ~$1MM tax burden due upon conversation if your Accounts Payable balance s maintained low. You must plan for this conversion liability and how you are going to pay for it.

- Financial transactions (sales, expenses, receipts, etc.)

- Bank statements

- Invoices (both payable and receivable) 

- Payroll records

- Contracts and agreements

- Tax filings

Maintaining detailed records will not only help during audits but also improve investor confidence and facilitate bank loans.

  A simple monthly reporting package for investors and banks should include:

- Income statement (P&L) Reported

- Income statement (P&L) Adjusted

- EBITDA 

- Balance sheet

- Cash flow statement

- KPIs relevant to growth (e.g., revenue growth, customer acquisition costs)

- Budget vs. actuals (comparison)

- Accounts receivable and payable aging reports

- Headcount data and employee retention

- Bank covenant calculations

- Cash Forecast for 13 weeks 

• The close process for a growing company should aim to be completed within 5-10 days after month-end to provide timely insights.
• Account reconciliation should occur monthly to ensure that bank balances, receivables, and payables are accurate and any discrepancies are promptly addressed.

 For detailed information and charts on the appropriate stages to involve each role, please refer to our Financial Oversight guide here:  Financial Oversight 

 The primary guideline is to avoid comingling personal expenses with business finances. While this may seem straightforward, lines can become blurred when considering the "company benefits" related to entertainment and business development costs. We advise seeking professional advice for accurate expense classification to prevent any unexpected issues during the valuation process.

Moreover, it is crucial for an owner to thoroughly comprehend the potential expenditures that may arise and not impact EBITDA. These expenditures could encompass start-up costs, non-recurring expenses (such as signing bonuses and third-party recruiter fees), and infrastructure implementation costs, among others  

Lastly, Growth-focused owners should closely monitor cash flow, ensure expense categorization is accurate, and have clear visibility into both fixed and variable costs. This helps in controlling burn rates and improving profitability.

Investors and banks will look for efficient cost management and strategic investment into growth drivers.

 See our article The Evolving CFO for insights into AI automation that you can implement now in your business.

- Failing to reconcile accounts regularly

- Incorrectly categorizing expenses

- Missing invoice payments or tracking receivables

- Not maintaining backup documentation

- Neglecting to track sales tax or payroll taxes

- Implement a collections policy for follow-ups at regular intervals (30, 60, 90 days overdue).

- Offer discounts for early payment or consider penalties for late payments.

- Use accounts receivable aging reports to identify problem areas and, if needed, hire a collections agency for persistent delinquencies.

- Implement internal controls such as segregation of duties, authorization of expenditures, and regular audits.  

- Use audit trails in your accounting system and regularly review financial records.

- Encourage a whistleblower policy and conduct background checks on key financial personnel.

See our Internal Controls Grid for detail segregation of duties by staging.

Auditors will focus on:

- Revenue recognition practices to ensure they comply with applicable accounting standards (like GAAP or IFRS).

- Timing of revenue to ensure it’s recorded in the correct period.

- Completeness and accuracy of recorded revenues, ensuring no omissions or misstatements.

- Existence of supporting documentation (contracts, invoices, and receipts) for significant transactions.

 Business owners must comply with federal, state, and local employment laws, which may include:

- Minimum wage and overtime requirements

- Anti-discrimination and equal opportunity employment laws

- Family and medical leave requirements 

- Proper classification of employees (exempt vs. non-exempt, contractors vs. employees).

- Payroll tax withholding and benefits administration (e.g., health insurance, retirement).

- Worker’s compensation and unemployment insurance

- Workplace safety regulations (e.g., OSHA in the U.S.)

These are critical to avoid legal liabilities from potential lawsuits or fines, which could affect investor confidence.

  Clear, detailed job descriptions are critical for several reasons:

- They define the responsibilities, skills, and qualifications needed for a role.

- They set expectations for performance.

- They provide legal protection if there are disputes over job duties.

- They help guide the recruitment and training process.

Investors and banks value structured HR processes, which reduce risks of misunderstandings or disputes.

Recruiting involves finding and attracting qualified candidates for open positions. Some best practices include:

- Writing clear and compelling job ads

- Using diverse channels to advertise positions (job boards, social media, industry-specific platforms)

- Screening resumes carefully and conducting structured interviews

- Checking references and conducting background checks (if necessary)

- Ensuring your hiring process is free from bias and compliant with anti-discrimination laws

A well-planned hiring approach attracts top talent and reflects positively on investors and banks, showing you can scale effectively. Use a data-driven approach to evaluate candidates, ensuring the right skill sets are brought on board. 

Onboarding refers to the process of integrating new employees into your business. A strong onboarding program:

- Helps new employees understand company culture, policies, and expectations.

- Provides necessary training for their role.

- Improves employee engagement and retention by making them feel welcomed and supported.

- Reduces time to productivity.

For a growth company, proper onboarding reduces turnover, a key factor investors and banks assess when evaluating operational stability.

The length of onboarding can vary depending on the role and the complexity of the company, but for a growth company, onboarding should typically take anywhere from 30 to 90 days. Here's a breakdown of the timeline:

1. First Week: Focus on introducing the new employee to the company's culture, values, team, and immediate job responsibilities. Cover administrative tasks like setting up payroll, benefits, and company accounts. Provide an overview of key projects and expectations.

2. First Month: The employee should start gaining hands-on experience with their job responsibilities, gradually increasing in complexity. They should also be fully integrated into team meetings and ongoing projects. Offer training specific to their role during this period.

3. First 90 Days: This is the typical period where an employee should be fully operational. By the end of this phase, they should understand company workflows, have built relationships with colleagues, and contribute meaningfully to the business. This period often concludes with a formal performance review or a check-in to assess how well they have adapted.

For a growth company, speeding up the onboarding process while ensuring effectiveness is key to getting new hires productive quickly, which is important for investors and banks looking at operational efficiency.

 An employee handbook outlines your company’s policies, procedures, and expectations. It can cover:

- Code of conduct and workplace behavior

- Benefits and compensation

- Attendance, leave, and time-off policies

- Disciplinary actions and grievance procedures

- Safety guidelines and protocols

The handbook should be clear, easy to understand, and legally reviewed to ensure compliance with labor laws.  A well-prepared handbook demonstrates professionalism and helps reduce legal risks, which is important to both investors and banks. 

Please find a template available for free download HERE: Employee Handbook 

A healthy workplace culture promotes employee satisfaction, engagement, and productivity. Owners can:

- Encourage open communication and feedback.

- Foster respect and inclusivity.

- Promote work-life balance.

- Promoting transparency and collaboration

- Offer professional development opportunities

- Recognize and reward employee achievements.

- Align company values with employee behavior and decision-making.

A strong culture attracts and retains talent, and investors or banks will see it as a foundation for sustained growth.

As noted in our article Maximizing Enterprise Value: Strategic Role of a Fractional CFO, a fractional CFO can help identify key cultural fits and address frictions through workshops and cross-cultural teams. For example, a fractional CFO working with a manufacturing firm developed a management office as a culture lab, which included in-person visits and workshops to smooth over cultural friction points and increase innovation. This proactive approach helped the company maintain a cohesive and motivated workforce.

To gain a pulse on your business, please find a template for an Employee Satisfaction Survey available for free download in our People Resources tool

Managing employee performance involves setting clear goals, providing regular feedback, and addressing underperformance. Key aspects include:

- Performance reviews: Conduct regular (e.g., quarterly or annually) reviews to discuss achievements, areas for improvement, and future goals.

- Training and development: Offer opportunities for employees to improve their skills and advance their careers (e.g., workshops, courses, mentorship).

- Disciplinary action: If necessary, use a clear process for handling poor performance or misconduct, ensuring fairness and consistency.

Also, we recommend implementing a performance management system that:

- Sets clear goals and KPIs for employees.

- Provides regular feedback and performance reviews.

- Encourages ongoing learning and development through training, mentorship, or coaching.

Effective performance management ensures productivity and supports long-term growth, key to convincing investors that the company is well-managed.

Please find a template for a Multi-Rater 360 Review available for free download in our People Resources tool

A competitive compensation package can help attract and retain talent. It can include:

- Salary and wages: Market-rate salaries

- Benefits: Health insurance, retirement plans, paid time off, parental leave, and wellness programs are common benefits.

- Bonuses and incentives: Performance-based bonuses, profit-sharing, or stock options can motivate employees.

- Non-monetary perks: Flexible work arrangements, remote work, professional development opportunities, and a positive work environment also contribute to job satisfaction.

A critical milestone in building a strong organizational infrastructure is establishing an effective compensation structure as the company scales. Conducting an annual compensation benchmarking study, segmented by job level, can provide valuable insights into competitive salary ranges and industry standards. Additionally, gathering data from candidates who decline offers is essential to understanding whether compensation played a role in their decision.

It’s important to note that compensation is often a factor, even if candidates claim otherwise. Therefore, it's crucial to obtain details on the total compensation package they were offered to make informed adjustments and remain competitive in the talent market.

  Employee disputes are inevitable, and it’s important to have a clear process for resolving them. Steps may include:

- Encouraging open communication and attempting informal resolution.

- Following a formal grievance process (outlined in the employee handbook).

- Involving HR or third-party mediation, if necessary.

- Ensuring decisions are consistent and legally compliant.

In addition, you can establish a formal grievance policy:

- Provide clear channels for employees to raise concerns confidentially.

- Ensure prompt investigation and resolution.

- Maintain open communication and encourage mediation where possible.

Handling disputes effectively can minimize legal risks, something investors and banks value in assessing your HR risk management.

  Payroll management includes ensuring employees are paid correctly and on time, as well as fulfilling tax obligations. Key considerations include:

- Accurately calculating wages, overtime, and deductions (e.g., taxes, benefits).

- Complying with tax laws, including income tax withholding, Social Security, and Medicare contributions.

- Keeping up with changing payroll regulations and tax rates.

Consider using payroll software or outsourcing to ensure compliance and efficiency, reducing financial risks that concern both investors and banks 

Employee retention refers to the company’s ability to retain its employees over time. To improve retention:

- Foster a positive work culture.

- Offer competitive compensation and professional development.

- Recognize and reward employee achievements.

- Conduct exit interviews to understand why employees leave and identify areas for improvement.  You can use our free download as a start for exit interviews in the tools above.

High retention rates indicate operational stability and lower costs related to turnover, key metrics for investors and banks.

As an employer, you’re responsible for maintaining a safe and healthy work environment. Key considerations include:

- Ensuring compliance with workplace safety regulations (e.g., OSHA in the U.S.).

- Implementing safety protocols and training employees on these procedures.

- Providing necessary protective equipment and maintaining safe working conditions.

- Creating a plan for handling emergencies or accidents in the workplace.

Prioritizing employee well-being helps avoid legal risks and demonstrates responsible leadership to investors

Termination can be difficult but sometimes necessary. Steps to handle termination correctly to reduce legal risks include:

- Following a clear structured and legal process (ensure due process and avoid wrongful termination).

- Documenting performance issues, warnings, and disciplinary actions.

- Conducting exit interviews to gain insights on areas for improvement.

- Offering severance packages or assistance with transitioning, if appropriate.

- Ensuring that final payments, benefits, and paperwork are handled promptly.

A well-managed termination process helps protect your company from legal claims and shows professionalism to investors and banks.

Please find a template for an Exit Interview Questionnaire available for free download in our People Resources tool

  Labor laws change frequently, and staying compliant is essential to avoid legal issues. Owners should:

- Monitoring federal, state, and local labor law changes.

- Regularly consulting with HR professionals or legal counsel.

- Participating in industry HR forums or subscribing to relevant newsletters.

Compliance demonstrates to investors and banks that you are prepared to avoid legal liabilities as you scale.

Depending on the size and complexity of your business, you may consider:

- Outsourcing HR: This can be cost-effective and ensure compliance, especially for small businesses without dedicated HR staff. Outsourced HR providers can handle recruitment, payroll, benefits administration, and more.

- In-house HR: For larger businesses or those with specific cultural needs, having an in-house HR team can be more effective for fostering company culture, employee engagement, and handling day-to-day operations.

As you grow, bringing HR in-house offers greater control and alignment with company culture and growth goals, which investors might favor when considering long-term scaling.

HR software can automate many tasks, such as:

- Payroll processing

- Employee record management

- Recruitment and applicant tracking

- Performance management reviews and employee development tracking

- Employee self-service portals for benefits and leave requests

- Using HR technology improves efficiency and reduces errors.

Leveraging tools like HR software (ADP Workforce Now, BambooHR) increases operational efficiency, appealing to investors looking for scalable solutions.

  Remote and hybrid work arrangements are increasingly common. To manage such employees:

- Set clear expectations for work hours, communication, and productivity.

- Provide the necessary tools and technology for remote work.

- Foster team collaboration and engagement through virtual meetings and check-ins.

- Ensure compliance with wage and hour laws, even for remote employees.

Managing remote work well will be viewed positively by investors and banks, showing you can maintain productivity across different working models.

Depending on your business structure and location, you may be responsible for several types of taxes, including:

- Income tax: Based on your business profits.

- Self-employment tax: Covers Social Security and Medicare taxes for owners of sole proprietorships, partnerships, and LLCs.

- Employment/payroll taxes: Withheld from employee wages for Social Security, Medicare, and unemployment insurance.

- Sales tax: On goods and services sold (if applicable).

- Property tax: If your business owns property or equipment.

- Excise and use tax: Applies to specific industries (e.g., fuel, alcohol, tobacco).

- Franchise taxes: for certain legal entities (depending on state requirements).

Investors and banks want to see that the company maintains proper compliance with tax obligations to avoid legal and financial risks.

Please refer to the in-depth analysis provided above in the Tax Tools.

• LLC + Partnership;
• LLC + C corporation;
• LLC + S corporation;
• Corporation + C corporation; and
• Corporation + S corporation.

So, you really only have five options. There are lots of other weird entities that exist (limited partnership; limited liability limited partnership; etc.) but almost no one without an extraordinarily unique situation chooses those."

With that said, your business’s legal structure (e.g., sole proprietorship, partnership, LLC, S corporation, or C corporation) significantly affects how your business is taxed:

- Sole proprietorship/partnership/LLC: Business income "passes through" to the owner’s personal tax return, and you pay taxes at your individual rate.

- S corporation: Similar to pass-through taxation, but owners may pay themselves salaries and take dividends.

- C corporation: Subject to double taxation—corporate income tax and then personal tax on dividends paid to owners.

Investors may prefer certain structures like C-Corps for equity financing, while banks might assess the risk differently based on liabilities and tax treatment.

Tax deductions and credits reduce your taxable income. Some common deductions for growth companies include:

- Business expenses: Rent, salaries, benefits, marketing, and office supplies.

- Salaries and wages: Payments to employees, contractors, and even yourself (if structured correctly).

- Vehicle and travel expenses: For business-related transportation

- Startup costs: Costs incurred before launching operations.

- Health insurance premiums: For self-employed individuals or if you offer insurance to employees.

- Qualified Business Income (QBI) deduction: Allows pass-through entities to deduct up to 20% of business income

- Depreciation: On assets like equipment and real estate.

Credits differ from deductions because they directly reduce your tax liability. Some examples include:

- Research and development (R&D) credits, especially tech or innovation companies.

- Energy-efficient property credits.

- Tax credits for hiring certain employees (e.g., veterans, disadvantaged workers).

Maximizing deductions improves cash flow, a metric both investors and banks value for financial planning and stability.  We recommend working with a tax professional to reduce your potential tax liabilities. 

Please refer to our article on Nexus HERE:  Planning for Nexus: The Sales Tax Monster.

Sales tax management requires obtaining sales tax permits in states where your business has nexus, either through physical presence or economic activity.  The business should:

- Maintain accurate records of taxable sales and regularly remit sales taxes to the appropriate state authorities, following the required frequency (monthly, quarterly, or annually).

- Leverage sales tax automation software (e.g., Avalara, TaxJar) to ensure compliance as your company grows.

- Conduct an annual nexus review by state for revenue allocation purposes and consult with a tax professional to establish a method of apportionment. Examples include revenue markers by state, such as income tied to Medicare populations, or the location of service, such as customer headquarters.

Sales tax obligations differ across states and localities. Key considerations include:

- Which products or services are taxable? (Taxability varies by state.)

- Where do you need to collect sales tax? This is based on your physical presence (nexus) or economic nexus if you sell in states that impose such requirements (e.g., online sales).

- How do you file and remit sales tax? Be sure to understand the reporting and payment schedules in each state where you collect sales tax.

 Proper sales tax management prevents legal risks that can deter investors or banks from providing funding.

Tax filing and payment deadlines depend on the type of taxes:

- Estimated quarterly taxes: Many small businesses and self-employed individuals need to make quarterly tax payments to avoid penalties.

- Annual tax return: Most businesses must file a tax return annually, though corporations may have different deadlines.

- Sales tax: Typically paid monthly, quarterly, or annually, depending on the jurisdiction and your sales volume.

- Payroll taxes: Deposits are usually required either monthly or semi-weekly, depending on the size of your payroll.

  ❖In addition, HR experts should be consulted for paying people in the proper states and proper payroll tax filings. ADP can help setup states for $150 per state so you don’t have to complete the paperwork or phone calls. They can also ensure quarterly filings, power of attorneys, and annual payroll tax filings are completed timely and correspondence with each state. 

❖Payroll taxes over a certain $ threshold will have to be deposited by wire the next day to IRS. If not in compliance, the business will get fined for late filing and accessed penalties. This usually triggers when a company is above 40 people.   

Timely filing is crucial to maintaining credibility with investors and avoiding penalties that can affect cash flow and creditworthiness with banks.

Keeping accurate and detailed records is essential for compliance and to substantiate deductions. Required records include:

- Income and sales records.

- Expense receipts and invoices.

- Employee payroll records.

- Credit card statements.

- AP and AR aging reports.

- Bank reconciliations and statements for year-end and first month.

- Tax filings and correspondence with the IRS or state tax authorities.

- Mileage logs for business travel.

- Proof of business deductions (e.g., utilities, equipment purchases, lease agreements).

- Fixed asset listing by location (including disposals).

- Confirmations of quarterly tax payments, if any.

It’s important to store these records for at least three to seven years, depending on local laws and tax authorities. Accurate records ensure compliance and can provide data to investors or banks during audits, funding applications, or due diligence.

If you're self-employed, you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes (around 15.3% of net earnings).

Self-employed individuals must also make quarterly estimated tax payments to avoid underpayment penalties. You may be eligible to deduct the employer-equivalent portion of your self-employment tax on your tax return. A trick is to apply your first quarterly tax payments to prior year to avoid any underpayment as you are always a quarter ahead. 

Investors expect founders and key stakeholders to be compliant with personal tax obligations, as it reflects responsible business management.

Owners can reduce tax liabilities by taking advantage of:

- Tax-deferred retirement plans: Contributions to plans like a SEP IRA, SIMPLE IRA, or 401(k) can reduce taxable income as a tax-advantaged strategy.  A Cash Balance Plan is a great option to maximize retirement now.  

- Business expenses: Ensure all legitimate business expenses and research activities are accounted for and properly classified.

- Business Assets: reinvestment into business assets.

- Depreciation methods: Maximizing depreciation deductions on large business assets (e.g., machinery, vehicles).

- Structuring the business: Choosing the right business entity can help reduce taxes (e.g., switching from a C corporation to an S corporation if it makes sense). Evaluate your business structure to ensure it offers optimal tax treatment.

Please refer to our Tax Tools above for detailed analysis on which business entity will fit your business needs.

A cash balance plan is a type of defined benefit plan that blends features of traditional pensions and 401(k)s. Employers contribute to a hypothetical account for each participant, which grows based on:

1. Pay credits: A percentage of salary or a flat amount.

2. Interest credits: A fixed rate or a rate tied to an index like U.S. Treasury yields.

Unlike a 401(k), the employer bears the investment risk and guarantees a retirement benefit. Employees can take a lump sum or annuity at retirement.

Maximum Contribution for a 50-Year-Old (2024):

For a 50-year-old, annual contributions can range between $150,000 and $250,000+, depending on compensation, plan design, and actuarial assumptions.  These contributions are calculated by actuaries and are designed to provide a specific amount of income at retirement and these limits are much higher than those for a 401(k), and contributions grow with age, as older participants need to accumulate retirement funds faster.

Tax Benefits: Employer contributions are tax-deductible, and taxes on contributions and earnings are deferred until withdrawal. Cash balance plans are often paired with 401(k)s for higher retirement savings.

For precise limits, consult with an actuary or plan administrator for the risk and reward analysis on a cash balance plan.

Missing tax deadlines can lead to penalties, such as:

- Failure-to-file penalty: 5% of the unpaid taxes for each month the return is late.

- Failure-to-pay penalty: 0.5% of unpaid taxes per month, plus interest on unpaid taxes.

- Underpayment penalties: For failing to pay estimated taxes.

Sales tax failure to pay penalties are state by state and can be negotiated with a VDA. See our article about Nexus on the process in Planning for Nexus: The Sales Tax Monster. 

These penalties can impact cash flow, making your company less attractive to investors and putting your creditworthiness at risk with banks. 

There are distinct tax and insurance obligations for employees vs. independent contractors:

- For employees, you must withhold and pay payroll taxes (Social Security, Medicare, federal and state income taxes) and file necessary tax forms (e.g., W-2s).  In addition, you must offer benefits for health insurance, 401K, workers comp, and company perks (that can amount to upwards of $30K+ per employee depending on your benefit structure).

- For independent contractors, you generally do not withhold taxes. However, you must file a 1099-NEC if you pay them $600 or more in a year.  In addition, you will need to collect insurance certificate or will be liable for workers comp to the insurance company when they conduct the annual audit, which is insured at the state level.

Misclassifying employees as contractors can lead to penalties, so it's important to understand the classification rules.

Proper classification is essential, as misclassification can result in penalties and legal challenges, negatively affecting investor trust and bank financing options.

Please refer to our Contractor Guide in our Tax Tools for the criteria for an employee vs independent contractor.

Businesses operating in multiple states may face state income taxes, sales taxes, and other local taxes in each state. Important considerations include:

- Nexus: Determining if your business has a physical or economic presence in a state.

- Apportionment: Some states require apportioning income based on sales, property, or payroll within the state.

- Sales tax: Collecting and remitting sales tax for sales made in multiple states, depending on their specific laws.

Use tax software to manage the complexity of multi-state taxation.  To note, although states don't talk to each other, you will have to agree on a universal method for allocation of revenue.  A tax professional will not let you apply different approaches to different states as that is consider tax manipulation.  See our article about Nexus on the Nexus process and planning in Planning for Nexus: The Sales Tax Monster. 

Investors and banks expect you to manage multi-state taxes efficiently, as failure to comply can lead to costly audits and legal liabilities.

Selling a business or transferring ownership has significant tax implications that need planning a year ahead of time, including:

- Capital gains tax: If you sell your business at a profit, you may owe capital gains tax on the sale. It is important to identify what portion is long-term (taxed at 20%) vs short-term (taxed at ordinary income levels) and your individual basis.

- Asset vs. stock sale: In an asset sale, individual assets are sold, potentially resulting in different tax treatments. A stock sale involves selling ownership shares, which may be more favorable for the seller. It is important to understand the “hot assets” like AR that will be taxed at ordinary income rates and any asset transfers staying with OldCo as you may want to keep your “investments”, if any and not include in the sale.

- Deal costs: It is important to understand which deal costs can be deducted in the year of sale and which are capitalized as deferred cost amortization over life of loan.

- Distributions vs. Guaranteed Payments: Guaranteed payments are taxed as ordinary income, while distributions may benefit from lower capital gains tax rates. Proper classification ensures the correct tax treatment for both the seller and the buyer. 

- Succession planning: If transferring ownership within a family, there may be estate and gift tax considerations.

Ownership changes can affect tax elections, liabilities, and benefits (e.g., loss of S-Corp status if ownership rules are violated).  Consulting with a tax advisor is essential during this process to minimize tax liability and understand the true cash (after tax) waterfall on a sale.

  Yes, it's important to understand if any §743(b) deduction benefits apply to you as the seller or if they all go to the buyer in a business sale.

What is §743(b) Adjustment?

- A §743(b) adjustment allows the buyer to step up the inside basis of partnership assets to match the purchase price they paid, enabling future deductions like depreciation.

- This adjustment only benefits the buyer if a §754 election is in place. The seller generally does not benefit from it.

Key Considerations for Sellers:

- No §743(b) for Seller: As the seller, you won’t receive the benefit of the §743(b) adjustment. You are taxed on the sale based on the outside basis (the difference between what you paid and the sale price).

- Buyer’s Tax Benefit: The buyer gets the future tax deductions, which may increase the value of the deal. This can be a negotiation point when setting the sale price.

Conclusion:

The §743(b) deduction primarily benefits the buyer, not the seller. It’s essential to know how this affects the overall deal and to negotiate accordingly. Consult a tax advisor to ensure proper handling of these tax implications.

Yes, business owners benefit from working with a tax professional, such as a CPA or tax advisor, is highly recommended for:

- Tax planning: Maximizing deductions, credits, and creating efficient tax strategies.

- Tax preparation: Ensuring accuracy and compliance when filing returns.

- Navigating complex tax rules: Handling multi-state operations, international sales, or mergers and acquisitions.

- Audit support: Providing assistance in the event of an IRS audit or dispute.

Engaging a tax professional demonstrates a commitment to compliance, which reassures both investors and banks about the company’s financial management.

International business activities may create additional tax obligations, including:

- Foreign tax credits: Avoid double taxation on income earned abroad.

- Transfer pricing rules: When transferring goods, services, or intangibles between subsidiaries in different countries, certain pricing rules apply.

- Value-added tax (VAT): In many countries, VAT applies to goods and services, and you may need to register for VAT in the country where you sell.

- Understanding tax treaties between countries to avoid double taxation.

You must comply with U.S. international tax laws, including foreign tax credits and reporting foreign income (e.g., via IRS forms 5471 or 8858).

Managing international taxes effectively is crucial for reducing risks and maintaining investor and bank confidence in your global expansion strategy.

If audited, you will need to provide documentation supporting your tax filings (income, deductions, credits):

- Be prepared with records: Ensure all financial records and receipts are organized and available for review.

- Cooperate with the IRS: Provide requested documentation and comply with deadlines 

A tax professional can represent you during the audit to ensure proper handling. If discrepancies are found, you may face penalties, interest, or adjusted tax liabilities.

Owners should be familiar with various methods, such as:

- Equity financing: Raising capital by selling shares in the business.

- Debt financing: Borrowing funds that need to be repaid with interest (e.g., loans, bonds).

- Crowdfunding: Raising small amounts of money from a large number of people, usually via online platforms.

- Grants: For nonprofits or specific types of businesses, grants can provide non-repayable funds.

- Venture capital/Angel investors: Investors who provide capital in exchange for equity.

- Donations or Sponsorships: Common for nonprofits or community-oriented businesses.

- Bootstrapping: Using personal savings or revenue to fund business growth.

You should define your goals clearly: Are you raising money for a specific project, operational costs, or to scale your business? Understanding how much you need and why you need it helps shape your strategy. 

Equity fundraising involves selling ownership in your company in exchange for capital, while debt fundraising involves borrowing money (which must be repaid, often with interest). Each has its pros and cons, and you should weigh the impact on your ownership and financial obligations. 

Consider who is most likely to support your business or nonprofit:

- Angel investors and venture capitalists are typically looking for high-growth startups.

- Impact investors seek businesses with social or environmental missions.

- Corporate sponsors might be interested in aligning their brand with your cause.

- Small donors may contribute via crowdfunding platforms.

- High-net-worth individuals or institutional donors may be relevant for nonprofits or certain types of businesses.

Investors expect a return on their investment (ROI), either through dividends, interest, or equity appreciation. Donors, especially in the nonprofit sector, may expect recognition, updates on how funds are used, or to see a social impact. For corporate sponsors, it could be brand exposure or marketing opportunities. 

General Ownership Guidelines by Stage

To keep ownership reasonable across stages, here’s a common guideline:

- Founders: Aim to retain 50-70% through Seed, around 30-40% post-Series A, and ideally, over 20% post-Series B. 

- Investors: Each new round will see cumulative investor ownership grow, but founders typically try to avoid cumulative investor ownership exceeding 50% before a possible exit.

These percentages are averages, and a lot depends on the negotiation, company valuation, and specific funding environment.

Ownership Guidelines by Stage Summary

Equity given up at each funding stage depends on factors like market conditions, your company’s traction, and how much capital you need. Generally, startups retain enough equity early on to maintain leverage for later rounds. Here’s a common equity dilution breakdown across each stage:

1. Pre-Seed Stage (Very Early Stage)

- Typical Equity Given: 5-10%

- Goal: Build a prototype, conduct initial product-market fit testing.

- Investors: Often friends, family, angel investors, or incubators.

- Capital Raised: $50k to $500k, depending on the startup and industry.

- Dilution Impact: Minimal, as this is the first stage and usually involves smaller amounts.

2. Seed Stage (Early Traction)

- Typical Equity Given: 10-15%

- Goal: Product development, early user acquisition, and validating the business model.

- Investors: Seed funds, angel investors, or early-stage VCs.

- Capital Raised: $500k to $2 million (industry and company-dependent).

- Dilution Impact: Adds up but can still be managed well if valuation is strong.

3. Series A (Growth and Scaling)

- Typical Equity Given: 15-25%

- Goal: Scale the product, expand the user base, and demonstrate consistent revenue growth.

- Investors: Venture capital funds focused on early growth-stage companies.

- Capital Raised: $2 million to $15 million, depending on the market and industry.

- Dilution Impact: Significant, as investors are seeking a sizable stake to account for risk.

4. Series B (Expansion and Market Share)

- Typical Equity Given: 10-20%

- Goal: Expand into new markets, scale operations, and optimize revenue channels.

- Investors: Larger VC firms or late-stage funds interested in scaling businesses.

- Capital Raised: $10 million to $50 million, often higher for high-growth industries.

- Dilution Impact: Usually less than Series A in terms of percent equity given up but may still reduce founder control.

5. Series C and Beyond (Late-Stage Growth)

- Typical Equity Given: 5-10% per round (often multiple rounds)

- Goal: Enter international markets, add new products, or prepare for IPO/acquisition.

- Investors: Private equity, late-stage VCs, and sometimes strategic corporate investors.

- Capital Raised: $50 million to $200 million, depending on the scope of growth.

- Dilution Impact: Small percentage, but the valuations are much higher, often allowing founders to retain more control.

 Before seeking equity investment, you need to establish a reasonable valuation of your business. This is the price investors will pay for a stake in the company, and it’s critical to back this valuation with data (e.g., current revenue, future projections, market size, and potential growth).   See our Fundraising Tools for the Valuation factors that will be considered.

Fundraising requires preparation, including:

- Pitch deck: A concise presentation that communicates your vision, business model, market, team, and financials.

- Business plan: A detailed document covering your business’s objectives, strategies, market analysis, and financial projections.

- Financial statements: Profit and loss statements, balance sheets, cash flow forecasts, etc.

- Executive summary: A brief overview of your business or nonprofit that summarizes your key points.

- Legal documents: Depending on the fundraising type, you may need incorporation documents, term sheets, or investment contracts.

Fundraising can take longer than expected, ranging from several months to a year or more, depending on the type of capital you’re seeking. Owners need to account for the time required to network, pitch, negotiate, and close deals. 

Fundraising, particularly equity fundraising, often involves strict regulatory requirements. Owners should:

- Understand securities laws (such as SEC regulations in the U.S.).

- Ensure compliance with tax laws.

- Seek legal advice to draft contracts and agreements 

This should be based on a detailed financial analysis of your business. Consider:

- How much capital is needed to reach key milestones.

- The runway the funds will provide (i.e., how long the funds will last).

- Future operational or growth needs for team and hiring plans.

- Don’t raise too much, which can lead to dilution, but ensure you have enough to meet your objectives.

Investors typically look at:

- Revenue growth

- Contribution margin

- Profit margins

- Customer acquisition cost (CAC)

- Customer lifetime value (CLTV)

- Burn rate (how quickly you’re spending money)

- Break-even point and projected profitability

Understanding and communicating these metrics is essential for investor confidence.

To note:  The CEO/Owner should be doing most of the talking because it is an orange flag if the CFO or COO are doing all the talking on the numbers.  Investors want to see that the CEO has a strong understanding of the business’s financial health and growth trajectory asthe CEO is expected to have a broad vision but also a solid grasp of details, especially on the financial side. 

Owners should be aware of:

- Dilution: Giving up too much control or equity.

- Debt obligations: Inability to repay loans or interest.

- Rejection: Fundraising is competitive, and many pitches are turned down.

- Investor influence: Some investors may want significant control over business decisions.

- Legal risks: If agreements are poorly structured, they could harm the business long-term.

Successful fundraising is not the end of the relationship. You must:

- Provide regular updates on the business's or nonprofit's progress.

- Report on how the funds are being used.

- Be transparent about challenges or changes.

- Engage with donors/investors through meetings, newsletters, or reports.

Fundraising is often iterative. To attract future funding, you should:

- Meet or exceed the milestones outlined in your previous rounds.

- Strengthen your brand, market presence, and operational efficiency.

- Continue networking with potential investors and supporters.

- Have a clear plan for future growth or impact.

Depending on the complexity of your fundraising goals, it might make sense to hire an expert or consultant to help:

- Refine your pitch and materials.

- Identify and connect with the right investors.

- Navigate legal and financial aspects.

Knowing the exact cash on hand is the starting point for effective cash management.

A cash flow forecast is a detailed projection of expected cash inflows and outflows over a specific period. For growth-oriented companies, this forecast is essential for ensuring that there’s enough liquidity to fund operations and expansion activities. A well-prepared forecast also helps anticipate periods where cash may be tight, allowing for proactive measures. 

 Please explore our tools and insights for comprehensive information and resources on cash management. 

 The cash runway indicates how many months a company can continue operating with its current cash reserves and burn rate (monthly net cash outflows). Knowing this helps in decision-making about growth investments, hiring, and funding needs. It’s especially crucial for growth companies, as rapid expansion often requires upfront investments that consume cash quickly. 

Identifying the primary sources of cash inflow (such as sales revenue, loans, or investor funding) and significant outflows (like payroll, rent, and supplier payments) allows for a better understanding of financial health. This insight is crucial for managing cash reserves effectively, prioritizing spending, and allocating funds where they’ll deliver the most value in supporting growth.  These are especially important to establish the company cash burn rate.

Monthly Cash Burn Rate = Monthly Cash Outflow - Monthly Cash Inflows

The cash burn rate refers to the amount of cash a company spends each month to fund its operations, calculated as monthly cash outflows minus cash inflows. It’s a critical metric for growth companies, as it measures how quickly they are using up available cash. High burn rates are common in early growth stages due to upfront investments, but they should be monitored closely. Knowing the cash burn rate in relation to cash inflows helps the business set realistic timelines for achieving profitability, plan for funding needs, and maintain sufficient cash reserves. 

The break-even point is the level of sales needed to cover all expenses, meaning no profit or loss. Knowing this is fundamental for growth companies to understand how much revenue they need to generate to support additional investments. It also informs sales and pricing strategies, helping to set realistic growth targets that support sustainability. 

Days Sales Outstanding (DSO), or the time it takes to collect receivables, impacts cash flow significantly. Growth companies need timely access to cash, and delayed collections can strain liquidity. Monitoring DSO and improving receivables collection helps free up cash for reinvestment in growth activities without requiring additional financing.  DSO is also a very important variable to run a proper cashflow forecast model. 

Inventory turnover measures the frequency with which inventory is sold and replaced over a period. Efficient turnover minimizes cash tied up in unsold stock, reducing holding costs and freeing cash for other business activities. Growth companies must balance stock levels to meet demand without overextending cash resources on excess inventory. 

Growth often comes with unforeseen expenses, whether due to new opportunities, delayed receivables, or increased operational costs. Establishing a contingency plan—such as maintaining a reserve fund, securing a line of credit, or obtaining flexible financing—ensures the business can weather these challenges without disrupting core operations. 

Cash flow risks might include seasonal revenue fluctuations, high dependency on a few customers, or significant upfront costs. Identifying these risks enables proactive planning to mitigate them, such as diversifying the customer base, securing additional lines of credit, or managing expenses more tightly. This approach stabilizes cash flow and reduces financial stress as the business grows.

Growth often requires external financing, whether through debt, equity, or a combination. Understanding the structure, cost, and repayment terms of any financing is essential to ensure debt does not overextend cash flow or hinder future growth. Responsible debt management, aligned with growth projections and cash availability, supports sustainable expansion.

Reinvesting profits strategically, whether in operational infrastructure, product development, marketing, or new hires, fuels long-term growth. Knowing the cash requirements for reinvestment and balancing this with liquidity needs enables smart growth choices, avoiding cash flow issues while positioning the business to capitalize on new opportunities. Establishing clear personal and business goals, understanding your access to capital, and evaluating your cash runway all serve as guiding principles for determining the appropriate amount to reinvest into the business.