Accountants provide invaluable advice and services for small businesses. Host Dennis Zink and Jim Repp, a CPA and SCORE mentor, discuss the ways that accountants and accounting services can assist businesses and touch on some of the decisions that those businesses need to make in the early stages of development.
Published: Monday, November 17, 2014.
MANY SMALL-BUSINESS owners do not know the best way to work with their accountant. I interviewed Jim Repp, CPA, and here are some of his suggestions.
From an accountant’s perspective, what should a client do before starting his business?
Establish a team consisting of an accountant, an attorney and a banker. Decide what type of legal entity to create (corporation, make a Sub ‘S’ election, partnership, LLC, etc.). Protect your assets — don’t do it on the cheap! If you have to go to court, make sure it’s set up properly by an attorney. Choose a banker to help you set up your business checking account.
Know what your entity is in order to have a final business name, and have your business address and phone number available before printing business cards and brochures.
When signing checks or other documents, is it necessary to use your title?
It helps to differentiate between acting as an individual or as an officer acting on behalf of an entity. Your business name (including Inc., Corporation, or LLC) should be on everything, including checks, invoices and letterhead. Sign all documents using your title (President, VicePresident, Managing Member, etc.).
When should an S election be made, if desired?
After discussing the matter with your accountant and attorney, and assuming you have decided to start a corporation or an LLC, if you decide to file an S election, form 2553 should be prepared and filed by the 15th day of the 3rd month after you start that business.
Does it matter what state you incorporate in or form your LLC? Are there any tax advantages in one state versus another?
There may be tax and legal advantages that could be significant on a state level. Some states have a very high tax rate, and legal considerations may be significant. Some states don’t have a personal income tax. Many companies choose to locate in Delaware or Nevada. Discuss this with your professional team.
How often should I meet with my accountant, and will that change as the business matures?
When you first start the business, you need an accountant to prepare the information, set it up correctly, and then, at the end of that period, sit down with you and explain what the different statements tell you: balance sheet, income statement, and cash flow. Understand what they mean and how you can use them. Everything is usable. Do it on a monthly basis initially, until you feel comfortable understanding these reports; thereafter you can review them quarterly.
Talk with your accountant at least quarterly to find out what his/her anticipation is of your tax needs. Estimated tax payments are going to be due quarterly during the year. You have to pay in at least 90% by the time you file a return. This is critical and can cost you penalties if you don’t do it properly. If you base your payments on the prior year’s taxes make sure you ask your accountant if the 100% or 110% payment is required either through quarterly or withholding taxes.
What should I expect to pay for accounting services?
It’s all over the board and it depends how you’re quoted. Most small firms are very competitive; they try to keep their rates in the ball park unless there’s a significant difference between the services being provided.
When you’re quoted a monthly amount, you have to find out what’s included in that monthly package. You have to be certain that it includes keeping track of the financial records. If you have sales taxes, the sales tax return must be filed quarterly. Will it include your payroll? (If it doesn’t, somebody else could do it, or you could do it in-house.) Most firms, including smaller CPA firms and bookkeepers, will do this on a package deal.
A package usually includes financial statements and accounting, sales tax, and your payroll and payroll taxes. Although it varies everywhere, it’s probably somewhere between $350 and $450 a month.
When should I do payroll in-house versus outsource?
Can you make more money or save more money by having it outsourced? If you only have one or two employees and have one or two payrolls a month, outsourced payroll can process it for about $40 a pay period. That’s a heck of a lot cheaper than you trying to learn the tax laws yourself.
How should I provide business information for my accountant? What should I give him, and how often?
If you’re preparing for year-end taxes, your accountant will give you a list of what happened the year before or what they want. Avoid bringing in a shoe box full of receipts in disarray, because you’re going to pay handsomely to have the accountant sort that stuff out. That’s why they send you an organizer — they want you to pull that information together.
What you provide should be organized, accurate and legible. It also has to be useful to them. The worst mistake people make is to bring stuff in piecemeal. That’s bad, because if somebody tries to prepare your return, thinking everything is there, they may get all set up to do it and start to record the data, only to find out something is missing. Then they have to call you. You may play telephone tag for a few days. Anyway, you can see the problem! It’s very inefficient for the preparers to work on it if they don’t have everything.
What’s the best accounting software to use for my business? Most CPA and accounting firms use QuickBooks and Peachtree. Both of them have been around many, many years. They offer sophisticated and flexible products. Most importantly, they are supported by local accountants who use them constantly with their clients. They know how to set it up and make it work for you.
Published: Monday, November 24, 2014.
Second of two parts.
THE FOLLOWING suggestions on working with your accountant are from my interview with CPA Jim Repp.
Q: In reviewing my financial information, what is most helpful for me to know?
A: Everything! If you understand financials, you’ll find out that a balance sheet tells you, on one particular day, what you own, all your assets, it shows your liabilities, which is the money you owe others, and your net worth.
These are all important numbers both to you and to a bank. It shows on one page how much of those total assets you own and how much of those your creditors own. Key elements are shown, to determine your cash flow.
The profit-and-loss statement is what everybody focuses on. What’s the bottom line? Am I making money? That’s certainly important, but you could be making a ton of money, and if you don’t have the cash to pay your bills, you can go out of business. A lot of companies — both large and small — have gone down that path. It’s important for you to get someone whom you can work with, who will give you proper advice.
The other financial statement is a cash flow statement. That’s going to be more critical than anything. You should keep track of receivable balances and know their aging. Are you collecting the receivables? Same thing with inventory, is there obsolete stuff?
If your inventory is going up and your receivables are going up, that means it’s not coming in as cash, and you’re financing somebody else’s business. This is critical to watch.
Q: Could you explain what a cash versus an accrual system is, and when should you use one versus the other?
A: A cash system is the one we normally use as individuals. On our tax return, we recognize income that we collected. When the money comes in, we record it as revenue. By the same token, we only get to take deductions when we actually wrote a check or paid a bill.
Cash means just that, money coming in and money going out. It can be very distortive, because if you don’t have the money to pay your bills, it looks like you’re making more money than you actually did.
The only truly accurate method of accounting is the accrual method. When you incur the cost, even if you haven’t paid it until the next period, you recognize that cost. When you make the sale, you recognize it as revenue. You put it in accounts receivable and record it as sales, even though you haven’t collected the money. By doing it that way, you’re actually matching your revenues with your expenses in the period they were incurred, not paid. That way you can tell if you’re making or losing money.
As a business, I would definitely want to be on the accrual method. The problem is that it’s harder to do because you have to record the payables and the receivables. However, you can make that adjustment to an accrual at the end of any period.
Your accountant will make journal entries. You can add those receivables that you haven’t collected. You can add the payables that you haven’t paid, and convert it to an accrual method. Some businesses, in some industries, use cash for tax, and also use accrual for books. This can be significantly advantageous to a company that hasn’t collected on a big sale, and has paid the bills in advance for some of the expenses.
It’s more distortive, but it’s simple. It was originally created for people to keep track of the records. You can provide your data, maintain on a cash basis, and have the accountant make the accrual only when you do a financial statement. What they will do is make a journal entry, and then the next day after that period ends, they do what they call a reversal entry, and it puts everything back on a cash basis.
Q: How should my accountant work with me to help me improve my business?
A: In addition to preparing your documents, your accountant can help you compare your financial information to a benchmark and review fluctuations in account balances. This comparison can be made against a budget. Your budget is your best guess at setting up a profit goal, and it provides a target to shoot for. If you don’t have a budget, you can compare your information to the historic information.
If you’re comparing the last year, for example, your profit and loss indicates what you did last year and that you’re doing better this year. But last year could’ve been horrible. You could’ve lost your shirt, and you’re comparing it to that. That’s why you want to use a budget, and have a positive, realistic outlook, rather than aiming at the wrong target. You want to take that target and look at percentages.
Look at ratios, so that on a profit-and- loss statement, you will see the ratios of your cost of sales and your operating expenses are the same, especially if you’ve got certain variable expenses.
If you know your material cost runs 40 percent, you should see that same 40 percent every month. If you don’t, ask what happened. Do we have a bad batch of something that we made? These are the things that you have to get used to looking at.
Another option is benchmarks. Some companies use RMA ratio data. Risk Management Associates is a national firm that does analysis of thousands of financial statements in every industry. The power is in the numbers.
One final note
It’s important that you communicate honestly with your accountant and ask him or her to explain and interpret how your business is doing and to make suggestions on what areas you need to focus on to improve your business.