Fred Dunayer: Welcome to the SCORE Small Business Success Podcast: Been There Done That. To get free mentoring services, as well as to see the wide variety of resources available for small businesses, visit our website at www.score.org or call 1800-634-0245. Now, here is your host Dennis Zink.
Dennis Zink: Episode number 17, “Working with an Accountant”.
Fred Dunayer joins me today in our studio as co-host, SCORE mentor, and our audio engineer. Good morning Fred.
Fred Dunayer: Good morning Dennis.
Dennis Zink: Our guest today is Jim Repp. Jim, welcome to Been There Done That.
Jim Repp: Good morning Dennis and Fred.
Fred Dunayer: Good morning Jim.
Dennis Zink: Jim Repp is a CPA from Wisconsin. Jim specialties include tax planning, advisory services, auditing, accounting, evaluations. Jim was manager at an international CPA firm small business department prior to co-founding his CPA firm in 1979. In 2011, Jim retired to Sarasota Florida, where he volunteers as a mentor for Manasota SCORE. Today’s topic is “Working with an accountant and what to expect.”
Jim, good to have you here.
Jim Repp: Great to be here, Dennis.
Dennis Zink: From an accountant’s perspective, what should a client do before starting his business?
Jim Repp: One of the most important things that I think people often overlook or they delay is establishing a team between a banker, an accountant, and an attorney. The reason I’m saying this now, most small businesses go out and do all kinds of things like, they want to get their business cards and their brochure set up from a marketing standpoint, and they print this all up. The problem is if you don’t know the type of entity, and you don’t know your current address where you’re going to be, you’re printing a lot of these stuff for nothing, that’s going to have to be scraped in the future.
Now, I think the most important things is to sit down with an attorney and an accountant to figure out which entity you want to select, and what are the pros and cons of making that selection. You, for example, want to make sure that you’re covering the legal aspects, and the attorney is there for that, as well as tax aspects and accounting issues. That team is going to be invaluable. Now, the banker could help you for two things. One of the most important things after this is to set up your checking account.
Now, you can meet with a banker from a local office. Maybe you won’t be working with that individual in the future, you might be farmed out to another part of the banking community, but at least you’ve got someone who probably works with other CPAs and attorneys, and can refer somebody to you that they worked with that can help you make these decisions.
Fred Dunayer: Jim, just to back up a second, you used the work entity. Can you explain what you mean when you’re talking about what kind of entity your company is going to be?
Jim Repp: Yes. We’re trying to create a legal entity that is separate from yourself. There are various ways of doing it. You can start a corporation. You can have an LLC. or a partnership. You can be a sole proprietor. Some of the ones, like the corporation and the LLC, they can create a limited liability aspect. Otherwise, your personal assets may be at risk. By setting up this entity, and setting it up correctly, you’ll get the future protection of limited liability. This is a big issue in today’s world, a litigious world.
When I look at it is you’re trying to create this protection. These items are not discussed on the online services that help you start up a business. I think it’s imperative. If you’re worrying about protecting all your assets, don’t do it on the cheap. You want to make sure that if you ever have to go to court, it’s done right by an attorney. Also, if you’re relying on the fact, avoiding tax consequences in the future, make sure your S corporation election, which we’re going to get into a little bit later on, is done properly, and timely, and correctly. Those protections can save you tax money and personnel dollars in the future.
Dennis Zink: My understanding of … I’ve always been told that when you sign documents, checks included, that you should put your title, is that true?
Jim Repp: I think it definitely helps to differentiate between, you acting as a personal individual, and also this shows that you’re acting on behalf of that entity. Again, in the printing, if you don’t know what entity it is, you’re not going to be able to put the required, let’s say, Inc., or corporation, or LLC, included in the name on your brochures. It should be on everything, your invoices, your letter head, all these things. Don’t get excited like a lot of new business people do. They want to get that printed stuff, because it’s fun to do.
Dennis Zink: How should my accountant work with my attorney? What’s that relationship supposed to be like?
Jim Repp: In many cases, these people have worked together in the past. You may be able to get a referral from an attorney, or you may be able to get a referral from another accountant. Maybe this one doesn’t do those specialty items you’re looking for. I think the most important thing is they would help, again, from a legal and a tax standpoint, 2 different viewpoints, completely different in times, in making that selection for an entity. We mentioned an S corporation in the previous question. Many entities can be enhanced significantly by electing subchapter S. It’s a complex issue. Again, it isn’t covered on line, unless you really want to get into some serious rating.
It is a critical issue if you’re trying to avoid the double taxation that’s going to face you somewhere in the future, when you sell the business or even when you pay a double tax between the corporate and the individual tax. It should be done right. A key issue to think about is if you start a corporation online, or if you just starting an LLC, and you decide in the future that you want to be an S corporation. Really, that decision should be made, that form 2553 should be prepared, and it should be filed by the 15th day of the 3rd month after you start that business. It’s something that you really need to talk to at the attorney, and at the accountant level, and do in that time frame.
Dennis Zink: Does it matter what state you incorporate in or form you LLC? Is there any tax advantages in doing it one state, versus in other?
Jim Repp: Some states don’t have income tax personally. My understanding is there’s precedent in some states like the state that don’t have taxes, some states … A lot of people are in Delaware, a lot of people are in Nevada. There are tax advantages to that. They’re pretty significant from a state level. Some states have a very high tax rate. I think those are things that really should be discussed with the accountant, because you’re getting into some serious complex issues that we’re probably not going to be able to cover her today.
Dennis Zink: What is the best way to work with an accountant? What should you do? What should they do?
Jim Repp: There’s a big temptation initially that, “I’ve got a brother-in-law who can do my payroll”, “My wife used to be a bookkeeper 15 years ago”. Those are the things that are tempting to say, “I can do it myself.” The truth of the matter is, you should do what you do best. If you’re starting business. You’re going to have your hands full on marketing, customer service, products, everything else. You do not have time to do bookkeeping, you don’t have time …A lot of these people who’ve done these things for you have done them years ago. Now, you’re going to end up having to spend a ton of time to find out the current tax rates, current laws.
I would say, do what you do best, and let that to be an outsource. They’re very economical. Many accountants, bookkeepers, and stuff like that, offer package services. You got to do it. You got to get that system up and running, before you start business. You got to have payroll ready, you got to have sales tax ready, and you got to have all the stuff ready to be recorded the first day you’re in business.
Dennis Zink: How often should I meet with my accountant, and will that change at the very beginning versus as the business matures?
Jim Repp: The first thing I want to say is if you have a problem and you have a questions, you can meet with your accountant anytime and call him up and say I need help. I would say it’s a service business, they’re going to try to serve you. In many cases, initially, in your first starting up 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 balance sheet, income statement, and even a cash flow, what they mean and how you can use them. Everything is usable, if you do it on a monthly basis initially, until you feel comfortable understanding that, then you could do it a quarterly.
I would say quarterly has to be done, at least minimally you should be talking to the accountant, finding out what his or her anticipation is of your tax needs, because tax payments are going to be due quarterly during the year, on estimated tax payments. You got to make sure you’ve got at least 90% of those paid in by the time you file a return. It is something that is critical and it can cost you penalties if you don’t do it properly. You got to communicate it to the CPA and find out what they think.
Dennis Zink: Can you explain estimated tax payments?
Jim Repp: The estimated tax payments are exactly like withholding. When we work for wages, they take our withholding out each pay period. The same thing here, the government wants their money, they don’t need it all at the end of the year, they need it during the year to keep their operations running. They have a penalty that’s injected to force you to pay just like withholding. As a result, you have to pay usually on … It depends upon the fiscal year you’re in, but usually it’s each quarter. They are very similar to the estimates that you have to pay as an individual on your tax party.
Dennis Zink: What should I expect to pay for accounting services?
Jim Repp: It’s all over the board. It all depends upon how you’re being quoted. Most smaller firms are very competitive, they try to keep their rates competitive, unless there’s a serious difference between the services being provided. That’s the real thing. When you’re getting someone who’s quoting you a monthly amount, you got to make sure that it includes keeping track of the financial records, and if you have sales taxes, they got to do the sales tax return on a quarterly basis, they got to do your payroll. If they don’t, somebody else could also do it, and farming it out to a professional. You got to find out what’s included in that monthly package.
Most firms that I’ve seen, including smaller CPA firms and bookkeepers, will do this on a package deal. That package would end up being usually for financial statements and accounting, sales tax, and for your payroll and payroll taxes. Now, it varies everywhere. Realistically, I would say it’s somewhere between $350 and $450 a month. Now, you can do this quarterly, if you only need it quarterly or when you need it quarterly. It all depends. You got to keep track of your business.
Fred Dunayer: Does that include the advisory services and strategic planning, or is that purely bookkeeping services?
Jim Repp: This is probably purely book keeping services. Those types of services are offered by some of the larger firms. In other words, the smaller firms are geared for high volume and low pricing, and that’s how they make their money. Now, they have a huge staff of preparers, but they don’t necessarily have a huge staff of advisers. The higher level people are few, the production people are high. Whereas, the other firms, the larger CPA firms and the more specialized CPA firms, most of their accountants are on board at the client’s office. In other words, their clients have their own accounts, they had their own book keepers. Many times, they even do their own tax preparation.
They’re looking for, the specialized services that you can’t get. That’s why if you ask one of them, what their hourly rate is, it’s going to be substantially higher than the one who’s quoting you these bookkeeping services. The problem is, at certain times of the year, the smaller firms are totally strapped to be able to do that advisory services because they’re focusing on taxes, they’re focusing on getting product out the door. That’s why there is a huge difference, because the bigger firms are marketing to a different area.
Dennis Zink: You mentioned payroll. I’ve often used services like Paychex and others. Would that be something that make sense to do at the beginning when you’re starting the business? Or you’re too small them, because you probably only have yourself or maybe another person or two for your small company? Or is it something that you should migrate to down the road when you hit a certain level of employees or volume in business? If you could elaborate on that.
Jim Repp: Really, the temptation in the beginning to do your own payroll seems like a very good way to save money. The problem is, if you look at somebody like Paychex or ADP is charging … These are national firms that have a huge system set up, they also have their own banks in California, so they can deposit it at the very last minute and still get it timely deposited. They’re in it for the production in the long haul. I feel more comfortable with a bigger firm, because they are less likely to have financial problems. One of your concerns is making sure the money their withholding from you gets in to the government properly, and many of those schedules are very short. Sometimes they’re the next day.
This is hard to learn, all these rules, initially. Most people want to a payroll weekly, it’s convenient for the employees, the problem is if you have the ability to set that timing in the front, like you’re starting your business. You can perhaps offer them semimonthly or bi-weekly. There, you’re only going to have 26 pay periods instead of … Or if you have semimonthly, it’s only 24 compared to 52 pay periods. Every period you have, you pay a processing fee. The timing of your payroll is a significant issue keeping the cost down.
Fred Dunayer: One of the major issues for me that would encourage me to go to one of these services is the fact that the regulations around payroll are changing constantly. They have dedicated staff to just sit there and watch those legal changes, and they’re on top of it, and you could be, as in individual, violating the law and not even realize it.
Jim Repp: There are substantial penalties that can be charged to the firms, especially if it was an officer who was in charge of it, and a shareholder. The penalties are very sizable. The other issue is you got to look at what’s your opportunity, people are … You don’t have many people when you start out. You need every employee and every person on board to achieve the opening of that business much less to learn payroll loss. It’s so inexpensive, I’ll be honest with you, I probably shouldn’t say this. When we run our firm, we would go ahead and hire … We hired Paychex. We did that for 30 some years, 40 years.
The reason we did it was because we looked at the people who we would have doing their work. They could make more money by doing a similar service to other people, helping them run their businesses than they ever could, by preparing our payroll. The other factor is confidentiality. You get it outside the shop. There aren’t many people who are knowing what everybody else is getting paid, these are significant factors.
Dennis Zink: It makes a lot of sense to me. How should I prepare to provide my business information with my accountant? What should I give them, and how often?
Jim Repp: One of the things you want is they will give you a full list. For example, if you’re preparing for year end taxes, they’re going to give you a list of what happened the year before or what they want. One of the things you need to do is avoid bringing in a bushel basket or a shoe box full of receipts all disarray, because you’re going to pay them to sort that stuff out. If you can sort it out, even … That’s why they send you the organizer, they want you to pull that information together as they need it.
If you can put together your own stuff organized accurate, big thing. If you add up a bunch of numbers, they better be accurate and the other thing is it has to be legible, and it also has to be useful to them. If you can get it in, probably the worst mistake people make is they bring it in piecemeal. That’s bad, because if somebody tries to prepare the return, thinking everything is there, they get all set up to do it, they start to record the data, and they find out something is missing. Then they have to call you. You play telephone tag for a few days. Anyway, you can see the problem. It’s very inefficient for the preparers to do it if they don’t have everything done.
Dennis Zink: Some good advice might be to use excel and type. Therefore, you don’t have to worry about legibility and organization, because you can always sort things, or they can too.
Jim Repp: Yeah. If you’re a doctor with bad penmanship, you definitely want to avoid writing out the items, because you might end up looking like your prescriptions.
Fred Dunayer: I do suspect that Jim will have a better suggestion than Excel though.
Jim Repp: A lot of people don’t understand Excel. I think even if you could type it down like you do on Word, or if you can even put it on an email, if you’re used to doing email, put all the information down. If you can write legibly, you can even put it in hand writing. That doesn’t make the issue. Most of these items are going to be scanned into the preparer’s documents, and they use it as back up, if you’re ever audited. They also use it for review. The people look at the documents, and they look at the tax return to make sure everything is where it’s supposed to be.
Dennis Zink: In reviewing my financials, Jim, what information is most helpful for me to know?
Jim Repp: If you’re looking at your financials, everything is important for you to know. The reason I say that is if you understand financials, you’ll find out that a balance sheet basically tells you, on a one particular day, what you own, all your assets, it shows your liabilities, which is the money you that owe to their people, and then shows your net worth. These are all key important things, because it shows you right on that one page how much of those total assets you own and how much of those your creditor’s own, and those are important elements to a bank. It also shows you the key elements to figuring out your cash flow.
If you’re inventory is going up and your receivable are going up, that means it’s not coming in in cash. It means you’re financing somebody else’s business. You can’t do that when you’re a brand new business, very critical to watch for those types of things. By the same token, the profit and loss is what everybody focuses on. What’s the bottom line? Am I making money? That is 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 big companies have, a lot of small companies have. These are all part of the managing of that data. That’s why it’s important for you to get someone who you can work with, that will give you that advice on that or show you where to learn it quickly.
Again, you don’t want to be an expert, but you need, as a business owner, to understand those financials. The other financial statement is that cash flow statement. That’s going to be more critical than anything. It also should be … Somebody should give you an idea of how to take these key elements that you want to watch, your receivable balances. Keep track of all these different things. What is the aging on them? Are we collecting the receivables? Same thing with inventory, is there obsolete stuff? If we got something on board that we have for a customer that we don’t sell anymore. These are all issues that you got to keep in mind in managing those things.
The other key element on financial statements is our different types of them. Right now we’re talking about what we call a compiled financial statement. Those are used internally, they don’t have all the key footnotes and stuff like that, but those are the ones we’re talking about. The other issues is if you have a bank or a contract that requires you to either have reviewed financial statements or audited financial statements, those can only be prepared by a CPA. You maybe just use your CPA firm for that aspect or for the specialized type of services we talked about before. You can use the bookkeeping services. Many of them work hand on hand, so you keep your price down on your operating cost, by the same token, use them as you need them.
Dennis Zink: What’s the best software to keep track of my business data?
Jim Repp: That’s the funny questions, because best changes daily. There are new software packages, new apps coming out all the time. I’d be hard pressed to use the word best. Let’s be realistic, most CPA firms and accounting firms use QuickBooks and they use Peachtree, which is put out by Sage software. Both of them have been around many, many years. They also offer pretty sophisticated, and pretty flexible things. The most important thing, like you said, they are supported by local accountants who use them constantly with their clients. They know how to set it up. They know how to make it work.
You might think, what’s the big deal, a little thing like using numbers can save you a whole lot. There’s one questions to ask you, “Do you want to use numbers or don’t you?” If you’re a new person trying to set this up yourself, you probably say, “No, I don’t need any numbers.” It sorts it alphabetically, and if you use the numbers, you can sort that balance sheet and the accounts the way you want to present it.
Dennis Zink: Are you talking about a chart of accounts? When you said the numbers, what do you mean by that? Do you mean the chart of accounts?
Jim Repp: I’m talking about financial statements. For example, if you sort an asset, a fix asset category, they sort it alphabetically. Your account that shows your total accumulated depreciation, which is a negative number, may be printing first and then it maybe shows your furniture and fixtures and stuff like that. You want to be able to keep it in order so a banker looks at it, and he says, “That’s the format it usually is”, but if you have it the other way, it looks goofy, puts an element of mistrust in there form your banker as to the quality of that package.
Dennis Zink: You mentioned QuickBooks, how widely used is that in the business community?
Jim Repp: I would say it’s probably the most used by people starting a small business. Peachtree is more structured to be a true bookkeeping. When you took book keeping in high school, if you took it, it’s that type of bookkeeping structure. QuickBooks is put out a company called Intuit. They created an intuitive product, and many people can get through it even if they haven’t had bookkeeping. It’s very flexible, you can use it in many different industries, and it’s very inexpensive to start. It may seem like a lot of money, but when you look at many … In the old days, we used to spend 20, $30,000 for a software package. At least with … You can do it with QuickBooks now. It is something that’s widely used.
Fred Dunayer: I use to sell those 20 and $30,000 packages. Intuit is not my favorite company, but the fact is I use them in my business. One of the side benefit is I’m actually able to minimize my accounting fees, because I present my accountant with a QuickBooks export every year, at tax time, and he’s able to use that for creation of the tax returns and saves a lot of time in terms of having to present him with paper work, or spread sheets, or other things.
Jim Repp: IT definitely gives them a starting point. They bring it in to their portal online, so you don’t even have to go to the office to get that information there.
Dennis Zink: QuickBooks has been around forever, and that’s like … You said Intuit, and they also do Quicken, so a lot of people are familiar with that. Can you use Quicken to run a small business?
Jim Repp: They do have a business version. The difference is, Quicken was originally set up so that it had your assets. Think of that balance sheet again, you had your assets and you had your liabilities. Because it was a net worth statement, that’s all they cared about. They dump everything else into an account called equity, which is fine for an individual and a single entry bookkeeping system. When you’re doing a double entry bookkeeping systems where you’ve got, excuse the old word, debits and credits, it makes it more error less, more prone to keep it accurate.
They took the components of Quicken and put it into QuickBooks, so you have a product for the business community. They’ve done a very good job. Peachtree actually was paid for, the development of it was paid for by IBM, to market with their PCs when they came out in the early ’80s. After several years, IBM decided not to be in the software business anymore, and then it was all farmed out. Peachtree took it, and everything was paid for IBM. They put a $99 product price on it, and put that package all together and sold it like crazy. That’s what started it out.
Dennis Zink: Jim, could you explain what a cash versus an accrual system is, and when should you use one versus the other?
Jim Repp: A cash system is the one we normally use as individuals. On our tax return, we recognize income that we got, 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 for that or paid the bill. As a result, it’s cash means just that, money coming in and money going out, actually records your transactions. 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 true accurate method of accounting is the accrual method. By that I mean, 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 a revenue. You go ahead and you put it in the accounts receivable and record it 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 losing money.
If I were a business, I would definitely want to be on the accrual method. The problem is it’s harder for people to do if they don’t have the ability to record. You’ve got to record the payables and the receivables. However, you can make that adjustment to an accrual at the end of any period, when you want to, if you make journal entries, or you accountant can make them. 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 people in some businesses, in some industries, you can use cash for tax, and also use accrual for books. It can be significantly advantageous to a company that hasn’t collected a big sale, and has paid the bills in advance for some of the expenses for those.
Now, again, it’s more distortive, but it’s simple. It was originally created for people to keep track of the records. You can give your data, you can maintain on a cash basis, and have the accountant make the accrual only when you do a financial statement. What they do is they make that 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 the cash basis.
Dennis Zink: When should someone … What type of business would use a cash basis versus accrual?
Jim Repp: Many of them are almost cash, and those would be things like restaurants, because people are coming in. They’re paying it either with cash, a check or credit card. They have all their revenue as pretty much cash basis anyway. In many of those you have to pay your vendors, sometimes in 7 day because you’re talking about perishables. You’re almost, by the end of the year, you could pay those 7 days, and you’d have a pretty much purely on an accrual basis. Very seldom does a restaurant, unless you’re a banquet hall, have a situation where they’re going to allow somebody to run a tab, and not put it on a credit card. I think that would be an ideal one.
Fred Dunayer: Would you say things, physically cash based business … For example you own a laundromat, or a car wash, or something like that where … What you’re saying is if all the transactions take place in a very short period of time, then the cash basis would be good. Whereas if have perhaps you have long lead times, cycles of where you take some deposits, and then you do some work in the future, those are most suitable towards accrual?
Jim Repp: Yes. For example, if you’re a manufacturer, you got to pay your labor when pay day is. You also have to pay the vendor, usually in 30 days, for that steel. The products that you’re putting together that you’re remolding into a product, those things have to paid far before that person is going to get invoiced when it goes out the door. As result, you’ve got to be able to use the accrual method to keep track of all of this, and in your costing too.
Dennis Zink: When should I do payroll in house versus outsource?
Jim Repp: I think one of the things I looked at when I mentioned it before is when we can make more money or save more money by having it outsourced, which is usually when you’re in an initial part. Again, I thought people had …. I put them on it, they have one employee, and it sounds stupid, but they’ll process that payroll. If you only have 2 payrolls a month or 1 payroll a month, they’ll process it for $40. That’s a heck of a lot cheaper than you trying to learn the tax laws yourself.
Dennis Zink: Can you explain what a PEO (Professional Employer Organization) is, and how our listeners might be interested in doing something with PEO?
Jim Repp: A PEO is a company that hires employees and rents them to you, in effect. They end up doing it based on a large group, so that if you need more employees, you can bring them on board. Your contract is very flexible with them, and usually … What they’re doing is they providing you not only the employees, and providing you with the payroll service or providing you with the ability to get insurance. Many times they can get better rates on those employees working for a large group, as opposed to … For example, there are some businesses that have a huge workman’s comp rate, for example, the construction business or reconstruction business also, because there’s a lot of accidents on those type of jobs.
Sometimes you can get a better rate on that, and your payroll taxes are substantially the same. Sometimes they have a better unemployment rate, because they have a wider group they’re spreading it over. Insurance rates, like I said, you can save money there too, on group insurance and that type of thing. One of the things I want to caution you, there are rules that if you’re renting that same employee for more than a year, the governments look at it a little bit differently. That’s something that’s buried in that tax law back there and a lot of PEOs don’t necessarily tell you that. It is an issue and something you should talk about with you accountant.
The other thing is when the economy turned around here lately. All of a sudden, a lot of those people they were hiring got laid off. A lot of their unemployment rates went sky high. As a result you might have had a very good relationship with your employees, work with them to keep their jobs, and you might have a lower personal rate. All depends on the size of your payroll, as to how much of a significant issue that is.
Dennis Zink: You got my curiosity. What is that one year rule with PEOs? What’s the details of that?
Jim Repp: What they’re trying to do is to make that this is a temporary situation. They are looking at items that are more than that. If you get the same people, that could be an issue. What you have to do is explain that if you can have the flexibility in there, and you’re bringing people on and off, and they’re doing it to other people, it shows that it’s really … They’re looking to see that it’s really a business.
Dennis Zink: When should I expect to pay taxes and file my tax returns for my business?
Jim Repp: Your taxes are normally due on April 15th. Corporate tax returns are due on March 15th, assuming the calendar year. Corporations, other than S corporation, you can have your fiscal year end throughout the year as a C corporation, which is a normal corporation. An S corporation has to follow on a calendar year. Those corporations are due on that. Partnerships, LLCs, are due on April 15th, and just like your individual one is. Payments are due quarterly. On the ones that have to pay tax, pretty much similar.
Dennis Zink: How should my accountant work with me to improve my business?
Jim Repp: I think one of the main things is, in addition to preparing your documents, they have to initially help you to learn how to use them. Also, the important thing about learning how to use them, we mentioned the financials before, is comparing them to another target, or benchmark if you will. They want to show you the key things, like we’ve briefly talked about, fluctuations in account balances. They also want to be able to compare it to either a budget. Budget is ideal if you had a budget to compare to. Your budget is trying to be setting up on a profit goal, and it gives you something to shoot for in the future. Whereas, if you don’t have a budget, you compare it to either the historic information.
If you’re comparing the last year for example. Your profit and loss says, “This is what we did last year. We’re doing better than the last year.” The bottom line, the last year could’ve been horrible. You could’ve lost your shirt, and you’re comparing it to it. That’s why you want to use a budget, to be positive outlook, rather than aiming at the wrong target. The big thing is you want to take that target, and you want to look at percentages, you want to look at ratios of what they are, so that on a profit and loss statement, you want to see that the ratios of your cost of sales and your operating expenses are the same, especially if you’ve got a certain variable expenses.
If you know your material cost runs 40%, you should see that same 40% every month. If you don’t, what’ happened? Do we have a bad batch or something that we made? These are the things that you got to get used to looking at. I think your accountant is in a good position to do that, because they’ve got a number of other … They’ll never going to tell you any proprietary information of your competitor, but they’re going to tell you, in most cases, you got to charge more for what you’ve got. This is probably one of the biggest mistakes I see in a lot of small business. They don’t charge enough, because they’re so afraid of what their competition had.
Some of their competition may be losing their shirts, and they won’t be there that long, because they’re trying to do their own bookkeeping. They don’t know why they aren’t making money. They’re just there to put a price on up that a person asked for. They’re unable to look at that. Another thing is benchmarks. There are tons of benchmarks out there. Some find RMA, Robert Morris Associates … Well, it’s now called Risk Management Associates.
Dennis Zink: They kept the same three initials.
Jim Repp: Yeah. It’s been a national firm that does analysis of financial statements, provided mainly by banks and financial institutions that have used those with their customer, and they have submitted as samples. There are other ones out there that have far more samples, but most of them are prepared from income tax data. When we talked about cash basis, a lot of that income tax is data that’s been collected from cash basis tax payer. What did I say, it could be distorted. You don’t know how reliable those percentages are.
Having 10,000 samples maybe has somewhat negated some of that, but it is something that you can compare to, Many times your industry has. If you belong to the trade association, they have publications out there to show you what a sample of their members have run. That gives you an idea where everybody else is, as far as what you should be doing.
Dennis Zink: Jim, you’re a CPA and a SCORE mentor. How do you work with clients, representing SCORE?
Jim Repp: I had focus form the large firm concept. I look at a lot of the additional services. One of the things that I’m finding is that a lot of the startups have tried to do their own bookkeeping. Some of them have mixed a lot of personal assets with business assets. It’s a definite no, no. They should have a separate bank account. It should have no personal assets in there. Again, I’m not an attorney, but from a legal standpoint, I’ve been told that if you co-mingle those things, it makes it difficult if you ever do have litigation, to prove that there is a separate entity that you’re not just pooling everything. Those are issues you got to talk with you attorney, but there is a reason why we do that.
The other reason is if we get audited, we don’t want the IRS, or whoever is auditing us, to see all our personal assets and get curious about auditing us personally too. IF you have just business records, you can present just the business records, the bank statements and that type of thing. I have found that there’s a need to help people with QuickBooks. We don’t have enough people with QuickBooks experience. If there are any out there that want to be SCORE mentors, more than happy to have you join us. That’s the problem. We’re here to help people plan. My biggest thing has been helping people figure out how to make money and what to do to do a business plan to get financing maybe.
Dennis Zink: Are there any suggestions or tips that we haven’t covered?
Jim Repp: There’s 2 things that I’d like to talk about. One of them is, we mentioned the budget before. The word budget, to a small business person who started their own business, doesn’t want anybody to tell them how to run their business type of thing, that’s an attitude you get initially. They don’t like budgets, because they don’t really believe they work. They didn’t like preparing when they worked for somebody else. It’s hard, so I call it profit planning. I also use a simple way of doing it, by doing a simple breakeven analysis. Then I show them if you add your desired profit on there or how much money you want to make, you can end up seeing how you can do it. You can test different what if’s situations.
I have found it to be invaluable, because once I can get them to see how flexible it is, how easy it is to set up, they can turn around and use a budget. It works into a budget, and they develop a budget, and they don’t realize they’re making a budget. They think they’re doing a profit plan. That has worked very well for me, in my practice for years, as well as currently. Everything is sales concentration. I’ve seen so many small business concentrate on a major customer. They get that major customer, and their customer uses more, and more, and more of them. They got to the point where they’ve got 40%, 50%, 60% of their business doing that one customer.
Let me tell you, people merge, people go out of business, people … When you get somebody who merges, chances are, they’ve already got their source of what they’re going to use.
Fred Dunayer: Yeah. The one example of that is if you do work for the governmental agency, they can change on the dime. They’ll get the anew bid. If you’ve built your business on providing services to the government or products to the government, you can lose your business very quickly.
Jim Repp: I had a large manufacture, it was a book binding business. They made a product, because when this major company came up with this item. They needed somebody now to make this. This guy came up with enough method of doing it. They ended up running 60% of their business. They bought specific equipment to do this. What ended up happening, the market slowed down, the customer didn’t need them anymore, and the major manufacturer did it in-house, found out how much money this guy was making. He would only charge him 30 cents apiece, but they found out how much he was making, they started doing all of it in-house.
Dennis Zink: They quickly became vertically integrated.
Jim Repp: Yes. It can be critical, and there’s no turning back. How are you going to get another 60% of volume?
Fred Dunayer: My experience with accountants and lawyers, both, is that good ones are not an expense, they’re an investment. The bookkeeping services, is one thing, that is an expense, and you’re getting something paid for. You don’t have to do it yourself, or learn. To get advice, strategic advice, tax advice from an accountant, it may cost you a few hundred dollars. I have personally experienced situations where that few hundred dollars has saved me many thousands. I don’t think a lot of new entrepreneurs realize. They just see that amount out there, they think it’s an expense, but they’re really making an investment for now and for the future, and they will see direct benefits from having had that advice.
Jim Repp: I agree with you 100%. We look at it at the other way. We looked at it. We had 2 types of customers. One was a customer, and one was a client. The customer was purely looking for price. They come and they go. Somebody else would build a better mousetrap or a service tomorrow, and undercut you. Those are going to come and go, but your whole practice should be made up of clients. They don’t care what you’re … I shouldn’t say that. They do care what you charge them, but they’re looking at the value they get out of the services you’re providing. It’s a rewarding feeling to have people say, “I never saw it that way”, and “Man, is that amazing?”
Dennis Zink: If there were 1 or 2 things you wanted to have our listeners leave with after this extensive discussion, what would they be?
Jim Repp: I think number one thing is you’re there focused to start that business. As you expand, you’ll have personnel and time to make these other things. You’re going to delegate, you’re going to have more people to delegate to. Focus on getting that business up and running. Leave the bookkeeping to somebody else, leave the taxes to somebody else. The second thing is, low cost is not always the main benefit. You’re going to find that quality and value reliability, timeliness, especially in accounting, when those things get done, and also the review that you get by knowing what you’re getting, is going to be more valuable in the long run.
Dennis Zink: Jim, thanks for being our guest today on Been There Done That.
Jim Repp: Thank you very much for having me. I totally enjoyed it.
Fred Dunayer: Thank you Jim.
Jim Repp: Thanks Fred.
Fred Dunayer: You’ve been listening to the SCORE Small Business Success Podcast: Been There Done That. The opinions of the hosts and guests are theirs, and do not necessarily reflect those of SCORE. If you would like to hear more podcasts, get a free mentor, view a transcript of this podcast, or would like more information about the services we provide, you can call SCORE at 800-634-0245, or visit our website at www.score.org. Again, that’s 800-634-0245, or visit the website at www.score.org.