Accounting

02

Jun'18

What do I Need to Know about Finance and Accounting for my Startup?

Knowing a number of basic finance and accounting concepts is essential to the success of your startup. At the bare minimum, you need to understand basic bookkeeping and preparation of financial statements, even if you are going to hire an accountant (recommended). You also need to understand the basics of finance and financial markets, as they impact the economy. Without this knowledge of finance and accounting you are running your startup blind. So, as a bare minimum, you need to master a beginning accounting and business finance class at the college level. I would suggest a local community college. You should also take a course in basic taxation, because you need to understand that. To be effective in running a business, you need these skills: (1)basic bookkeeping (2) setting up and monitoring internal controls (3) banking and credit including the way credit works, how to balance your checking account, managing cash (4) payroll, and payroll tax compliance (5) Sales, GST and VAT tax compliance (6) the basics of income tax (7) cost accounting, to the degree necessary to figure out what your product/service costs are, your overhead, and your margin under varying circumstances (8) how to read a financial statement, …

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25

May'18

How do I find the Right CPA?

Finding the right CPA or the right accountant is really important. Important because the results depend upon who you get, and it’s an area where you, the client may not be aware of whether you got the best advice or not. There are a lot of stuffy accountants (CPAs) out there who have very high opinions of themselves. They talk about “the firm” and act like they are something special. They tend to be rigid, unimaginative, high priced and advocate for themselves. There are also a lot of very friendly nice guys who are not very competent. They talk a good spiel, but they have neither the resources nor the experience to handle your problem. So how do you find the right CPA? What are you looking for? Lets see: 1. A hard-bitten no nonsense negotiator who can deal with the IRS at their level, knows all the audit tricks, has been there many times, a street fighter. 2. A clever innovative thinker who knows all the ins and outs of the law, understands the difference between light gray and dark gray, wants to take you to the limit of tax savings, but without crossing the line. 3. A plugger, …

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24

Apr'18

What Should You Know to Analyze a Financial Statement?

What do you need to know to analyze a financial statement? The answer is a little complicated. Here are the things you should know: A basic understanding of accounting. You need to be able to appreciate what the various components of a financial are, and where they come from. You need to understand the pitfalls of financial reporting, and the limitations of GAAP. A good understanding of the tools of financial analysis, how they are used and what they reveal. Things like ratios, trend lines, scatter charts, and the like are important tools, if you know how to use them. A good understanding of the industry. You need to know what is expected and what is unusual. Without some comparative information and background, your financial analysis of the company is in a vacuum, and probably meaningless. A good understanding of the business. If you don’t know anything about the business except what you see in the financial statements, you don’t know very much. When I read an annual report, I spend far more time reading the explanatory material than actually looking at the financials. I do a web search on the company, try to understand what their products are, their …

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21

Apr'18

What’s the Difference Between a LLC and a S Corp?

There are many differences between a LLC and a S Corp, even though at first glance they appear to be essentially the same. First, let’s tackle the issue of forming a LLC versus a corporation, in general. The LLC is generally a lot easier to form. Usually it only requires registration from the state. To make things formal, you should have what’s known as an operating agreement amongst the owners. That’s it. With a corporation, you also have to register with the state, but you have a lot of busy work to do. You have to adopt a charter, adopt bylaws, appoint a board of directors, pass resolutions, etc. Both a LLC and a Corporation will most probably have to do annual filings with the secretary of the state in which they are formed. Some states, like Missouri do not require that for a LLC. Now, what is the difference between a LLC and a S Corp? Easy. The S corp has one set of rules for its taxation. Very rigid rules. Very mechanical in application. Some of the other respondents have pointed out that S corps must pay their owner/officers reasonable compensation. The balance of the income can be …

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05

Aug'17

What is “Days Payables Outstanding” and Why is it Important?

Simply put,  Days Payables Outstanding it’s the number of days worth of  expenditures that you owe in the Accounts Payable balance at any point in time. It’s mechanically calculated by taking your accounts payables and dividing it by the average expenditures per day. For a manufacturing business, the “average expenditures per day” is usually calculated by taking the cost of goods sold for the last year and dividing by 365. Sometimes a shorter period is used, especially if things are changing rapidly. For a service business, the total expenses are used, less salaries, payroll taxes, payroll related expenses (such as pensions) and then dividing that by the number of days … similar to what is done for a manufacturing facility. Of what use is this number? Of and by itself, not much. As a comparative figure to industry averages, mildly interesting, perhaps indicating an abnormality. As a comparative figure to past periods ( horizontal analysis), it is very indicative of what’s happening in payables management. It’s a good figure to monitor. If you can get it, a great measure of payables management is the “discounts lost” figure, which indicates how much in those “ 2–10, net 30” discounts for prompt …

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03

Jun'17

Should I do a Customer Profitability Analysis?

The ease with which you do this analysis and the accuracy depends entirely upon the level of granularity of your accounting system and ancillary reporting systems. The obvious idea is to figure out how much each customer provides in profit. You need to know what customers buy, how much they buy, how often, and the gross margins from each of those products. However, to do a realistic job of analysis, you have to take into consideration the returns, defects, post sale customer service, and the cost of maintaining the customer. Some would also suggest that the cost of acquiring the customer should be factored in… to get a total profitability from each customer. Few organizations have enough data to provide all this information in an easily accessed format. Figuring all this out depends upon whether you can get the requisite information, or whether you have to make “assumptions.” The biggest and most distorting assumptions will be in the product mix and the after-sale support. If you are considering the total profitability, you also have to figure out how much it cost to acquire the customer… a process fraught with assumptions. So, you end up doing all this analysis, and what …

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27

Apr'17

What’s the logic behind Debits and Credits?

This one’s easy: for every action there is an equal and opposite reaction. Pure physics; a fundamental law of the universe. Now, how do you remember that assets are increased by debits? This one is also pretty logical and easy. Imagine a balance sheet, with the left hand side listing the assets. On the right hand side are the liabilities and equity. We know that the total of all the assets, on the left, equals the total of all the credits on the right. Debits and Credits. Debit is on the left hand side of that statement. Assets are on the left hand side of the balance sheet. Ah! Debits increase assets! Credits… the credit is on the right hand side, and on the right hand side of the statement. Thus Credits increase liabilities. Example: we take out a loan. We debit cash ( the loan increases our cash, an asset) and we credit liabilities, because we now owe a loan ( increase in liabilities) Brilliant! Now, let’s do a tough one…. income and expenses. First, remember we said that equity was on the right hand side of the balance sheet. It represents the amount invested in the business, plus …

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31

Mar'17

What’s the Biggest Challenge for Small Businesses regarding Financials?

The biggest challenge most small businesses  have is just getting accurate financials. When you own and operate a small business, 110% of your effort is devoted to marketing and execution. The backroom tasks – including bookkeeping and accounting tend to get second fiddle, at best. As a result, back office systems in most small businesses are not given enough attention, until, that is, the company runs out of cash. Then there is a fire engine approach that takes over, as the business owner attempts to put out this fire and that. Not particularly conducive to developing sound information reporting systems. Most small business owners are not systems or detail oriented. They are big picture people, by necessity. As a result, keeping history, making things neat and developing internal reporting systems falls by the wayside. I have seen dozens of small businesses which ran by dashboard metrics alone. No financials. At year end, the outside accountants would struggle to make sense of the mess and sometimes the financials actually corresponded with the dashboard results… sometimes. Most of the time, the financials come as a rude shock. This is a symptom of being an entrepreneur. It’s a rare one who understands the …

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08

Mar'17

How Much Can I Deduct for Auto Expenses in My Business?

How many cars can you deduct: as many as you use in the business. How much? You deduct the “business use portion” only, computed by taking the business miles driven in a year divided by the total miles driven in that year. You can’t guess or take a wild average you pull out of your hat, either. The law requires contemporaneous records. That means you keep an auto log for each vehicle. What do you deduct? The costs of owning and operating the vehicle, including things like gasoline, oil, repairs, tires, car washes, registration, taxes, lease expense, interest paid, licenses and depreciation. But here’s the hard part: you have to know what those expenses are by vehicle! You can’t just take a wild guess, you have to have records (and receipts, proof), by vehicle! That’s what gets most people in trouble. Does the car have to be used over 50% for business?  If you use the car over 50%, you can take special, accelerated depreciation deductions. Under 50% you are limited to the old fashion straight-line depreciation. Again, only for the business use portion. Drive 10,000 miles and only have 1000 provable business miles, you get 10% of all costs, …

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05

Feb'17

What’s the Best Free or Low Cost Do-it-yourself Tax Software for an Entrepreneur?

There isn’t one. If you are self employed and you think you should be doing your own taxes, acting as your own accountant, I have only one piece of advice: don’t. Instead of chasing down some “free” software to save yourself a few nickels, you ought to be going to see a CPA or EA. If you can’t save double what it will cost you, then I’ll eat my hat. I am as frugal as they come. After all, doesn’t CPA stand for cheapest person around? But the most frugal people always understand that you can sometimes save a dime and lose $ 10 in the transaction. This is one of those situations. People who are self employed should spend their time at what they are best at. Unless you are a CPA or EA, you ought to be devoting your time to what has the most return for the time invested. I can assure you that spending 40 hours a year keeping up with tax code, then fiddling with all your own parts is just not time or cost effective. Don’t even try to convince me that you know the code as well as a well trained CPA specializing …

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