Business Financial Planning: Accounting

and Tax Issues OverviewPresented by:

Michael Sowinski, CPACFO Consultants

mike@cfoconsultants.net828-712-2913

Opening Comment

Now more than ever, financial information needs to be used to make decisions

Financial Statement Information

Examine your accounting software Quickbooks is the largest provider of

small business accounting software Peachtree is a viable option, but a

smaller company Larger packages include Microsoft

Dynamics, Great Plains, Solomon, Navision, Mas90/200, others

Financial Statement Information

Setting up the Chart of Accounts Class Tracking-Departments Should be sufficient level of detail to

manage the business Try not to use miscellaneous Try not to set up a new account for

every different kind of expense Use Project Tracking and Monitor

Monthly

Financial Statement Information

Internal Controls Begin with job descriptions If an employee handles an asset, they

should not also be the sole accountant for it

Good Business Practices Bank Account(s)

Develop a banking relationship, meet the branch manager

Think long term in choosing your bank- Depository relationships are more important to bankers than loans, and can help in the future

Lending policies will be important in the future Some banks have more depth (Swap Agreements,

Insurance, 401K and investing) Companies with low activity should not pay bank

charges Signature Authority Analysis Fees and negotiation

Buying or Leasing Furniture, Computers, etc. Leasing should always be an option, do the math

Good Business Practices

IT and Telephone Backup accounting data daily Use passwords and tracking Internet usage Email and telephone usage policy

Good Business Practices Cash

Reconcile Monthly, keep printouts Accounts Receivable

Set up terms comparable to the industry Monitor over 30 day items, watch the Aging Communicate with your customers-you may

find opportunities Promptly bill, and promptly deposit – days

matter (Amex Example) IRS does not approve of loans to owner

Good Business Practices Fixed Assets

Represent items purchased that have a life greater than one year that are not going to be sold as a part of the revenue stream

Banks like assets on the balance sheet, so do not be hasty in expensing them $500 is a GENERAL rule

IRS section 179 will expense it all for tax purposes

Keep track of what you own Pay county property tax Depreciate monthly

Good Business Practices Accounts Payable

Use cash discounts, usually 1%. Doesn’t sound like much, but that represents 12% annually if monthly billing

Negotiate terms Try not to pay early (unless a cash discount) Communicate and develop a relationship with

vendors – They can help in the future if you can’t make a payment for some reason, vendors are often the easiest source of financing

Bid services at every opportunity W-9 Forms

Good Business Practices Debt Structure

Avoid having 0 Debt – sound financial plans include long term financing of long term assets in order to match cash outflows with cash inflows – financing long term assets with current operations is dangerous

Credit cards are a good beginning-easy to access (usually very little or no paperwork), not collateralized, and have 0 interest or below market interest options

Avoid paying credit cards late – interest rates skyrocket, you may lose the 0 interest forever, and late fees are substantial

Good Business Practices Other options include home equity

loans (lower interest due to security) and unsecured bank loans (similar to a credit card, higher interest)

Cultivate a relationship with a banker so that there is a resource when needed

Good Business Practices Payroll and Employees

Proper employment paperwork (Application, W-4, NC-4, I-9)

Handbook and Policies and Procedures Salary vs. Draw, Self Employment Tax if Draw Independent Contractors

Must be “independent” as defined by the IRS, which generally means the worker is free from control or direction in the performance of the work, the work is done outside of the usual course of the company’s business and is done off premises, and the worker is customarily engaged in an independent trade, occupation, profession, or business Services performed by any non-incorporated person or company (See W-9 above), where the amount is over $600 must be provided a 1099 at year end

Good Business Practices Background checks

Several online companies (employeescreen.com, corragroup.com, and others) provide these. The important thing is to find out about any criminal histories

Get a credit check (experian, etc.) if an employee is going to deal with any financial operations

Employee Screening Interviewing Profiles international (and other companies)

provide testing of potential applicants

Good Business Practices Expense Reports

Mileage (IRS rate is .585), don’t have to use this (can be a problem with employees)

Meals and Entertainment (IRS only allows 50% deduction) Other business expenses related to the business Business and personal expenses must be kept separate, or

there will be a problem with limited liability Tax Issues

Importance of a CPA – Start the relationship early and shop carefully

Try to filter tax advice through your business filter Keep good records, don’t put things off until tax season Remember that net income will have an impact on your

personal situation if not a C-corp

An Often Missed Important Number

Current Portion of Long Term Debt Represents the amount of principal

payments due in the next year Usually can be found as a negative

figure in the long term debt section

Banker Financial Ratios

Current Ratio = Current Assets / Current Liabilities

Benchmark- at least 1 goal of 2 Long Term Asset Leverage = Bank

Loans/Book Value of Fixed Assets Benchmark- no higher than 75%

Banker Financial Ratios

Equity Position = Net Worth / Total Assets

Benchmark- no lower than 25% Debt Coverage = Net Income +

Depreciation / Current Portion of Long Term Debt

Benchmark- 1.5 or higher

Banker Financial Ratios

Cash Coverage = Net Income + Depreciation + Interest / Current Portion of LTD + Interest

Benchmark – 1.25 or higher

Other Ratios

Sales to receivables ratio (Net Sales/Accounts and Notes Receivable)

Days in accounts receivable ratio (365/Sales to receivable ratio)

Profit to assets ratio (Profit before taxes/total assets X 100)

Standard Ratios

What to do with the ratios Compare to industry standards

(Robert Morris and Associates) Look at them over time Compare to benchmarks

Common Size Analysis

Shows every line of the income statement as a % of sales, and every line of the balance sheet as a % of total assets

Can compare to the industry and over time

Incentive Based Compensation Options Goal based with ranges Based on Gross Sales Based on gross profit and/or other

line items Could be entire company

profitability or departmentalized All give the employees more of a

stake in the company’s success

Incentive Based Compensation

Makes payroll instantly scalable Be careful of minimum wage Run the numbers and see the

impact on what/if analysis