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Archive for the Accounting Category

Should We Change Our Accounting System?

accounting systems
Regarding the decision to change or not change accounting program, consider the following as part of your guidance system:
[1] how easily can the system (with the right people and processes) give you the insights that you require in order to make decisions WHEN you need those insights?
[2] how easy is it to find qualified accounting professionals at an affordable cost to use the system to the level that you require in order to get those insights? Remember that you might have people now who can do it, but how many more are out there and accessible? People change jobs for one reason or another.
[3] how much time does system troubleshooting take away from value-added time / how much do system issues slow down your ability to get those insights?
[4] how easy is it for independent auditors to access the data as well as any transaction backup (that’s jargon for “documentation”) and workpapers? This can impact audit price and on-time delivery of the audited F/S to the board, as well as whether you have to go on extension for the 990 each year.
[5] to what extent is downtime an issue? what are the risks of losing data or not being able to access it when you need it?
[6] does the system include other capabilities or integrate with non-accounting systems such as donor management?

How Should We Structure Our Profit & Loss Accounts?

Profit and Loss Structure
The Account:Subaccount structure is incredibly powerful because it facilitates both high-level strategic planning and more frequent tactical decision-making.
One issue is how to group accounts. For example, in the construction industry, does it make more sense to have Labor be a parent account and Drywall and other types of labor be subaccounts? Or does it make sense to have Drywall be the parent account and Labor and other drywall expenses be subaccounts?
It depends how you think, how you make decisions
You can have the best of both worlds if you set up your file cleverly.
More about that second point: In general, I believe that it makes more sense to group items differently than the COA o you can have 2 different ways of looking at the data.
In systems like QuickBooks Desktop, QuickBooks Online, and Xero, you can create an account structure for Profit & Loss (a.k.a. Income Statement) one way, and create items mapped to those accounts with the opposite hierarchical structure.
A few pointers:
[1] Anytime you use a parent:substructure, never EVER use the parent. And in the case of items, make the “Description on sales transactions” and the “Description on purchase transactions” to pop up by default as “DO NOT USE; SELECT SUBITEM”
[2] If you’re going to allocate labor to drywall and other services, remember to also allocate payroll taxes, union costs, workers’ comp, and the like. It’s extra work, but this is a policy that can and will impact profitability. See my next point.
[3] One of the great ways to use this information is to roll it up and see the major areas in which a project is most and least profitable and make changes accordingly. The owner could adjust pricing, have better leverage in negotiations, decide where to subcontract and where to have in-house people handle it, even decide to specialize in areas that are most profitable and not deal with other areas but partner up with another company for those…or learn techniques that other companies are doing to be more profitable in certain areas.
[4] it’s still useful to group other items such as meals, permits, & travel. If everything is grouped, then you get extra insights upon rollup.

Support an Auditor in Supporting You

Support an auditor in supporting you
Someone asked recently if it is reasonable for an independent auditor to request year-to-date (YTD) financial statements when putting together a bid for a financial statement audit.
Yes!
YTD financials are incredibly useful in determining scope/price. If there have been any significant changes since last year’s audited financials, they’ll see it. They’ll (hopefully) act accordingly – the fewer the changes, the lower the risk, the more reasonable the price, for example. More changes might be more areas for them to audit, more things for them to propose fixes on, they will need to price accordingly.
Don’t be afraid of a higher price, though. If an auditor is facing a tough situation and they have to continually have to write off too much time each year, they’ll fire the client and you’ll have to start over in your search, and THAT’S so much fun.
Also, if the YTD financials show a serious cash crunch, it could be problematic. Auditors aren’t allowed to be owed any money, so if they’re still owed this year’s audit fees when it’s time for next year’s audit, they won’t be able to do the work.
And if the YTD financials show a serious contraction and they think it’s not in your best interest to pay their fees but need someone who charges a lot less, they won’t waste their time or yours with a proposal.

How should we set – and justify – donation levels?

justify donation levels
Should the dollar amounts be your cost for the service that the donation covers, your cost plus some overhead, or the market value of the service?
I’ve worked with clients in the for-profit world as well as nonprofit, and for this one, I recommend that you take a golden nugget from the for-profit world:
  • There is no “true” value of anything.
  •  The fair market value of any product or service is only determined at the moment after a purchase occurs between a willing buyer and a willing seller.
Nobody cares about how you came up with the number. They care about whether what they receive is fair for what they pay.
What they receive is the satisfaction that one or more people will be helped in a specific way, and your specific story (i.e. “one therapeutic massage”) plants that satisfaction in the mind and heart of the donor.
You’ll simply have to test it and see if people go for it.
Then you’ll know whether it’s fair or not.

Is it worth it to track inventory quantities, not just dollars?

 

How much money do you stand ready to make & keep from this data?
Uses of quantity-specific inventory information include:
* prevention & detection of theft and loss
* guard against being overcharged by the supplier
* highest ROI on giving of samples
* shaping of messaging & promotion strategy to focus on highest-margin products, not just highest or lowest sale price
* cash flow management from clarity on reorder points so disbursements aren’t accelerated, or on the other end of the spectrum, she isn’t left without product when a customer needs it
* prevention of losses when she has too much of a non-selling or slow-moving product and has to let it go at a fire sale
* once her business is large enough such that she has to file on the accrual basis, you can help her to make sure she’s not paying too much in income taxes (or too little and then pay extra for it later with money and time)
* assist in setting sales targets & plans for achieving those targets
Track.
Profit.
Repeat.

How can a startup nonprofit create a budget needed to apply for its first grant?

 

A budget isn’t a guarantee. It’s a plan, a target.
Just because your nonprofit is a startup doesn’t mean you can’t have a budget.
Even for long-running nonprofits, no one can say what the future is. You don’t have to have guaranteed revenues in order to have a budget.
As you learn more about what revenue streams are available to you and what is available for your mission as a result, consider designing a target revenue portfolio.
Consider how some revenue sources come with rules about how to use the money (i.e. grants) and some don’t (individual contributions). Consider that come with easily definable costs (i.e. product sales) and some have costs that are less easily definable (i.e. sponsorships).
Use that information to shape up the expense side of your budget that corresponds to your revenue portfolio.
Then you’ll have your budget.

Which Accounting Program Should I Choose for my New Business?

 

Congratulations on your new and exciting business!
The right accounting program for you depends on what you need now and what you want later.
The three most popular ones for startups are:
QuickBooks Desktop
QuickBooks Online
Xero
In summary, if you are going to start small and grow into something quite large, go with Xero.
If you want to keep costs down in the long term and are accepting paper checks from customers, use QuickBooks Desktop as long as you can run Windows.
If you are accepting paper checks, aren’t going to grow to a 7-figure company, really need a mobile app, and don’t mind the risk of not being able to access your file when you want to, take a risk with QuickBooks Online.
~~~PROS AND CONS~~~
QuickBooks Desktop:
PRO: You only have to buy it once
PRO: Can give you detailed business intelligence on customer trends, service trends for the types of flights – this information can help you price for maximum profitability
PRO: Is the fastest of the 3 programs
PRO: If you will be accepting checks, this has a clear way of handling that
CON: If you need more than one user in the file at the same time, it can get pricey, depending on the situation
CON: Only accessible on a computer, not mobile
QuickBooks Online:
PRO: Syncs with more 3rd party apps (project management, CRM, time tracking, invoicing & payment for example)
PRO: If you will be accepting checks, this has a clear way of handling that
PRO: There’s an app which I hear is “okay.”
CON: Frequent outages
CON: The GUI slows down the whole process because somebody came up with the bright idea that all of the data entry screens should slide up and down. I hate having my time wasted.
CON: Intuit, the company that makes QuickBooks, is pushing everybody toward QuickBooks Online, but for years it has been a problematic product, and now they’re running around fixing bugs and trying to make it better.
Xero:
PRO: Syncs with the most 3rd party apps (project management, CRM, time tracking, invoicing & payment, analysis, forecasting for example)
PRO: In an all-digital environment, it saves you the most amount of time in regular bookkeeping. It pretty much handles everything automatically.
PRO: Has 2 tracking categories in comparison to 1 in QuickBooks, so if you’re going to build a large business with different locations and lines of service, it’s all clear and trackable so you can see things clearly and manage things well.
PRO: There is an **amazing** app
PRO: Once the business grows and you have people helping you, you can approve bills in the system in order to keep track of your money
PRO: They are the up-and-coming cloud-based accounting app taking the world by storm. No bugs. No outages. And getting better all the time.
CON: Doesn’t handle batches of customer paper checks very well.

What Should I Expect From My QuickBooks Trainer?

Start by sharing your business strategy and business model so your trainer can activate features that you’ll need for external and internal reporting, such as:
* bank accounts, including PayPal
* receivables
* jobs vs. customers
* customer types
* inventory features
* item specifications
* item groups
* price levels
* credit card accounts
* payables
* sales tax
* class tracking
* 1099 setup
Then learn how to pull meaningful information from your QuickBooks file and how to interpret that information and make money with that information. If your company is new, have the trainer use a sample file from your own industry to teach you. Examples are: Financial statements, aging reports, job profitability reports, Profit & Loss by business segment or location.
Next: Back-fill into the data entry that’s required to produce those reports. Sales cycle, purchasing cycle, how to do an inventory count & inventory adjustment if you have inventory. Your training should include bank feeds, information about the best 3rd party apps (if any) for you, and the massive time-saving merits of attaching files to transactions and list items.
Next learn how to check your own data with error trapping techniques. For example, if you’re using class tracking, then the Profit & Loss Unclassified report should always be empty. Undeposited Funds should never be stale; the bank reconciliation detail will show transactions that have been outstanding for too long. Stay on top of this and you’ll avoid an irate vendor who hasn’t gotten paid because the check that you wrote is sitting on someone’s desk. You’ll also avoid making a decision based on incorrect financial statements.
To put a bow on the pre-structured piece, learn best practices in backing up the file, data security.
Don’t sign on to a training without a final phase that includes trainer availability for questions that will arise as you actually use the file. You can discuss with your trainer if you want anytime availability for questions as they arise vs. weekly sessions to get the answers, and you’ll document your questions in a list as they come up.

Figuring Out the Real Value of a Compliance Project

How do you measure the value of a compliance service that you received…or provided?
A story recently came my way in which a business owner received professional services required to help his business be in compliance with federal and state laws.
Specialty knowledge was required to accurately complete the right forms.
He engaged the services of an expert who got the job done…but didn’t want to pay the invoice in full because it just didn’t seem worth the price tag.
As a buyer, have you ever felt like that?
As a service provider, has that ever happened to you?
Let’s hone in on why the business owner did not perceive value for the service. In this case, it was because there just weren’t that many documents produced.
I can’t blame the business owner for using what he knows – and a quantitative metric, at that – in order to assess value.
However, this needs to be a lesson for all of us, those who engage the services of others and those who provide services.
Notice what metric you’re using to assess value. And use the right metric.
“Number of pages produced” is an inaccurate and unhelpful metric.
Ask yourself:
* What isn’t possible without said documents
* Comparable pricing with other service providers for the same level of speed, accuracy, and other factors in the relationship
* Opportunity cost of his time if he were to do this himself
* Length of time that it takes anyone to be able to build the expertise to handle this
* Making sure the RIGHT documents get prepared
* The fallout from the documents being prepared incorrectly or late
The Emancipation Proclamation is only 5 pages long.
The Declaration of Independence is only 1 page long.
But “number of pages” is what he knows to use as a measurement of value in the face of nothing better.
Service providers: Teach your clients how to measure value, and you’ll empower them for life. And thereby get them present to the amazing value they have access to by working with you.
Business leaders: Beware of illusion of value that comes when you measure something that is NOT correlated with actual value. Get clear with yourself and with your service provider about the real indicators of value before your engagement begins, and you’ll both be delighted and better off after your project is complete.

The Perfect Chart of Accounts for Your Business

Your “Chart of Accounts” is the list of accounts in your accounting software.  The accounts are listed in your reports, and the totals allow you to determine how much you’ve spent, made, own, or owe depending on the type of account.

It’s essential to create a list of accounts that you need in order to make better business decisions.  Your chart of accounts needs to be designed intentionally.  If it hasn’t been, it’s never too late.

Two Types of Accounts

There are two major types of accounts:

  1. Balance sheet accounts that tell what you own and owe.  These are determined by your checking accounts, inventory, and credit cards.
  2. Income statement accounts that tell you about current period operating results.  These, in turn, have two major categories, income and expenses.  For companies with inventory, expenses are further broken out into cost of goods sold and other expenses.

Three Purposes

A chart of accounts should meet three needs:

  • Make it really fast for you to do your taxes
  • Give you all sorts of “Aha’s”
  • Allow you to spend far more time on revenue analysis than expense analysis because that’s where success lies for small businesses

Taxes

Your accounts should be the same as (or be able to be grouped into) the lines on your tax return.  You can find a copy of the tax form you fill out. For example, a sole proprietor will use a Schedule C of the 1040, and a corporation will complete an 1120.

There are a few special needs, such as meals and entertainment which are only partially deductible, that you need to pay special attention to. We can help you with that.

Aha

As small business owners, we work with a gut feel, but when you see what you’ve made or spent in black and white, it takes on a whole new level of meaning.  Your income statement and other reports should do that for you.  If they don’t you may not have your accounts set up right.

Revenue

Think about how you want to see your revenue:

  • By product line
  • By major supplier
  • By category of solution to the customer
  • By customer type
  • By service type
  • By location (you can also use Class for this)
  • By job
  • By distribution method

We can help you brainstorm based on your industry and type of business.

Actionable Intelligence

If you’ve been putting all your revenue into one revenue account, it will be exciting the first time you see your new Profit and Loss statement.

If you’ve been breaking out your revenue but it hasn’t led to any actionable change in your business, then there may be a better way to break it out.

If you’re happy with the way your revenue is broken out, then think about how you can take it to the next level.

Once you see your new chart of accounts, you will likely have even more questions.  The chart of accounts can be an evolving entity, designed to serve your business needs.

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