The Hidden Monsters of Accounting

halloween-graphic-finalHappy Halloween! With it being the scariest time of the year, you are probably thinking about black cats, jack o’ lanterns and how to sneak away with a little bit of your child’s Halloween candy. However, you’re probably not thinking about another topic that can be frightening to some: accounting!

We promise, it’s not that scary… we numbers nerds actually find it pretty fun! But, there are some monsters hiding in the accounting world that you should always be on the lookout for.

The Zombie — Assuming Profits Mean Cash Flow

It’s easy to make a sale (we’re talking either a sale of goods or services) and subtract your costs and then record the remaining amount as a profit. But if you’re allowing your customer to purchase on credit (meaning you are letting them pay you later), don’t be too fast to count it as cash in your pocket and spend it on your Halloween costume. What if it takes longer than expected to collect? What if you don’t collect? Now you have cash flow issues you weren’t anticipating.

It may be tempting to think profits and cash flow are the same, but by doing this, you’re giving yourself a twisted image of your company’s real condition and this can lead to even bigger problems down the road. Like a zombie, your financial statements (if you don’t understand them) can rise from the dead and scare you. If you need more help with this concept, check out this blog.

The Vampire – Not taking Bookkeeping Seriously

It’s easy to pretend bookkeeping doesn’t exist (just like vampires). However, if you’re not keeping accurate books, you might be in for major struggles that can be very painful in the future.

No matter the size of your business, investing in accurately tracking your business financials can be compared to garlic. That’s right, maintaining a good bookkeeping system can protect your business from the vampires who can suck your financials dry. Having accurate, timely financial statements also gives you confidence when making your business decisions. 

Frankenstein – Not Having a Clear Budget on Each Project

Does your company operate without a budget? And we’re not talking about the kind of budget you fill out at the beginning of the year and forget about the rest of the time. We’re talking about a rolling budget; the kind you reference and update throughout the year (ebbs and flows with the changes in your business). Operating without any financial guidance could result in a freaky experiment with the end product not being what you hoped for.

Operating without a clear budget can make it difficult for your company to keep in check, and can lead to spending a lot of your hard earned money unnecessarily (nobody wants to flush money down the toilet). Don’t throw everything into one pot and hope it turns out. It is best to have a rolling budget to start with the end in mind and to help provide a roadmap for getting there.

The Witch – Lack of Accountability

Do your people know what is expected of them? And do they know what they should be doing day-to-day to meet those expectations? Lacking accountability can lead to some serious confusion; it may be a struggle to figure out who’s flying around on which broom.

It is extremely important to define everyone’s roles and performance expectations. Not only that, tell them how they can meet those expectations by relating them to their day-to-day tasks. We’re talking about KPIs (key performance indicators).

And now a plug for accounting (let’s be honest, you knew that was coming). Having timely, accurate financial information is important as many KPIs are tied to financial information. Make sure you are holding your people accountable against accurate information.

The moral of dealing with this Halloween monster…having accountability in your business can help your people know which broom they should be flying and be able to fly them in the same direction.

The Ghost – Failing to Reconcile Your Books With the Bank

Failing to reconcile your accounts frequently can come back to haunt you. When you reconcile your books, you are ensuring an account balance is accurate and correct, and that it can be tied back to supporting documentation (such as your bank statement). Without reconciling your accounts, there could be a ghost hiding around the corner. Boo!

All accounts should be reconciled (especially the balance sheet), no matter the size. From cash to accounts payable, these accounts all have an impact on your financial situation. Small to mid-sized businesses should especially be sure to reconcile their books every month to ensure the accuracy of their financial information. And don’t be afraid to reconcile them more frequently. For example, if you are experiencing cash flow deficits or concerns, you may want to consider tracking your accounts receivable, accounts payable and cash more frequently just to keep those ghosts at bay.

The Mummy – Managing All Accounting Tasks In-House

It is a common misconception that handling all of your accounting activities in-house will allow you to save money. That’s not always the case. Depending on your situation, outsourcing might actually save you money. In some cases, outsourcing is less expensive than hiring internally (remember all the cost associated with your people, onboarding, training, wages, benefits, etc.). Not only that, a reputable outsourced accounting provider may save you money due to costly bookkeeping errors.

If your business is too busy getting wrapped up in all of the accounting details, you may struggle to pay attention to other important parts of the business, and this can hurt your company – whether in the loss of revenue, customers or even reputation. Outsourcing your accounting needs (we can help!) allows you to ensure the other parts of your business are running smoothly, and lets you get back to why you got into business in the first place.


Although these accounting monsters may be scary, they are avoidable. With the right knowledge and skills, your business can avoid these tricks and instead focus on the treats of timely, accurate financial information.

Exit Planning: Identifying Objectives & Goals

As a reminder, these seven steps are based on BEI’s Seven Step Exit Planning Process

Last week, we introduced a new blog series on exit planning. There are many things to consider when you’re getting ready to exit. Today’s topic? Identifying owner objectives and goals.

In order to successfully begin exit planning, you need to identify goals and objectives to guide you through the stages of exit planning. These goals act as a roadmap and, let’s face it, trying to navigate without a roadmap is a difficult task that can take you in circles and get you lost.

When a man does not know which harbor he is heading for, no wind is the right wind” – Seneca

This quote, although a classic, still holds true today, especially in the world of exit planning. In the context of exiting a business, no goal means no style. There will be no smooth transition or easy transaction; the process will be bumpy and difficult. In 2015, Securian Financial Group conducted a study which found that 72% of small to midsized business owners don’t have an exit plan, and aren’t taking action toward getting one. If goals are so important in exit planning, why are so many people not setting them?

The main reason, according to Business Enterprise Institute, is because many owners find it emotionally exhausting. From the idea of separating themselves from an entity they have created, nurtured and watched succeed, to the time and energy needed to create a successful exit strategy, many owners just simply feel they cannot handle the pressure. However, by setting goals and objectives, some of this stress can be alleviated, as these goals are the guidelines for the strategy.

John Brown of the Business Enterprise Institute notes there are five central elements needed before a comprehensive exit plan can be created. These elements include:

  • setting a departure date
  • conducting a financial needs analysis,
  • choosing a successor
  • determining the preliminary valuation of the company
  • estimating the company’s future cash flows

Although all five elements are highly important, the first three embody the key universal objectives in developing a successful exit strategy.

Setting a Departure Date

The first step in creating an exit plan is setting a date for departure, as this will be the basis for your plan. You might be wondering how in the world it’s possible to simply pick a date. Many people plan around a significant life event, such as a child’s graduation or reaching retirement age. Other owners may just throw a date out there that sounds appealing. However you decide to choose your departure date, it is important to note that nothing is set in stone, and a rough estimate is better than nothing at all.

Financial Needs Analysis

Conducting the financial needs analysis will, in the most basic sense, tell you how much money you need from the sale of your business in order to live comfortably. To conduct this analysis effectively, a business owner must look at his or her current lifestyle choices, and determine how they expect this lifestyle to look in the future and how much it will cost. Then, many factors, such as inflation rate, life expectancy, after tax income rate and income variations, must be considered. Once all of these items have been factored together, the owner can come up with the bottom line amount needed from the sale of the business.

Choosing a Successor

Choosing a successor may be one of the hardest steps in exit planning. In this step, the owner is faced with a choice of who will take the reins once he or she makes their exit. There are many types of successors (some of them are mentioned here) that owners must consider, but the five that are the most common on include:

  • children/family
  • co-owners
  • key employees
  • an unrelated third party
  • an ESOP
  • Each of these choices have advantages and disadvantages (more on that down the road) that must be taken into account when making the choice. It is important to make sure you don’t let emotions get in the way; it is often best to follow your gut feeling – if it’s wrong, this can possibly be tweaked. It is better to have made your choice, and maybe even included a backup option, than have nothing at all.

This first step in exit planning helps owners clarify and prioritize objectives, facilitate progress, control the exit planning process and focus energy on the reason they got into business in the first place.

Next up: business valuation and future cash flows. Stay tuned!

Research & Development Tax Incentives: What You Need to Know

For a number of companies, research and development is a critical aspect of their business. Research and development (R&D) can lead to the introduction of new products, bring about improvements to existing products and establish more efficient and effective methods of production. Aside from all these exciting things that can help grow a business, some costs can be offset with tax incentives.

Welcome to the world of R&D!

What types of incentives are available to companies?

Businesses can choose to deduct or capitalize R&D expenditures. Many taxpayers choose to deduct as much as possible in the current year, so they elect to treat R&D costs as current business expenses. The amount of expense deducted reduces taxable income on the tax return, much like other business expenses. A business can also capitalize and deduct these costs over a five or ten year period. So you have options.

Federal and state R&D credits are also available in addition to the expense deduction. Many companies find the R&D credits to be an attractive benefit. The net federal R&D credit is typically between 5% and 7% of eligible expenses (more on that later), and the state benefit can exceed this. Just remember, you have to file for the federal and state credits separately on the applicable tax returns.

A business can calculate the credit for all open tax years, but it may involve amending tax returns. This is still something you may want to consider if there has been an increase in R&D spending over the last several years.

So what exactly qualifies as eligible R&D activity?

The definition of what fits in this category is quite broad making the credit accessible to businesses in many different industries. A few examples of the types of activities that typically qualify include:

  • Development of new, improved or more reliable products, processes and techniques
  • Designing/modifying production equipment
  • Molds, tooling, dies, fixtures, jigs design/modification
  • Raw materials research
  • Development or testing of new concepts and technologies
  • Development or customization of software
  • Automation and/or streamlining of internal processes

Who qualifies for R&D tax incentives?

Businesses that qualify generally employ technical personnel, such as engineers, designers and developers. The credit can offset taxable income (or payroll tax if the business qualifies), whether the business is established or is a startup company.

Anything else?

Recent developments in R&D tax incentives make it more available to a larger population. Some of these include:

  • The federal R&D credit was made permanent in December 2015. This means it’s around for good!
  • Beginning in 2016, businesses with less than $50M in gross receipts can use the federal R&D tax credit to offset Alternative Minimum Tax (AMT).
  • Businesses less than five years old and with less than $5M in gross receipts can use R&D tax credit to offset quarterly payroll taxes in 2017.
  • Final regulations enhance the ability to include prototype component costs and software development expenditures in the credit.

The moral of the story?

If you think all this sounds complicated, you’re right. It can be complicated, but also a real benefit for your business. What’s important is to talk to your tax advisor and ask these types of questions. If they don’t know, make sure you track down someone knowledgeable in this area (cough — us).

A knowledgeable advisor should be able to help you set up a plan to calculate and file for the R&D tax incentives, as well as ensure you have the documentation you need.

Shameless plug: We can help you with all of the above. Just ask.



Behind the Metrics: Accounts Payable & Accounts Receivable

This set of blogs will take you behind some of the metrics you should be measuring in your business. We’ll talk about what they are, what they really mean and more.

accounts-payable-behind-the-metricsToday we’re talking the ins and outs of your accounts … payable and receivable that is. To begin, let’s look at what they actually are:

            Accounts payable: Money owed by you to your vendors

            Accounts receivable: Money owed to you by your customers


Okay, so what does this really mean?

Accounts payable and accounts receivable are different sides of the same coin. When you talk about accounts payable, you’re discussing the money YOU owe. On the other side, accounts receivable measures how much money OTHERS owe you.

Let’s break it down …

Accounts Payable

When you buy goods or services from someone and don’t pay them for it at the time of transaction, you’re buying them on credit. This is tracked in your accounting system as an account payable. This seems like it should go without saying, but you need to pay these off within a given time to avoid incurring late fees and/or interest. Some vendors are even nice enough to offer discounts if you pay early.

Accounts payable are current liabilities; meaning the accounts payable due within a year However, we all know vendors typically don’t give you a year (most are due on receipt or within 30 days). There are other liabilities like short-term loans, payroll costs or income taxes for your business … but those are recorded elsewhere.

Accounts Receivable

Think of accounts receivable as your outstanding invoices. It’s like you’ve received an IOU from your customers. They have a legal obligation to pay you back.

Similar to accounts payable, the accounts receivable is a current asset … we’re talking at the most a year. But again, you likely aren’t going to give your customers a year to pay you back. If a company cannot collect on its accounts receivable, they do have options for recourse, including taking the debtor to court or handing over the debt collection to a third-party bill collector.

As a fun fact, if a company has bad debt (accounts receivable was recorded as income but payment was not received …learn more about why this would happen here), the IRS allows you to subtract it from your gross income on your income tax return. However, this is only as long as the debt was reported as income on a previous return. But if by chance your customer comes through (after you record it as bad debt), you will need to record a bad debt recovery (income) when the money is received.

So how do I track it?

Accounts Payable

To track your accounts payable, your numbers guru credits accounts payable when a bill is owed and debits accounts payable when the bill is paid.

Of course, we’re just talking here about the accounts payable section of your accounting system. In reality, the full tracking looks like this:

When an invoice is received, the invoice is recorded as a credit to Accounts Payable, AND a debit to another account(s) within your system like inventory or expense (cough, double entry accounting).

When an invoice is paid, the payment is recorded as a debit to Accounts Payable, AND a credit to cash (or in some cases credit card payable).

Accounts Receivable

To track your accounts receivable, your numbers guru debits accounts receivable when an invoice is create and credits accounts receivable when payment for the invoice is received.

Of course, we’re just talking here about the accounts receivable section of your accounting system. In reality, the full tracking looks like this:

When an invoice is create, the invoice is recorded as a debit to Accounts Receivable, AND a credit to another account(s) within your system like income.

When payment for the invoice is received, the payment is recorded as a credit to Accounts Receivable, AND a debit to cash.

Anything else?

Why yes in fact … let’s talk turnover.

Accounts Payable Turnover Ratio

In its simplest form, the accounts payable turnover ratio is a measurement of the rate you’re paying off your short-term debt to suppliers.

It’s calculated like this:

Total Supplier Purchases

Average Accounts Payable

This matters because this calculation allows your investors (and you) to see how often you pay your average payable amount to your vendors. When your turnover ratio falls, it means you’re taking longer than normal to pay off your short-term debts. When the turnover ratio rises, you’re paying off vendors at a faster rate.

Accounts Receivable Turnover Ratio

What this basically means is your ability to effectively extend credit and collect debts on those credits. In other words, how well are you collecting on the debts your customers owe you?

It’s calculated like this:

Net Credit Sales

Average Accounts Receivable

A high receivable turnover ratio often means your collection policies are effective and efficient. You have a good quantity of customers who pay off debts owed to you in a timely fashion. Or, it could mean you’re conservative with the amount of credit you extend.

A low ratio can tell you that you have a poor collection process or are being too generous with your extensions of credit. It could also mean you have customers who aren’t willing to pay off their debt, or are having difficulty doing so.

Big difference in your turnover numbers?

This can tell you a story about your cash flow; but these aren’t the only components of cash flow. For example if your accounts receivable turnover is low compared to your account payable turnover, it means you are paying your suppliers faster than your customers are paying you. This could create decreased cash flow and you might be feeling the pressure. However if your accounts receivable turnover is high compared to your accounts payable turnover, you might be seeing a cash influx. But it’s important to remember you have accounts payables coming due so don’t be quick to spend it all.

The moral of the story …

Accounts receivable and accounts payable (and their respective turnover ratios) tell a part of your company’s story. By examining them and continually measuring them, you can see ways to adjust course, change methods or improve systems in order to help make you a more successful business.



Exit Planning: An Introduction

Chances are, as a business owner, you have heard of exit planning. But have you ever sat down and considered it in all its glory? Exit planning is a crucial step to any business, no matter what stage. In fact, the earlier you consider it, the more time you have to create an effective exit strategy that will ensure your business stays successful even after you are no longer in the driver’s seat.

Did you know that exit planning and succession planning often get confused? While the two sound similar and have some common themes, they are actually different.

  • Succession Planning – Focuses on identifying successors within a business and preparing them to replace the existing business leaders; Focuses on transfer of leadership from one generation to the next
  • Exit Planning – Analyzes all of the factors that impact a business owner, including current and future planning; Identifies strategies and steps that are most likely to allow the business owner to reach their goals

In this next series of blogs, we will be discussing a framework for exit planning and what you, as a business owner, need to know to keep your business running smoothly after you exit.

The steps we’ll be discussing are based on BEI’s Seven Step Exit Planning Process. They include:

  • Identifying Owner’s Objectives & Goals. This step will focus on identifying primary planning objectives, such as desired business departure date, who you want to leave the business to and more.
  • Quantifying Business and Personal Financial Resources. In this step, we will talk about valuation and cash flow. This will include asking yourself how much you know about the worth of your business, and how much it is expected to bring in future cash flows.
  • Business Value Enhancement. In order to make the business more appealing to your ownership interest, you must know how to increase value.
  • Ownership Transfer to Third Parties. To make sure that a smart transfer is made to a third party, this step will ensure you know how to sell to a third party in a way that will maximize your cash while minimizing your tax liability.
  • Ownership Transfer to Insiders. If you are considering transferring the business to someone on the inside, such as family, this step will be of high importance to you. This step can also help you decide whether an inside or third party transfer is right for you.
  • Continuity Planning. This step will help you ensure you have all the necessary precautions taken to be sure your business continues on if you don’t.
  • Personal Wealth and Estate Planning. It is imperative to have a plan in place to provide for you and your family post-business sale. This step will help make sure you are on the right track for financial security.

Prepare to join us over the course of these next seven blogs to learn a framework on successful exit planning and how it can benefit you and your business now, as well as in the future.


The HR Side of Succession Planning

Earlier, we brought you a blog about the importance of getting started early with succession planning. In case you don’t remember …

Succession planning is the process of identifying and developing people inside your organization to fill key leadership and ownership positions. It’s also commonly known as transition planning, as you’re looking at how you’ll transition the business to the next leader(s).

Now that you realize how important it is to get started early, the next step is figuring out how you are going to undertake this process of implementing a succession plan.

The Human Resources (HR) department is a great (and often overlooked) tool in succession planning. Not only are these professionals in the business of keeping employees satisfied, but they also know how to work with employees (and potential employees) to find out what talents, traits and characteristics they have, which can be crucial in implementing a succession plan. A survey by the Corporate Leadership Council, an HR organization, showed that of the 276 companies surveyed, only 20% of HR executives were satisfied with the succession process. This leaves a large area for HR professionals to jump in and take over the succession planning process.

According to the Society for Human Resource Management, the preparation process for keeping talent in the pipeline is generally a 12 to 36 month process. What does that mean for you? You need a good plan and strategies in place to ensure your business is always in good hands, and you need these strategies in place ASAP.

From an HR standpoint, there are a number of ideas to focus on in order to find the best candidates to have lined up in your succession plan. This starts with the search: should you look inside or outside of your business? There are advantages and disadvantages to each that can help you decide where to look.

Let’s start with taking a look inside your business…

  • Advantages
    • Already have an established fit with the company and are familiar with how things operate
    • Have already been invested in by the company
    • Can be monitored on performance and can be “groomed” to fit the position
    • Can start planning process sooner with these people, as they are already a part of the company
  • Disadvantages
    • May have experience in your company, but may not be the correct experience
    • May have been hired because of skills, but these skills may not be a good fit for the new position
    • Takes time and money to implement a plan within
    • The plan could fall through if they end up leaving the job

And now outside of your business…

  • Advantages
    • Brings in a fresh perspective
    • Ready to learn new skills and can be adaptable
    • The company can search from a larger pool to find an exact match
  • Disadvantages
    • Don’t know the company as well and may not be an immediate team fit
    • Could potentially lengthen the already time consuming succession planning process
    • This person may be able to do a job, but can they do the job?
    • If the wrong person is brought in, it can lead to a complicated, expensive mess

After weighing the pros and cons of each pool of candidates, you need to know how to implement a successful succession plan (say that three times fast!). There are some components of an excellent succession plan that deserve some thought and attention.

  • Motivation – You want to provide your employees with incentives to encourage motivation. Herzberg’s Theory of Motivation states that meeting personal growth, achievement and recognition of needs promotes motivation. Focus on these factors, and watch your employees become more motivated.
  • Participation – Commitment and support from everyone involved in succession planning will have a positive influence on the program. It also allows for more inclusion, which can help create a positive learning experience.
  • Alignment – Making sure the succession plan matches up with the business objectives. This will help with a smooth transfer of skills for the position needed to be filled.
  • Variety – People learn in different ways. Offering different techniques for training can assist in finding the best possible method for succession planning that will be beneficial to all candidates.
  • KPIs – Having Key Performance Indicators in place will help you measure how far along the candidates are in their succession training, and can also help you decide who is learning and adapting quickest, which may indicate their readiness to be a successor.

Although these components can help to implement a successful succession plan, there are, of course, some obstacles you should be aware of.

  • Resistance to Change – Change is often something that can be hard to handle. In an organization planning to find a successor, tensions could arise if people are not exactly in favor of implementing a succession plan, especially if it involved bringing in someone new. Start small with the changes, involve everyone and work to build a cohesive team and strategy.
  • Lack of Support – If outspoken anti-succession employees get the floor to speak, it can be hard to sell the idea of succession planning. In this case, locate the source of skepticism and address it with relevant facts to gain this support back.
  • Lack of Time – Let’s be honest, you knew we would mention this one again. Without giving yourself enough time to develop a succession plan, the time may come when a successor is needed, and the pool of candidates to take this spot is empty. Always prepare yourself for any possible “what ifs” and make sure you have ample time to address them.

If you’re ready to get started, but need some help getting going, we are here.