Setting up for Success: Part 1

You’ve decided to start a new business – how exciting! There are many important things to consider when getting everything set up, such as your human resources policies (your employees matter!) and software and solutions (you want everything organized and running smoothly). Another important component you need to consider is your accounting – after all, these numbers lay the foundation for your business and essentially tell your story.

Accounting is an important part of your business, and getting it right the first time is crucial. So where do you even begin?

First, it’s important to understand your business and industry. This understanding can help you answer some important questions for designing your accounting system. Some of the questions that may come up include:

  • “What basis of accounting should I be using?”
  • “What information should I be tracking in order to make informed decisions?”
  • “I know what I want to track, but how do I track it?”

Let’s start with the first question: selecting your basis of accounting. Your basis of accounting is essentially a framework used to record your transactions. There are a few different types to choose from, with the following being the most common.

  • U.S. GAAP (United States Generally Accepted Accounting Principles) – Try saying that one ten times fast. This is an accrual based framework in which revenues and expenses are recorded when they are earned and incurred, respectively. This is the most commonly recommended type.
  • Cash Basis – In this framework, revenues and expenses are recorded when cash is received or paid, respectively. Cash basis presents two different methods of accounting: pure and modified. The difference comes in that under modified cash bases, some transactions follow U.S. GAAP. Check out this blog to learn more about cash versus accrual methods.
  • Income Tax Basis – This is a framework in which revenue and expense recording depends on tax regulations. This helps eliminate the need for converting from one basis of accounting to another for tax return purposes.
  • Regulatory – In this framework, a regulatory agency prescribes the best method.

Now that we’ve looked at the different basis types available, it’s time to determine what information you should be tracking. The key here is to capture all of your business transactions in the simplest, and most efficient, way possible. This includes both cash and noncash transactions.

Depending on your specific business or industry, you might need to consider tracking your transactions in greater detail. Here are some areas to consider tracking:

  • Should you be tracking direct and indirect costs related to construction or manufacturing contracts so you can see the profitability?
  • What sales tax jurisdictions do you need to track for sales tax reporting?
  • Do you need to track certain items for tax return purposes?
  • If you do business in multiple states, should you be tracking transactions by state for tax purposes?
  • Do you have different departments or divisions that you need to track in order to view profitability?

Once you decide what information you should be tracking, you can select an accounting solution, and start designing your accounting system.

Stay tuned for the second part of this blog, where we go in depth about how you track your information. Although we’ve shared similar posts about these topics in the past, we think a refresh and reminder is important. If you need help in the meantime, just ask!

Small Business Loans 101

Guest Blog By: Matt Gruchalla and Shelly Kegley of Bell Bank

In today’s banking environment, securing a small business loan takes more organization than one may anticipate. There also seems to be a correlation between how organized a borrower is, and success in getting approved for a small business loan.

Financing for a New Business

It is important to plan well in advance for starting a business so the business owners are financially well positioned for success. This gives the bank an idea of the owner’s capacity to support the business if additional cash injections are needed at any point. Some items to consider prior to starting a business include:

  • Personal credit – The owner’s credit report should be free of anything derogatory, and reflect that all accounts have been paid as agreed. Revolving debt and credit card balances should be minimal. Assuming the owner’s personal accounts have been handled as agreed, personal credit scores should be acceptable.
  • Personal income tax returns – Typically, lenders require three years of personal income tax returns, as well as income tax returns for any business ventures the owners have been involved with.
  • Personal financial statement – This is a detail of the owner’s assets and liabilities. Potential lenders will look closely at owner’s cash, liquid investment balances and equity in homes or other real estate, as these can be sources for initial or ongoing business capitalization.
  • Outside investors or loan guarantors – If a business owner feels they may not be financially positioned to start a business, a good option may be to consider outside investors or loan guarantors.
  • Business plan – A great business plan includes a market analysis that’s backed by real data. The business plan should explain why there’s a need for the product or service that the potential business will sell, as well as what differentiates them from their competitors. The business plan should include a summary of the background and experience of the owners and key employees. Obstacles and success barriers should be discussed and mitigated.
    • A business plan shouldn’t be lengthy or redundant. Keep it clear and concise! SCORE and the Small Business Development Center are two outstanding resources available in the FM area to contact if you need assistance with completing your business plan.
    • Projections are a key component of a business plan, and shouldn’t be overly optimistic. The assumptions used to formulate the projections need to be explained so the lender understands how they were determined. The projections should include a “day one” balance sheet, along with year-end balance sheets for the first three years. Income statement projections should include monthly projections for the first year and annual projections for the next two years.
  • Sources and uses summary – This gives the lender an idea of what the loan funds will be used for, and will detail the equity that will be contributed by the owners. There isn’t a hard and fast rule for the amount of equity needed but typically 20% to 25% is normal.

Financing for an Existing Business

Securing financing for an existing business is normally an easier process because a lender can rely on a proven history rather than on projections. A projection may be needed if the financing request materially changes the business operations; however, these projections may be easier to complete since the business owner will have a better understanding of their business and industry.

From the business a lender will require:

  • Three years of business financial statements
  • Most current year to date financial statements
  • Three years of business income tax returns

From the business owners a lender will require:

  • Three years of personal income tax returns
  • A current personal financial statement

Obtaining a small business loan may seem daunting, but an organized, financially healthy borrower will have a much easier time securing a small business loan. Taking the time to prepare a well thought out business plan, and becoming financially healthy, will make the financing process go more smoothly.

Tips for Year-End and a Smooth Audit Prep

By: Stephanie Berggren, Eide Bailly LLP

Year-end is always a hectic time. Your company is making sure that all required state and federal filings are done and internal documents are completed. Plus, to make things even crazier, you’re also starting to think about and prepare for your annual audit. Can you say overwhelming?

One question that is fairly common: How early is too early to start on year-end procedures? The answer? There’s no such thing as too early. We are in a world where activity happens every day that will affect your year-end and your audit, so paying attention and staying up to date is important.

So what does year-end preparation look like?

To get started, at a minimum, you should have a review process that documents when purchase orders are created, when bills are paid and when cash/checks are reviewed and deposited. This will help lay a solid foundation you can use to make sure you’re on the right track.

Monthly, you should be doing reconciliations for the following common accounts:

  • Bank accounts – this helps verify that all revenue and expenditure activity is captured in your records on a monthly basis.
  • Accounts receivable – this will help you make sure your customers are paying in a timely manner, and will also help with your collection procedures.
  • Accounts payable – this will help verify that amounts showing due are true payables and to make sure your vendors are getting paid timely. This may also help you take advantage of discounts given by your vendors for early payment.
  • Capital asset inventory – this will help establish that any capital outlays are added to your software and/or external schedule. This list is an audit necessity.
  • Payroll accounts (accruals and expenses) – this will help verify that payroll is being accounted for properly in the correct accounts.

Doing these tasks on a monthly basis establishes good review and control habits. It also gives you, or your accounting and finance team the ability to find and fix errors during the year – and before your auditors find them.

Now that we’ve reviewed what to do on a monthly basis, let’s discuss year-end. Annually, you should:

  • Review checks paid after year-end to make sure they are properly included in or excluded from your accounts payable ledger. This not only helps make sure your auditor isn’t finding any adjusting entries during their audit, but also helps ensure you have included all your expenses in the proper year.
  • Review old outstanding payables/credits to see if either payment was missed or if payments were misapplied.
  • Review your deposits received after year-end to make sure you applied payments to the correct customer and year.
  • Review old outstanding accounts receivable to see if an allowance is necessary for accounts that may not be collectible.
  • Update your capital asset listing for any disposals/deletions that have happened. This can be done by having each program/department/etc. do physical counts of their assets and submitting that to the finance department or selecting a lucky individual to verify the entire list.
  • Review year-end adjustments, usually prepaid, accruals, and current versus long term debt, which are required for the audit. This is the last part that has an impact on your findings if the auditor is the one posting these journal entries. Below are a list of accounts that are usually adjusted:
    • Prepaid rents, real estate taxes and insurance
    • Accrued payroll and taxes
    • Compensated absences
    • Long term debt (car and equipment loans)

Because you have accounted for your monthly procedures, your year-end procedures should become less burdensome since those issues were addressed throughout the year (and who doesn’t want an easier year-end?). With the confidence that your company gains from knowing you have reviewed and reconciled your financial information, you are able to concentrate on accurately and confidently preparing your financial statements.

Year-end work can be time consuming and sometimes tricky. If you need to save time or need help figuring out where to begin, let us know. Ours numbers nerds are no stranger to this type of work – and they even enjoy doing it!

 

Exemption Certificate Errors

We figure with it being tax season, we can never talk too much about taxes and all the rules and regulations that go along with them. So, without further ado, we bring you another tax blog. Today’s topic: exemption certificates.

What is an exemption certificate and why do I need to know this?
Sales tax applies to most items of tangible property – something you can usually touch or see –unless there is an exemption under the law, or an exemption certificate. Exemption certificates usually are presented by a customer to a seller. If the exemption certificate is properly completed, the seller will not be required to collect sales tax.

Can all types of sales be exempt?
Generally speaking, there are three different reasons a sale can be exempt from sales tax. These are considered the type of exemption.

  1. Use Based – These exemptions come from the idea of where and how the product will be used after the sale. Items that are intended for resale are a common example of a use based exemption.
  2. Product Based – This exemption has to deal with – you guessed it – what type of product is being sold. Exemption laws vary from state to state. For example, shoes are taxable in ND and exempt in MN.
  3. Buyer Based – Exemptions that are buyer based focus on the type of buyer who is making the purchase. Examples could include government, hospitals or some not for profit entities.

What’s on an exemption certificate?
As mentioned before (and like anything tax related), the rules and specifications of exemption certificates vary based on state. However, there are some general points that are almost always included on an exemption certificate, no matter which state you are in.

They include:

  • Type of exemption
  • Name and address of both the buyer and the seller
  • Explanation of what is being purchased
  • Tax registration number or other unique identifiers such as a SSN or FEIN.
  • Signature

Sounds good. Anything else I should know?
We’re glad you asked. When state sales tax auditors do their work, they review invoices, types of payment and the information on the certificate for exempt sales. Lately, we are seeing issues where the exemption certificates are not valid because pieces don’t match up.  We will give you some examples.

Example one: A tractor was sold exempt from sales tax with a completed exemption certificate on file. The invoice lists Johnson Farms as the as the buyer. However, the financial paperwork indicates Johnson Auto Parts, and the exemption certificate is from Johnson Farms, claiming a farm exemption. Rather than this transaction looking like a farm use sale, it now looks like it was a non-farm use sale at the auto parts store.

Example two: A riding lawnmower was sold exempt from sales tax with a completed exemption certificate on file. The invoice and exemption certificates list Wee-Town Schools as the buyer. The payment for the sale comes in the form of a check from Mike Johnson. Because the schools name is not on the exemption certificate, it appears the lawnmower is not paid for by the school, and is instead an employee trying to buy an item for his own personal use exempt from sales tax.

Example three: An engine is being sold. The invoice lists Ace Anderson Auto Sales, and is paid for in cash. The exemption certificate, however, comes from Alex Anderson for resale. Alex has gone by Ace his entire life, but only uses the name Alex for official business. Although this is the same person, the auditors do not see it that way. Because the names do not match up, there is a problem with this sale.

The moral of the story…
For an exemption certificate to work properly, the name on it must match up with the invoice/payment. We get it, all this sales and use tax stuff can be pretty tricky (although this blog is pretty helpful). Luckily, our trained professionals are here to give you guidance when you need it.

Employer Provided Vehicles: What You Need to Know

Welcome to tax season. When it comes to taxes, there are many factors and considerations to keep in mind (go figure!). One you might not be thinking of is properly accounting for business versus personal use of vehicles. Trust us, it’s important.

Why do I need to know about this?

First and foremost, the IRS and state taxing authorities will almost ALWAYS ask about this during an exam. If the IRS wants to know about it, you should know about it too. Personal use of a company owned vehicle is considered a taxable benefit and should be included as taxable wages/salary to the employee, unless he or she reimburses the business for personal use. Also, the amount of business versus personal mileage will determine the amount of deductions (i.e.-depreciation) that can be taken in regard to the vehicle.

What do I need to do in order to be in compliance?

Each employee who drives a company owned vehicle should keep records, such as a mileage log, to track business and personal miles. These records should be submitted regularly to the business accounting department so they can properly account for the personal usage. Undocumented mileage may be considered personal miles upon exam. Commuting miles, driving from home to the office, are also considered personal miles.

Do I really need to go through the hassle?

Yes – but there is help! There are apps available to help log business and personal miles. You can also adopt a company policy restricting personal use of company vehicles.

An example of this would be disallowing personal use. When no personal use is allowed, this usually means the vehicle is stored on the employer’s premises. The only exception would be de minimus personal use, such as a stop for lunch between two business locations (food is important, people).

However, frequency is a factor of consideration to the de minimus exception. Another policy would be to allow personal use only for commuting from home to the office. The commuting miles would still be a taxable benefit to the employee, but the mileage log would no longer be required.

The moral of the story…

Keeping records on employer vehicles is good. Keeping accurate records so the IRS can’t bug you (too much) is great! If you need help down the road (see what we did there?), let us know. From figuring out what counts as business or personal use, to drafting an appropriate personal use policy or even teaching the basics of this, we’ve got you covered. We’re happy to jump in the driver’s seat (okay we’re done with the awful puns now) to help.

PCI Compliance

By: Calvin Weeks, Eide Bailly LLP

By now, you’ve probably heard of some big name credit card data breaches. They’re becoming more and more common, and hackers are finding more creative and sneaky ways to steal the information. In fact, since 2005, more than 900 million records have been breached. These information thefts can happen anywhere in the process of using a card – from PoS devices, to mobile devices and even wireless hotspots. Hackers are everywhere trying to gain access to this information.

To combat these nasty attacks, the Payment Card Industry (PCI) Security Standards Council developed the PCI Data Security Standard (PCI DSS). The standard was created to ensure businesses are doing their part in protecting cardholder data. The standards put in place apply to all businesses that process, store, and transmit cardholder data. In other words, if you’re a business who processes transactions with credit and debit cards, listen up!

To begin with, there are important steps that operate in an ongoing cycle that can help you stay compliant. You will need to:

  • Assess – Analyze your processing methods and IT to see if there are any problems that could lead to a leak in data.
  • Repair – If problems are found, you will need to take the necessary steps to fix them.
  • Report – You will need to document any details about the repair process and what you have found, and submit compliance reports.

There are six main goals of the PCI DSS, which each have certain requirements within that act as a guide to make sure you are compliant. They are as follows.

  1. Build and Maintain a Secure Network and Systems – Because many payments and transactions are facilitated on devices and computers that are connected to different networks, there is a need for security. Network security systems can help prevent criminals from virtually accessing these records. Building a trusty firewall and staying away from default passwords can help keep criminals at bay.
  2. Protect Cardholder Data – Businesses who process card payments need to protect the data stored on the cards – after all, these are your customers and you care about them! Some ways to do this include limiting data storage time, encrypting data messages and never sending data across networks that are unprotected.
  3. Maintain a Vulnerability Management Program – When you maintain a vulnerability management program, you are regularly finding any issues in your payment card system. To do this, you should regularly update all anti-virus programs and develop and maintain secure systems and applications.
  4. Implement Strong Access Control Measures – Not everyone in your business needs to access data. This includes both physical data, as well as records stored on the network. Access should be restricted to only those who need to the information as it pertains to their job.
  5. Regularly Monitor and Test Networks – This one goes without saying – make sure everything is in tip top shape! Tracking and monitoring access to resources and data makes it easier to detect where something went wrong if something were to happen to your data. You should also continue to test all security systems to make sure there are no holes or changes that make it easier for hackers to get in.
  6. Maintain an Information Security Policy –Having a good security policy in place ensures all employees know and understand what is expected of them when it comes to cardholder data and keeping it secure.

The PCI Security Standards Council sets this general standard, but it is also important to remember that each card brand, such as Visa or MasterCard, have some of their own standards to follow as well.

Compliance with the PCI DSS is verified by reports which are usually completed by an outside assessor. The reports contain a summary of findings, information about your business, card payment structure and information about important external relationships.

Your customers are one of your best assets – without them, where would your business be? Keeping their payment card data safe is important for them, and the reputation of your business. Following and complying with the PCI DSS will keep your customers happy and safe, and your business looking great.

*The PCI Security Standards Council website was used in creating this blog. It contains even more in depth and specific information. Check it out here.

What You Want to Know: Mixing Business & Personal Expenses

You’ve started your own business and you’re ready to go. With all the things you have to do to keep this business going, you set up a business account that you occasionally use for personal expenses. No harm, no foul right?

WRONG.

But, it’s all my money.

Doesn’t matter. If you are mixing business and personal expenses, you could land in a heap of trouble with the IRS if you aren’t accounting for the expenses properly.

What’s a business expense?

The IRS defines business expenses as ordinary and necessary costs of carrying on your trade or business. Seems reasonable, right?

So what happens if I mix business and personal?

We’re not saying you can’t mix business and personal, because you can. However, you need to account for the personal expenses properly – like a distribution. Also, make sure you are keeping the supporting documentation (invoices, receipts, etc.) for your business expenses because the burden of proof is on you. Yes, you need to prove that your business expenses are legitimate; in this case you are guilty until you prove you’re innocent.

Helpful Hint: There are more considerations for distributions. To learn more, check out our previous blog on basis.

Is this seriously that big of a deal?

If you pay personal expenses with your business account and categorize them as business expenses, you are reducing your taxable income by the amount of those personal expenses. Therefore, you are improperly reducing your tax liability, resulting in remitting the incorrect tax payment to Uncle Sam (and then we are talking penalties and interest).

We sincerely hope that if you’ve been doing this it’s not deliberately. Because if it is, that’s also known as a little thing called tax evasion … and then Uncle Sam isn’t the only person who will want to talk to you.

On the flipside, you can also be missing legitimate business expenses by paying with your personal account.

So what’s the moral of the story here?

We recommend keeping it simple and don’t mix business and personal. You should have a personal account for personal expenses and a business account for business expenses. We understand that, in some cases (which are hopefully rare), mixing may be unavoidable. However, make sure you account for the personal expenses in the proper manner on your financials.

Keeping business and personal separate can help you stay out of harm’s way in the case of an IRS audit.