"Your Business is Only as Good as Your Accounting System" by Dave Baldwin
This article may be a rude awakening for a number of small businesses. You may bake the best cupcakes, deliver the best massages, or engineer the fastest and most secure computer systems, and still be held back by your accounting system. It's a sad thing when businesses make amazing products or invest years of sweat equity to build a stellar reputation -- only to watch it all crumble because they didn't build a robust financial infrastructure to support it. The cold hard truth is that every business's accounting system (or lack thereof) is ultimately what makes or breaks the business.
What does accounting have to do with your competitive advantage?
The competitive advantage of a business is that which your competitor cannot easily duplicate. In Rule #1, investor Phil Town details the approach by which he follows Warren Buffet's methods for investing in companies. One of the criteria is what he calls "moats," or layers of protection around the proverbial castle that comprises a business. One type of moat is a well-established brand name. Even if a competitor builds a superior product at a lower price, they cannot copy or take away brand recognition. A strong brand does not guarantee success in itself, but it is a key factor in the longevity of a business.
Now, let's take a look at how management systems play a role in competitive advantage. Let's use a hypothetical example of two marketing agencies. Both agencies have highly creative talent. Both are well-known in their markets. Both work with high-profile clients. Both have a well-established track record for delivering great service. But they diverge in one area: accounting. We'll call them Agency A and Agency B.
Agency A has a basic nuts-and-bolts accounting system. They keep track of their costs, they know how much money they have. They know their cash flow, and they know their break-even point. They know how many client engagements they need per month to cover their overhead expense and taxes. The goal of Agency A's accounting system is to keep the lights on. And it works.
Agency B, on the other hand, looks at accounting differently. They aren't just trying to survive; their goal is to grow. Their goal is to dominate their space and scale their business to twice its current size over the next two years. They have built a system to support their objectives.
Now, let's take a look at the difference between their accounting systems.
Sales, Marketing and Revenue Forecasting
Agency A knows how much revenue they bring in each month. They have a rough estimate of how much they are likely to make for the next six months, based on their recurring monthly revenue from regular clients as well as a few deals in the works that they expect will close soon. They exhibit at a couple of expos each year, and they've found that these usually generate enough business to pay for themselves. They don't feel the need to examine any data, because they know that certain marketing tactics work if you just do them. They don't take clients whose budgets are too small. They will never say no to a client with a big budget, unless they just can't do the work.
Agency B knows how much revenue they bring in from each of their major service lines, and they've used their accounting system to determine which types of services are the most consistently profitable. They track their marketing campaigns and sales activity relentlessly, and they pay close attention to how much it costs them to acquire each new customer. They notice where their best customers come from, and how many marketing touches each one required. Based on this data, they constantly fine-tune their campaigns and focus their advertising spending on the most effective marketing channels. They are sometimes surprised at what the data reveal. They are not concerned with how big or how small a client is; only whether the job is profitable and whether the client is a good fit. They take pride in their track record of starting with small clients and helping them grow. They have also walked away from multimillion-dollar accounts when the risk was too high.
Talent Utilization and Capacity
Agency A tracks time spent on client projects with a reasonable degree of accuracy. They have a pretty good sense of how busy everyone is. They are very cautious about hiring, because they've made the mistake in the past of hiring too many people and then needing to let some go when business slowed down. They often use independent contractors and freelancers as a stop-gap measure when large projects come in or when work becomes unusually busy. They like having a flexible work force that can be called on an as-needed basis. Hiring full-time staff is generally a rarity unless someone leaves the company, so they usually do not advertise for new talent. When they do hire, they are often in a hurry to fill the position quickly because it is in reaction to a sudden upswing in work, so they can't be as selective as they would like to be.
Agency B is rigorous about utilizing their team's time and talent in the most effective possible way. They have broken down each service line into standard operating procedures, and they have defined benchmarks detailing reasonable time spans for completing tasks. When they notice that tasks are taking longer than usual to accomplish, they investigate to figure out why. Agency B's management carefully watches the team's capacity and is always advertising and interviewing candidates for their next team member. They are always anticipating growth, and they know when to pull the trigger on a new hire based on their sales pipeline and capacity of their current team. They view the next hire as inevitable, and they recognize that finding the right person may take time, so they are always advertising and interviewing whether or not they have an immediate need.
Company Culture
Agency A has a ping pong table and free coffee in their employee lounge. They take pride in having a hard-working team, but also a laid-back office. Employees generally like working there, and the pay and benefits are comparable to the rest of the industry. Communication is good overall, and people have a lot of flexibility to do their jobs in the way that they prefer- as long as the work gets done and the clients are happy. People sometimes work from home, and they enjoy the flexibility to adapt their schedules to the needs of their families, to a reasonable degree. There is no obvious path for advancement at Agency A, but management points out that there's plenty of room to grow for people who take initiative. They've been frustrated a couple of times when their best people left to take jobs in larger firms or to start their own businesses. There have sometimes been grumblings about inconsistencies in pay, but the owners feel that this is not justified.
Agency B has a no-frills workplace. Everyone discussed the idea of adding perks like a nicer employee cafeteria, but since the company has a generous profit-sharing plan, and everyone feels a sense of ownership in the company, no one wanted to spend the money on extraneous benefits. At Agency B, everyone loves their work. They know their numbers, and everyone is fantastic at what they do. There is never a boring day at Agency B, because they are always taking on new challenges. Since the company is always growing, new opportunities for career growth are always emerging. It is rare that the company makes a bad hire, and when they do, it becomes apparent quickly. The wrong people weed themselves out. There is a sense of friendly competition among the team. People work different schedules, but everyone is dedicated and working hard, and no one doubts it. Because everyone's job is measured against benchmarks, there is never any question as to who is performing and who isn't.
Which agency would you rather work for? Which one would you be more likely to invest in? Which one's services would you be more likely to retain?
Every single competitive advantage listed here, and countless others, all boil down to accounting systems. There is one difference between best-in-class businesses and average businesses, and it all boils down to their accounting systems. As boring as it might sound to some, the accounting system of a business is what creates the clarity and insight to make decisions. Businesses that have imprecise accounting systems tend to make decisions based on feelings, and people tend to perceive feelings as more accurate than they really are.
If you're weighing your options for next year and considering what investment of time and energy will make the biggest difference, the first place to look is your accounting system.
Dave Baldwin is an integral part of The Bookkeeper staff experienced in marketing and management consulting. His own entrepreneurial journey was spurred on by a desire to help introverted entrepreneurs succeed in business.
Accounting Technological Changes: Fear, Abuse, or Embrace?
At my first job (as an accounting intern for a midsized corporation), we ran reports in Excel and did manual daily bank reconciliations. When I got to college, my accounting practice sets were on paper ledgers; it was a thrill to go to my part-time job in a CPA’s office where the original version of QuickBooks Pro was available for me to use. 5 years ago, when I left my job as a Budget Officer with the North Carolina state government, we were finally upgrading our accounting software out of DOS.
Needless to say, I love and appreciate all of the new accounting technologies available today.
However, as the industry changes, so must those of us within it change and improve, or risk being left behind. Firms tend to fall into one of three categories when facing these changes.
Those who fear change.
Sadly, I have found that roughly half of the CPAs and tax preparers with whom I interact are highly resistant to new technologies, with the majority of them refusing to use cloud-based accounting software in any sense. I am frequently told, “I learned on desktop, and that’s what I’m comfortable with.” Having a preference and continuing to use desktop is fine, of course; many businesses are still on desktop accounting solutions, and it is still the best option for many businesses. But by refusing to work with other software packages, these professionals are either a) closing themselves off from a large portion of the market or b) forcing their clients into a solution which might not work best for them.
Cloud-based accounting allows multiple professionals (tax preparer, bookkeeper, and client) to work in the same set of books simultaneously, without the need to transfer a file back-and-forth. It also allows the client to perform some of the lower-level accounting tasks that might be more efficient for them to do (i.e., invoicing), without the need to outsource it and pay more unnecessarily. By refusing to adapt, either due to fear or stubbornness, the accounting professional is doing their client a disservice, and costing them more money. Over time, they will also cost themselves business, as more and more clients move to newer softwares.
Those who abuse change.
Accounting programs have come a long way, but there is still a real need for a high level of professional oversight. Sadly, there has been a push in the accounting world towards “100% automation” and “a business which runs itself”. While the work certainly has gotten easier (or at least, less manual), trusting the machines to do everything, without your involvement, is still a recipe for disaster.
Take, for example, the integrated bankfeed in QuickBooks Online. This is a very nifty feature that allows bank accounts and credit cards to feed directly into the accounting software and be added from there, greatly speeding things up from the manual entry of days past, and helping to ensure that transactions are not missed. It also has some additional interesting functions, such as machine-learning that allows the software to recognize bank descriptions and default transactions to how they were last entered, and a “rules” feature that allows a user to program certain descriptions to default to certain transactions.
90% of the time it works very well, which is what makes the 10% of the time it doesn’t work so disastrous.
For example, the feature that recognizes and assigns transactions based on the bank’s description of the transaction is a nightmare when it comes to assigning checks. Let’s say you write a check to a subcontractor, and assign it correctly in QuickBooks. The next time a check comes through the bankfeed, it will automatically default to that subcontractor. If the person assigning it is not paying attention, multiple checks can be assigned to one individual or business, throwing off the financials, future 1099s, etc.
Bankfeed rules can cause similar problems, as there is an option to create rules which add transactions to the ledger automatically, bypassing human review. We never use this option at The Bookkeeper, but we have seen companies do so. Again, this can be disastrous on those rare occasions where the computer algorithm makes a mistake.
New technologies can only be trusted to work up to a point; overreliance on them is inexcusable when it results in results in inaccuracies in the financials.
Those who embrace change.
One of the things that makes me very proud of our company is how we have integrated new technologies in ways that better serve our clients, without using them as a substitute for genuine human oversight and customer interaction.
Things like cloud accounting, app integrations, bankfeed rules, and the like have allowed us to serve a greater number of clients more efficiently. It’s also allowed us to work with clients who might not have yet been able to afford a fully outsourced solution, by training them on some of the tasks which have been made easier by improvements in software.
However, we have no fear of being replaced by technology. In fact, new technologies have freed us up from manual tasks so we can focus on the part of the work we really love; working directly with clients on analyzing their financials, examining the market, making plans for improvement, and educating business owners on best courses of action for their companies.
And even as computers get better at aggregating and analyzing data from various sources, they will never be able to replace a human connection. A machine may recognize that retail rent prices are better a zip code over, but we can understand that a client wants their storefront in walking distance of their child’s school. Or, it might make more sense, by the numbers, for a business to adjust hours seasonally, to save money in the slow periods. But a person can recognize when an owner wants to keep his employees at full-time wages, even if it means a little less money in their own pocket. And the more that computers can handle the data entry, or “number-crunching” aspects of our job, the more we can focus on solving these more complicated, human problems.
Technological changes are unavoidable. But from where we sit, that’s not a bad thing.
Getting Ready for Year-End Starts Now
You may be lamenting the fact that stores already have Halloween decorations out but, here at The Bookkeeper, we are already preparing for year-end.
In an effort to help our clients (and everyone else) get ready, we’re putting out a list of things you can start doing now to ensure a smooth first quarter and segue into tax season.
Hire a tax preparer.
If you don’t already have a CPA or EA lined up for your year-end taxes, start interviewing now. They will get very busy by the end of the year, and the good ones tend to fill up on clients quickly. (If you need a referral for a good tax preparer, we are happy to provide some!)
Get last year’s records handy.
If you are using a new tax preparer, they will likely want to see a copy of your prior year tax returns. If available, a copy of your balance sheet from the end of the prior year will be helpful, as well.
Check your sub-ledgers.
If you have a copy of your balance sheet handy, it’s a good idea to go ahead and take a look at your sub-ledgers, your Accounts Payable and Accounts Receivable. It may be that interest hasn’t been properly recorded on some of your loans, and that you are missing out on a deductible expense there. Or, if you are accrual-basis and have receivables outstanding, you want to either follow up on those clients for payment, or write off any unrecoverable invoices, so you aren’t liable for taxes on income which you’ll never receive.
Review uncleared transactions and amortizable expenses.
If you are filing accrual-basis, you will also want to be sure you have a record of checks which were written but have not cleared the bank, as these expenses should be deductible in the same calendar year they were incurred.
Also, if you have any assets on the books for prepaid expenses, be sure those were expensed properly throughout the year, so they will lower your taxable income.
Prepare your 1099 list.
You will be liable for filing 1099s for any non-incorporated service provider to whom you have paid over $600 in cash receipts within the calendar year. To file 1099s, you will need a W-9 from each vendor fulfilling that criteria, and a total of how much you paid them this year.
What’s worse is that 1099s are actually due not at tax time, but at the end of January, and the penalties for late or missing 1099s are stiff. So start gathering that information now!
Start your payroll reconciliations.
If you have staff, or yourself, on payroll via an outsourced service, it’s a good idea to review the reports on a quarterly basis, to make sure that what you have in your set of financials matches the payroll provider’s records. You want to also ensure that any taxes they have taken on the responsibility of paying have been paid in a timely fashion.
W-2 corrections take time, and you can be liable if W-2s are late. If there’s an issue in your payroll reporting, it’s best to locate it before year-end, when the payroll companies will be at their busiest.
Finally, don’t forget that any bonuses you plan to pay employees around the holidays are treated as W-2 earnings, and should be run through regular payroll.
Pay your quarterly estimated self-employment taxes.
Paying in on a quarterly basis is a good way to avoid a massive tax bill the following spring. But be aware, the next due date is only 9 days from now, on September 15th!
Make sure you’re not missing anything.
Be certain there’s a record of any business expenses you might have paid out of personal accounts, and that any transactions which have been uncategorized to this point are properly allocated. And if you find that it’s been an unexpectedly successful year and you need to lower your taxable income, (particularly if you’re cash-basis), you might want to consider going ahead and paying for some of your typical January expenses earlier, in December before the year ends.
Ask for help, if you need it.
If you’re finding that you don’t have an up-to-date set of books, and you’re feeling overwhelmed, don’t be afraid to ask for help. If you’re already behind, the last thing you want to worry about is catching up your books over the holidays. We’re here to take that off your plate so you can focus on the things that matter most to you at this time of year.
Planning to rent out a home? Be prepared.
Everyone likes a little extra income, and the "sharing" economy has made that easier than ever. For those with a second property, options like Airbnb and VRBO have become very popular as means of procuring rental revenues. However, renting a home through one of these services can include tax implications of which many are unaware. If you are operating as a landlord for short-term rentals, here are some things you should know.
What qualifies as rental property?
The IRS has a great deal of information on classifying rental properties in Topic Number 415. https://www.irs.gov/taxtopics/tc415
To be considered a rental property, the home in question cannot qualify as a residence. A residence is one in which personal use equals the greater of either 14 days or "10% of the total days you rent it to others at a fair rental price". So what does "personal use" mean, in this case? Personal use can be one of four scenarios.
1. When you or another individual who has an interest in the property (i.e., a business partner or co-owner) uses the property (unless that individual pays you a fair market price for rental). So, if your business partner's family uses the property for a vacation, that's personal use.
2. When a family member uses it without paying a fair price. If you let your niece rent it at half the usual rate while she's in town for the weekend, that's personal use.
3. "Anyone under an agreement that lets you use some other dwelling unit" Consider the rom-com "The Holiday", where Kate Winslet and Cameron Diaz swap houses with each other for a vacation. If you were to do something similar, those days spent at your house would county as personal use, since you were trading them for your own lodgings during that time.
4. Anyone at less than a fair rental price. This is self-explanatory, but also somewhat nebulous. Your best option is to have documentation supporting your pricing strategy, and apply it consistently.
Likewise, any expenses deducted must be deducted proportionally to the amount of time the home served as a rental. (So, if 5% of the year was personal use, only 95% of the appropriate expenses may be deducted.) If the property, in fact, does not meet the criteria to be considered a rental, you cannot deduct expenses on it. However, you also do not have to report rental income, in that case.
What can be deducted?
Expenses that are necessary for "managing, conserving and maintaining your rental property" can be deducted. These could include plumbing repairs, or cleaning services. You can also deduct expenses related to the business of renting out the property, such as any host fees from Airbnb, or advertising and legal fees related to the property.
You can also deduct any expenses which the tenant paid and which you then had to reimburse the tenant for. (For example, if the air conditioner breaks on the weekend, the tenant pays to fix it quickly, and you then reimburse the tenant, you can deduct that repair expense.)
You cannot deduct costs of improvements, those costs incurred in the act of restoring the property, or adapting it for a different use. You can, however, recover some of those costs on Form 4562 where you would report depreciation expenses.
Occupancy Tax
Many states and municipalities require landlords to collect and remit occupancy tax on short-term rentals. (It's a bit like a sales tax, but for hotels.) You will need to closely examine your local laws, as they can vary greatly on tax rates, what constitutes short-term rental, how frequently it must be remitted, etc. To further complicate the matter, occupancy tax may be collected by states, counties, AND cities.
Additional Taxes
If you were to sell your property, after it has been designated as a rental, you will need to report the income from the sale as capital gains, and pay capital gains tax on that accordingly. If you are a high-income earner, you may also be responsible for net investment income tax. (See IRS Topic Number 559.) https://www.irs.gov/taxtopics/tc559
1099s
As always, be sure that you are collecting W-9s from service vendors and following all applicable requirements for filing 1099s at year-end.
We work with a number of property owners, on these very issues every day.
You Better Reconcile
When we meet with new clients, one of the first things we like to determine is how recently their books have been reconciled to the bank accounts. Sometimes, (rarely), the books have been reconciled to the prior month. Sometimes it's been a few months, or a few years. Sometimes a bank reconciliation has never been performed, and the client's not really even sure what that means.
Since "knowing is half the battle", I'm going to explain what a reconciliation is, the basics of how it's performed, and why it's important.
What's a monthly bank reconciliation?
To clarify, there are many types of reconciliations, for bank accounts, credit cards, petty cash, inventory, sub-ledgers, etc. For this article, we're referring to bank reconciliations. A bank reconciliation is like balancing your checkbook, for your business. Most accounting software programs now come with a reconciliation tool (instead of the spreadsheets we used in the days of yore). Since it is the most popular accounting software in small business, I'll be referencing the QuickBooks reconciliation tool.
How is a reconciliation performed?
First, you need to see when the account was most recently reconciled, and then obtain a copy of the bank or credit card statement for the following month. Second, after ensuring that the prior month's ending balance matches the following month's beginning balance, you'll note the statement's ending date and ending balance.
From there, you go line-by-line through that month's transactions, matching each one to its equivalent entry in your accounting software, to make sure that all transactions are properly entered and that your cash balance in the software matches the balance in the bank, for the same ending date.
That sounds very time-consuming and tedious. Why would anyone want to do that?
Monthly bank reconciliations are a very useful tool for ensuring accuracy in your books. They can:
Show you what's missing. Sometimes, transactions do not make it into the books, either because they did not download correctly, or weren't manually entered. If a transaction is on the bank statement but not in the software, you know it needs to be added. Also, sometimes there will be things recorded in the software which aren't on the bank statement. These could be inaccuracies, or it could be something like checks which have not yet cleared the bank. If there's a large number of uncleared checks, it's helpful to know that, for cash-flow purposes.
Show you what's duplicated. If you have a large number of uncleared checks, particularly if some of them are months-old, it could mean that an expense was added without being matched to the written check, and was therefore duplicated. The same thing can happen with income. I once found where a new client's prior-year annual sales were overstated by about $50,000, due to deposits not being matched to previously-recorded payments. The uncleared payments showed up on the reconciliation report, and helped the client avoid overpaying on his taxes.
"Lock down" errors to one period. If your books were accurately reconciled last month, and something is wrong on this month's bank reconciliation, you only have to go through about the last 30 days to find the error. If your books have not been reconciled in a long time, or ever, it's going to be a lot more work to find where the inaccuracy occurred.
Maybe accounting professionals are a little weird, but many of us even find bank reconciliations to be fun (or, at least very satisfying when accurately completed). If you're having trouble with your bank reconciliations, if you need help learning how to perform them, if something looks wrong but you're not sure what, or if you're just sick of doing them and want to pass the job off to someone else, contact us. We happily provide a free 1-hour initial consult to answer your questions.
When you're not a "startup" anymore...
All of "Hamilton" is great, of course, but, among the multitude of great lines, there's one in particular that always speaks to me as a business owner. During Cabinet Battle #1 (a rapped debate about America's fiscal strategy), Hamilton states to Jefferson, "Thomas, that was a real nice declaration. Welcome to the present; we're running a real nation."
Though the line is directly referring to conflict between the Federalists and Anti-Federalists, it always makes me think of the challenges startups face after they've achieved their first measure of success. You start with your own personal "Declaration of Independence" (from your previous job), start a company, and then just fight to survive. One day you wake up and it's a real business. The question then is, "Now what?"
Speaking from our own experience growing a fast-moving startup over the past five years, I wanted to offer our advice on what to do next when your startup grows up.
Scaling economically.
Ironically, in a lot of ways, it's easy for a startup to be profitable. The staff is small and working like crazy, and no one expects a huge salary or a ton of perks, so you get a lot of bang for your buck out of the few people you have. You probably don't have an office yet (maybe just a co-working space), so there's not that huge monthly expense hanging over your head. The overhead in general is low, and you're really putting your A-game out there for every possible sale.
Sure, it's not sustainable in the long-term (unless you are cool with regular nervous breakdowns), but in those early days you can often at least break-even, even if you're not rolling in the dough.
Eventually, you realize that your staff does need to grow, or that you do need a place everyone can work centrally. (Though you have to be careful not to add those costs just because they're things you want. See our prior article, Living a Lie: The mistakes that make entrepreneurs go broke.)
Scaling is not without its risks, but there are steps you can take to mitigate those risks. Having a budget is key, obviously, but it is also helpful to map out conditional budgets for if you add various expenses, such as rent (or if you were to have a slow sales month). You can use those to establish a set point for when you're willing to add to your overhead. (For example, once we are regularly at x recurring revenue, we will sign a lease on an office, or hire support staff.) This can allow you to scale at a safe pace, without over-expansion.
Managing changing stresses.
When a startup is new, your main stressor is where the next sale is coming from. As the business grows and acquires clients in greater numbers, some of those stressors go away, and new stressors are added.
One of the biggest headaches in a growing company stems from managing a growing staff. When the company is small, you're operating in your area of expertise. As the company grows, you have to learn more about being a leader. Hiring and managing employees can take a mental toll, especially as you realize that the systems that worked when the company was smaller are no longer sufficient. (For instance, you will likely need to invest in a CRM that can help your new staff navigate their workload. Even if the original startup members don't need it, new employees will.)
Additionally, as you get more and larger clients, the clients themselves will require additional management. It can be hard to deliver the same level of personal attention when your time is spread so thin between them. It will become necessary to delegate some of the customer service duties to other staff (terrifying as that may be).
This is not to say you drop contact with clients, or aren't available when they need something; it just means you unload some of those duties onto other people, so the client can get what they need (even if they're no longer getting it directly from you).
Becoming who you are supposed to be.
It's not uncommon to feel a bit "lost" as your company grows. I experienced a small existential crisis the first time we signed and began work with a new client with whom I myself had never directly communicated. Once I got over the brief panic that I might no longer be needed, I realized how freeing it was, that I knew we could bring in revenue without my involvement. As we grew and hired additional staff, I didn't have to work on every single account; a new admin meant that I didn't have to manage the filing and calendar anymore.
I began to have something almost resembling "free time", and for me, that was terrifying. I had to figure out what to do with myself.
Fortunately, I really enjoy the study of business, in general. I began focusing on how we could improve processes, expand into new markets, and stay ahead of changing trends. I worked for us to become one of the first Xero-certified partners in our area, and began focusing on new business types (B-Corps, for example), so we could be prepared to serve upcoming businesses.
I also started focusing on who I wanted to be as a business leader, and who we wanted to be as a company. In a lot of ways, the company's growth has freed us to circle back to those original goals and mission statement. It's not enough just to grow a successful business; we want to stay in line with why the company was founded in the first place.
It's easy to imagine what you think a business owner should look like (see our article What makes an owner? for some prime examples) and fall into the trap of backing too far off from the company, or becoming an absentee owner. This is not what embracing your changing role means. It means that, instead of ordering business cards, you're calling referral partners (not that you're relaxing on a yacht while the minions do all the work).
It seems ironic that success should bring so many difficulties, but adapting to those new challenges is what sets companies apart. Be flexible, stay committed, and plan for everything you can, and you'll keep the fire you started growing strong.
Guest Post: Neal Isaacs, "Advice on Accountants (for what it's worth)"
Today's guest post is from Neal Isaacs. Neal Isaacs, MBA, CBI is a Business Broker and the owner of VR Business Brokers of the Triangle, located in Raleigh, NC. He writes about business and helps business owners discover their exit options. Call (919) 628-0571 or email [email protected] for your free consultation. Learn more at http://www.vrbiztriangle.com/.
As a business broker, I answer a lot of questions about how to sell a business. One of my FAQs that I share with all business owners planning to sell is about the total cost to sell a business.
People don’t think about costs in selling a business. The first question people always think is “How much can I get?” but the truth is:
It’s not how much you make, but how much you keep that matters.
So how much will you keep? What will be left depends on how much it costs to sell a business, as well as your tax treatment on what you get. Costs to
sell a business, if you don’t consider paying off your debts, are primarily professional fees. Consider the investment in a business broker, as most business sellers are doing it for the first time, and the sale of a business is a complicated and convoluted transaction, and consider the costs of a business attorney.
You’ll also want to consider the costs of a accountant. Chances are sellers are already using these advisors, but there may be some additional costs for updating or adjusting P&L statements.
Depending on your time frame for the sale of your business, there may be more that can be done from an accounting perspective to increase the value of your business from a buyer’s perspective. Let’s consider:
How Far?
The “look-back” period for the sale of a business is normally three years, but some buyers will ask for five. If you’re planning to sell your business in the next couple of years, it’s wise to communicate this fact to your accountant, and to start working with a business broker. Preparing and highlighting the best financial aspects of your business is something a good business broker can help you with in conjunction with your accountant.
The fact of the matter is, running a business to sell is different than running a business to support a lifestyle. The IRS has a lot of rules that your accountant will know and guide you on regarding how much you’ll have to pay in taxes, but a good accountant will also know how to protect you from paying too much tax in a legal and ethical manner.
How Much?
It may sound obvious, but don’t be afraid to ask an accountant how much they charge, or at least to give you a range of what to expect. Different accountants charge different prices for similar work because they have different costs to run their businesses, and they bring different experience to each opportunity, so interview your prospective accountant to learn if they are bringing the right skill and experiential sets that you need.
Do We Fit?
When picking an accountant, it’s good to ask them about what their client base looks like. You’re accountant will know exactly how much money you have, and the size of your business eventually, so consider being up front with them in your first meeting if for no other reason than to ask them if your business resembles their current book of business. If your business is an outlier, they may simply not be reviewing the tax code and regulations related to the needs of your business.
Too Much?
I have seen one person pay $400/hour for financial due diligence on a deal for buyer representation, and it was way too much. The CPA on the buyer’s side was more than willing to ask questions and go down paths that were not germane to the deal at hand, in part because he was being paid by the hour, and in part because his client hired him to investigate, and he was used to investigating very complicated businesses. This was not a complicated business, and in my opinion this buyer brought a cannon to a knife fight (and paid for it).
Whether you’re a buyer or a seller, picking the right accountant, or even upgrading to the right accountant, can pay for itself. Especially after the sale, when you have to deal with the financial repercussions of capital gains (this is another great question to ask your accountant early if you’re a seller).
If you need help choosing or interviewing an accountant in preparing for the sale of your business, I can help. Email me at [email protected] and I’m happy to share some questions that you could ask an accountant that you’re considering hiring.
What to Look for in Hiring a Bookkeeper
As your business grows, you will reach a point where you need to seriously consider hiring a bookkeeper. Unfortunately, bookkeeping is still a very un-regulated industry. Anyone can market his or herself as a bookkeeper, and it can be very difficult to sort the wheat from the chaff.
Obviously, your needs will be very specific to your company. However, there are a few basic things you can look out for to help you make the best decision in hiring a bookkeeper.
Look for certifications AND references.
Some people are very good at test-taking, and can certifications easily in an afternoon. (For instance, some lower-level QuickBooks certifications can be very easy to obtain with a minimal amount of studying.) But if they are difficult to work with, or don't do a great job of taking care of clients' books, they will likely not have many positive references available.
Some bookkeepers are very social and, at least on the surface, can impress clients. (Or, at the very least, they're good at getting friends and family to provide them with references.) However, if they do not have the accounting knowledge and technical skills necessary, they won't be good bookkeepers.
When seeking help, prioritize bookkeepers who have both certifications and a significant amount of references. Beyond client reviews, also look for reviews from partnering businesses, such as CPA firms. A good CPA appreciates working on financials that have been prepared by a good bookkeeper.
You can also ask your potential bookkeeper for references from current or prior clients in a business similar to yours.
Check their business registration.
Most legitimate bookkeeping firms will have officially registered their company. Depending on their state of registry, you can look up such information as how they are structured, how long they have been in business, their company officers, whether they have every faced dissolution, etc. (In North Carolina, where we're based, you can check the Secretary of State website for business registrations.)
There's nothing wrong with hiring a newer company, but you might want to consider a bookkeeping firm which has been in business for a few years, first. You can also look at things like whether they have a physical office space, or if the company ownership has changed hands multiple times. (And if they have been administratively dissolved in the past, consider it a major red flag.)
Heed the red flags.
There's a great quote from the show Bojack Horseman which goes, "When you look at someone through rose-colored glasses, all the red flags just look like flags."
Considering the high importance of your bookkeeping being done accurately, you do not want to ignore any red flags in your search for a bookkeeper. Being slow to respond, having little web presence, or being too eager to jump into working with you can all be red flags. If they are setting off your alarm bells during the initial search, consider how much worse things can become once you have hired them.
Ask about their experience with companies like yours, and with services you might need (such as their systems for managing payroll, sales tax, etc.). Ask about their policies on client communication, and how they prioritize time-sensitive tasks. Most importantly, particularly if they are a 1-person shop, ask about their plans for who can back them up on your account in the event of an emergency, where they might be unexpectedly unavailable.
Make sure THEY ask YOU good questions.
A few months ago, we met a prospective client for a free 1-hour consultation. She was upfront about the fact that she had scheduled interviews with other bookkeepers, and would be following up with us later. A few weeks later she let me know she would like to hire us. Her reason for choosing us, over other companies was, "You actually asked me questions and looked at my system. You were the only one who did that."
Be leery of a bookkeeper who swears they can handle your business financials without first establishing exactly what that entails. Not every client is a good fit for every bookkeeper (and vice versa). We maintain friendly relationships with our local competitors, so we have a good alternative to offer when we meet with a prospect and realize they would not be a good fit for us. Likewise, our competition sends us referrals, as well.
In your initial meeting with your potential bookkeeper, make sure they are trying to learn about your business, and not just sell you on theirs.
Find someone who understands accounting beyond record-keeping.
There is a misconception that a great bookkeeper is just someone with exceptional data entry and organizational skills. However, there is a lot that a real bookkeeper can do to help save money on taxes, identify areas of risk, or even improve profitability. Something as simple as how an owner's cash contribution to the company is recorded can have a massive effect on tax liability. A good bookkeeper can also locate missing accounts receivable, or locate credit balances with vendors. There's so much more to it than entering transactions from the bank feed.
Hiring a bookkeeper is one of the most important decisions you will make for your business. Be sure to take your time and be intentional in your search.
If all taxes were abolished tomorrow, you would still need a bookkeeper.
If the world hit a big reset button tomorrow and taxes were simultaneously, globally eradicated, a lot of professions would go away. There would be no tax preparers, of course, but also significantly reduced need for financial advisors (why bother with tax shelters?), and payroll companies (can't I just hand my employees whatever I'd like to pay them?).
But you would still need a bookkeeper.
You would still need to track not only your income and expenses, but also who owed you money, and to whom you owed money. You would still have loans to track, and need to break out the amortized interest from the repayments. You would still need to know how much your assets were worth, and how much your company as a whole was worth.
There are so many things a good bookkeeper can do for you that are relevant not only at tax time, but throughout the year and over the whole life of your business.
Take some time, away from tax season, to take a look at your financials and discuss them with your bookkeeping professional. Getting the best possible tax return is important, but there's so much more you can be using your financial data for.
2018 Tax Changes (Explained as Best as Humanly Possible)
To put it very (very) mildly, the new tax bill is not without its problems. In their newsletter attempting to explain the new bill's changes, the American Institute for Public Bookkeepers (AIPB) wrote, "Warning: You are encouraged to wait, where possible, for IRS guidance to confirm the details below. There are many technical errors in this tax law."
We have tried our best to explain how a few of these various changes might affect your business. In the interest of keeping this an article and not a book, we'll be summarizing many of the details, with links to articles where each piece can be expanded upon in greater depth.
To begin, here are a few of the easiest changes.
Mileage rates. The standard business mileage deduction has been raised from 53.5 cents per mile to 54.5 cents per mile.
Listed property. Computers and peripherals are no longer listed property, and therefore do not have to be held to the same proof of exclusive business-use standards as, for example, vehicles.
Meals & Entertainment. From 2018 through 2025, on-premise meals for employees will be reduced from 100% deductible to 50% deductible. As of 2026, they will no longer be deductible at all. Most entertainment expenses are no longer deductible.
Getting a bit more in-depth...
Income from pass-through entities. Anything other than a C-Corp is now considered a pass-through entity (including S-Corps). Pass-through deductions on individual returns are also significantly changed, particularly for those higher-income earners in the fields of law, accounting, medicine, consulting, athletics, financial services, and brokerage services. More details can be found here, Can You Win From the Pass-Through Deduction?, and more details on other lines of businesses to be affected will hopefully be explained by new IRS amendments and regulations.
C-Corp income. You may already be aware that taxes for C-Corps have been significantly reduced, to a flat 21%. However, the deduction for dividends received from other corporations has also been reduced from 70% to 50% for most dividends, and to 65% for those dividends which had been previously deducted at 80%.
Depreciation changes. This is another area that has received a lot of coverage, as the changes here are extensive. For starters, tangible personal property has been expanded to include property primarily used to furnish lodgings and improvements to nonresidential real estate. (If you're in the hotel business, this should be very exciting news for you.) Furthermore, Section 179 and bonus depreciation have been increased, with new rules not only applying to 2018, but also to property purchased in 4th quarter 2017, or purchased before 4th quarter 2017 but not put into use until 2018. Unfortunately, most of the bonuses expire in five years. Forbes has a great write-up of these changes, Tax Geek Tuesday: Changes To Depreciation In The New Tax Law.
Business interest expense and income. The business interest deduction is now capped at 30% of income (excluding depreciation) and can be carried forward for five years. Small businesses are exempt if they have less than $25 million in annual gross receipts, or are cash-basis. It also does not apply to "any taxpayer in the business of being an employee" (IRS clarifications hopefully coming soon), or to real property/real estate businesses. Business interest income also no longer includes interest from investments.
And the information we either don't have, or which is too long to list here.
FITW. For starters, federal income tax withholding tables are not yet available, but are scheduled for this month, to be used for employee wages as early as February. These could mean for some significant changes in employee take-home pay, but we won't know exact details until they are released by the IRS. This can be a bit of a headache for small businesses handling their own payroll; if you are not currently using a payroll service provider, now might be a good time to research those options.
Fringe benefits. Many fringe benefits which previously counted as deductions for employers will now no longer be deductible. Additionally, certain expenses are no longer deductible for employees, as well (in particular, un-reimbursed business expenses). See The New GOP Bill and What It Means for Employee Benefits in 2018 for a list of the eliminated benefits.