Duluth/Lawrenceville/Johns Creek CPA  Assists Taxpayers with Converting Atlanta Business Taxpayers to an S Corporation

His CPA PC: Providing Bookkeeping & Accounting Services to Metro Atlanta

About S Corporations/What Entity is Best for Your Georgia Business

Subchapter S Corporations can have no more than one hundred shareholders and they all need to be U.S. citizens or resident aliens. This corporation type almost always has to have a calendar year as the fiscal year. S Corporation rules have been around since the 1950s and were set up to simplify the rules and regulations of being a business owner.

Liability Protection and Subchapter S Corporations

A subchapter S Corporation, like a C Corporation, affords the business owner personal liability protection from business risks. Some of the keys to maximizing that protection are to treat the corporation like one by doing all your business in the corporate name, signing all of your documents listing your corporate title, not co-mingling any personal issues/bills in the corporation, and by having your annual Board of Directors and Annual Shareholder Minutes Meeting.

Tax Advantages of S Corporations/Incorporating in Georgia

No income taxes are paid with the corporate return. The profits of the business are reported on the personal tax return of the S corporation’s shareholders. As long as you pay yourself a reasonable salary, you may also take shareholder distributions out of the business that are devoid of FICA/Medicaid taxes.

Another advantage of S Corporations is that if you have corporate losses, and you fund (you put the money in the business) those losses personally, then you can deduct those losses on your personal return. Any losses that are funded by the bank (a direct loan from the bank to the corporation) or by trade creditors are not deductible. Below is a sample letter one might send to the IRS to ensure that the S election has been properly received and timely processed by the IRS.

Taxpayer Advocate Office

Atlanta GA  

Dear Sir/Madam, 

I am writing to follow up on your IRS Letter dated 1-16-10  (copy enclosed). Please note I have enclosed a copy of the S Corporation election and the signed S Corporation return as requested. Please fix your records accordingly to show that the client was an S Corporation for the tax year in question. 

Accordingly please refund any monies previously paid. 

I appreciate your attention to this matter and please do not hesitate to contact me should you have any questions. 

Very Sincerely Yours, John C. Dillard, CPA, President

www.HisCPA.com Duluth/Suwanee/Johns Creek/Lawrenceville CPA: Income Tax Preparation, Financial Statements & Bookkeeping, IRS Representation, Back Taxes & Offer in Compromise

Duluth/Gwinnett CPA Teaches How to Prepare S Corporation Returns (Form 1120S)

A Beginner’s How to S Corporation Tax Preparation Guide by His CPA PC

Lifting the veil behind the confusion of tax returns is an important part of the relationship with your CPA. The more a business owner knows about preparing corporate income taxes the better suited they will be in providing what will be needed. The initial step, in any well-thought out preparation process is to first obtain all of the information that will be required to complete the returns. For example on our web site www.hiscpa.com/newclient.html  you will find a listing of all of the information that will be required to prepare the year-end corporate income taxes. The most critical part of this process is to obtain a Balance Sheet and Profit & Loss for the year being sure to include an adequate chart of accounts to properly reflect items on the tax return as well as to manage the financial decisions of the business. The tax form to be filed for an S Corporation is Form 1120S and the corresponding form to the state of Georgia is Form 600S. Corporate income tax returns are due March 15th of each year or seventy-five days after the end of the company’s tax year. This due date would relate to LLC’s who have filed a tax election to be taxed as an S Corporation as well.

To help illustrate how to properly prepare a Form 1120S, especially the Taxable Portion of the return, let’s assume an example we’ll call the ABC Company with the below Profit and Loss (prepared on a cash basis):

Sales                                                               $200,000

Purchases                                                          80,000

Independent Contractors                                   10,000

Total Cost of Goods Sold                                    90,000

Gross Profit/Margin                                          110,000

Salaries – Owner                                              70,000

Payroll Taxes                                                    7,000

Section 179 Depreciation                                  10,000

Meals & Entertainment                                      4,000

Contributions                                                   1,000

Office Supplies                                                10,000

Legal & Professional Fees                                  2,000

Net Income                                                    $6,000 *

*No provision for income taxes are to be recorded on an S Corporation Internal books as an S Corporation does not pay income taxes. Instead those earnings flow down to the owners of the company who pay taxes on accordingly on their respective Form 1040/their personal return.

The major tenants of the form are and how the Profit and Loss of ABC Company would be reflected on the Form 1120S are predicated on the above assumptions following:

Corporate Name and Identifying Information.

This will include the company’s full physical address (not a P.O. Box), the Federal ID # or EIN, date of incorporation and date that the IRS accepted the company’s S Corporation election (which is obtained by filing of Form 2553 within seventy-five days of the tax year to which the election relates). Also noted at the beginning of the return is a notation of whether the return is the first or final return filed, if the return has been amended and acknowledgment of any address change. Here ABC Company would lists its name, address, ID#, date the company was incorporated as well as the date S Corporation status was formally accepted by the IRS.

Reporting of Income

Gross Receipts of the business are listed on page one of the return with any corresponding reduction reflected for any returns and allowances. If your corporation is located solely within one state, doing business in several states or worldwide all of the corporate income is listed on Line 1a of the return. Here ABC Company would lists its Sales of $100,000.

Cost of Goods Sold

Cost of Goods Sold are detailed on Schedule A of Form 1120S detailing the opening and ending inventory for the year, purchases, cost of labor, other direct costs, and Section 263A (which is an allocation, if required, of any applicable overhead costs). Here ABC Company would lists its Purchases of $80,000 and Contract Labor of $10,000 detailing a $90,000 Total Cost of Goods Sold per the return.

Gross Profit

Perhaps the most significant indicator of the likelihood of corporate profits is the amount of gross profit or margin that a company reflects for the year. Care should be taken at all levels of management and personnel alike to ensure that an adequate gross profit in terms of both dollars and percent is achieved on each and every single billing done during the year. Managing this percentage is critical to influencing what the final profit for the year will be. Here ABC Company would lists its Gross Profit Margin of $110,000 which is calculated by subtracting their Cost of Goods Sold of $90,000 from their Sales of $200,000.

Salaries

Salaries are broken down between on the return between Officers, Other salaried personnel, and payroll taxes thereon. Usually apart from Cost of Goods Sold these are the second largest dollars listed on the return. Care should be exercised to ensure that these accounts are similarly reflected on a company’s internal profit and loss as well. Here ABC Company would lists its Salaries to its owner of $70,000.

Repairs & Maintenance, Rents, Taxes & Licenses, Interest, Depreciation, Advertising, Pension Cost, Employee Benefit Plans and Meals & Entertainment.

Repairs & Maintenance, Rents, Taxes & Licenses, Interest, Depreciation, Advertising, Pension Cost, and Employee Benefit Plans are listed as separate line items on the first page of the return. Here ABC Company would lists its Payroll Taxes of $7,000. Section 179 Depreciation of $10,000 would not be listed here as it is a tax preference item which will be reflected on the K-1 schedule which will be attached to the Form 1102S indicating to all owners their respective share of tax preference items. Meals & Entertainment of $4,000 would also be listed here but, per tax law, this amount would be reduced to $2,000 as only one-half of Meals & Entertainment are tax deductible.

Other Deductions

As an attachment to the return, Other Deductions are listed detailing other substantive expense items such as Office Supplies, Insurance, Travel, Telephone & Utilities and Legal & Professional Fees. Here ABC Company would lists its Office Supplies of $10,000 and Legal & Professional Fees of $2,000. On the return the company will reflect Total Other Deductions of $12,000.

Ordinary Income (Loss)

Ordinary income (loss) reflects the Gross Margin less all of the subsequently listed expenses. Here ABC Company would lists its Ordinary Income (per the tax return) of $19,000 (calculated by taking the Gross Profit Margin of $110,000 and subtracting from it $70,000 of Salaries to the Owner, $7,000 of Payroll Taxes, the deductible portion of Meals & Entertainment of $2,000, and total Other Deductions (described above) of $12,000). All of us, upon first glance would initially ask the question, why is the cash based profit of $6,000 above now increased to the $19,000 as listed on the return? To help clarify this difference please see the below reconciliation:

Cash Based Net Income Per the Company P & L                     $ 6,000

Add Meals and Entertainment (fifty percent deductible)            2,000

Add Section 179 Depreciation (a tax preference item)**          10,000

Add Contributions, which are also tax preference item              1,000

Taxable Income Per the Return                                             $19,000         

**For Fixed Assets that qualify (up to certain statutory tax limits and further limited by the amount of profit of the business) ABC Company can write off in full, in the year purchased, qualifying fixed assets. In this example the $10,000 is below the IRS allowable limits and the company still has a profit after considering the Section 179 deduction. Section 179 Depreciation is a tax preference item and therefore not listed on the face of the Form 1120S. However it is reflected on the K-1 schedule attached to the return for the owner to accordingly reflect as a tax deduction on their personal return (assuming the individual taxpayer meets qualifying parameters that are applicable).

Income Taxes

As an S Corporation is a “flow through entity” all of the earnings from the corporation flow down to the returns of the shareholders who own the company stock. It is there on the personal returns that the S Corporation shareholders reflect the operating results and pay the income taxes that are owed on S Corporation earnings. As these monies flow down to the individual owners/taxpayers return (Form 1040), there are no income taxes due to the IRS on the filing of the Form 1120S/the corporate income tax return for S Corporations. When the GA S Corporation return (Form 600S) is filed there are no income taxes due GA, as well, as the earnings are reported on the GA owners return (regardless of whether you are a resident of GA or a non-resident). However there is a modest net worth tax due the State of GA, which is based upon a company’s net worth (per the Balance Sheet) at the end of the year. Here ABC Company would lists no income taxes as the corporation is a “flow through entity” on the Form 1120S and all profits and tax preference items will appear on the appropriate forms and sections of the shareholders personal income tax return (Form 1040).

Tax Method & Business Activity

A company’s method of the filing of its income tax returns, whether cash, accrual, percentage-of-completion or completed contract are reflected on the return. Generally all companies with inventory would file on an accrual basis to ensure that cost of purchases of items still in inventory are not unduly expensed. Otherwise, typically it is tax advantageous to file your tax return on a cash basis, assuming you qualify. Also in this section of the return the Business Activity of the return is shown as to whether the items sold of the company are a product or a service. Here ABC Company would list that it is a cash basis taxpayer detailing the business that it does.

Tax Preference Items

As all of the earnings flow down to the respective owners of an S Corporation to their individual returns so do any tax preference items such as interest income, contributions and Section 179 depreciation so that owners may reflect in the correct locations of their personal returns these respective items. Here ABC Company would delineate the Section 179 Depreciation of $10,000 and Contributions of $1,000.

Balance Sheet

On Form 1120S there is a section of the return to reflect the Balance Sheet for the current and the prior year. Here all of a company’s current assets, long term assets (such as fixed assets), current and long term liabilities, common stock, additional paid-in-capital, and retained earnings are reflected. Supporting schedules, if needed, to substantiate the balance listed are also frequently shown. Here ABC Company would detail and list its Balance Sheet accounts as of the close of the last two taxable years.

Reconciliation of Income (Loss) per Books With Income (Loss) per Return

Here a schedule is performed which details and reconciles book income to taxable income as delineated on the return detailing any timing or permanent tax differences. Here ABC Company would detail (as per the above reconciliation) how the company’s internal Profit & Loss reconciles to the Taxable Income as reflected on the return (Form 1120S).

Analysis of Accumulated Adjustments Account & Shareholder’s Undistributed Taxable Income

This schedule is on the page of the Form 1120S and reconciles all adjustments to the retained earnings account including the amount of taxable income (loss) and netting those against shareholder distributions. S Corporation owners pay taxes on all the company’s earnings “when they make the profit, rather than when the profit is distributed.” For example if a company has in a given year $100,000 of taxable profit, then the owners would pay tax on the $100,000 in the year the money is made, rather than the year when a shareholder distribution for these monies are made to the company’s owners. Here ABC Company would detail the roll forward of the prior year retained earnings account to the current year balances reflecting the taxable income of $19,000, tax preference items, any non-deductible (for tax purposes) business expenses and shareholder distributions.

Helping to remove the mystique of income tax return preparation and helping to educate our client base is our watchword. A well-informed client is our goal so that we might closely work together to do what we legally might to keep your tax bill as low as legally possible. For articles relating to the above issues and to learn more please see:

Preparing and Reviewing Financial Statements
As your financial results of your business are like a doctor’s chart of their patient, this will help enable you to understand financials and their use.  See http://www.hiscpa.com/financial-statements.html

Managing the Heart Beat of your Business
Unlock the secrets of your business by learning to check its pulse by a review of your company’s internal financial information.  Visit http://www.hiscpa.com/managing-financials.html

Using the Profit and Loss Statement to Determine the Value of Your Business
The balance sheet shows what a business is worth, the profit and loss statement, properly analyzed, shows a company’s growth rate and rate of return, and points to its future viability. For more information http://www.hiscpa.com/profit-loss-statements.html

Corporate Returns
Discover what type of returns your corporation is required to file and its corresponding due dates ensuring that you do not miss an important deadline resulting in unnecessary penalties and interest.  See http://www.hiscpa.com/business-tax-returns.html

Press Release…Name Your Own Price CPA Services Offered by Duluth CPA

As a Faith Based Christian CPA Firm we constantly work to see way that we might serve God by “Serving You One Tax Return at a Time.”

This past year to help out in this down economy we have offered to many new clients as well as clients who are unemployed, down on their luck and retired a chance to retain top quality CPA services by naming their own price. For those that have done so and their offer is reasonable it is accepted.

Join the growing number of people who are seeking out HIs CPA PC to see how a faith based CPA firm can help you navigate the maize of IRS tax law. At His CPA PC we offer:

• Corporate and Personal Income Tax Preparation

• IRS Representation, Back Taxes, Tax Advocacy and Offer in Compromise

• Financial Statements, Bookkeeping and Tax Planning

• Virtual CFO and Part-time Chief Financial Officer Services

• Tax Planning, Business Acquisitions and Business Consulting

Call John Dillard CPA today at 770 814 9304 and find out what an Award Winning CPA Firm can do for you and your business. www.HisCPA.com  A Duluth CPA Firm Serving Atlanta, Alpharetta, Dunwoody, Sandy Springs, Roswell, Buford, Suwanee, Buford, Lawrenceville, Snellville, Decatur, Lilburn, Tucker, Norcorss & Beyond

Duluth GA/Gwinnett/Lawrenceville Christian CPA…Ten Top Ways to Know It’s Time to Hire a Bookkeeping Service/Virtual CFO

Top 10 Ways to Know It’s Time to Hire a Bookkeeping Service/Virtual CFO

1. You Don’t Know Which Accounting Software is Right for Your Business.

2. You Don’t Know What a Journal Entry is.

3. You Don’t Know a Current Asset from a Gross Margin.

4. You Don’t Know How to Debit or to Credit.

5. You Don’t Have an Accounting Background.

6. You Do Want to Know Where you are Financially.

7.  You Do Want to File Your Tax Returns Correctly.

8. You Do Want to Increase Your Chances of Financial Success.

9. You Do Want to Make Prudent Financial Decisions.

10. You Do Believe Your Business is Important.

At His CPA we work hard with your accounting and bookkeeping issues so you don’t have to.

Financial statements are often misused and abused. They are often ornately presented with accountant’s opinions ranging from audits to compilations. Often we even find a statement of cash flows and financial footnotes. What do these statements tell us? Numbers and data when prettily presented often are an accountant’s representation of the financial status of an entity. Be sure you work with a CPA on your bookkeeping and financial statements who cares about your business as much as you do.

“Financial statements without narratives, analysis of trends, and a review of expenditures are nothing more than formal proof that the bank account has been reconciled and that everything balances. Data without thorough critique is useless.”  –John Dillard CPA

Monitoring Your Books at the End of the Month

Consistent month end control procedures are critical, as any variance to these will negatively impact the reliability of your internal financial. As a Duluth CPA Serving Gwinnett & Metro Atlanta business owners and entrepreneurs here are just a few of the tips we give clients each and every day http://www.hiscpa.com/monthend.html

www.HisCPA.com A Christian CPA Firm in Duluth GA Proudly Serving Alpharetta, Suwanee, Lawrenceville, Norcross, Atlanta, Gwinnett, North Fulton, Johns Creek, Roswell, Forsyth, Flowery Branch, Buford, Dunwoody, Snellville, Lilburn & Grayson as an Award Winning CPA

Award Winning Gwinnett CPA: Bookkeeping for Your Gwinnett/Atlanta Business

Bookkeeping & Financial Statements

Need Help With Your Atlanta Financial Statements or Bookkeeping?

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Visit us online at www.HisCPA.com  A Christian CPA Firm

Atlanta Part-Time Virtual CFO 

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Be Sure You Do Your Internal Financials correctly so you will avoid unnecessary IRS audits, liens, collections, amendments, penalties and interest. The below is a sample letter we might send to a taxpayer to ensure that their internal bookkeeping is correct to ensure you pay only their lowest legal possible tax:

As you well know your internal financial statements as well as your tax returns have been prepared on a cash basis. 

Your internal August financial statements showed a $100K year to date profit  while your September results showed a $50K loss. Preparing your financial statements on an accrual basis will allow you to show a truer picture of your financial operating results. 

ASAP after we get your financial statements current I suggest you have your staff prepare the attached report each month and their forwarding for inclusion and reflection into the company’s operating results.  

To complete the return please forward the amount of medical insurance premiums the company paid on your behalf. 

ASAP after I get this I can complete your corporate tax return. 

When convenient for your books as of 12-31-10 please do the below Journal Entries: 

Debit Depreciation Expense on the Profit and Loss and Credit Accumulated Depreciation on the Profit and Loss for $10,000. 

To fix the liabilities on your balance sheet please debit Sales and Credit Accrued A/P to adjust the liabilities to zero as you are a cash based taxpayer. 

To complete your personal return please forward copies of receipts for: 

Mortgage Interest 

Real Estate Taxes on Home. 

Property Taxes on Personal Vehicles. 

Incorporating Your Business in Georgia…Confused by all the Hype?

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Visit us online at www.HisCPA.com  A Christian CPA Firm 

John Dillard, CPA of His CPA, PC (An Atlanta Christian CPA firm) 1940 Woods River Lane, Duluth, GA 30097  Phone 770-814-9304   http://www.hiscpa.com/   To retain John Dillard CPA (An Atlanta Christian Speaker/Author) for your business group or church congregation, you can contact him today at 770.814.9304 

We advise clients on: IRS representation, Offer in Compromise, Tax Problems, Incorporation in Georgia, Corporate and Personal Income Tax Returns, Part-time CFO, Virtual Controller, Business Planning, Back Taxes, Business Acquisitions/Sales, Forensic Accounting, Business Valuations and Bookkeeping.

Dare to Attempt Something so Great for the Kingdom of God that it is doomed to failure, lest Christ be in it!

www.HisCPA.com   Taxes by the Book: A Biblical Guide to Tax & Business Management is now available on line at http://www.hiscpa.com/blog/  It will be published here in full and is a must read for all seeking to take God’s Principles to Tax & Business Management

Bookkeeping Basics

First and foremost in keeping your company legitimate is to make sure that you keep your personal expenses separate from your business expenses. To keep and maintain a clear delineation of your company from your personal affairs you should only pay business expenses out of your business/corporate account. Accordingly you will want to ensure that you only issue monies for your personal affairs out of your business and not out of your corporate account/monies.

One of the first issues if a legal challenge is faced will be for the judicial authorities to determine if you have indeed acted and behaved as a corporation would and should under the auspices of federal and state law. Corporations and other legally recognized entities have many legal laws as well as formalized business practices that they should follow. Many times when a small business owner begins their own venture they tend to let the area between personal and business become unduly blurred when there is confusion between what is a personal item versus what is business. Tax law generally requires that valid business expenditures are those which are necessary for the valid business affairs of a business and for the furtherance of its survivability and profitability.

Often it is best to contemplate many of these questions in light of what you would do if a Fortune 1000 company employed you. If you were to ask yourself these questions in light of this environment then most of your decisions would gain clarity in this newfound light. If in working for a major company you were asked the questions below, what would be the anticipated/correct response:

• Would my corporation have an annual Board of Directors/Shareholders Meeting?
• If I were a corporate officer would I sign contracts in the corporate name while being sure to also list my title (i.e., President)?
• If I incurred business expenses, such as mileage, personally would I turn in an expense report to get reimbursed?
• Would I be expected to only pay valid business expenses out of the corporate account?

As you read through and evaluate these you can see that the answer to all of these particular questions is yes. As a benchmark to help keep you on track, please be sure to always ask yourself what would be the norm/expected if you were acting in a fiduciary relationship for another and what would be acceptable. In fact, though you may be the sole owner of your business you are indeed acting in a fiduciary capacity for your business as a corporation has most all of the same legal rights and responsibilities as an individual in protecting its rights and the full rights and abilities of ownership of all types of property both real estate as well as intellectual property. Given the ability to contract, a corporation may perform and expect others to fulfill their duties as detailed in a formal contract or everyday business practices.

Please be reminded that all business owners/entities are required to have a valid business license. Typically these are gained from the county in which you live, unless your office is within the city limits of a town/municipality. If so you will obtain your business license there. Also you will be expected to file annual tax returns, to pay a company’s annual registration with the state, file and pay payroll as well as sales tax filings and reports, and property tax payments and reports for corporate real estate and fixed assets. Thus, the services of a good CPA will bode you well as you strive to overcome the complexity of the varying tax laws and rules from the varying governmental agencies.

Using a computerized accounting package which has a balance sheet and profit and loss capability is a great start to being able to track your business transactions accurately and efficiently. Generally speaking for many small businesses QuickBooks is good system and often has much more capability than you will ever need. However this program is not a universal fit for everyone and you should take care to carefully evaluate your needs to ensure that you select a system which will work for you long term. Special consideration, for example, should be given if you need a POS/Point of Sale System, detailed inventory costing/tracking/and valuation, or if your business will require a multiple user system.

Being an expert at running your business does not make you one at the responsibility of accounting for your business. By applying our decades of experience we are well suited to guide you to track the financial and operational affairs of your business.

Financial Statement Preparation

All successful business owners either initially or over time become extremely proficient in their field of choice for it is by this growth of knowledge and wisdom which affords them the insight to make prudent decisions. Each and every hour of a business owner’s day, there are a series of insignificant and important thoughts and directions that directly impact the profitability of a business. Continually you are faced with making a positive impact towards bringing your business closer or further away from your goal. A company’s financial statement is the measuring stick by which you are able to gauge a company’s progress along the business continuum and are able to accurately measure the distance between where you are and where you want to be.

Balance Sheet

A well-presented balance sheet in good form will break out the assets and liabilities separating the long-term from the short-term items as well as a separate section for equity. Short-term items are those that are anticipated to be utilized/spent/collected/paid within the next twelve-month period. Long-term assets/liabilities are those whose ultimate disposition is to be addressed beyond the following year and not within it.

Balance sheets begin with the current asset section with cash usually listed first and then with accounts receivable and inventory following next. Any other short-term items would also be included in this section with care given to presentation to ensure that like kind items and accounts are appropriately detailed and segregated.

Subsequently the long-term assets of a business are listed, consisting of items that will be held by a business beyond the next twelve-month period. In this category you will find a company’s fixed assets such as equipment, furniture and fixtures, vehicles, and leasehold improvements along with their corresponding amortization. Other long-term assets might include any deposits the company has paid or other items anticipated to be an asset beyond the next year.

Next on a company’s financial you will find the current liabilities section, which will list all of the items a firm owes and believes it will need to address short term. This section typically will have included in it the accounts payable, payroll and sales taxes payable, customer deposits, and any short term portion of any notes payable (the long term principal portion of the note will appear on long term debt section which should immediately follow the current liability section).

The balance sheet ends with the equity/stock section which details a company’s stock, retained earnings/capital account, distributions/dividends, and the annual year to date net income (loss) of the business for which most accounting packages rolls forward from the profit and loss. Your distribution account should be closed at the end of each year to the retained earnings/capital account at the end of each year so that the net worth of a business might be tracked.

Profit & Loss

A well presented financial statement will be broken out in the sales section, cost of goods sold, and general and administrative expenses. Many businesses will break out their sales and cost of goods sold accounts into several categories that might be useful for review and analysis.

When reviewing your company’s financial, it is usually best to review your profit and loss being sure to show the current period under review as well as the year to date totals. This will have the added advantage of reviewing specifically the most current operations for any significant variances or trends as well as contemplation of where you stand vs. your annual and year to date goals. Your financials are best reviewed and presented when you also add a column which calculates items as a percentage of sales which allows the reviewer to have a good grasp/rule of thumb of which to measure operational results.

Often financial statements are unduly cluttered with accounts that have no financial, operational, or tax significance. A company’s statement should be concise giving the business owner as well as the CPA meaningful information without unnecessary data. A financial statement, like a heart monitor in a hospital, is the barometer that measures the lifeblood of a business, giving its holder critical and insightful information that is needed for all short and long term operational and strategic decisions.

Preparing and Reviewing Financial Statements is one of the most critical aspects to having information to properly manage your business. Our exhaustive experience in this field will help guide and direct you to understanding this critical aspect of your business.

Month End Control Procedures

The below procedures should be done at each and every month end so that you can better ensure that your internal financial statements accurately reflect your operating results. To gain a regular schedule it is best to “close the month” at a prescribed time such as 12:00 the last workday of each month and then to count all business done after the deadline as that of the next month. At each month end, for the below categories you will want to ensure that you:

• CASH. That at the end of each month that you ensure that all checks issued, deposits received, and any other cash transactions, (i.e., bank charges, automatic debits/payments, letters of credit, etc.) that have been recorded on both your QuickBooks/Accounting package and that they reconcile to the same balances. At the end of each month you will want to review it and all the data entered to do so to ensure its correctness and that your review your canceled checks to ensure all the checks recorded on the bank statement are enclosed and that all the canceled checks are valid expenditures of the business.
• INVENTORY. That you do a physical count of all that you have in the warehouse and accordingly adjust your balance sheet account up or down accordingly and that the offsetting part of the entry will be to cost of sales.
• ACCOUNTS RECEIVABLE. That you bill for all items shipped, close the month, and then run an open accounts receivable report and verifying that you have adjusted to this number on the balance sheet and reconciling why/if the balance sheet balance could be different from that of the detail as they should be the same. At this time please be sure to review the accounts receivable detail in detail verifying that the balances listed by customer are correct. You should start and maintain a file and keeping in it the entire month end open and unpaid accounts receivable reports.
• ACCOUNTS PAYABLE. That you record all items received, close the month, and then run an open accounts payable report and verifying that you adjust to this number on the balance sheet and reconcile why the balance sheet balance could be different from that of the detail as they should be the same. You will want to review the accounts payable detail in detail verifying that the balances listed by customer are correct. You will want to start a file and keeping in it the entire month end unpaid accounts payable reports.

Consistent month end control procedures are critical, as any variance to these will negatively impact the reliability of your internal financial.

Reading Your Business’s Financials

Whether your business is a billion dollars in revenue or a start-up venture in your basement, learning to read your business’s vital statistics is critical to your company’s profitability and even its very survival.  Financial statements act as a warning bell helping the entrepreneur who reads them to become aware of trends, aberrations, calamities and successes.  An owner who is well versed in reading and reviewing financials will always have a leg up on those who do not. 

The words of the Bible teach us not to lean on our own understanding as by ourselves we are much more probable to wallow because of our limits and our own ineptness and though we are exhorted as Believers to seek wise counsel we are not to unnecessarily lean on others for all of our wisdom.  “Plans fail for lack of counsel, but with many advisers they succeed”- (Proverbs 15:22). If our vision is too limited, we are unnecessarily handicapped and need a broader view in order to converse with the very professionals we all so desperately need. 

Though a CPA, as a trusted advisor and friend, will dramatically strengthen your decision making ability, having equipped yourself with sufficient knowledge will prove invaluable as you plot your business steps.  Being able to avoid miscues that befall your competitors will protect the gift of your business, which God gave you to provide for your family.

Cash is King

A solid business model will always require sufficient resources to meet the financial obligations of a business as they become due.  To this balance, an owner will want to ensure there are substantive excess capital and lines of credit to meet varying and unexpected needs.  Regardless of your accuracy as a planner and being able to anticipate the future events and needs of your business, there will always be circumstances and capital needs which arrive on the horizon that all of your contingency models have not anticipated.  Thus, it is imperative that you maintain ample surpluses and reserves for such events.

Accounts Receivable

Accounts receivable are the second most valuable of all of your business’s financial assets.  Though you are not able to spend accounts receivables, they pale in liquidity only to your cash balances.  There are many businesses such as retail that will not carry receivables, as their business is a cash and carry venture, which requires each and every purchase to pay for goods and services at the time they are received.

The best time for billing is at the time a service is rendered or a product is delivered.  At that moment both you and your client are best informed as to what was agreed to and delivered.  It is also this point of time an owner should be sure to verify that all items sold are billed for, the very best possible product was delivered and that due care was given to job costing considerations.  Billing decisions will be paramount to your year-end profitability.  After a bill is sent, there will never be another opportunity to influence the year-end results of your business.

Though each and every business and industry are specific as to the norm for billings and payments, it is wise to track two critical components in evaluating cash balances:

• Days in Receivable – This statistic calculates the number of days an item is in receivables relative to the sales volume.  It is better to have your days in receivables lower than higher as this means there is less time between when a billing is sent and when it is collected.
• Aging Balance – A preparative of your aged accounts receivable will place your balances into columns based upon their age.  This allows for a receiver to quickly review and access the status of all unpaid monies and to determine any specific collection steps that are warranted.

These calculations/reviews should be done at least monthly and more often as situations and sensitivity warrant.  Tracking and comparison to prior periods will give an astute owner an early detection system to preclude and make corrections prior to unnecessary/unwarranted trends before they worsen and become problematic.

Accounts Payable

Due care and planning should always be exercised to ensure that all vendors, independent contractors and trade payables are paid on a timely basis.  Individuals and companies who provide to and service your business should be able to always anticipate prompt and timely payment.  Though most vendors will never have a security interest collateral or personal guarantee ensuring their payment, you should hold these monies in trust for them nevertheless.  In fact, prudence would suggest that you never request or incur services if you do not have the cleared funds already in your account with them being specially earmarked accordingly.  A business, which is not able to pay their just debts as they become due, is one whose business model is not working and their time potentially short lived.

Gross Margin

Your profit and loss statement contains a recap of your business operating results and summarizes the positive and negative influences of every business decision you reach.  Though many of the balance sheet indicators are somewhat lagging to predict a firm’s success, the profit and loss statement dramatically states and presents current financial data.  There is no statistic, computation, component or percentage as important as a company’s gross margin.  Beguiling a tale of success or failure the calculation of a business cost of goods sold and corresponding margin of profitability speaks volumes as to the firm’s management ability.  Pricing of a ventures products and services are an integral component of ongoing operations. 

A persistent review of pricing and a comparison to the corresponding costs to create these products or services will determine a firm’s niche in the market place, and its competitive advantage in the business climate in which it serves.  A continual pattern and scrutiny of your gross margin will better enable you to maximize your operating results.  Beyond a shadow of a doubt you cannot sell yourself out of a slump.  On the contrary, if you persist in selling at below acceptable prices/standards, you will unnecessarily perpetuate an otherwise avoidable result.  Gross margin analysis and their corresponding changes to operations dramatically heighten the probability of your business’s sustainability. 

Discovering the pulse of your business is critical to hearing its needs and for its care and feeding. We work with clients everyday to both decipher and discern their business’s heart beat and to help you understand the nuances of what makes your business tick.

Profit & Loss Statement

To determine the future net worth of your business, a determined and insightful understanding of your Profit & Loss statement (P&L) is essential and critical. Though a balance sheet is a recap of what has happened to a business’s assets and liabilities to date, a P & L, if properly presented/managed/understood is a look into the company’s short as well as its long term viability. A businesses P & L essentially measures how well the business is utilizing company assets, personnel procedures and facilities in its effectiveness of serving customers while keeping a keen eye on profit maximization. By properly gathering and studying one’s operations and its corresponding P & L, one can learn much about a business which is useful for measuring rates of return, detecting both positive and negative trends, taking corrective action, and business valuation.

As with all ratios, care and attention should be given to evaluate them in light of company size, maturity, business climate and industry. Though there are many general rules of thumbs for a variety of different industries, there is no substitution for wise and judicious counsel of a wise and trusted business adviser/CPA. They will help evaluate these and many other nuances which make your particular circumstances, operating overhead and unique niche.

Gross Margin

First in line of the analysis of your business P & L is to carefully evaluate its gross margin. This calculation is done by subtracting the company’s cost of goods sold from sales and by dividing its result by sales. Cost of goods sold is best measured as a percentage and proper care should be exercised to ensure that the periods P & L has properly allocated all direct sales cost to cost of goods sold. Typically most all of these costs will vary proportionally to the amount of product/services sold and delivered. A proper and consistently applied cut-off of accounting data is critical to this evaluation as otherwise the data/margins are unduly skewed to start.

Pretax Margin

What your business nets in dollars and as a percent of sales are an essential part of understanding your business. A business pre-tax margin is determined by subtracting from sales, all cost of goods sold, personnel, sales and operating expenses. Knowledge of this margin is essential as it is a leading indicator of business future assets; liabilities and equity as well as the respective income taxes it/its owners will owe/be required to pay.

Net Margin/Net Income After Taxes

A company’s net margin is what a business has made off of its base operations/business decisions reached during the year. It is what is earned after paying all of a business P & L charges, depreciation, interest and taxes to both the IRS and the respective states in which a business operates. To maintain a clear and adequate understanding of this in dollars, it is prudent to invest the needed time and resources to ensure that one has an adequate overview understanding of how their business is taxed. To that end, it is wise to be aware of several key components:

• Does the business keep its internal books on an accrual basis and file the tax returns on a cash basis? Are the appending timing differences carefully delineated, documented and understood? For example, business owners might inadvertently neglect to recall that receivables billed and reported in an earlier period when financials are prepared on an accrual basis will have to be reported on a subsequent years tax return when the cash based tax return is prepared.
• An understanding of the company’s effective tax rate, which is determined by dividing one’s federal and state income tax bill by the related sales for the period.
• A company’s marginal tax rate, which is the amount of tax that would be due as a percentage and dollars, on any additional profit. This is a critical component as the IRS tax system is graduated, thus requiring more tax, as a percentage to be paid on additional net income.

Interest Expense

There are several hidden risks in acquiring debt that companies need to contemplate before acquiring debt/line of credit. Any of these issues either individually or collectively can cause irreparable damage to your firm’s ability to operate and continue forward. Often business owners who are flush with cash fail to make wise and judicious cash/debt decisions as they are inclined to believe the good times will last forever. Also before making any large non-recurring cash expenditure, care should be exercised to review the proposed transaction with projected cash needs as detailed in the company’s business plan.

Unfortunately, I have witnessed all too often companies spending all of the money they will soon critically need, simply for the lack of proper planning and advisement. An owner will also want to carefully contemplate a proposed line of credit/debt to be sensitive to its flexibility to meet an ever-changing business environment. Attention should be paid to ensuring the debt being requested is adequate as it is always better to have too much credit than too little. Also, the debt provisions should be carefully scrutinized to ensure that all provisions, repayment scenarios, and interest rate calculation and fluctuations are all well understood. Often banks and lending institutions will remove/negotiate several debt provisions in an effort to earn your business.