Friday, December 21, 2012

Rolling Forecast v. Budget

With many of our clients we have moved to a rolling forecast instead of the traditional budget model. Why? To be frank, we started with this method a few years ago because so many of our micro businesses just used the budget more as a forecast anyway. Many solo entrepreneurs and micro business owners make quick decisions and run their businesses a bit on the fly. The mention of a budget is a painful thought to some of them and one that they resist as unnecessary with all their heart. They did not use the budget in the traditional sense of controlling their spending each month but rather as a forecasting tool for looking at where they will be now that they already made a decision and spent the money.

While this method served our small clients, it has actually become critical with our larger small businesses. With the rapid changes in technology and the continual political and economic uncertainty, small businesses need to be able to adapt to changes in the business environment in a very short time. It is no longer a certainty that you will be able to turn to a bank or outside investment to shore up a temporary short-fall in cash, so having a better way to plan the future and having the agility to adapt is crucial to success.

The purpose of a Rolling Forecast is to be able to foresee risks and opportunities, adapt your strategy given those risks and opportunities, and assign resources in a continual planning mode. The model depends upon identifying the key drivers in your business. In other words, identify what might cause your plan to vary, how you will know it is deviating from your original plan, and what you need to measure to see the deviation. And the model also needs to incorporate a cash flow aspect in the rolling forecast, since cash flow will make or break your business.  For some businesses, for example, the key drivers in your plan might be the dollar value of open sales orders as of a certain day of the month, the price of raw materials, the number of credit sales and the average accounts receivable days outstanding.

Once the drivers are identified, various forecast models can be built to predict expected, worse case, and best case scenarios. By using a rolling process, you are constantly looking at what your results were versus what you expected, and by using multiple predictive models you will have already planned ahead and assigned the resources to act quickly given your results.

Friday, November 16, 2012

Learn to love accounting

My goal in life is to get everyone to love accounting. I don’t think I’m going to succeed but I’ll keep trying. What do I love most about accounting? It’s all about balance. Balanced equations, balanced transactions, balanced books. In these turbulent times, couldn’t we all use a little balance in our lives?  So how can accounting bring some balance to your business life?

Try focusing on managerial accounting. Large businesses have cost accountants, Fortune 500 corporations have whole departments devoted to the discipline. Successful small business owners need to assume this role as well. It is not as scary as it sounds. We are fortunate in this time period to be able to make use of a variety of accounting software programs. Beth and I are QuickBooks Pro-Advisors, but there are many other good programs out there that make accounting and bookkeeping easier for the small business owner.  We have noticed that too many small businesses have only a tax accounting focus to their accounting. We suspect that is because most small businesses use a tax preparer to finalize their books and a tax preparer is naturally focused on what the business needs to file their taxes. It is very important to keep the tax authorities happy! It is also important to recognize that tax accounting is only a small component of the accounting picture.

Managerial accounting is using the information your accounting program or accountant is providing to help you guide your business. This means you must have financial statements prepared and available to you on a monthly basis. This is where the focus shifts from tax accounting which relies only on a year-end statement to managerial accounting which requires monthly statements. Ideally, as the small business owner, you have prepared a budget for your business and you are comparing your actual results to your budget regularly. You should also be comparing this developing and this task will bring these problems to your attention before they reach a crisis point. If your gross profit is less than you expected you need to understand why. Is your main supplier charging more than you anticipated? Are your shipping costs running higher? Do you have an employee theft problem? If your supplier is charging more, do you need to raise your own prices or can you get your sales staff to increase volume and earn you a volume discount. If shipping costs are rising, do you need to add a surcharge to your customers? If you suspect theft, do you need to install security cameras in your warehouse?

In today’s tough economy, no business can afford to be blindly operating at a loss. If you are losing money and you don’t know why, putting on your managerial accountant hat can help you answer the questions and formulate a plan to solve the problems. So do you love accounting a little more? Maybe not, but hopefully you can see how it can help bring some balance to your business life.

Friday, October 26, 2012

Tips for a Painless Sales Tax Audit

I have just been through a Wisconsin Sales & Use Tax Audit with one of my clients and it left me with some tips for all of my small business client.

1. One of the first things you need to do when starting a business is to verify whether your sales are subject to sales tax or not. If none of your sales are subject to sales tax or all of your sales are subject to sales tax, then you do not have anything special to do. If some of your sales are exempt from sales tax, then you need to be sure that you have Exemption Certificates on hand. There is a penalty for claiming the exemption without having the Exemption Certificate from the customer. I recommend filing them alphabetically in a 3-ring binder and if you have the technology, also scanning them and attaching them to your customer record in your Accounting or CRM program.

2. The main area that is being audited lately is the Use Tax as more people are purchasing over the internet. An audit normally consists of an alphabetical sample over the past 4 years. For this reason, I recommend that you file all vendor invoices first by year, and secondly by Vendor in alphabetical order. If you have vendors that you purchase from regularly, they should have their own file. All other vendors can be filed under the first letter of their business name (a generic F file, for example). A normal accounts payable practice is to attach a copy of the check stub to the vendor bill when paid or to write the payment date, amount, and reference number, and account paid out of on the vendor bill if it is scheduled for electronic payment. Be sure that you obtain a vendor bill or receipt for all purchases since it will be assumed that you did not pay sales tax if you cannot produce a receipt. Filing by this method allows you to easily look up any inquiries for internal purposes and also allows you to easily pull the required sample (i.e., 2008 A-F vendors). If you are paperless, this same filing system is appropriate on your computer.

Vendor bills paid with a credit card cause an issue. Some people prefer to attach all invoices to the appropriate credit card when reconciling the credit card and then file the entire bundle under the letter for the credit card company. I prefer to mark on the vendor bills that they were paid by a particular credit card and then file them under the appropriate vendor file. This makes it easier to find a particular invoice as you can look directly in the vendor file and do not have to guess as to what month the purchase happened on the credit card.

3. The purchases that you need to treat with special care are all purchases for which you did not pay sales tax. This means that as each bill is paid, you need to check to see if you paid sales tax or not. If you did not, you need to verify that it falls within the law of items exempt from usage tax. If it does not, then you need to set those bills aside in a "usage tax" file and calculate the usage tax on them when you file your Sales & Use Tax Filing. In particular beware of the following:
  • Internet purchases from out of state companies
  • Purchases from companies that are normally exempt from tax due to manufacturing or resale but are being used for a purpose different than the reason for the exemption 
  • Fixed Asset purchases. Each one of these was looked at separately (no sample was taken).
We have several clients who have so few vendor bills that they file first by the year, and then by a topic (i.e., insurance, purchases, etc), normally in an expandable file folder system. If your vendor bills are small enough to file using this method, that is fine as you will likely have all of your bills looked at instead of a sample anyway.

If a business files timely Wisconsin Sales & Use Tax returns, the records must be retained a minimum of the 4 years open to audit (7-10 is often recommended for income tax purposes anyway). If Sales & Use Tax returns were not filed, then records should be kept for a minimum of 10 years. Exemption certificates marked "Continuous" should never be destroyed.

In Wisconsin there are pen the sample is extrapolated over the 4 years of the audit and interest is calculated at 12% annually on errors. In addition steep penalties can be assessed for failure to produce the documents or failure to use them correctly. If you have any questions related to what is subject to sales or use tax, be sure to ask your accountant  for clarification.

Monday, October 22, 2012

Quarterly reviews

We are in the middle of quarterly projects right now which includes the filing of payroll taxes and the review of financials. 

We prepare actual reports for some of our clients which include analysis and suggestions.  Others need a less formal process, but we like to sit down with all our clients to talk about their financial statements.

If the client has a budget, we compare the actual results with the budget.  We ask questions about any variances in the results. If there isn't a budget, we just compare the current quarter to the previous quarter and the same quarter in the previous year. 

We look at the various ratios on the balance sheet (current, quick, A/R aging, inventory turnover, debt/worth) and the income statement (gross margin, net margin, sales growth).

Looking at the aging of receivables should be done regularly and past due accounts followed up on promptly.  The longer an account is overdue, the less likely the business is to collect.  Inventory should be monitored closely as well, especially if it is perishable.  Even non-perishable goods need to be watched as money is tied up in inventory and therefore can't be used to pay other bills.

Margins need to be looked at for various reasons.  Reduced prices during a sale need to be viewed from an overall standpoint to see if the results were a success.  Increases in the cost of raw materials need to be monitored to see if increases sales prices are warranted.  The same is true for increases in employee expenses-is your staffing level appropriate for your level of sales?

Business owners should be looking at their financial statements on a regular basis and asking these questions themselves, but talking them through quarterly with an accountant or financial advisor is often very helpful.

Monday, October 8, 2012

Does your accountant have a backup plan?

We met with a potential new client recently who had a sad story to tell.  He had an accountant processing his payroll including filing the payroll taxes.  She was a sole proprietor and was the only one who knew all the passwords and logins she used. The woman died unexpectedly and her husband did not know how to access her computer to get the information the client needed to be able to continue processing his payroll and handling the payroll taxes. 
As a result, he ended up missing some filing deadlines and ended up owing the government a large penalty and interest which put his business in a precarious spot.  E&S Entrepreneur Advisors, LLC has the benefit of two owners and we have many redundancies built in so our clients will always be able to get the information they need regardless of what happens to Beth and Susan. 
If you are working with an accounting firm, this shouldn't be an issue but this isn't the first time we have heard about problems with a small accounting business.  A single accountant is great because you are working with the same person every time and she/he really gets to understand your business.  Just make sure when you are creating your own disaster recovery plan, you ask about your accountant's!

Tuesday, September 11, 2012

Emergency preparedness for a small business

Owning a small business requires you to wear many hats.  One thing you may not think about is how your business will replace you!  Risk management is often a whole department in a corporation but often overlooked by smaller businesses. 

We recommend all small business owners have an emergency plan in place.  This includes talking to friends, family or colleagues to determine who can step in and run your company if you are injured or ill.  You will want to have a binder for people to refer to which has all your policies and procedures described in full detail.  Who are your contacts for each customer and vendor?  What are all your logins and passwords?  How do you handle your accounting?  How does the money get in the bank?  How do your bills get paid-are any set up automatically? 

The process of putting together the binder can be helpful not only in case of emergency, but also should you reach the point where you need to hire employees.   You will have a good deal of the training information already to go.

Start jotting down your procedures as you go through your day and put the notes in a binder and you will have a good start to this process. 

Planning for emergencies is even more important for a small business than a large corporation where there are others who can fill in should the need arise.  Protect your business by developing a contingency plan today.

Monday, August 27, 2012

Do I have to do my accounting?

Do I have to do my accounting?
We revisit this topic every so often as we continue to see people not doing the accounting for their business.  The simple answer is yes-you have to get the accounting done.  If you really don’t like to do it yourself then you need to build a bookkeeper or accountant into your budget.  No matter how small your business is, you just can’t run it properly without good numbers and you cannot get good numbers without someone doing the accounting.  We thought the evolution of accounting software programs like QuickBooks or FreshBooks would reduce this problem, but there are still a lot of people who don’t enjoy the numbers the way we do!  I don’t know if it is fear (fear of doing it wrong or fear of the results you get?!) or just a feeling that the work is tedious, but we still see people procrastinating and it makes us sad. 

Establishing a good process for your bookkeeping/accounting functions and staying current will empower you.  Even if the numbers paint a bad picture, you still have the knowledge and it will help you pinpoint the source so you can start fixing it. 

Do I have to do my accounting?  Yes-but look towards the reward of gaining the knowledge and not at the tedium of completing the process.

Thursday, August 9, 2012

On the Merits of Being Quiet

I recently read this article on Fast Company from their Guest contributor Roberta Chinsky Matuson and LOVED the message. I simply have to share it with you! For those who know me, I strive to be more quiet!!! Beth

"Some of you may have tried to reach me this morning and found that I was unavailable. That’s because I was knee high in muck with my husband and some friends. We were out having what I call clamming wars, here on Cape Cod.
I have to admit, my team was quite vocal everytime we scored a clam, which by my count was many. The other team raked for clams quietly in the distance. You can imagine our surprise when the quiet team hauled in considerably more clams than our team. Who would have thought?
Sometimes we forget that the most productive people in an organization aren’t the ones who make the most noise. In fact, it’s often the quiet ones who out-produce everyone else.
Here are some reasons I think this is so.
Being quiet strengthens focus. It's hard to focus on the task at hand when you yourself are making so much noise. The other team, who participated in the clamming wars, never took their eye off the prize. Our team, on the other hand, did a happy dance in the sand every time we hit pay dirt. In retrospect, this was probably valuable time wasted.
Being quiet calms others. Quiet people have the ability to calm those around them. For example, when everyone is stressing out because it looks like a team isn’t going to meet their deadlines, it’s usually the quiet people who are able to calm people down and carry them over the finish line.
Being quiet conveys confidence. You don’t have to prove anything to anyone when you are confident. You know you do a good job and you believe that eventually others will take notice.
Being quiet means you think before you speak. Quiet people are usually thoughtful thinkers. They think things through before making a statement. Something you probably wish many of your workers would do before taking up your valuable time.
Being quiet gives you the space to dig deep. Quiet people tend to delve into issues and ideas before moving on to new ones. Compare this to the surface people in your organization, who often move onto other matters without giving thought to the gold that may be sitting right below the surface.
The next time you evaluate team performance, be sure to give credit where credit is due. Remember that at the end of the day, it’s not about the noise one makes, but what one actually gets done."
Guest contributor Roberta Chinsky Matuson is an internationally recognized expert on increasing profitability by maximizing employee contribution. Her website is She is the author of Suddenly in Charge: Managing Up, Managing Down, Succeeding All Around, a Washington Post Top-­5 Leadership pick. Download a free bonus chapter. Her new book, The Magnetic Workplace: How to Hire Top Talent That Will Stick Around will be published in 2013. Sign up to receive a subscription to Roberta’s complimentary newsletter.

Wednesday, July 25, 2012

When is it the right time to start a business?

Starting a business is just like starting a relationship; the best time to do so is when you have sufficient time to devote to it.

It is possible to start a part-time business when you are still working at a job, in fact sometimes the bankers prefer this!  People have different energy levels and abilities, but you will give yourself the best chance of succeeding if you are fully committed to the endeavor.

It is not the right time to start a business if you are already experiencing turmoil or stress in your life.  If your personal life is in flux (new marriage, new baby, in the middle of a divorce) or if you have other demands on your time and attention (family health issues) it is smart to put off starting your business until your life is more in control.

The perfect time to start a business is not related to age; many successful owners are very young while others are mature and experienced.  It is really a matter of where you are in your life and whether you are ready for the challenge.

Think you are ready to start a business but wondering whether you have what it takes?  Take the quiz on the attached link to see!

Wednesday, April 25, 2012

Why Do Your Customers Keep Coming Back?

Why do your customers come to you for the first time and why do they keep coming back? Understanding that basic question is crucial to the continued growth and success of your business. The question is first asked when you are initially planning your business to help you create your focus and determine your branding and marketing strategy. Understanding what sets you apart from your competitors is what enables you to target your first clients.

This question needs to be asked continually throughout the life of your business. Once those first several customers are hooked, you need to ask them what brought them to your business and what is important to them so that you are sure that you are focused on the right things. Listening and adjusting to this answer is what leads to return customers and bountiful customer referrals. Once you know this answer, then you can integrate it into your sales pitch to ensure that you continue to attract new business.

It is also critical in other areas of business management as well. I am working with a client at the moment on restructuring their incentive pay system. While attempting to design a pay incentive program which accomplishes the operational objectives that we are striving for, we also need to keep the customer service question at the top of mind. We can't have people control costs at the expense of not providing to customers that very thing that is most important to them so we need to incorporate that into the incentive program as well.

Why do your customers come to you for the first time and why do they keep coming back? Understand this and you will thrive!

Monday, February 13, 2012

Big Business and health care

We try not to get political in our blog, but I read something in the New York Times yesterday which was so upsetting that I must address it.

This is near and dear to my heart.  My daughter was diagnosed with leukemia (ALL) when she was seven weeks old.  She was treated with an experimental chemotherapy protocol which has now become the gold standard for this type of cancer.  One of the key drugs in this protocol is methotrexate.  This drug kills the cancer cells in the brain and spinal fluid and replaces radiation which is extremely damaging to children under the age of one.  My daughter was blessed to be treated with this drug regime.  She was a straight A student in high school and is consistently on the Dean's list at UW-Madison.  Her cure and her healthy brain is due in part to the methotrexate.  I find it horrifying that our country allows shortages like this to occur.  The health of our children, of all citizens of this country needs to come ahead of t the drug companies need to make money.  I really hope the government figures out how to fix health care in our country, because from the drug companies to the health insurance companies, it seems the CEOs and stockholders are the only ones benefiting from the current system. Please make sure you understand your legislators know where you stand when it comes to health care reform in the United States.


Monday, January 30, 2012

Closing the Books on 2011

January is drawing to a close and you should have enough information to close the books for 2011. We use a checklist for our clients to make sure everything has been entered and all accounts reconciled or verified. A brief checklist looks like this:
1. Verify that all vendor bills are posted by the end of the year
2. Invoice any customers for any work done in 2011
3. Review Accounts Receivable and determine if any need to be sent to a collection agency or written   off as uncollectible
4. Review all loan payments to verify the correct allocation between interest and principal.
5. Reconcile
    a. Bank accounts
    b. Credit cards
    c. Accounts Receivable (compare the Balance sheet amount to the aging report)
    d. Accounts Payable (compare the Balance sheet amount to the aging report)
6. Create a list of 1099 vendors and calculate the amount due them.
7. File your 1099s
8. Adjust any prepaid items, such as insurance
9. Record any accruals for the year end for any other expenses which aren't included in Accounts        Payable or the credit card
10. Calculate and record depreciation and amortization expense as needed
11. Review asset and expense accounts to insure that all fixed assets have been recorded on the books
12. Prepare year-end reports: W2, W3, 940, 941, 1096, 1099, WT-6, WT-7, UCT101 and remit to the   appropriate parties
13. Review your financial statements for 2011: Profit & Loss, Balance Sheet, A/R aging, A/P aging,   Budget to Actual
14. Enter the budget for 2012 into your accounting program
15. Review your data backup plan for adequacy and clean up your paper files
16. Schedule your appointment with your tax preparer

Monday, January 23, 2012

Physical Inventory best practices

Most accountants and business owners don't like to hear the word inventory at this time of year!  I worked for a CPA firm for the first three years out of college and everyone who wasn't a manager or partner had to help take physical inventories on either December 31st or January 1st.  My most memorable sounding experience was counting bull semen for a genetics company.  It actually wasn't bad-test tubes stored in tanks of liquid nitrogen so it was cold, but the company was well managed so the the physical count went smoothly.
Every business which owns inventory needs to take a full physical count at least once a year.  Year-end is the most common timing as it insures that the ending numbers are correct and the tax authorities hope it that COGS will be correct as well.
The way to insure that a physical count is as painless as possible is to plan and prepare well in advance.  Planning will keep the count organized so employees don't get frustrated, time isn't wasted and the numbers are accurate. 
Once you have set the date for the count, notify everyone of the shut down or non-shipment period.  You don't want to be receiving new inventory when you are counting the existing inventory.  Verify that all inventory has been received into your data system and all inventory transactions are current in your system prior to the count.  Print out the count sheets and assign them to employees.  The count sheets should have the amount on hand according to your accounting program and another spot for the actual count.
On the day of the count, make sure you have good coffee and perhaps, donuts on hand to start the process on a positive note!  Divide the location into counting areas.  Divide and conquer in little steps.  Break the overall counting process into a series of smaller counts.  Make sure employees know to make note of any damaged or obsolete inventory and that the items are properly marked if they aren't disposed of immediately.  You don't want to make the mistake of counting them again next year!  Make note of all counts and investigate any large differences between the system and the actual counts.  Make your adjustments are you are ready to start the New Year.
Taking a physical inventory isn't something people look forward to, but if you are organized it can be relatively painless and it can leave you with a sense of accomplishment knowing your books are accurate to start the New Year.

Monday, January 16, 2012 flow style

Beth and I are big believers in budgets.  It gives a business goals and benchmarks to guide decision making and can warn of developing problems with enough lead time to make corrections.  When we create a budget, we use a cash flow format rather than a profit & loss format.   Budgeting solely on income and expenses can leave out major pieces of your cash flow: money tied up in accounts receivable and inventory and money spent on fixed asset purchases and making loan payments. 

Last year, one of our clients witnessed first hand the benefits of a cash flow based budget.  The business was experiencing a slight downturn in sales while costs (specifically wages) were up.  The client had a line of credit which was used to cover purchases in their slow period and our budget to actual analysis showed that in a few months, the line would not only be maxed out, but the expenditures were heading in a direction that would require even more money.  Because the budget warned of this trend, the owner was able to quickly make some changes.  She renewed efforts to bring in sales and she cut back on employee hours and thus wages by working a few more hours herself.  As a result, the trend reversed itself and not only did she not hit the upper limit on the line of credit, she actually was able to pay it down to nearly $0.

We recommend all small business owner try to get a line of credit.  Having a line gives a business flexibility during the slow seasons, it also helps during periods of rapid growth.  Having a line of credit requires good cash management because the bank will expect the business to use the line properly.  Proper usage dictates resting the line periodically (paying it down to $0).  All the more reason to have a cash flow based budget and comparing actual results to the budget every month to make sure you will have the money to use your line properly.