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.