As a business owner, financial data is critical to your success — but only if you know how to interpret the meaning behind the numbers correctly. Most owners or leaders within an organization rely on the aid of an accounting team to accurately analyze and organize financial data. Still, when it comes time to make a big decision, it’s up to you to do so based on the gathered information.
There are at least three primary financial statements your accounting team will (read: most definitely should) be presenting to you regularly: income statements, balance sheets, and statements of cash flow.
With a solid understanding of each financial statement, you can unlock powerful insights to help you compete more effectively in the marketplace, achieve better terms from vendors and suppliers, and offer accurate projections to both internal stakeholders and lending companies alike.
The income statement (also called a profit and loss statement or P&L statement) measures the profitability of your business during a specified accounting period. This statement assesses all of your business’ revenue and expenses, and then reports a net profit or net loss.
By industry standards, this is the most influential of the three significant statements. This report shows where the money is allocated and breaks down business costs into categories.
Importantly notated are costs directly related to goods and services. It also calculates your company’s earnings from multiple viewpoints, reporting not only the net earnings (your bottom line) but also an assessment of the business’ productive efficiency before the impact of taxes and financing.
It’s helpful to compare multiple income statements from different accounting periods to monitor whether your business is becoming more or less profitable over time — allowing you to adjust your spending and production processes accordingly.
The information on the balance sheet is monumentally more valuable when viewed in conjunction with your income statement. For instance, you can use the data from the balance sheet to determine how many investments are required to support the bottom line shown on your income statement.
While the income statement focuses on one specific accounting period, the balance sheet shows a snapshot of your overall financial health on a particular day by using a simple equation: liabilities + equity = assets.
These factors give you an idea of what the business owns (assets), what it owes (liabilities, including short-term expenses and long-term debt), and how much capital shareholders have invested (equity). As the name suggests, the two sides of the equation in your balance sheet should balance out.
The cash flow statement does just what the name implies — it reports on the flow of cash into and out of your business. Unlike the income statement, which breaks down earnings and expenses into more specific categories, the statement of cash flows focuses on the overall amount of money coming in (inflow), compared to the amount of money going out (outflow).
To find this data, it takes precise calculations using the following equation: starting cash balance + cash inflows – cash outflows = ending cash balance.
Cash inflows include sales, loans, and accounts receivable collections. Alternatively, cash outflows include equipment costs, inventory, and expenses paid. The statement of cash flows presents the most transparent view of a company’s cash variation. In other words, what caused the balance in your bank account to increase or decrease.
Comprehensive knowledge of the financial side of your company will be incredibly helpful when it comes to making smart business decisions.
If your accounting team needs help or are not sure how to gather the information for these reports, have them contact us. Our expert team of accountants and business advisors are here for help in situations just like these.
The beginning of the year is anything but dull, but after the holiday celebrations, it’s time to settle down and get organized for tax season. While employees might not have taxes on the brain until April, businesses, and employers are busy preparing early on. It’s crucial to start this process sooner rather than later, so no paperwork is forgotten. One essential form to remember is 1099.
What Is A 1099 IRS Form?
A 1099 IRS form is a record of a person or an entity providing payment to someone. There are several types of IRS 1099 forms, such as 1099-MISC, 1099-INT, 1099-CAP, and more. These informational returns are used to record payments to individuals or partnerships for interest, services, bonuses, and other types of income paid during the year.
Please note that business owners must file 1099 forms with the IRS and send a copy to the individual each year by January 31st, the same as the W2 filing deadline.
If you have convertible notes payable that accrue interest during the year, you must file Form 1099-INT
If you paid dividends to inventors, you must file Form 1099-DIV
If you forgave an outstanding debt during the year, you must submit form 1099-C
All amounts paid to law firms must be reported on a 1099, regardless if the law firm is categorized as a corporation and even if the amounts are less than $600
Here Are The Accounting Best Practices for 1099s
Good recordkeeping is key to fulfilling this requirement and meeting the January 31st deadline:
Payments to vendors should be categorized in your books and records by vendor and not merely by category or expense line item.
Small businesses should always request a form W9 from any vendor with whom they conduct business. A W9 will tell you if the vendor is a Corporation (excluded from 1099 requirement) and what their federal tax ID number is (needed for the 1099). Read More:Financial Tips From Successful Leaders
These Are Common Mistakes To Avoid
Below are some examples of mistakes commonly made by small business owners when it comes to 1099 rules:
Classifying employees as a 1099 vendor when they meet the IRS definition of a W2 full-time employee.
Giving expensive gifts or prizes to sales representatives or others without issuing a 1099 for the value of the gift.
Not filing a 1099 for interest accrued on convertible notes or other bonds.
Not keeping proper records or requiring a W9, so when it comes time to prepare the 1099s they are filed late due to trying to collect all the necessary data from each vendor.
Do not wait until the last minute. Reduce the January time crunch by reviewing your vendor list with your accountant in December if you can remember. Find and address issues early and make sure you have a plan to get the 1099s filed by the January 31st deadline.
Signature Analytics Can Help
If you need help preparing the data necessary to complete your 1099s, have questions about who you should be sending this form to, or any other financial paperwork inquiries, please contact us today.
The full financial picture of any company is like trying to solve a scrambled Rubik’s cube: it’s complicated. This makes proper accounting essential to both the financial health of your business and its overall potential for longevity.
There are two standard methods of business finance tracking: the cash method and the accrual method. Understanding the difference between these two methods will help you in determining which method is the best fit for your business.
What is cash accounting?
The cash accounting method tracks income when it is received and expenses when they are paid and is the most popular method for small businesses and personal finances. If you’ve ever balanced a personal checkbook or entered what you’ve spent and earned into a spreadsheet, then you have a good idea of how cash accounting works.
For example: you own a business that builds websites for companies and finish a website in August, but your company doesn’t get paid until October, then that income is recorded in October’s books. If the client never pays, then the income is never recorded.
The benefits of cash accounting
The cash accounting method accounts for real-time transactions, meaning that transactions are recorded when cash changes hands. For small businesses who are worried about overspending and want to know exactly how much cash they have on hand, the cash accounting method may be a good fit for your business.
There are also tax benefits to cash accounting. Finance and accounting professionals can work with your tax personnel to determine the most advantageous method for your situation. Since some companies are restricted from using< the cash accounting method, it’s important to consult with an accounting professional who can help to identify whether cash accounting is a viable option for your business.
While cash accounting is essentially a “simpler” way of maintaining a business outlook, it can also produce an erroneous picture of your company’s performance since revenue isn’t recognized until the money is in the bank.
What is accrual accounting?
Accrual accounting takes a more hypothetical approach to your big-picture business finances; accountants or financial firms count income when it is billed and expenses when they arrive.
Unlike the cash method, the accrual method records the client invoice the day it is received, even if it isn’t paid until a month later. In the accrual method, accounting professionals will use a balance sheet to record the offsetting asset or liability so you can maintain a good sense of your business’ current financial status.
The benefits of accrual accounting
Since accrual accounting records transactions upon completion of a delivery or service, it allows a company to see how well it’s doing and have the ability to make better predictive decisions regarding the future.
Because you know how much is anticipated in the short-term (regardless of it being in your account yet), accrual accounting gives you a better sense of your cash flow needs as well as any outstanding expense liabilities that are due. Financial professionals will usually add another reporting function that lists actual cash available at any given time.
Since the accrual method records all transactions, regardless of the payment being received, your books could could reflect revenue even if your bank account is completely empty.
Which one is right for your business?
There are a few factors to consider when deciding whether to use cash or accrual accounting methods. Here are a few things to keep in mind:
Size and Industry
The size and industry of the company you run are major determining factors. For instance, C corporations who generate over $10 million and S corporations who generate over $20 million in average gross revenue over the past 3 tax years, are excluded from using the cash accounting method.
The size and industry of the company you run are major determining factors. For instance, C corporations who generate over $10 million and S corporations who generate over $20 million in average gross revenue over the past 3 tax years, are excluded from using the cash accounting method.
Ease of Reporting
The accrual accounting method is more difficult to report from a tax perspective, though financial service experts can easily handle this aspect.
Insight into your business
Cash accounting doesn’t give much insight into the overall health of your business as far as sales, expected income, or expected expenses go.
Financial experts can also give you more insight into which type of accounting method makes the most sense for your business and set it up for you so that you can keep focusing on the most important thing: running your company. Hiring a reputable financial firm can help your company reduce the risk of spending too much or straining vendor/contractor relations with late payments. Get expert advice now.
It is difficult to accomplish goals without a plan. Think of the last time you wanted to lose 10 pounds. You likely planned out your meals, picked which days you would go to the gym, and got yourself into bed early, so you were rested each day. All of this encompasses a plan; without one, you likely wouldn’t have been able to achieve your goal.
Just like you, your business also needs a plan. Strategic financial planning is required for any company to be successful. It’s a roadmap to understand what direction your business is heading and why. It can also help you plan for some of life’s unexpected happenings, like a recession.
Financial planning strategies for your business can help you determine where to spend money, time, and other resources. It should include specific goals to help you reach your dream. To help identify each unique point within the strategy, you should utilize various tools such as forecasting, budgeting, cash flow analysis, and key performance indicators. Let’s break down exactly what should and should not be included.
What Valuable Questions Should I Consider First?
First, let’s start by answering some common questions that can help guide your direction:
What are the goals of ownership? Do they want to sell the company in 3-5 years or hold and operate for 20 years?
What are the key metrics that drive profitability to the business?
What are the key metrics that drive value to the business?
Do they understand the profit margins of the business in total and by revenue stream?
What is the cash conversion cycle of the business? (How long it takes for cash outflows to turn into cash inflows, i.e., cash paid for product to cash received from the sale of product.)
It’s essential to take the time and consider the answer to each of these questions. These responses can give you a clue as to where to begin in the process. To help guide you on the strategic and financial planning process, we have broken down tangible steps to help get you there.
Figure out where you are: Use your resources to conduct internal and external audits to help better understand the marketplace. Are you at the top of your industry or floating somewhere in the middle? Maybe you are at the bottom, and that is ok too, so long as you know where your business stands currently. This process can help you reach the next step. Have a clear understanding of what you are great at and what your competitors are doing too.
Focus on what’s important: What is it about the business that will get you to the next rung on the ladder? What do your customers come to you for and praise you for doing? What is your company’s mission? Once you identify these main points, you will understand what your team and financial business plan should ultimately be focusing on right now.
Define your objectives: Now that you know what you should be focusing on, also consider areas that your company has been “distracted.” What teams or committees are taking away from the main objectives? Zero in your attention on what is most important and focus all your efforts there.
Put people in charge: How many times has a project fell through because no one was championing it? Use your team to your advantage and make people accountable for their projects that focus on your company’s objectives. Accountability is a true key to success in your company reaching its goals.
Circle back: This plan, if done correctly, will work for now, but not forever. It is vital to set up a timeline to check back in with your team on their projects to ensure your company is hitting its goals and objectives. Maybe a quarterly check-in is what is best for your business or, perhaps, it’s yearly. Whatever cadence you set up is based on your companies needs; just don’t forget to review the strategic plan every so often.
Once a financial plan development has been made for your company, an annual budget should be created. When creating a budget, it is important to look at the income statement, but also the flow of activity driving the balance sheet, and then ultimately the timing and flows of cash.
For many of our clients, in addition to the budget, we use a rolling forecast model, which is updated monthly based on the most recent company information available. This allows us to have clear visibility into our clients’ cash position for a minimum of 90 days in advance at all times. This way, we can help ensure there is appropriate cash and business planning can be made proactively in advance.
Key Performance Indicators (KPIs) can then be developed to focus on driving profitability, value, or both to the company. Examples of KPIs may include tracking the average days outstanding in Accounts Receivable in which continued improvement over time will increase cash flows of the business. Another simple KPI to track would be gross margin by product or service line. By knowing this information, the management of the company can make decisions to improve these metrics over time.
KPIs should be included as part of an ongoing scorecard and reporting package (monthly at a minimum) that management reviews. Management must develop KPIs that can be translated into actionable insight and ultimately to action. An action plan should be established at each meeting based on the movement in the KPIs, continuously focused on improving the KPIs over time. The action items should then be reviewed at the next meeting for progress, at which time new action items are then created.
In short, know your goals, develop a plan, budget, and forecast out your plan, develop trackable metrics, and then execute on your plan. Want to break down the process even more? Read our blog on planning a strategic budget that sticks.
We Can Help
Contact us to see how Signature Analytics can assist in identifying your goals, developing a plan, and developing metrics to execute your plan. Our talented, experienced accountants and financial analysts can complement your existing accounting employees, or act as your entire accounting department (CFO to staff accountant).
We provide the ongoing accounting support and financial analysis necessary to more effectively run your company, analyze operations, and guide business decisions to help you grow.
Clean books – What does that really mean? Your financial accounting records, the “books” we reference, are a window into the health of your business. They represent the results of operations, and help guide strategy and measure execution of initiatives. However, they are only as useful as the underlying information, processes and procedures that comprise the accounting and finance department. In Signature Analytics’ decades of combined experience with small business accounting, we have seen some real horror stories.
Definitions – It’s All in the Name First, let’s start with some high-level definitions of accounting – You may have heard some of these:
Balance Sheet vs. Income Statement – One measures results at a point in time, the other over a period of time.
Accrual vs. Cash Basis – One tries to match revenue and expense to the period they are incurred, the other when they are received or paid.
Tax vs. Book – Tax compliance is regulatory focused, like tax law, and often bears little resemblance to actual financial results of the business. Think “accelerated depreciation” or “disallowed deductions.”
Further definitions and discussions around these are the subject of a future blog post, but without a clear understanding of these concepts, horrors can develop.
What Is “Accounting,” Really? In one respect, accounting can be looked at as the “reconciliation engine” of your operations. We record the transactions generated by the day to day activities, and we compare or reconcile to outside information. Bank and credit card statements, customer and vendor statements, lease and loan payment schedules are all examples of independent information that is used to “confirm” the data in your records with things happening “around” your accounting department. Without a consistent reconciliation process, horrors can fester and grow.
Horror Scenes – Ripped From the Headlines! Here are some real world examples of things we have seen:
Customer payments that do not match invoice amounts. When a customer pays less than owed on an invoice, and no credit memo is generated to account for the difference, you may think your customers owe you more money than they do. Without reconciling to customer statements, these amounts may build up significantly over time. We rarely see a customer pay too much – although see the next point!
Vendor payments that are duplicated. Without consistent use of document numbers in the financials, bills can be entered more than once for the same charges, and duplicate payments can be made. We have also seen bills paid by credit card, and then also paid by check.
Expenses booked to fixed asset accounts. Computer, office and auto expenses can often get entered with the fixed asset account associated with these types of equipment. These are reflected on the balance sheet, implying additional equipment purchases, understating the expenses on the income statement.
Depreciation of fixed assets missing or not consistent. We often find that depreciation entries are incorrect or missing on the monthly financials, as either new purchases are not reflected in the calculations, or the entry is made yearly after the tax return is generated, or not at all!
Vacation or PTO accrual missing or inaccurate. If you have a time off policy, the expense associated with the granting of the time off should be recognized when incurred, not taken. As these policies often have long waiting periods, and people can accumulate large balances over time, this can amount to a significant amount of liability. We usually see the expense recognized when taken, if recognized at all.
What is the impact?
All of these scenarios result in reports that have a large variation from month to month, even year to year. Users of the financial statements rely upon coherent and consistent application of accounting policies and procedures. These can be financial institutions that have or will lend money, accounting firms that perform reviews or audits, and investors that own part of the company. They all rely on consistency as an evaluation of risk. The less risk, the better the results. Clean out your financial dark closet before you need these outside resources to grow your business.
Signature Analytics can help with your accounting records! Our talented, experienced accountants and financial analysts can complement your existing accounting employees, or act as your entire accounting department (CFO to staff accountant). We provide the ongoing accounting support and financial analysis necessary to more effectively run your company, analyze operations, and guide business decisions to help you grow. Contact us today.
IT managed services have recently taken center stage in the fight for global acceptance as cloud-based solutions and an outsourced IT model gain popularity. Cyber threat management, data protection and privacy, and compliance to third parties have shifted priorities from a “do-it-yourself” mindset to one of collaboration and strategic partnering.
So what does that have to do with “fractional accounting?” And why is that relevant to CEOs, Presidents and Business Owners? All excellent questions as we segue into the mainstream.
Large Fortune 2000 businesses can easily afford the services of a full accounting and finance team. From CFO to staff accountant, the complexity of basic operations combined with the need for significant financial and data analysis requires the continued due diligence of a high performing team. In a highly competitive landscape with reputations on the line, access to real-time, accurate, and complete financial data must be at the executive’s fingertips.
CEOs and CFOs realized their existing ERP and conjoined legacy applications housed vast amounts of data they were incapable of mining. This trend laid the groundwork for the “Big Data” revolution, and you saw a host of predictive and prescriptive analytics software companies continuing to break new ground to fill the need. Fully staffed teams became the norm, and fee-based recruiting agencies searched for potential hires.
But where does that leave small- and mid-sized businesses? They do not have the luxury or the cash flow to bring on a full-time CFO complemented by a Controller, Senior Accountant, and Staff Accountants. So the void is filled out in many inefficient, and sometimes dangerous, ways:
Hire a Full-time CFO….and pay $150,000 and up for accounting services. This figure is much higher when you add the employer payroll taxes, employer portion of health insurance, vacation, bonuses, and more. We often see this situation with our clients. The CFO is relegated to managing and executing the accounting function, which is not a good use of his or her time. Plus, it’s expensive. And as the CFO gets buried under more and more accounting work, business owners find that they’re not getting the high-level financial analysis they needed in the first place. Not to mention the high likelihood the CFO will ultimately quit to pursue greener pastures.
Hire an Office Manager….and let them do the accounting. We see this in about half our clients, and it is met with good intentions. An Office Manager works double duty managing the office and running the accounting department, which seems like a cost-effective way to kill two birds with one stone. Alas, these individuals rarely have accounting degrees, let alone their CPA, and we typically find a host of problems – incomplete or sloppy work (not on purpose), timing issues, inaccurate financial statements, unreconciled accounts, looming tax issues, and more. Combine that with the high likelihood your CEO is unknowingly going down the wrong path because they do not have the financial planning and analysis needed to make the right decisions. This is dangerous – it’s what you don’t know that can kill your business. Cash is king, you only have so much cash to run your business, and steering the ship in the right direction is vital to your continued growth and success.
Leading small- and middle-market businesses are leveraging the high value and low costs that fractional accounting provides to turbocharge their accounting and finances.
Fractional accounting is high value and cost effective at the same time, which makes good business sense to consider. Business owners are demanding more from their accounting function, and expecting financial planning and analysis to help them make the right business decisions. The growing need brought about a new paradigm as leading companies turned to a fractional accounting model.
It’s simple – only use, and pay for, the accounting and finance resources you need, when you need them. Signature Analytics is a full-service accounting and finance firm, and we provide full teams to our clients at a fraction of the cost of full-time, internal staff. As a former business owner myself, I’d have bought our services immediately, and been that much better for it.
Of course, proof is in delivery. How do business owners deploy this model in their businesses?
Here are steps you can take to understand if fractional accounting is right for you. Since the model can also complement your existing accounting function, it is worth going through an analysis. A simple conversation could save you thousands a year, not to mention increase the value of your business. 1. Determine your needs and pain points. It’s vital to understand what you need to help your business grow. Accounting is at the foundation and requires diligence, accuracy, completeness, and timely input to be effective. Some key questions to ask:
Who does your accounting? Are they a CPA? Do they have an accounting degree from an accredited school?
Are you receiving the information you need to make the right decisions for your business? Financial planning and analysis is vital to help you determine choice A over B, and any significant allocations of working capital that affect cash flow need this due diligence.
Are you comfortable they have the expertise to properly record and account for all transactions that reflect the operations of your business?
What stresses you out as a business owner that you feel you’re not getting answers to? For example…
Are your monthly or quarterly Board meetings a slug fest, even though you believe you’re doing the right things to run the company?
Are you worried that you are paying too much in taxes, and you’re not sure how to plan effectively to minimize your tax exposure?
Have you been denied by banks to get a bank loan or increase existing lines of credit?
Are you concerned about where your cash is going and unsure how to forecast your cash flows?
Do you understand the gross profit of all your products and services?
Do you have a handle on your employees’ profitability and utilization, and do you understand their fully loaded cost?
Do you truly know your lines of business and their growth and profit potential?
And many more
2. Carefully consider your options. Oftentimes, small and medium businesses employ a CFO or an Office Manager/Controller combination to “take care of the books.” Either option has its advantages and disadvantages. The key is understanding the strengths and weaknesses of your accounting and finance function, and the advantages and disadvantages of keeping with the status quo. A fractional accounting model provides you the flexibility to adjust the mix of your accounting and finance team as your business needs change. That is crucial as your business grows and the level and complexity of your enterprise demands higher level oversight and analysis to achieve your goals.
Ultimately, the success or failure of your business starts at the top, which can be lonely at times, we know. Steering the ship demands passion, executive leadership, and the drive to be successful. It also requires top-notch financial data and analysis to make the right decisions. Fractional accounting is a way to get what the big companies have in spades at a fraction of the cost.
About Signature Analytics
Signature Analytics is an outsourced accounting firm providing ongoing accounting support and financial analysis to small and mid-size companies in stages ranging from innovative start-ups to well-established businesses. Our team of highly experienced accountants act as your entire accounting department (CFO to staff accountant), or complement your internal accounting staff, to provide the ongoing accounting support and financial analysis necessary to effectively run your company, analyze operations, and guide business decisions.
Author: Steven Conwell has more than 20 years of experience in strategy, operations, finance, accounting, sales, marketing, and corporate branding. He recently joined Signature Analytics as the Texas President for Dallas and Fort Worth Metroplex. Read his full biohere.