Storing tax records: How long is long enough?

Posted by Bruce Mc on Dec 31, 2010 in Information | 0 comments

Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the “three-year law” and leads many people to believe they’re safe provided they retain their documents for this period of time.

However, if the IRS believes you have significantly under-reported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.

Caution: Identity theft is a serious threat in today’s world, and it is important to take every precaution to avoid it. After it is no longer necessary to retain your tax records, financial statements, or any other documents with your personal information, you must dispose of these records by shredding them and not disposing of them by merely throwing them away in the trash.

10 things

Posted by Bruce Mc on Jul 27, 2010 in Accounting, Bookeeping, Information, Opinions | 0 comments

Below is a list of 10 practices that you should run-through, and 10 practices you should avoid. In an effort to get this information out to my readers, I have taken this list and edited it to where from my outlook as owner of a small business accounting firm with our knowledge and experience makes a better working sense. Working on your business can be a challenging task if you are unprepared.  Please keep in mind that I have edited this for my readers, my clients, and my own commercialism. 

10 things you should be doing 

1. Even if it’s likely you’re not going to be managing most of the financial aspects of your business, learn basic accounting concepts yourself, such as what a profit and loss statement is, what a balance sheet is, and what a cash flow statement is, just so that you’re in the know. As the owner, you need to know why and how things flow the way they do.
2. Hire a small business accountant who is going to be familiar with your industry to manage the financial assets of your business. If you are starting your own pluming business and your accountant doesn’t know how to turn a faucet on anything else about the plumbing industry, find one that does.
3. All Accountants will offer programs that can certainly help you do your job better, find out which ones work best for you, and then use them. Make an informed decision on the services you engage and the products you use.
4. Update cash flow control spreadsheets at least once a month, but preferably at least weekly.
5. You should have internal controls in place whereby you know that your business has received all of the income you have coming. If you don’t know how to do this yourself, hire someone who is a small business accounting professional to help you.
6. When you first start, your business, it is likely to be small; because of that, you can probably manage your own bookkeeping tasks (QuickBooks Pro and Premier Conveniently come in Download Versions and are Easily Upgradable. Buy Now and Save up to 20%!). (see number one in this list) Do this if you can so that you can learn how bookkeeping works, and how to manage the finances of your business (please note, as you grow, you may/will have to turn these tasks over to someone else later).
7. Prepare financial statements at monthly:
   1. Income statement
   2. Owner’s equity statement
   3. Balance sheet
   4. Statement of cash flows
8. Reconcile your bank account immediately when your monthly bank statement is received. Bank reconciliations are extremely important. Unfortunately, many small business owners do not realize this, because they do not even reconcile their own personal checking account. They just figure they can look on line for a balance and as long as there is money in the account, they are fine. The issue is, bank reconciliations are a must because they are the final way to be sure all entries are made into your books and that there are not any double entries.
9. Keep business and financial records separate, and don’t intermingle the two.
10. Outsource your payroll and payroll accounting to a payroll service provider. (On-line payroll service provider, this is a less expensive choice.) 

Top 10 “should not”

1. Don’t brag or over-inflate your numbers; be modest about your sales projections, and don’t underestimate what expenses are going to be.
2. Never put your personal and business assets together.
3. Don’t hand over control; make sure you retain the authority to assign all of your checks, and DON’T delegate this job to someone else.
4. Don’t touch money that’s been withheld for tax purposes like payroll or sales tax and use it for anything else — even if you’ve got an “emergency.”
5. Never pay an invoice without matching it to your purchase order.
6. Don’t have someone else do cash flow projections analysis for you.
7. Don’t hire a small business accountant and/or a lawyer to help you with financial matters, only to ignore their advice. They are trained and experience in what they do. Yes they make a mistake or two. You pay them good money; listen to what have to tell you.
8. Verbal agreements are fine, but get everything in writing, too — including purchases.
9. Never assign to others your relationship with your lending sources.
10. Don’t wait to establish credit resources when you need financing. Instead, do it well in advance.

Okay some good advice that has been around the internet awhile. Remember while you work in your business you will need to also work on your business.

The Income Statement (Profit & Loss) Part 1

Posted by Bruce Mc on Jul 13, 2010 in Accounting, Bookeeping, Income Statement, Information | 0 comments

The Income Statement is one of the three main financial statements. (The other two being the Balance Sheet and Cash Flow Statement.) The important thing to remember about an income statement is that it represents a period of time. As opposed to the balance sheet, which represents a single moment in time.

The income statement is sometimes referred to as the profit and loss statement (P&L), statement of operations, or statement of income. In QuickBooks it is the P & L.

This financial statement indicates changes in the financial position of the business for a particular period of time, i.e. month, quarter or year. The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company’s regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section.

An Income Statement is related with the Balance Sheet in the terms of net result for the period, i.e. profit or loss for the period from this financial statement goes to the Balance Sheet as an increase or decrease in Retained Earnings (result not distributed to the shareholders as dividends).

The Items Included in

Considering the structure of Income Statement, it is important that this statement indicates not only net result for the period, but also fundamental parts, which make this result. So this statement will include the following:

Revenue:

amounts earned for the goods sold or services provided

Cost of Sales:

cost of goods sold or services provided. In case only goods are being sold, this items will be called Cost of Goods Sold. Here all the cost which are directly related to the revenues earned are included

Gross Profit:

difference between two mentioned items, which indicate how much business earns from the main operations

Operating Expenses:

this items consists of the expenses which cannot be directly related to the cost of goods sold or services provided. Examples can be salaries of accountants, administrative office space rent and other

Operating Profit:

difference between Gross Profit and Operating Expenses

Interest Expenses:

these expenses are shown separately to indicate financial costs the business incurs and whether it earns sufficient profit to be able to pay interest on time

Net Profit (Loss):

this is the net result for the period. If it is positive, we have a profit. If it is negative, we have a loss.

Important to notice, that the Income Statement is usually prepared on the accrual basis, i.e. income and related expenses are recognized despite the fact that cash was not yet paid or received, but based on the obligation from customers to pay for goods sold or services provided and based on the obligation of the business to pay its liabilities.

It is very important to format an income statement so that it is appropriate to the business being conducted.

Income statements, along with balance sheets, are the most basic elements required by potential lenders, such as banks, investors, and vendors. They will use the financial reporting contained therein to determine credit limits

It may look like this:

The Company Balance Sheet

Posted by Bruce Mc on Jun 29, 2010 in Accounting, Balance Sheet, Information | 0 comments

There are three major financial statements – the profit & loss, the balance sheet, and the statement of cash flow.  The balance sheet is what drives the cash flow of the business. 

The balance sheet is an important financial-analysis and reporting tool that outlines the assets, liabilities and equity of the company at the end of the accounting period. If the balance sheet is not correct, then the cash flow forecast is most likely inaccurate and worthless. 

Unfortunately the balance sheet is what is usually the most neglected and least understood.

In an effort to help get the balance sheet forecasting correct, here are some common mistakes that entrepreneurs, CEOs, business owners, and even business financial consultants regularly make:

The most common mistake made is not having a balance sheet.  The balance sheet represents the most complex transactions of the company and may be left out because the company lacks the expertise of a CFO (Chief Financial Officer) or a firm with CFO services to assemble this critical part of the three major financial statements needed.

The major operating assets include accounts receivable, inventory, pre-paid items, and much more.  The major operating liabilities include accounts payable, taxes payable, and other accrued expenses.  When sales go up, accounts receivables go up, and cash goes down.  However, does your information show that?  If sales go up, can we expect our inventory level to stay the same?  Most likely it will need to increase.  The increments of these changes are dependent upon the relationship between the days sales outstanding and your inventory turnover. 

As sales increase, your accounts payable usually increase as well.  The timing of your payments against your accounts payable is a major outflow in the cash flow puzzle that is called working capital.  We need to define the relationship that payables have with your operating activities and implement this relationship in your balance sheet. 

There are several other operating assets and liabilities that dramatically influence cash flow.  I’ll avoid all of the details of each, but it is fair to say that without properly forecasting them, your cash flow forecast will never be accurate.

Are we bringing in any more equity investments during the period?  What is your dividend policy for shareholders?  Is some or all of the active shareholders compensation coming through equity?  All of these items can have a significant impact on cash flow, although none of them show up on the P&L. 

In addition to equity transactions, the structure of all of the company’s debts and obligations need to be correctly reflected. This is done on the balance sheet.  An interest only line of credit will keep the same balance until more is withdrawn or some is paid back based on the cash flow of your business.  Term loans need to show the correct amount of principal being reduced every month. 

Obviously these items can seriously change your cash flow, and they need to be included in the financial model so you can correctly forecast your cash flow.

Above are a few common mistakes, certainly not all-inclusive (you’ll notice I did not address capital expenditures at all), but should help create a positive foundation to build the balance sheet. 

L & R Tax Preparation offers CFO services. We have helped our clients get a handle on their companies, make the best strategic decisions possible, raise necessary capital, and perhaps most importantly, track their progress so they can correct problem areas and make more valid assumptions in the future.