A Fresh Start – 5 Things in Accounting to Check for the New Year
1. The Bliss of Budgets:
Nothing helps money management more than a good budget. A few things to check out when you draft your 2011 Budget are:
o Planning for large purchases, new products and sets, and large marketing campaigns are all part of strategic planning. Checking your actual sales against your budget will give you the fastest and most accurate assessment of the success or failure of your plans.
o Recurring expenses, expenses that come in on a regular basis and for a fixed amount, make budgeting easier. When a recurring expense increases, review it. It might be time to negotiate or find a new vendor.
o Remember payroll expenses are not just the amount of the pay check. Depending on what benefits you offer, it can cost a great deal more for labor. The average cost for staff is figured at salary plus 25-30%. Remember to budget the complete cost of each employee.
2. Chart of Accounts:
The most important task in accounting is setting up a good Chart of Accounts. No software can possibly do that for you. The best they can do is offer a generic, one size fits all, form. You need to set up accounts to produce the information you need for your business.
o Most generic Charts of Accounts are set up to give the information required by the IRS. None of them are set up to track the individual needs of your business.
o Of all you need to know about your company, the tracking of sales revenue and cost of goods sold is the most basic. Take a minute to think by your Chart of Accounts and make sure it is producing the data you need.
3. Tax Strategies:
You should have a CPA do your taxes as soon as the business can provide it. If you cannot provide a CPA, at the minimum use Turbo Tax. Here are just a few ideas for you:
o Check your fixed assets, in this year, 2010, you are allowed to deduct 50% of new fixed assets. Check the IRS web site for details. You will want to use this if you have experienced large growth in your revenue.
o Remember to use Carry Back and Carry Forward forms. If you are a new business chances are good that you have less than zero due on your taxes. That is, you have more deductions than you can use. Next year you can carry those deductions forward and apply them to next year’s taxes. If you had a big profit, you can go back to past years when you lost money and carry the loss forward to deduct from this year’s taxes. Both of these forms are described in the Tax Booklet you receive with your forms and on the IRS web site.
o If you are an LLC, check to be sure you are filing the correct form. If you are the only owner, you file as only Proprietor, if you are a partnership, you file as a Partnership. LLC’s can file as Corporations if they have two of the four corporate characteristics. The four basic characteristics of a corporation are: a separate legal existence; ownership is in the form of shares of stock; limited liability; and a Board of Directors.
o Since businesses are taxed only on the money (revenue) they truly received, many companies slow down on collections and invoicing in December so that the money is not truly in their hands until January.
o Check your Chart of Accounts to make sure deferred revenue is precisely placed in the liability accounts. Deferred Revenue is money you have received, but not in addition earned, like school tuition.
o The new Health Care Bill Credit is in effect for the year 2010. Here are the specifics for small business: The company must have less than 25 complete time employees; the average wage amount the company pays must be less than $50,000; the tax credit covers 35% of the premiums the small business must pay; the business must be paying at the minimum 50% of the health premiums for the employees; the credit can be applied to healthy, vision and dental benefits.
o Do you taxes as soon as possible in January. If you have a refund, file right away. If you owe the IRS, don’t pay until April 15th.
The New Year is a good time to review your pricing. Are you over priced? Underpriced? For a small business the answer is almost always underpriced. Customers generally believe if it costs more, its worth more. Look at your profit and ask yourself a few questions:
o Where are you in your industry? Industries are commonly divided into three tiers for pricing, high, medium and low. Where do you stand?
o What is your best selling product or service? What is the worst selling? Do you need to make decisions about what to offer?
o Small Businesses, especially service companies, should not price low. Price in the middle. Small Businesses win by having the best quality and service.
o Can you see which product or service will make you stand out in the marketplace?
o Are some products or sets too “high maintenance”? Do they consume too much money or time? If so can you drop them?
o Set your price that enables you to show a profit and don’t budge. There is no faster trip to the bankruptcy court than selling too low.
5. Harvest the Data- 4 Important Numbers:
Don’t waste your hard earned, carefully complied financial data. No data of any kind will tell you more about your business. You will see the results of your decisions. The answers may well surprise you. Here are four basic ratios from typical ratio examination that will get you started. They require only that you can add, subtract, multiply and divide. Take your year end Balance Sheet and Income Statement and check them out.
o A Profitability Ratio- Gross margin.
The data for this ratio is on your Income Statement. You need to know the total amount of sales revenue and the total amount of cost of goods sold. The formula is:
Total Sales Revenue – (minus) Total Cost of Goods Sold / (divided by) Total Sales Revenue = the Gross Margin given as a percentage
Total Sales Revenue= $157,900
Total Cost of Goods Sold=$76,000
157,900 – 76,000 = 81,900
81,900/ 157.900 = 51% Gross Margin
o This method 51 cents of every dollar from sales is profit.
o Each industry has its own gross margin goal. In general, retail and manufacturing need a 50 % gross margin to stay in business. Service companies need a 25-30% gross margin. The additional money is needed for indirect expenses (expenses not directly related to sales) and to sustain the owner.
o A Liquidity Ratio- The Acid Test Ratio
The data for this ratio is on your Balance Sheet. You need to know the total amount of current assets (assets that can be turned into cash in less than a year) and the total current limitations (limitations that will have to be paid in less than a year). Here is the formula:
Total Current Assets/ (divided by) Total Current limitations = The Acid Test Ratio given as a ratio
Total Current Assets= $235,000
Total Current limitations=115,000
235,000/ 115,000 = 2.043
2.043 to 1 ratio
o This method the company has $ 2.043 in current assets for every dollar of current debt.
o edges like to see 1.30 to 1 or better. Any time the current limitations are higher than the current assets, the company is in trouble and action must be taken.
o A Leverage Ratio -The Debt Ratio
The data for this ratio is on your Balance Sheet. You need to know the total amount of assets and the total amount of limitations. The formula is:
Total limitations / (divided by) Total Assets = The Debt Ratio given as a ratio
Total limitations= $225,899
225,899/ 726,942 = 31%
31/100 (to transform to ratio) =.31
.31 to 1
o This method for every dollar of assets the company owns, it owes 31 cents.
o This ratio tells prospective lenders if the company can manage more debt. Lenders prefer to see this ratio at 30 to 1 or less.
o An Activity Ratio- Total Asset Turnover
The data for this ratio is on your Balance Sheet and the Income Statement. You need to know the total amount of sales revenue and the total amount of assets. The formula is:
Total Sales Revenue/ (divided by) Total Amount of Assets= Total Asset Turnover given as a ratio.
Total Sales Revenue= $711,238
Total Amount of Assets =$2,335,840
711,238/ 2,335,841 = 30%
31/100 (to transform to ratio) =.30
.30 to 1
o This method the company needs $1 in assets to generate $.30 in sales.
o This ratio is used to look at how efficient the company is. It is also used to estimate many other processes in accounting. By replacing the Total Amount of Assets with Average Inventory, you cans see how fast the inventory is moving.
The new fiscal year is the perfect time to make the changes that give you better knowledge and control of your company’s finances. Have a thriving New Year.