A Guide to Making Wise Financial Decisions for Businessowners

Navigating through the financial side of a business can be overwhelming but I’m here to provide you with all the support and resources you need to understand accounting matters better. William R Barefoot CPA LLC in Florence, SC has compiled insightful blogs where you can get helpful tips about financial management. Browse my blogs today to learn more.

Mind Your Business!

Marcus Lemonis of the CNBC reality business show The Profit stresses the importance of knowing your business’ numbers. He is credited with saying “Every business owner needs to know three numbers: annual sales revenue, gross profit margin, and expense as a percentage of gross profit.”

Where should you start?

Annual Sales is the total revenue collected for services performed and/or products sold. It should be broken down by each service or product. If there are multiple locations, each location should be considered independently for accurate assessments.

Gross Profit Margin is the amount of gross revenue less the cost of services or cost of goods sold divided by the gross revenue. Gross profit margin should also be calculated for each service line or product line and by location.

Expense as a percentage of gross profit can be calculated from determining the gross margin, which is Sales minus Cost of Goods/Services Sold. Then, divide the expense by the gross margin to get the percentage of each expense to gross profit.

All these numbers should be based on the previous 12 months, not on a calendar year. If your accounting software will not provide a rolling 12-month report, a supplemental application may be available. If not, spreadsheets can be utilized to structure the data for analysis.

How do we use the three sets of numbers?

Look for trends. The key is to look for trends from one 12-month actual period to the next. Ideally, we are comparing the actual results to our budget and forecast. By comparing the actual results to our budget, we can determine if we need corrective action.

If we do not have a budget, we can use the numbers to create one. We can also use the numbers to create a forecast. Budgeting and Forecasting will be discussed in a separate post.

Benchmark. In addition to trend analysis, it is a good idea to compare the performance of your businesses to the performance in your industry. This is called benchmarking. Industry data is provided by many franchisors and some trade associations.

Industry data can be provided by many franchisors and trade associations as well as by NAICS code. Benchmarking is one useful tool, but your business’ circumstances may be different from the industry. For example, if Advertising as a percentage of Sales is higher for your business than the industry average, there may be a good reason.

In summary, we have 3 important sets of numbers that each business owner needs to know. We can use those numbers for trend analysis, budgeting/forecasting, and benchmarking. A trusted advisor can assist with generating accurate reports, provide recommendations, objectivity, and accountability.

Tax-Related Holiday Scam Prevention

Preventing Tax-related Identity Scams Over the Holidays.

On November 29, 2021 the Internal Revenue Service and Security Summit partners warned taxpayers and tax professionals to remain vigilant in preventing scams and identify theft (IR-2021-236, Nov. 29, 2021) during the holidays.

Opportunities for thieves increase with more online shopping and preparations for the upcoming tax season. Beware of communications about refunds, stimulus payments, or requests for information. Criminals often try to look like emails or texts from the IRS or Social Security Administration. We are reminded to be extra careful when online.

Security Summit offered 10 basic steps to help protect sensitive information:

  • Use security software for all devices and keep it updated.
  • Use anti-virus software with malware prevention and firewall enabled.
  • Beware of phishing scams. Phishing is the use of emails that appear to be from reputable companies, agencies or contacts that are from criminals who trick you to share sensitive financial information. They are the #1 way your data is stolen. Do not click on links or attachments in suspicious emails. Do not share sensitive financial or personal data with anyone unless you are 100% sure it is safe.
  • Beef up your passwords. Use phrases or a combination of upper- and lower-case letters, numbers and symbols or use a password manager.
  • Turn on multi-factor authentication to help prevent hacking. Many sites offer this extra layer of protection. Use it whenever possible.
  • Shop websites with https (instead of http). The “S” is for secure. Look for a “padlock” icon in the browser.
  • Don’t shop or do online banking on public Wi-Fi.
  • Use strong passwords for home Wi-Fi.
  • Back up your files on all devices.
  • Consider a VPN (virtual private network) if you work at home.

IRS YouTube Video:
https://www.youtube.com/watch?v=eJYQL89qMfI
It is important to be careful at all times but be extra careful around the holidays.

Manage Cash Flow to Stay in Business!

According to the Small Business Administration, it is estimated that 20% of small businesses fail in the first year, approximately 50% fail by year 5 and only about 35% make it to year 10.

Businesses can fail for many reasons including poor marketing, inadequate planning, or bad management decisions. However, one of the most common reasons for closing is they run out of available cash. Reviewing the Statement of Cash Flows (SCF)and creating a Cash Flow Forecast may help avoid coming up short when funds are needed.

Many bookkeepers, managers and business owners pay little attention to the SCF. When business is good, some entrepreneurs only care about how much money is in the bank.

Only when funds get tight, do they start looking into the Income Statement or Balance Sheet for the answers. A better strategy is to use the SCF to create a Cash Flow Forecast and analyze both reports monthly.

In simple terms, the SCF presents where cash came from and where it went. Activity is presented in three sections - operating, investing, and financing.

  • The operating section contains cash received and cash paid for operating activities such as customer payments, purchase of inventory, payroll, interest expense and taxes.
  • The Investing section includes proceeds from the sale of and amounts paid for property and equipment.
  • The Financing section includes money received from credit lines and loans, and the payments on those obligations.

Analyzing this data is essential to preparing a cash flow forecast.

Preparing a Cash Flow Forecast may help anticipate cash needs. Failing to plan for cash shortages is planning to fail. It is a good idea to run multiple projections for best case, worst case, and most-likely scenarios.

Some methods to avoid a cash shortage can be by collecting past due receivables, paying vendors on the due date, running a sales promotion, trimming overhead, borrowing against a line of credit, or bringing on investors.

Creating a cash flow forecast will help the business prepare in advance and hopefully avoid taking desperate measures. The forecast may also help foresee cash surpluses, but that is for another discussion.

Many accounting applications have cash flow reports and cash flow forecast built in, as well as add-on applications for forecasting that will work with some accounting applications. Spreadsheets are another option, but they take time to setup and update each month with fresh data.

There are two ways to prepare a SCF, the indirect method and the direct method. For this discussion, I focused on the direct method. The main difference is the way the operating activity is presented. The direct method uses only cash transaction and ignores non-cash transactions like depreciation.

The indirect method presents adjustments for non-cash transactions. The direct method is accurate, and it takes less time to prepare. Just note that QuickBooks Online uses the direct method for presenting the SCF.

Analyzing and preparing a forecast for a Statement of Cash Flows is a good service to outsource to a trusted advisor. Most entrepreneurs do not have the time, capability, or desire to prepare, analyze and take the actions necessary to manage cash flow.

Another reason to outsource is having an objective third-party provide recommendations and accountability to cash management.

Consider Outsourcing Accounting for Small Business.

The well-known quote "The only two certainties in life are death and taxes." is attributable to Benjamin Franklin. Another certainty for business is accounting. There is no escaping the debits and credits. Accounting is a must for many reasons; tax reporting, reporting to owners, debt financing, vendor credit and valuing the business.

An accounting system should help owners manage their business finances. Business finances includes cash flow, fixed assets, debt management for growth. A decisions business owners must face is who will handle the accounting duties. Many choose finance and accounting outsourcing over doing it themselves or hiring in-house accountants.

Most entrepreneurs do not open a business because they enjoy paying bills, sending invoices, reconciling bank accounts and filing tax returns and other compliance forms. They open a business because they are passionate about a service or product that they believe others will purchase.

Most business owners would rather spend their time serving their existing customers, cultivating new relationships and providing the best product or service they can deliver. Why should a small business outsource their accounting?

Because businesses typically perform better when owners spend time doing what they do best. Outsourcing the back office accounting can give entrepreneurs the opportunity to focus on their strengths by hiring a trusted advisor to handle the accounting.

Technology has made outsourcing more feasible than ever before. The last year has proven that many jobs can be done remotely. Before the pandemic, "digital accountants" were already serving clients utilizing technology from assisting with accounts payable to video conferences to review financial performance and filing tax returns.

Working remotely with your accountant has several advantages including lower travel costs, easier collaboration, and real-time information. Since 2010, the American Institute of Certified Public Accountants (AICPA) and many state societies of CPAs have promoted digital accounting and connected CPAs with vendors and resources to help them deliver accounting services to customers more efficiently.

Artificial Intelligence (AI) applications are available now that automate many tasks which may reduce transactional costs and free resources for data analytics and advisory services. Having financial information available in real-time can help owners better manage their business. Other benefits include enhanced internal controls and greater transparency into their finances.

William Barefoot has worked with small to medium businesses for over 10 years in outsourced accounting and can evaluate your current accounting system. Contact him today for a complimentary consultation to see how you can benefit from outsourcing your accounting.

The Lighthouse Keeper

I grew up going to the shore. My father loved fishing from the piers and surf on Topsail Island North Carolina. As I got older, I enjoyed visiting other coastal areas and many of the lighthouses along the Atlantic Ocean. Like many, I appreciate the beauty of lighthouses and the history of maritime adventure associated with them.

Lighthouses were not built to enhance the scenery. They served as navigational aides and helped seafarers steer clear of danger. Some lighthouses were kept by individuals, others were kept by entire families. They were known as "wickies", because one of the responsibilities was to trim the wicks in the lanterns that lit the early lighthouses.

Wickies also cleaned the lenses, performed building maintenance and even responded to shipwrecks. You may have noticed that I use past-tense when I referred to the wickies. That is because beginning in the mid-1900s, lighthouses were automated.

According to the U.S. National Park Services website, all lighthouses in the USA have been automated, except for Boston Light in Massachusetts. (https://www.nps.gov/articles/lighthouse-keepers.htm)

What do lighthouses and wickies have to do with accounting? For the last 10 years or so, the accounting profession has also become automated. The days of manual data entry are almost entirely gone. Accounting applications and technology have made it possible to automate many of the duties once performed manually.

Getting payments from customers and paying vendors is being digitized and becoming more efficient. Paper and file cabinets have been replaced with emails and online storage. Important information to help manage your business can now be available in real-time instead of waiting to close the books at the end of a period.

The key difference between the accountants and lighthouse keepers is that most business still want a trusted advisor to assist them. "Digital Accountants" can help transition to more efficient accounting systems, help you manage the process and provide valuable insight into financial information.

If you need help with automating your accounting system and/or improving the way you get financial information, speak with your current accountant. If your current accountant is not familiar with "digital accounting", please contact me for a consultation.