REPOST: Make Financial Statements Useful With These 6 Tips

For a company to make the most out of its financial statement, it must contain more than an accurate balance sheet. This Entrepreneur.com article can help businesses draft substantial reports:

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Trying to run a business without good financial statements is like trying to call football plays without knowing the information on the scoreboard (score, quarter, down, distance needed for a first down, time remaining, etc.). Regardless of your coaching skills, it’s impossible to call plays effectively under such circumstances. Yet, in our experience, far too many small business owners attempt exactly this.


They have financial statements that are, at best, not useful for management decision-making. At worst, they are inaccurate. In addition, small business owners often receive their financial statements so late that they are no longer relevant. For entrepreneurs who are counting on their businesses to provide a consistent source of income for them and their families, this is not an acceptable state of affairs.


At a bare minimum, you must have accurate financial statements. This is an absolute requirement. If you aren't receiving accurate financials, you most probably need a new bookkeeper. Beyond this, we suggest six tips for upgrading your financial reporting process:


1. The right system. It's generally best to use an accrual accounting system rather than a cash system. Accrual systems do a better job of matching expenses to revenue. If you report revenue and the associated expenses in different periods, the result can be wild swings in month-to-month profitability. The company might well show a loss in one month and be extremely profitable the next. This variation in results prevents the owner from understanding true performance. If there are advantages to using cash accounting for taxes, you can still do that while using accrual accounting for management decision-making.


2. Accurate accounting. Separate costs directly associated with delivering your product or service from other expenses (selling, administrative and overhead costs). This will enable you to calculate a gross margin percentage (equal to the difference between revenue and the costs directly associated with producing the revenue divided by the revenue). Generally, the gross margin percentage should remain relatively stable from period to period. If it fluctuates wildly, this could be a red flag indicating a problem.


3. Line by line. In a service business, understanding the profitability of each job/client is critical. Similarly, in a product-based business, it’s important to understand product line profitability. We have often found small businesses that had unprofitable clients or product lines and didn’t know it. When you discover such a discrepancy, it’s generally best to raise prices or stop doing the unprofitable work.

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4. Accountability. Revenues and/or costs that are the responsibility of a single manager should be broken out separately. This makes it easier to hold people accountable. For example, we have frequently seen line items such as "People Costs," that lump all personnel costs together. However, if there are four senior managers each having responsibility for a portion of the people costs, such categories obscure performance. Our rule is that for every line item on a financial statement, there should be only one person accountable. Break apart line items where multiple people have responsibility until you reach point accountability.


5. Deadlines. Insist on receiving financial statements within two weeks of the end of each month. In most cases, you can do better than this. We’ve seen bookkeepers who deliver financial statements one, two, three months or more after the end of a month. This greatly diminishes the value for management decision-making. We’ve often heard bookkeepers say that they can’t deliver financials as quickly as we would like. Don’t accept this. Additional resources may be required. You may need to estimate certain items, but you can usually get good financial statements within two weeks of the end of the month.


6. All available information. Set a hard close to the end of each month. Worse than not delivering financial statements in a timely manner is making change after change to statements that have already been delivered. Figure out how to get all significant items reported in a timely manner and close the month. Any additional entries go in subsequent months.

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Insist that your financial statements are accurate, formatted in a way that is useful for management decision-making and that you receive them in a timely manner. Anything less can limit your ability to make effective decisions and cripple your business.

Kimball Ramey is the person behind Kimball Parks Ramey, PLLC, a firm that specializes in accounting, tax planning, and wealth management. Subscribe to this blog for useful information and sharp insight on managing the cash flow.

The importance of adhering to accounting standards

One of the core aspects of doing business is establishing an accounting system. Not only is it essential to monitor the financial standing of the business, proper accounting is necessary to furnish financial statements for disclosure as required by government regulators. 

 

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The fiscal statements released by a company are meant for various audiences. It is therefore important to prepare these documents in a format that follows universally recognized accounting standards. Independent firms offer assistance in preparing reports that conform to industry and auditing norms.

 

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Adhering to accounting standards develops investor confidence. Smart investors consider only stable companies that present lucrative returns. And they will rely heavily on a company's business reports for judgment. Standard formats simplify for investors the comparisons of the financial positions of different companies to determine which shows more promise. Therefore, a business's financial report is key to facilitating investments. 

 

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In many cases, the government sets standard accounting formats for compliance purposes. To protect investors and consumers, regulators closely monitor and scrutinize the financial reports of public companies. In preparing business reports, the company should lean toward openness in providing pertinent information. Following the standard format promotes transparency in business transactions.

Kimball Ramey has over 25 years of experience in the industry and has provided his expertise to various international and local accounting firms.  His firm in Dallas offers accounting services, including the preparation of financial statements.  Learn more at the firm's website.

 

REPOST: 10 critical things to look for in a small business bookkeeper

When selecting a firm to handle accounting and finances for your business, studying their practices in different areas will help you understand how they can best serve you. This article talks about the many different qualities that make a good bookkeeper.

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 If you run a business and are looking for a bookkeeping solution, it’s important to start by understanding the who, what, when, where and how of your ideal scenario. (What is ideal for you may not be ideal for a different business type.)

Below, I’ve outlined 10 of the most important areas to consider when comparing bookkeepers so that you will be able to weigh the pros and cons of each.

Experience

Experience comes in many shapes and sizes. You may think that if you have a small business, the experience you need from a bookkeeper can be “small” as well. There is nothing further from the truth. You need as much experience as you can afford, because great bookkeeping and accounting is instrumental in growing your business and maximizing your profits.

Experience does not always equal good fit, either. Someone who has worked for 20 years as a part-time bookkeeper for a landscaping company, although “experienced,” may not have the depth and breadth you need for an early stage startup company. When you start looking for your solution, make sure you create a wish list of level, depth, and type of experience you need.

Education

The person that is doing your bookkeeping should have had some level of formal business and accounting education. A business degree by itself does not qualify someone to be a great bookkeeper. Make sure the education level of your solution matches the needs of your business — today and in the future.

A great bookkeeper is always going to be thinking 10 steps ahead, helping you prevent problems rather than just helping you solve them. Someone who has a formal accounting education will understand policy, procedure, strategy, tactics and ethics. The educated bookkeeper is going to want to grow with you and your business. This desire will keep them sharp, focused, and looking ahead to help your business become a financial success.

Oversight

You are probably not an accountant yourself and you may not have the resources, knowledge, or desire to oversee and check the work being done by your current bookkeeping solution. You may have a CPA, but paying them for oversight can be costly. You must take oversight into consideration.

Oversight has various levels. If you employ a bookkeeper that does not have formal education or training, your need for oversight will be high. Conversely, if your solution has lots of specific experience and education, oversight will be simpler and less costly.

Working with a bookkeeping service that has built-in oversight is a great way to get the function for a fraction of the cost. Whatever you decide, at the end of the day, you are responsible for the condition and accuracy of your books.

Banking Technology

In the 21st century, being able to conduct commerce over the Internet is not just a luxury, it is a necessity. Working with your bank and other third-party companies to pay bills and receive payments is crucial to remaining competitive and strong. Being able to access your financial data online from anywhere is now a key aspect of running a business. Make sure your bookkeeping and accounting solution is capable of conducting your business online in a safe and secure manner 24/7.

Software and Systems

Are you still writing checks to pay vendors, employees and others? A great 21st-century bookkeeping and accounting solution has the ability to conduct a majority of your financial business electronically. We have been able to do individual parts of this for some time; the problem has been that these “time-saving” technologies have not been tied together.

Fortunately, there are now a few bookkeeping and accounting solutions today that have been able to glue most of this together, creating a streamlined, efficient, and cost-effective means of keeping your books virtually. QuickBooks and Bill.com, in conjunction with online banking systems, now allow for a smooth flow of information and funds from a single point of access, anywhere and anytime, to name one example.

If you are not already set up with systems that work for you, make sure that your bookkeeper can assist you in setting up or transferring your documents.

Accounting Policies and Procedures

You already have accounting policies and procedures in place, whether you know it or not, but they are probably not yet where they need to be. Policies and procedures are the guidelines you establish on how bookkeeping and accounting get done in your business — how items get posted, when bills are paid, when you close the monthly books, who reviews what and when, and so forth.

It is extremely important that no matter what bookkeeping solution you choose, you set up at least simple guidelines. If you are a nonprofit or if you have certain types of government loans, you may have to adhere to policies and procedures specific to loans, grants, and fundraising. Your bookkeeping solution should be able to guide and direct you in establishing policies and procedures and should be savvy enough to adhere to any guidelines.

Data Entry, Reporting and Reconciling

Bookkeeping is not just about entering numbers into the ledger. It is a thoughtful understanding of the business at hand, managing the day to day input of information, outflow and inflow of cash, and much more.

Having accurate financials at your fingertips allows you to react quickly and deftly to situations as they arise. For example, let’s say you have a vehicle or machine that your business depends on, and it unexpectedly dies on you. Unless you have a large pile of cash, you are going to have to borrow money to replace that equipment. You can spend days or weeks trying to catch up the bookkeeping to satisfy the bank or lending institution — or you can just print out up-to-date financials. But those days or weeks could mean the difference between success and failure of your business.

Keeping on top of the data entry, reconciling and reporting also means you head into tax season armed with every expense, depreciation, and deduction you can possibly file, saving you hundreds, if not thousands, of dollars on your tax bill.

Bottom line? Your bookkeeping solution should provide you with the reports and regular updates you need to make good decisions every day of the week.

Cash Flow Management

Cash flow, or lack of it, can make or break any business.

All too often, a small business will sacrifice positive cash flow to meet short-term crisis needs and may never recover. This is one of the biggest reasons small businesses fail. A great bookkeeper will be able to understand your financial needs from day-to-day and month-to-month, help to keep you honest, and keep you walking in financial reality. Even though it is up to the business owner to set the guidelines of what gets paid and when, your accountant should be able to foresee problems and help you make wise financial decisions. Understanding the ramifications of your possible actions is half the battle.

Tax Preparation and Planning

It’s January 15th and you suddenly realize that tax season is here. You call your bookkeeper in a panic, asking him or her to make time to get all the bookkeeping finished and the reports ready for your tax person.

If you had a great bookkeeping solution, December would have already been closed out and year-end reporting would be the push of a button away. You would not have to worry about mistakes, missing expenses because you were in a hurry, or risking an audit.

A great bookkeeping solution will warn you about red flags that might arise in terms of unforeseen tax burdens. When your business is growing, you may not be taking into account that you will be paying higher taxes and/or heading into a new tax bracket. Your bookkeeping solution should be able to see that far ahead and help you plan wisely so that you are ready to meet growing pains and keep the finances under control.

Credit Management and Strategy

Lines of credit are a double-edged sword. If you use credit cards, you should be aware of the risks and costs of maintaining high balances and the ramifications of not paying those balances down. Sometimes, Line of Credit balances must be paid down to zero, depending on the terms of the bank agreement, and are not really revolving lines of credit.

With either instrument, the business must exercise planning, discipline, and consistency to prevent serious business-threatening situations from arising. A good bookkeeping and cash management strategy will ensure that the credit lines remain a priority and don’t get you into trouble. Once you have screwed up your credit rating, it may difficult or impossible to recover.

Kimball Ramey leads Dallas-based Kimball Parks Ramey PLLC in providing top quality accounting, payroll, and bookkeeping solutions to local and international clients. For more information on the firm’s full range of services, visit this website.

REPOST: 5 tax mistakes you should never make again

Tax planning lasts all year long.  Understanding how the taxation process works can help one reduce tax burdens systematically.  Bill Bischoff of Marketwatch shares ideas on avoiding five taxation pitfalls.

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Now that you’ve recovered from the trauma of filing last year’s tax return, your impulse is probably to forget about taxes for a good long while. Bad idea. Now is actually the best time to plan ahead for future tax savings. Any missteps you made last year are still fresh in your mind, plus you’re still up to speed on the current rules. So Brothers and Sisters I beseech you to commit to being a more tax-smart person for the rest of 2014. First, promise not to repeat those tax sins that nobody else knows about (so far). Then promise to adhere to the righteous path outlined in this column.

Resolve to get on the Roth IRA bandwagon


You’ve been hearing for years about the wonderfulness of Roth IRAs. But have you done anything about it? If not, please get on the bandwagon this year, because Roth IRAs have two huge advantages over other tax-favored retirement accounts.

• You can take federal-income-tax-free Roth withdrawals after reaching age 59½ as long as you’ve had at least one Roth account open for more than five years. If you die, your heirs can dip into an inherited Roth account without owing any federal income tax, as long as the account has been open for more than five years. So open a Roth account now to start the five-year clock ticking. If federal income-tax rates go up in the future (a distinct possibility especially for high-income folks), funds in your Roth IRA will be blissfully unaffected. Think of your Roth IRA as insurance against future tax rate increases.

• Roth IRAs set up in your name are exempt from the required minimum distribution (RMD) rules, which force you to start taking taxable withdrawals from other types of tax-favored retirement accounts, including traditional IRAs, after reaching age 70½. If you fail to withdraw the proper RMD amount for a year, you owe a 50% penalty on the difference between the amount you should have taken out and what you actually took out (if anything). Ouch! In contrast, you can leave Roth IRA balances untouched for as long as you wish and continue earning federal-income-tax-free income and gains. When you die, your remaining Roth IRA balances can be left to your heirs who can then take out the money federal-income-tax-free.

There are two ways to get money into a Roth account

• Start making annual contributions of up to $5,500 or $6,500 if you are age 50 or older. If you are married, your spouse can join the fun. The catches: you must have earned income at least equal to what you contribute, and the contribution privilege is phased out at higher income levels.

• Convert a traditional IRA into a Roth account. A conversion is treated as a taxable distribution from the traditional account with the money going into the new Roth account. So it will trigger a bigger federal income tax bill (and maybe a bigger state income tax bill too). However, the two positive factors mentioned earlier may greatly outweigh the one-time tax hit.

You don’t need any earned income to do a Roth conversion, and there’s no income restriction either. So retired billionaires can do Roth conversions.

Resolve to take advantage of tax-saving deals at work

Salary-reduction contributions to tax-favored employee benefit programs reduce your taxable salary and your federal and state income tax bills. For 2014, the maximum salary-reduction contribution to a company 401(k) plan is $17,500 or $23,000 if you will be age 50 or older as of year-end.

You may also be able to make salary-reduction contributions to your company’s cafeteria benefit plan, which may include flexible spending accounts (FSAs) to cover: (1) up to $2,500 of out-of-pocket family medical costs and (2) up to $5,000 of expenses to care for your under-age-13 children so you can work (or if you are married, so both you and your spouse can work). The tax savings from participating in FSA plans are permanent rather than temporary, so failing to sign up is like leaving cash on the table. Don’t do that!

Resolve to do year-end tax planning this year

Lots of people talk about year-end tax planning, but not that many actually follow through. Put this date in your planner right now: Saturday, Nov. 29. Thanksgiving will be over, and you don’t want to be out and about on that weekend anyway, because you’ll get crushed by all the holiday shoppers. And by then, you should have a solid fix on your 2014 tax situation. You can consider selling some loser stocks and mutual fund shares held in taxable accounts to offset your earlier gains, giving some appreciated securities to your favorite charity, and so forth. Of course, you should also check back here for additional year-end tax-saving tips.

Resolve to get your estate plan in order

What estate plan, you ask? Exactly. People don’t like to think about this subject, but you need to think about it in fairness to your heirs.

• At a minimum, you should have a will — even if you are young, incredibly healthy, and don’t have enough assets to be even remotely worried about estate taxes. Without a will, state law decides who gets all your stuff and who raises your kids in the event of your unanticipated demise. I don’t have that much faith in my beloved state legislature, and you probably don’t either.

• Quite possibly, you do have enough assets to be exposed to estate taxes, but you don’t know it. Consider this: for tax purposes, your estate includes your house, furnishings, cars, retirement plan assets, investments, equity in employer stock options, baseball card collection, and everything else you own. Here’s the kicker: it also includes any proceeds from insurance on your own life unless you take planning steps to prevent this (such as setting up an irrevocable life insurance trust). In my experience, it is usually life insurance that causes unexpected estate tax exposure. Right now, your taxable estate must exceed $5.34 million for you to be exposed to the federal estate tax. But 19 states impose their own death taxes, and some kick in at much lower wealth levels. For example, the New Jersey tax hits estates worth over $675,000. Bottom line: you may need to make some estate-tax-reduction moves after all, just because of where you live.

Resolve to consult your tax pro before major transactions

Obviously, you cannot plan your whole life around taxes. That said, most big life events have significant tax consequences. And from a tax perspective, there is often a right way and a wrong way to do things — whether it’s selling your home, transferring funds from one retirement account into another, getting divorced, whatever. To make sure you do things the right way instead of the wrong way, consult your tax pro before the deal is done. Take it from me: the Internal Revenue Code is riddled with traps for the unwary, and the tax savings from obtaining competent professional advice will dwarf the fees over the long haul.

Kimball Ramey leads Kimball Parks Ramey PLLC, which assists domestic and international clients in their financial planning needs.  Visit this website for more information on the firm.

How to breeze through tax season with office deductibles

It’s no secret that the IRS is an iron-clad bunch, but that doesn’t mean you can’t exercise your rights as a self-employed US citizen come tax time. Whether you own a small enterprise or a midsized outfit, the following are office items legally deductible from your taxable business income.  

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Home-office

According to the IRS, a space or room devoted exclusively to your business is a valid tax deduction. Measure the work area or work room, then divide the figure by the square footage of your entire home. Apply the resulting percentage to the total amount of home-related expenses sustaining your work room or work area (rent, mortgage, home insurance, electricity) – the product is the amount you can claim.

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Office supplies, equipment, and furniture

Founder and major shareholder for Dallas accounting and tax planning firm Kimball Parks Ramey PLLC Kimball Ramey stresses the importance of tracking business purchases in receipts and card statements, as these activities are a huge tax-cutting opportunity.

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Office furniture like desks, chairs, and filing cabinets are deductible either by claiming 100 percent of the cost on the year of purchase, or via depreciation, which cuts portions of the total expense as a write-off across seven years. The same claim options go for office equipment, although computers, copiers, scanners, and fax machines have a five year-depreciation period.

For Ramey, who has frequently spoken as tax expert on KLIF 570 AM McGowan Group’s NetWorth Radio, it’s best to determine when your business will need these deductions the most, then file claims according to that.  

With over 30 years of experience in accounting, tax planning, and wealth management, Kimball Ramey leads Kimball Parks Ramey PLLC in providing custom-fit strategies for its local and international clients’ financial needs. Visit this website for more information on the firm's professional services.

Beyond bean counting: Kimball Ramey and his methods for success

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Certified public accountants (CPAs) perform an essential role in society and in the organization they serve. Beyond reviewing financial reporting processes and ensuring internal accounting controls, CPAs have the continuing responsibility to improve and protect the traditions of accounting and to carry out the profession’s special duties for self-governance all while serving the public’s interest.

 

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Kimball Ramey, a certified public accountant and founder and managing shareholder of Kimball Parks Ramey, PLLC, has evolved with the times in his over 25 years of hands-on experience in the many areas of the profession. Mr. Ramey has worked in several accounting firms, both local and abroad, where he has seen his expertise and experience culminate into diverse business strategies and impactful financial solutions. His corporate profile stands as an emblem of success brought about by his excellent performance in several organizations, including start-ups, distressed companies, and acquisitions and mergers.

Mr. Ramey is merited for his outstanding performance particularly in:

• Providing the U.S. government with proven strategies that eventually resulted to settlements of over $450 million received from all major oil companies from 1995 to 2002. 
• Reducing a client’s IRS assessment from $150,000 to just $15,000 through negotiation and tax reduction strategy.
• Performing forensic accounting functions to uncover fraud committed against a client that allowed a $5.1 million verdict to be reached in favor of the firm’s client.
• Planning and managing audits for large multinational companies in the U.S.

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Besides these accomplishments, Mr. Ramey has authored several tax savings articles published by Dallas-based newspaper Park Cities News. He has also appeared as a guest tax expert on KLIF 570 AM McGowan Group’s NetWorth Radio. Currently, he focuses on serving the accounting needs of clients through his Dallas-based firm.

Kimball Ramey established Kimball Parks Ramey, PLLC, in 1979 to offer a wide range of services for individual and business clients. Visit this website to learn how the firm can be of service to your financial needs.