ACCOUNTANTS DO MORE THAN COUNT BEANS

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2 ACCOUNTANTS DO MORE THAN COUNT BEANS Accountants are a dime a dozen, so choosing the right accountant for you and your business is extremely important. Some accountants are only bookkeepers; others are cost accountants, which is significant for costing and profitability, but they are limited to that particular skill; then there are accountants who specialize in preparing financial statements according to the proper rules. With all of these different types of accountants running around, how do you know which kind of accountant you need? And on top of that, there is nothing as boring as an accountant. Accountants have worked hard to earn that boring reputation. The bottom line (that sounds like an accountant) is that accountants are analytical, and you want someone to analyze your accounting records and your tax information. You want an analytical type to prepare financial statements so that they will have all the answers if questioned by the banker, an investor, a creditor or other third parties. But you really need more than that, and you should expect more than that from your accountant. Let s first make a distinction between some terms. A bookkeeper basically is a person who does routine clerical work that is numbers related. A company may have several bookkeepers that have specialized responsibilities such as accounts receivable, accounts payable, sales records, etc. In specialized industries, there are bookkeeping positions that relate to that industry; for example, in the property management industry, bookkeepers maintain property ledgers (records about each building or apartment managed by the company). Sometimes a company will have a full-charge bookkeeper who normally has the responsibility of summarizing the monthly accounting information. In some cases, the full-charge bookkeeper will prepare financial statements.

3 An accountant may do some of the same bookkeeping functions but will have more training and be able to make decisions about how to record and report financial information in the business. Again, some companies have accountants in charge of the same functions that a bookkeeper may perform in other companies. Small companies may not have a bookkeeper but may use a secretary or other clerical person for billing and additional daily functions, and then contract out the accounting functions to their Certified Public Accountant. The accounting systems of start-up companies often consist of a checkbook, a file of unpaid customer invoices, a file of bills owed and a file of all government forms, including tax forms. They then give this information to their CPA for analysis and summarization into financial statements. I don t think it s just because I m a CPA that I believe having a CPA is imperative for a start-up business. However, CPAs by nature are helpful--otherwise they would be lawyers. CPAs have exposure to a wide number of businesses and can apply that experience to your business needs. To begin with, you will probably need to use a bookkeeper within your company in addition to an outside CPA for financial advice. Certified at the state level, CPAs must pass a rigorous four-part exam which tests their knowledge of income tax, accounting rules and procedures, and auditing and business law. Furthermore, CPAs are required to take 40 hours of continuing education each year to keep them current in their profession.

4 FINDING A CPA THAT WORKS FOR YOU When you invite any person to be a part of your vision and mission, it s always important for both of you to connect on some level. Making your dream a reality takes teamwork; therefore, the members of your team should understand your wants and needs, as well as help you implement your plan. Your CPA is part of that team, and you should spend your time searching for an accountant who works well with you and cares about the well-being of your business. Here are some suggestions when it comes to using a CPA: Find a CPA who understands the constraints of a growing business. As your business takes off, there will be months when the money is tight and the cash is lacking. Your CPA should help you through these difficult times by explaining to you where the money is going and where the money will possibly come from in the future. A CPA who performs audit functions for large companies like General Motors or for a specialized industry is often not knowledgeable about how small businesses run. If you work for a large company in any capacity, you will not necessarily understand the importance of marketing, focus, leadership and cash management that a small business must faceeveryday. Find a CPA who will teach you and your staff about finance, accounting and cash flow. Your CPA should teach you how to read financial statements and how to interpret them correctly. After all, others will read your financials and you must understand them. Remember, your financial statements are your responsibility and you should hold yourself accountable for them. Others will. Furthermore, your CPA should teach your clerks how to prepare routine tax reports and do basic bookkeeping--which will ultimately save you money because you won t have to pay your CPA an expensive fee for these services. Before you hire a CPA, find out how long the CPA firm has been in business, how long the individual CPAs have been working in their fields, if they specialize in a particular area of accounting, and if so, which areas. Don t hesitate to ask specific questions about the overall firm or to inquire about an individual Certified PublicAccountant s expertise. And, always checkout referrals. This is a good way to find out if other clients have been satisfied with the firm or an individual CPA s work.

5 WHAT SHOULD I EXPECT FROM MY CPA? Understanding what to expect from your CPA requires understanding something about the profession. At the top are the BIG Six accounting firms. These giant firms have thousands of CPAs as employees and do work for the Fortune 500 companies. Lately, these giant firms have been doing work for smaller companies as well. However, I asked a Big Six partner to describe a small company, and he said, One with sales of $100,000,000. Obviously, he didn t really understand what small business is. As these larger firms try to serve smaller entrepreneurial clients, they encounter problems beyond just understanding a small company s needs. That problem is cost, because their experienced people charge hourly rates of $150 to $300 per hour. And these are for technical expertise, not the expertise of how a small business operates. At these rates, a small client would go broke. So larger firms assign inexperienced people to smaller clients at the same rates that experienced local CPAs charge. There is no justification for a small client paying big CPA rates or paying to train a green CPA. There are a large number of regional firms that may have offices in several cities and employ 50 to 200 people. These firms can respond to clients that have offices in several cities and that have specialized needs. The rest of the CPAs work in local accounting firms either in association with other CPAs or by themselves as a sole proprietor. Most small companies look to the local CPAs for their accounting expertise because they can benefit from the CPAs exposure to a variety of clients. Furthermore, these CPAs benefit from their clients as well because the educational demands of the profession keep the CPAs up on the latest changes in accounting and tax issues.

6 Don t be surprised if your CPA has limitations. The greatest limitation I ve seen in many CPAs is a lack of understanding about marketing and customer service. There are many CPAs who are specialists but who don t understand what it takes to operate a business. Some CPAs are entrepreneurial and act as their client s financial vice-president. Others take an equity interest in clients and have long-term relationships with them.

7 YOU SHOULD DEMAND AND EXPECT MORE FROM YOUR CPA A CPA can and should perform many more functions than just preparing your financial statements and incomes taxes, although these are necessary functions for your company s survival. Other duties for your CPA are much more valuable to your business. The two most valuable functions are in the areas of cash flow management and financing. Here are some of the ways your CPA can help you with these issues: Cash management. Your CPA should be able to explain to you where your cash went and why you haven t been able to keep most of the profits you earn. Better yet, they can implement systems to help you keep more of what you earn. Finding financing. If you need financing, your CPA should be an active part in helping you find the financing you need. If your bank, the SBA or an investor requires you to have a reviewed or audited financial statement, you will need a certified public accountant--a CPA who is licensed by the state.

8 TECHNICAL DUTIES YOUR CPA CAN PERFORM Here s some technical stuff. When your CPA prepares your financial statements and does very little to prove the numbers, that is called a compilation. A compilation is the lowest form of financial statement preparation, but it is the form that most CPAs prepare because its preparation must be cost-effective for the business. Sometimes a bank will require an audited financial statement. Only a CPA can prepare this. When a CPA does an audit, they verify the information in your financial statement by checking with other persons and understanding fully where the information comes from. For example, they ask your customers to verify the amount of money they owe you. They ask your vendors to verify the amount of money you owe them. They ask your bank to verify the bank balances and the balances of any loans. They ask your attorney if you are being sued. If you have inventory, they watch you count it and make sure you don t count obsolete items. They do a wide variety of technical things to make certain you re following the set rules known as GAAP (Generally Accepted Accounting Principles). These rules are important because they give a foundation to others who may read your financial statements. There is a form of financial statement called a review that is between a compilation and an audit. For a review, the CPA must verify your financial statement, but the CPA does not contact outside parties such as your customers, banker, attorney, etc. Instead, the CPA verifies your information by performing tests on your accounting records in your office.

9 The result of any form of financial statement preparation will be a set of financials prepared according to a established set of rules, making them understandable and readable by others. The CPA will write a letter that will be attached to the front of the financial statements, stating the level of work that he or she performed. The wording for these letters is established by the American Institute of Certified Public Accountants and varies only when the CPA identifies a problem and notes that exception in the letter. The CPA will be held responsible for a certain level of professional service, so the letter will be important to him or her as well as to the other readers of your financial statements.

10 IF YOU THINK ACCOUNTING IS BORING... Most people associate accounting with boredom because the focus of any good accountant hinges on details. However, these boring details may determine the profitability and survival of your business. Therefore, consider why these boring details are so necessary for your business: Billing. As the lifeline to your business, this is your primary cash-receiving method and an important part of customer service. Whether through sales or services, you must turn production into cash. Maybe accounting isn t so boring when it relates to billing. Accounts Receivable. Your accountant is responsible for making sure that your customers pay you. Outstanding bills must be managed and money must be collected if your company is to remain in business. If you don t have cash, you re out of business--then you wouldn t be so bored. Accounts Payable. Your accountant should also keep track of what your business is responsible for paying. Negotiating a great price for you or making sure that you re not being overcharged for materials is part of this whole deal. If boring details keep you from paying too much, you can use the extra cash--and having extra money isn t boring at all. Payroll. You and your employees expect to be paid. The job of your accountant is to make sure that everyone gets paid on time and according to legal tax standards. It won t be boring if an employee receives his or her paycheck late. The general ledger. The general ledger is the basis for the organization of the financial data in your business and the basis for your financial statements and tax returns. Keeping an accurate general ledger for these purposes is a must. This boring activity won t be so boring if you re ever audited by the IRS. If your company grows and becomes very large, you may want to hire a controller or management accountant who performs these above functions within your

11 business. However, many companies still retain a CPA for special functions such as looking over the shoulders of the controller and accounting personnel and making certain that accounting functions are being consistently and accurately prepared.

12 SPECIAL DUTIES YOUR ACCOUNTANT SHOULD PERFORM There are certain functions which your accountant must perform in order for your business to operate effectively and legally. However, there are also many additional duties which you can and should expect your accountant to help you with. Consider the following as special projects for your accounting staff or CPA: Help you analyze the cost of each product you offer or buy. Analyze the costs associated with various commission and discount plans which you offer your customers or pay to your salespeople to encourage higher sales performance. Analyze the costs associated with new pricing. Whether you decide to bundle up a group of services and sell it as a package for one price or whether you sell each service separately, your accounting personnel or CPA should help you analyze the cost, so you don t lose money. Keep accurate sales tax records and documents. To keep the state controller off your back and to minimize the time and cost in case you are audited, your accountant or CPA should keep accurate records for you. File payroll taxes in a timely manner. To avoid heavy penalties and interest charges from the IRS, your accountant should prepare and file your payroll taxes on time. Compare the sales and costs that your company incurs against its annual plan. In order for you to see the areas where you missed your goals, your accountant should show you the company s actual income and expenses compared to the estimated annual plan. Furthermore, your accountant should help you plan for next year.

13 Make certain that employees are not stealing inventory by implementing controls to minimize theft. Some employers are concerned about employee theft. There are many ways that this may occur. Your CPA can implement procedures to make certain all cash is accounted for, that all customer receipts are received by the company, that all inventory is accounted for, etc. For example, if you sell stereos and the number sold plus the number in inventory are not equal to the number bought, you may have theft. Knowing that allows you to determine if some were stolen. Stay on top of expense reports. If your sales personnel or other employees are being reimbursed for expenses, their expense reports should be turned in and reviewed by your accountant before reimbursement is issued. Calculate your break-even. It s not enough to sell an item costing $50 for a sales price of $100. You also need to know how many you must sell to cover all of your other costs. Some costs vary with the number of units sold. For example, a sales commission and freight are an added cost for each sale. Other costs are fixed. These fixed costs are referred to as overhead and include things like your management salary, rent, telephone, advertising, etc. So, with that $50 product and a sales commission of $10, leaving you $40 a unit, you would have to sell 500 per month to cover your overhead of $20,000 per month. Your accountant should help you calculate these costs, so you can determine your break-even. Compare costs of various suppliers and find the cheapest source. As I mentioned before, your CPA can and should negotiate deals for you when it comes to purchasing inventory or paying for services. Keep you up-to-date about what customers are not paying. As the person who writes the checks and pays the bills, you should be on top of who owes you money and how much money you are owed. Staying current on accounts receivable is not only your accountant s responsibility but also it is your responsibility as well.

14 WHAT YOUR ACCOUNTANT SHOULD NOT DO Just as there are certain duties your accountant should perform and special functions you may ask your accountant to accomplish, there are also services which your accountant should not provide. Your accountant or CPA should not set prices or make pricing decisions for your product. As I mentioned earlier, your accountant can help you understand the cost of your product and the cost of selling it. But, when it comes to setting the price, you are the only one who can make that decision. After all, as the entrepreneur, you face competitive pressures which your accountant does not have to deal with. If for some reason you must underprice a product or service, there are many alternative ways to make up the loss, and your accountant may not understand this reasoning. Refer to my How to Price Your Product booklet for more information about these and other types of pricing issues. Your accountant should not decide how to spend your money. Many accountants are like misers, and their goal is to not spend any money. For this reason, your accountant is not the person to decide how to spend money. This is your vision and your mission; therefore, you have to step up to bat and make financial decisions as well. If you are spending too much too fast and depleting your company s cash, you had better listen to your CPA. Remember, this doesn t mean that you shouldn t counsel your accountant regarding expenditures--in fact, your accountant should attempt to find ways for you to reduce your costs. However, when it comes to cutting the checks, you--the entrepreneur and owner of the business--should call the shots.

15 Using the advice in this booklet, search for an accountant carefully. Take your time interviewing several firms and individuals. Ask your friends and family if they know of any good CPAs. Look around for someone who specializes in the area of business you are in, or even better someone with an understanding of marketing and customer service. Hiring a qualified, experienced accountant is a significant part of organizing your own entrepreneurial dream team.