Accounting – Sometimes Less Is More

I was recently asked by a client to assist with setting up some accounting policies for his bookkeeper. When reviewing the client’s financials, I could immediately see why this was necessary.

Here’s an example of “more:”

·         A chart of accounts that reads like a phone book

·         A balance sheet that is 4 pages long

·         A profit and loss that has a line item for every.single.vendor

For example, here is what I saw on my client’s chart of accounts:

·         Taxes

·         Taxes & licenses

·         Property taxes

·         Income taxes (which he never had to pay)

·         Taxes – payroll

·         Payroll taxes

·         Sales tax (again, he never had to pay sales tax)

·         Car taxes

This is what we proposed:

·         Taxes – Property & Other

·         Taxes – Payroll

·         Business license

Boom! This was only one example of what we changed. The financial statements were condensed from nearly 9 pages (most of which were never reviewed) to only 3 pages (all of which contained useful information for our advisory work). The banker who had to review those statements each quarter thought we had invented the wheel and maybe even fire.

Accounting isn’t about endless data. It’s about useful data. Sometimes less is, in fact, more.

IRS Summertime Tax Tip 2015: Back to School Education Tax Credits

If you, your spouse or a dependent are heading off to college in the fall, some of your costs may save you money at tax time. You may be able to claim a tax credit on your federal tax return. Here are some key IRS tips that you should know about e tax credits:

• American Opportunity Tax Credit.  The AOTC is worth up to $2,500 per year for an eligible student. You may claim this credit only for the first four years of higher education. Forty percent of the AOTC is refundable. That means if you are eligible, you can get up to $1,000 of the credit as a refund, even if you do not owe any taxes.


• Lifetime Learning Credit.  The LLC is worth up to $2,000 on your tax return. There is no limit on the number of years that you can claim the LLC for an eligible student.


Things to remember with these credits:

• One credit per student.  You can claim only one type of education credit per student on your tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student. For instance, you can claim the AOTC for one student, and claim the LLC for the other.

• Qualified expenses.  You may use qualified expenses to figure your credit. These include the costs you pay for tuition, fees and other related expenses for an eligible student. Refer to IRS.gov for more on the rules that apply to each credit.

•  Eligible educational institutions.  Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify. If you aren’t sure if your school is eligible:

o Ask your school if it is an eligible educational institution, or
o See if your school is on the U.S. Department of Education’s Accreditation database.

• Form 1098-T.  In most cases, you should receive Form 1098-T, Tuition Statement, from your school by Feb. 1, 2016. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be different than the amounts you actually paid. That might happen because some of your related costs may not appear on the form. For instance, the cost of your textbooks may not appear on the form. However, you still may be able to include those costs when you figure your credit. Don’t forget that you can only claim an education credit for the qualified expenses that you paid in that same tax year.

• Nonresident alien.  If you are in the United States on an F-1 Student Visa, the tax rules generally treat you as a nonresident alien for federal tax purposes.  To find out more about your F-1 Student Visa status, visit U.S. Immigration Support. To learn more about resident and nonresident alien status and restrictions on claiming the education credits, refer to Publication 519, U.S. Tax Guide for Aliens.

• Income limits. These credits are subject to income limitations and may be reduced or eliminated, based on your income.

Visit IRS.gov and use the Interactive Tax Assistant tool to see if you are eligible to claim education credits. Visit the IRS Education Credits Web page to learn more. Also see Publication 970, Tax Benefits for Education. You can get it on IRS.gov/forms at any time.

Following Up is Like Gold

I ran over a muffler on I-385 a few months ago.  I have no idea how that muffler got there, but it was shiny and looked like a piece of rogue sheet metal….until I got right up on it and couldn’t get out of the way.  So, I managed to put a hole the size of a loaf of bread in the floor of my car.  When you run over a muffler at the rate of speed of 55 mph, that’s what happens. 23 days later, I still didn’t have the use of my car.  The insurance company blamed the body shop for losing the paper, and the body shop blamed the insurance company for not returning phone calls.

Since the incident, every time I wanted to find out what was going on at the body shop, I had to call.  Even after they promised to keep me in the loop every couple of days, I had to call.  I finally felt so much like a nuisance that I limited my calls to one per week, so as not to inconvenience Becky at the body shop.  Let’s not discuss the inconvenience of being down to one car for almost a month.

I learned something valuable. We should be following up BEFORE it crosses your mind to call us. We should be more proactive.

Silence isn’t golden. Family businesses know their business, but they don’t necessarily know everything that we know. When a client receives a tax notice from the ever-cordial IRS or SC Department of Revenue, they freak out. They bring those notices to us for resolution in a timely manner (in other words, please help me with this because I have no idea what to do next). Our job is to ease their minds and provide solutions. Easing their minds equates to regular updates as we work with IRS to resolve the issue. Our silence only frustrates the client, like the body shop’s silence frustrated me. I just want to know that my problem will soon not be a problem anymore.

The blame game never works.  Family businesses have enough on their plates, with making profit and paying their employees for great work. If I get a phone call from the client, asking for follow-up on the tax notice, and I blame IRS for not getting back to me or blame Congress for budget cutbacks which make me hold for an agent for nearly an hour, I have only frustrated my client even more. When I called the insurance agent and asked about the status, and he blamed Becky because he most certainly remembered sending her what she needed, nothing was solved. I just became angrier.

Just this once, yes, I should be able to read your mind.  If I’m as good at my job as I think I am, then I should be documenting when I called you and updated you last, and when you expect me to update you again. I should be able to read your mind, and contact you before you actually request information from me. Becky promised me that she could call me last week and update me, since the work was finally commencing and she knew I was anxiously awaiting the return of my car. But, she didn’t. When I called her, she told me that there was another hold-up with the insurance company. At this point, I just have to believe her. I wonder how many times my clients have felt that way? Well, no more. I don’t want you to JUST believe me because you have no other choice. I want you to TRUST that I have your best interest at heart, knowing that I’m doing all I can for you.

I finally did get my car back, and the repairs were complete. It didn't come without its share of curse-inducing moments, however. One thing is certain, I am sure the experience made me a better CPA for my family business clients. I might owe that shiny muffler a thank-you note.

“You Don’t Know My Business”

Many a wise statement has been made by the embattled entrepreneur.  Remember these?

“I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” Steve Jobs

“Timing, perseverance, and ten years of trying will eventually make you look like an overnight success.” Biz Stone, co-founder of Twitter.

I have been in meetings with clients over my career, where we are discussing why their respective businesses were not flourishing as they intended, or why they’re working so hard and not making as much profit as they felt they should. Then, I am  asked for my opinion, and after voicing it I immediately know I've hit a nerve. The client’s face gets red, and these words come out of his mouth…

“Well, you don’t know my business.”

The ultimate defense mechanism, right up there with “I know you are, but what am I?” and “Your mamma!”

Are there intricacies within the four walls of your business of which I’m not aware? I’m certain there are. Have I ever stood behind your desk/counter and interacted directly with your customers? Nope. Are there universal truths in all businesses, some of which I am aware and will use to help you? AFFIRMATIVE.

In no particular order, here are three of my universal thoughts about your business:

No matter what you’re doing, it is your job to provide your marketplace with an awesome service/product and delight your client base by filling a need in their world. If this weren't true, you wouldn't be talking to me. I may be boiling down the main purpose of your business to three lines of text, but maybe you’re over thinking things. Heck, we all do it. We think our business challenges are so great that it can’t be this easy to think about. I disagree. I know that to accomplish the task, we need to be innovative, forward-thinking, customer-centric and somewhat maniacal in our approach to service.

You have the same number of hours with which to work that I do. 
I once told a former client that he needed to raise his prices to achieve better margins because he would never grow and flourish at his current pace. He replied with the quote that titles this blog, to which I replied “Are you going to somehow create more hours in your work day? OK, if you can’t do that, then you need to raise your hourly rate to make more money (he refused to entertain the idea of value pricing or bundling his services into a flat fee package). If you have indeed hit a wall, and you’re maxed out with the number of hours you can work, this is a simple fix.” I gave him other advice as well, and while he’s not a client anymore, I found out the other day from a client who contracts with his company that he changed his pricing policy and initiated other changes I recommended. His team size has doubled, his wife is much happier with her life, and he has moved to new office space nearly three times the size of his former office. We all have the same number of hours to work each day/week/year. How you price makes all the difference in the world, and there are more options out there than $xxx.xx per hour. Maybe I wasn't totally off the mark after all.

If you don’t take care of your team/employees, the talent will someday leave and you’ll be screwed. 
Taking the people who work with you for granted will hurt you. Period. Read any recent studies on employee satisfaction, and you’ll find that higher pay isn't the only way employees feel valued. I don’t think it’s even in the top 3 or 4. There are more subtle, personal, moral-building things you can do as the boss-man to make people want to work with you, sacrifice their waking hours to help you build something, and spend more time with you than they spend with their family. One of our new clients asked me to prepare her employee’s personal tax return as part of my engagement with her company, because she knew the employee would value that perk. BRILLIANT! I had never even thought of offering that to any of my other clients. I asked her nicely if I could steal it, and she agreed.

I believe that realizing these universal truths has helped us make lasting differences in our clients’ lives. I’m not a know-it-all, and I hope that I never come off sounding like one.  But I find that it helps to remember this quote about the game of baseball from “Bull Durham:”

“A good friend of mine used to say, ‘This is a very simple game. You throw the ball, you catch the ball, you hit the ball. Sometimes you win, sometimes you lose, sometimes it rains.’ Think about that for a while.”

Getting Healthy versus Staying Healthy

My wife and I started a new workout regimen. We recently decided to begin working out daily for 30 minutes. A few weeks in, and we are sticking to our goal and noticing some changes. We have more energy, we feel better, and we know in our heads that we are doing the best thing for our bodies.

My chiropractor once told me that it is much easier to stay healthy than to get healthy. Once you figure out what’s wrong with you, and you fix that problem, then you have to maintain the wellness. It’s easier on your body if you take care of yourself and stay well because you don’t experience those hills and valleys of sick, then well, sick, then well. It’s just good business, you could say.

Physical health is similar to business health. We began working with a client a few years ago, purely for tax advisory/planning and QuickBooks file review each quarter. We did our job, notified them when profits were high and we had tax planning opportunities, and carried on. 
Then one day we noticed that they were getting really busy, and the bookkeeping was beginning to suffer. They used to close each month no later than the 6^th of the following month; then one month it was the 10^th; and the next month it was the 20^th. Before we knew it, they were an entire quarter behind in updating their accounting records and tax planning was nearly impossible. 
So, we set about helping them “get healthy.” We cleaned everything up, made sure that all the activity was entered and reconciled, and then we proposed a plan to help them “stay healthy.” 
To this day, nearly two years later, we handle most of their accounting work, their payroll, the business and personal taxes, and we do everything from assist in forecasting the acquisition of a new client to the purchase of new real estate. Staying healthy (accounting-wise) is a heck of a lot easier than getting healthy.

Today, I emailed that client to let them know that I had prepared a tax projection for 2015 and we needed to get ahead of a serious liability before we moved too much further into 2015. I got the greatest thank-you email and we scheduled a time to meet. No shots, no fasting, no prodding…just staying healthy and making entrepreneurs better.

"Because I Deserve it" Isn't on Your Income Statement

I had a very interesting conversation with a small business owner the other day. We were reviewing his cash flow, and I noticed that his cash was dwindling at a quicker rate than normal, but his general overhead and payroll expenses weren't changing month-over-month. His sales were down about 25% from the year before, so the cash trend was worrisome to me. I then examined his Shareholder Dividends account, and noticed some drastic increases there. I had found my cash flow leak, and it was the owner.

So, I asked some questions, mostly because I was concerned that something personal had happened and he needed cash quickly. That’s never a good thing and I wanted to help.  

“I took that money out because I deserve it.”

What he said to me made me sit back and scratch my head.

I have to say, I've never heard anyone say that before. I’m sure people think it…heck, as business owners, we all think it sometimes. It’s just never been spoken.

“Why do you think you deserve that cash?” I asked.

“Because I took all the risk, I paid the taxes on the profit, and I’m not paying myself enough. Therefore, I deserve to take this money out,” he replied.

Well, I can’t argue with the fact that he took the risk. As entrepreneurs, that’s what we do when we start a new business. And since he is the sole shareholder, he also paid the taxes on the profit. He’s got me there. I had been on his case to raise his payroll a bit, but he hadn't done it yet because he hates paying Social Security and Medicare tax. He’ll never see a penny of that money, or so he says. But, it’s the word “deserve” that I have a problem with.

In the setting above, with less sales, less profit, and presumably less cash in the long run, did it make sense for the owner to deplete the cash because he “deserved” it? In this case, I argued that it wasn't a wise move.

I think dividends are dangerous to some S-Corporation shareholders. It looks like free money, but it’s not. I see companies get into cash flow trouble when the owner takes cash out of the company as a dividend, mostly because owners only read the Income Statement and they don’t show up there. Out of sight, out of mind. When we work with family businesses, we stress the importance of allocating profits for the future, for things like expansions or periods of time when cash is tight. In my client’s case here, cash flow could be tight before year-end if the sales trend continued, and where would he get cash to keep things moving?

I asked this question. “If you are sitting here in six months and sales are trending downward, and cash flow works out as we have projected, will you be comfortable firing 5 or 6 people to help ease your problem?”

His face drooped a little. “No, I don’t want to fire anyone. I can’t fire anyone. I’ll take less pay if I have to.”

But isn't that what you are doing now? How well is that working?

I looked at him over the rim of my glasses. “My advice is to start acting like that concerned boss today, and ease up on the dividend checks. I don’t see a “Because I Deserve It” account on your Income Statement. What I do see is “Payroll” and “Payroll Tax” line items. We can raise your pay slightly if you need more cash, but maybe we should talk about how you spend your personal money to make sure we don’t create a problem at your business in six months.”

I really hope I see progress when we meet again. When I checked up on him last week, he seemed to be upbeat since sales were up and he felt good about his personal cash position. He seemed more humble and less deserving. He and his team will reap the rewards of that change of heart.

Who’s the Problem? It’s Probably You.

I normally write my blog posts from home on Wednesdays.  But, at 10:10 am on Thursday morning after a quick meeting with my team, I realized a harsh truth.

They had a few questions regarding one of our business clients’ accounting records for last month, and they had been spinning their wheels on it since yesterday. Lo and behold, I had taken notes during my last meeting with the client, but I hadn't communicated it to them.

Crap.

How much time had they wasted due to my poor communication? I feel like dirt right now. Their time is valuable, and while I don’t track time and use it to price anything, I don’t want them wasting their time. They look at it as “I’m spending so much time on this account right now, and it’s probably costing Jonathan money.” I look at it like “I want their work time to be productive and rewarding, but experiencing uncertainty due to my lack of communication isn't helping further that.” They may not blame me for it to my face, but some of this is my fault.

I read the other day that when something happens over and over again, and it’s causing you problems at work, it more than likely isn't a people problem. It’s a process problem. Man, was that ever made clear to me today.