Company doctor: Crunch the numbers

At the recent Wisconsin Entrepreneur’s conference in Milwaukee, I participated in a panel that discussed how to utilize a board of advisors to deal with the challenges that arise during the growth of a business.

This article is the first in a series that will deal with strategies for leveraging your relationships with your business advisors. Previously in Small Business Times, I wrote an article on improving your banking relationship. In this article, I will address how to maximize your relationship with your CPA/accountant.

Many times when a business is in its infancy, it relies upon basic software packages or a bookkeeping service to monitor the company’s financial inflows and outflows. The need for sophisticated financial consulting grows with the business, and its complexities require the input from a seasoned professional. Let’s first address the needs of the business in the initial stages of development, and then we can address how these needs change during the growth phase.

The goal of the accounting professional is to get the business owner up and running on their own and not to make them reliant on the accountant’s bookkeeping services. Since I am not a CPA, I asked Barry Werner, president of Milwaukee-based Scribner, Cohen & Co. S.C. to provide specific strategies for these two stages of development in the life of a small business.

In the initial phase of development, the CPA can assist the entrepreneur with the choice of entity for the new or existing business. The CPA/accountant will assist the entrepreneur in determining if the entity is best served being an LLC, C-Corp or S-Corp. The election of any one of these entities will impact the amount of tax liability that the entity and entrepreneur will be liable for. Often, the entrepreneur/business owner does not engage the services of the CPA at this stage until either they receive a notice from a taxing agency regarding their tax liability or when their bank requests detailed financials prior to granting a loan or line of credit.

According Werner, if the owner of the business is comfortable using bookkeeping software, he or she will be able to produce the necessary basic reports to monitor their business. The challenge many owners run into when using bookkeeping software is when they need to interpret the reports. With the assistance of a seasoned accountant, these reports can be analyzed as to business trends, inventory turnover, cash flow analysis and the aging of accounts receivable and payable. In his experience, Werner has found that many smaller firms lose trade discounts because of late payments, which results in a reduction of cash flow. In many industries the trade discounts can be as high as 8 percent if an invoice is paid on a timely basis.

Another advantage of seeking the assistance of a seasoned professional at this stage is to ensure that the business is properly funded. In order to determine if this situation exists, the accountant needs to see a business plan that includes sales and expense projections for at least two to three years. Many business owners elect to fund their business through credit cards in the early years and subject themselves to upwards of 18 percent to 24 percent in annual interest charges. This is an expense that could be avoided with the proper amount of funding from a lending institution. In many cases the owner does not have a sufficiently detailed business plan to be granted financing from one of these lending institutions.

In the second stage, the growth stage, the accountant can assist the business owner in monitoring the progress of the business to ensure that the proper funding is there to fuel the growth. It is now time to replace the bookkeeper and augment the software package with the experience of the accountant and his/her firm.

As the business grows, so does the level of complexity of the tax situation, especially if a second location is established in a different state. Now the owner is faced with lease vs. buy decisions on equipment, additional record keeping requirements and the need to track expenses and profits by location. The need to closely monitor all aspects of the business is now critical, since the owner can no longer manage by just walking around. Also in this stage, the need for capital grows and in many cases additional players join the business. This may require another review of the choice of entity.

Let’s recap how the CPA can assist you in planning and monitoring your business:

•    Choice of the proper business entity.

•    Development of a business plan that includes sales and profit projections, so a lending institution can grant the needed capital to fund the business.

•    Maintenance of the company books and payroll records so that the company can withstand an audit from a taxing entity (city, state or federal).

•    The proper costing of products and services to insure maximum profit potential.

•    Control over cash flow, accounts receivable and payables to maximize trade discounts.

•    Selection of the proper method of depreciation that would maximize cash flow potential.

•    The development of management reports on WIP, raw materials and finished inventories.

The use of the services of an experienced accounting firm and their staff of seasoned professionals is an investment whose dividends could potentially make up for the cost of their services. They could also help you avoid the penalties associated with late and incorrect reporting of taxes (payroll and withholding) a common occurrence experienced by firms in their infancy and growth stages.

In this instance, the benefits definitely outweigh the cost. Remember, professional services are an asset, not a liability.

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