ACCOUNTING FOR YOUR BUSINESS
Setting Up Accounting Systems
For any business to succeed, the owner needs to know what is going on. An accounting system is important to establish the financial component of that information. A well-designed system provides you with both the information you need and the information to satisfy government reporting requirements.
Because my accounting practice has "grown up" using Macintosh computers, I am familiar both with Macintosh and Windows operating systems. In fact, now I'm running Windows software on my Intel Macintosh. Today, there are a number of computer programs suitable for the small business that will provide both sets of information. I am particularly familiar with two of them AccountEdge, and QuickBooks. I am a member of both the AccountEdge Professional Advisors Program and the QuickBooks Pro Advisors.
A checkbook program like Quicken sometimes works for small proprietorships, but the basic versions don't effectively help you keep track of things like receivables and payables, and the reports are far from standard business reports, especially the balance sheet. Some clients have had me use Excel tables for transactions and Pivot reports in lieu of a proper accounting program; that's OK for a basic set of books, but has limitations similar to Quicken.
I have found through experience that even accounting novices can learn to operate a well designed accounting program for their own business with a few hours of assistance from me. Typically that involves:
* Choosing which accounting program best meets the client's needs;
* Setting up the accounting system (anywhere from 1 to 8 hours, depending on the complexity of the business);
* Teaching the owner how to enter information (1-3 hours); and
* Providing follow-up consultations by telephone and email ("mid-course corrections").
HELPING YOU UNDERSTAND YOUR BUSINESS
I maintain a library of the most recent versions of the accounting programs my clients use. For example:
Notes:
† Some older versions can cause payroll problems. If you do not update the payroll program regularly, the payroll still will create paychecks, but won't calculate deductions, much to the distress of one client who issued several paychecks before discovering this. I recommend QuickBooks only if (a) you do not have payroll, (b) you use an outside payroll service, or (c) you enroll in QuickBooks Payroll update service and do not let your subscription lapse.
†† Not all of these versions calculates payroll. Instead they make use of a payroll program, Aatrix Top Pay, which is non intuitive to setup and use. I don't recommend it. I suggest you use an outside payroll service with these programs, or be willing to calculate paychecks manually.
††† These programs are cross-platform compatible (i.e., the same file can be opened in either Windows or Mac computers). FirstEdge and Business Essentials also are cross-platform compatible.
∂ The backup file of QuickBooks Versions 2005 through 2010 can be opened in either Windows or Mac computers; for newer versions, save the backup for the operating system you're going to use it in.
The one I use for my own accounting is MYOB AcountEdge (on Macintosh).
Keeping all the versions available permits me to receive my clients' files and use them on the same version they are using, even if they haven't upgraded to the most recent version of the software. That way, when I return the file to them, I haven't upgraded them to a version they are not using.
Many of my clients send their data files to me (see the link to send me a file) to make specific changes, or to help them correct errors that they can't figure out. With a planned "appointment day" I can usually receive the file during the night and have it back by the end of the next day. Others have set up a Virtual Network Connection (VNC) server on their accounting computer. Using a VNC viewer I can access their accounting file directly, and under their direction modify or enter transactions. (It's necessary to do this under their direction so that when I prepare financial statements for third parties, I can remain independent during the stage of preparing compiled or reviewed financial statements. This doesn't mean that the client can reproduce what I'm doing, only that they understand what it is I'm accomplishing for them).
By keeping the books in good condition, you can be assured that reports you generate from them will give you current information you can use in running your business. For example, you can keep track of receivables and payables, and the resulting cash flows that are critical to the health of your business.
In order to minimize making errors that could change prior years data and to avoid spelling errors that multiply items and accounts, I strongly urge you to have me be the sole Administrator user on your accounting file, with you being a User with limited privileges. If you attempt to do a transaction that needs Administrator privileges, call or email me; it may be that I can suggest a way to enter the transaction, or, if it is truly a new type of transaction, send the file to me and I'll create the accounts/items for you. When you don't set things up like this, I often spend an hour (or many hours more), creating adjustments to bring the records into the position they were in at the end of the prior year before I can even begin to look at this year's data.
Many clients will consult with me periodically (for example, quarterly) to have me describe what their financial statements mean in terms of business operation. I can use my business background to help clients determine whether a particular expense is too large (or too small!) for their business.
SECURING BUSINESS INFORMATION FROM UNAUTHORIZED ACCESS
A small business has unique problems when it comes to securing business information and assets. If you pay attention to the news, you have undoubtedly seen or read reports of someone accused or convicted of embezzlement; and often the victim is a small business. Rarely is the business able to recover from these losses.
If your business accepts credit cards, you may have had to beef up your security to meet the credit card company requirements. Here are some ways to do that:
* For Windows: Get VeraCrypt, free open source software, and create a virtual secure encrypted disk. Put all your sensitive information in that disk. You can even double the security by having a visible disk that contains dummy files and an inner "hidden" disk that contains the real data. For Macs, you can use VeraCrypt or create an encrypted disk image using the Disk Utility. Don't have the system or program save the password.
* Don't use default user names and passwords, especially for the Administrator. I've seen automatic access attempts using names like "Admin" and "Administrator" and passwords like "123456789, "password, "pswd," and other basic variations. So use a strong password and a complex user name. When possible, have two accounts, an Administrator account for making system changes and a standard account for everyday use. Unfortunately, in Windows, many programs (like older versions of QuickBooks) require an Administrator account to operate; that compromises security. See how effective your password is at https://passfault.appspot.com/password_strength.html.
* Make sure you have installed internet security programs. Here's a recommendation when you get a new computer: Don't connect it to the internet until you have ensured that security programs are installed and operational. When I was first installing Windows on my iMac I didn't do that and it was immediately bombarded by who knows what stuff. Fortunately, I could merely trash the file and re-do the installation after disconnecting the computer from the internet. The architecture of Mac computers makes them much less subject to viruses.
Another security issue is preventing embezzlement or theft. I remember years ago when Ian was managing a convenience store, he caught employees in cahoots with a vendor stealing product before it even came into the store. A cardinal rule is to trust your employees, but don't give them the opportunity to abuse that trust. That means doing background checks on new employees, and putting measures in place to minimize problems. For control over money, the most important thing is to do bank reconciliations promptly. Do these yourself or have me do them; don't have the bookkeeper do them. If the bank provides on-line or paper images of the checks, review them for details (a common scheme is to change the name of a vendor to a dummy company after you sign a check). Be familiar with your regular vendors; do a Dun & Bradstreet check on new vendors.
HELPING YOU COMMUNICATE WITH LENDERS, INVESTORS, AND OTHERS
Lenders and investors often will want more assurance that your business is what you say it is than just accepting the print out of reports from your accounting program. Sometimes you maintain your business records on the income tax basis or cash basis of accounting, but they want "Generally Accepted Accounting Principles" (GAAP). Sometimes, they want descriptive notes so they can better evaluate your business. And sometimes they want financial statements or schedules that your accounting system can't generate automatically (a Statement of Cash Flows often falls into this category).
Who else might want information about your business? Often this will be the result of a legal encounter of some sort. If you are getting married, you might need this to properly draw up a pre-nuptial agreement; if you are getting divorced, you or your soon-to-be-ex spouse may want it for settlement purposes.
FINANCIAL STATEMENTS AND FORECASTS
Besides the traditional financial statements, I can also prepare Financial Forecasts to help you plan your business, raise capital, or get a business loan. I design Financial Forecasts on a spreadsheet program so that it produces output in financial statement form, self consistent throughout. I help you define your assumptions, and incorporate them into the spreadsheet. It can start with fairly basic assumptions, and can be refined and expanded as necessary to include detailed calculations.
CPAs offer four levels of assurance regarding financial statements and forecasts:
*Preparation
* Compilation
* Review
* Audit
COMPILATION
In a compilation I do not provide assurance of any sort (one might wonder why anyone would want to accept this). The basic report I prepare is along the following lines:
I have compiled [description of financial statements] in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. I have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the United States of America.
Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
My (our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
(Statement 19 on Standards for Accounting and Review Services, Issued by the Accounting and Review Services Committee Copyright 2009, American Institute of Certified Public Accountants, Inc.)
There can be circumstances where the report is expanded to include other information. Examples are: management elects to omit disclosures (notes describing accounting methods and other matters), I might not be independent with respect to the client (though under new guidance I can now list the reasons I am not independent), and there might be significant departures from the basis of accounting used for the financial statements.
When you only plan to use the financial statements for internal (management) use, I can issue such financial statements without a compilation report, by including a "For Management Use Only" footer on each page. It's likely that by next year, I will be able to issue compilation reports only on your request, due to a change in accounting standards; for internal purposes, the additional cost of preparing the report would be avoided.
REVIEW
In a review I provide limited assurance. I perform two types of activities in addition to the procedures I follow in a compilation:
* I will ask appropriate managers and owners about business, financial and accounting matters that relate to the financial statements and accompanying notes. Part of this includes having them write me a "representation letter" that acknowledges the information they have given me.
* I will perform limited tests of the accounting records, mostly of an analytical nature. These include comparison of financial statements with prior periods and anticipated results (budgets), and studying the relationship between elements of the financial statements (ratios, trend analysis, reasonableness tests).
These two types of activities fall far short of the work required to perform an audit. A review report will look something like this:
I have reviewed the accompanying [description of financial statements]. A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I do not express such an opinion.
Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
My responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require me (us) to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. I believe that the results of my procedures provide a reasonable basis for our report.
Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.
(Statement 19 on Standards for Accounting and Review Services, Issued by the Accounting and Review Services Committee Copyright 2009, American Institute of Certified Public Accountants, Inc.)
AUDIT
Performing an audit of financial statements is the one activity that requires licensing as a Certified Public Accountant. Everything else that we do can legally be done by others, although terminology might vary. Performing an audit is also one thing I do not do, since I do not have enough experience to competently perform audits. In the rare situation where an audit is needed, I refer my client to another CPA firm that is much better qualified than I to do this type of work. For comparison, here is what a basic audit report looks like:
We have audited the [description of financial statements]. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluation the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the preceding present fairly, in all material respects, the financial position of X Company as of [dates], and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
(AICPA Professional Standards, Vol. 1, AU Section 508.08, Copyright 2009, American Institute of Certified Public Accountants, Inc.)