Small Business Accounting and Financial Reporting_StarterCompanyRevised
- 1. By: Jayson Bastien, Client Service Accountant Mentor: Summer/Starter Company Program
- 2. Main goal is to provide relevant and useful information to youth entrepreneurs starting, expanding or purchasing a business Provide guidance, answer questions and become a contact for future inquiries
- 3. Topics: 1) Introduction 2) Role of the accountant 3) Types of services 4) Accrual vs. cash 5) Bookkeeping technologies 6) Financial Accounting 7) Cash flow forecasting 8) Cost Accounting & Pricing 9) Income taxes & HST
- 4. Current Mentor: Summer Company Staff Accountant at Roth Mosey & Partners LLP ◦ Provide accounting, assurance and tax services ◦ Act as advisors to our ongoing client needs ◦ http://www.roth-mosey.com/ Previous ◦ Summer Company 2008 participant ◦ OSB graduate
- 5. To measure the success of your business To help you make better business decisions To anticipate cash flow / financing needs Comply with income and other tax laws
- 6. • Act as an advisor • A second set of eyes • Risk management • Strategic planning • Key contact to connect you with other professionals • Bankers • Lawyers
- 7. Financial statement compilation (NTR) Assurance services (review vs. audit) Tax compliance and planning Cash flow projections (create/revise) Evaluating financing alternatives Starting a business ◦ Business plan development ◦ Shareholder agreements Purchasing a business ◦ Due diligence
- 8. Accrual accounting is recording transactions and events when they “occur or expected to occur” Cash accounting is recording transactions and events when “cash” is paid or received Accrual accounting is the required method and provides the most realistic representation of the underlying business transactions
- 9. • You do not need to be an accountant to perform bookkeeping • There are simple and effective bookkeeping technology available at affordable prices for all sizes of business
- 10. Software Learning curve Customizable Notes Cost Sage Accounting -Low to medium 4 editions More checks and balances than other software Recommende d by accountants $100 - thousands Quick-books -Low to medium Multiple editions Easier to use $100 - thousands Excel -Flat to low Yes – pivot tables, etc. Highly prone to human error $0 to $100
- 11. Software Learning Curve Notes Cost Xero Accounting Low - Electronic transmission of invoicing - Easy bank reconciling - Access anywhere - Accountant has access $20-$50/month Fresh Books Low -Time keeping and expense tracking - automatic payment for recurring - PayPal integration $20-$50/month
- 12. The process of collecting and reporting financial information. Financial Statements consist of the following: • Balance Sheet • Income Statement • Cash Flow Statement • Notes to the Financial Statements
- 13. Date Pa ge 13 Liabilities Current and future obligations Examples: - Accounts Payable - Loans Assets = Liabilities + Equity or Assets – Liabilities = Equity Assets Items of value and future benefit Examples: - Accounts receivable - Prepaid Expenses - Inventory - Fixed Assets Equity What you own/what you have earned Examples: - Owner Contributions - Retained Earnings
- 14. Date<footer> Pa ge 14 Important concepts: • Revenue Recognition - when it is earned (i.e. goods are delivered or services rendered) which is not necessarily when you receive the cash • The Matching Principle - match your expenses to your revenue Revenue – Expenses = Net Income
- 15. Purpose: To explain the difference between Net Income (accrual accounting) and change in the cash balance. Date<footer> Pa ge 15 Add Back: - Non – Cash Expenses (i.e. Amortization) Adjust For: - Changes in working capital (A/R, A/P, Inventory) - Purchases of Fixed assets - Proceeds from debt -Repayment of Debt - Owner’s drawings/injections
- 16. Questions you are asking yourself: Where to begin? What should I include? Am I on the right track? How often do I revise my forecast?
- 17. At first it will feel like a guessing game Plan out operations using a timeline Mark each point in which costs will be incurred and when you expect to receive your first sales Do this for each month up until you have 6 to 12 months Input the information into the cash flow projection template See whether you have a shortfall in cash
- 18. Add in any financing obtained and forecast out payments (including principal and interest) Revise cash flow forecast each period (weekly, monthly, etc.) Run an actual and forecasted cash flow Determine where and why there were variances immediately!
- 19. Be realistic about your forecast... you are only hurting yourself if you are not Continuously revise your forecast and determine explanations for variances Ensure you have valid supported reasons for each number You should be able to explain every assumption made
- 20. Enables you to determine how much products cost in each stage of production Provides a base and a key ingredient in determining price! The Basics: - Variable vs. Fixed Costs - Contribution Margin - Direct vs. Indirect
- 21. Variable Costs Costs that vary in direct proportion to the changes in the level of activity. Examples may include: - The cost of paint per sq. ft. of house - The cost of strawberries per basket Fixed Costs A cost that remains constant, regardless of the changes in the level of activity. Examples may include: - Rent - Employee wages - Advertising
- 22. Important ! - a $10 sale of apples does not equal a $10 sale of oranges Consider your Contribution Margin when determining your sales mix! Selling Price - Variable Costs= Contribution Margin Contribution Margin (CM) contributes toward covering fixed expenses and profit. (CM x # of units sold) – Fixed Costs = Profit Looking at your costs in terms of variable and fixed helps you identify inefficient product lines, establish your minimum selling price and hopefully, maximize profits.
- 23. • High quality/low price • Low quality/low price • High quality/high price • Low quality/high price Skimming Premium Market Penetration Economy
- 24. Cost plus markup (15%) ◦ Process ◦ Job-order ◦ Activity based Competitor Customer willingness to pay Remember the pricing quadrants and where your business is at/where you want it to be!
- 25. 3 key pricing metrics ◦ Gross margin Sales – direct costs (variable and fixed) ◦ Break even Fixed costs/(price per unit – variable cost) ◦ Target profit (Fixed costs + desired profit)/(price per unit – variable costs) http://www.readyratios.com/reference/analysis/break_even_point.html
- 26. Process ◦ Manufacturing costs are tracked by process (sum all costs in process and divide by # of units produced) ◦ Complete for each separate process Job-costing ◦ All costs are tracked to specific jobs (ie. Hours, materials used) ◦ Good for any custom work (ie. Custom home, special consulting project) Activity costing ◦ Costs are tracked based on activity (ie. Machining, quality inspections)
- 27. Overhead costs are grouped in cost pools (ie. machining, service department, warehouse) Total overhead costs per pool divided by cost driver (ie. labour hours, square footage) equals overhead costs per unit produced
- 28. Charge your customers based on competitors’ prices... ◦ Reduce prices to obtain greater market share Focus: ◦ Increase volume to generate greater income ◦ Reduce costs to increase margins Where do you want to be relative to the pack?
- 29. Charge customers the highest price they are willing to pay Focus ◦ Technological advances ◦ First to market ◦ Creating trends Examples: ◦ Apple Inc.
- 30. What is a deductible expense? Basically it is any expense incurred to earn income. Expenses incurred for personal benefit are not tax deductible. It’s a write-off!..... does not mean it’s free! You still have to pay the expense! As a business owner, you pay tax on your net income, not your revenue… ……..so keep track of your expenses!
- 31. Whether income is earned personally or through a corporation, the amount of income tax payable is virtually the same. The most significant tax benefits of incorporating are due to “tax deferral” Sole Proprietorship Corporation All income earned through the business is taxed at personal tax rates Two-tier – income is first taxed at the corporate level and then personally once money is taken out Personal assets exposed to creditors Owner removes money from corporation by way of: -Salary or bonus (deductible) -Dividend (not deductible) Each has its own advantages and disadvantages Less expensive to setup and maintain Easier to transfer ownership Can set their own year-end
- 32. Sole Proprietorship Corporation Tax rate Personal marginal tax bracket (see next slide) 15.5% on first $500k of active taxable income Advantages - Losses can be used against other personal income -Defer income tax by leaving money in company to grow - Shelter income from creditors - Can pay combination of salary and dividends for optimal tax strategy -Utilize capital gains exemption upon sale of business Disadvantages - All income is taxed at marginal tax bracket - Losses cannot be used against other personal income
- 33. What you should know: HST of 13% applies to most goods or services sold in Ontario Generally, all HST “Registrants” have to collect and remit HST on all taxable goods and services You do not have to register if your rolling four quarter sales are less than $30,000. Unfortunately, if you do not register, you can not claim a refund on the HST you paid for previously purchased supplies, therefore it may be beneficial to register early on to obtain the ITCs Taxable Supplies Remitting Frequency < $1.5M Annual $1.5M to $6M Quarterly > $6M Monthly
- 34. Keep documents going back 6 years plus the current year you are in Keep all receipts, invoices, deposit slips, bank statements, letters, etc. Store hard files in a dry and fireproof container Ensure backup copies exist for any electronic files
- 35. Email for inquiries and to sign-up for newsletter: [email protected] LinkedIN to connect professionally: http://ca.linkedin.com/in/jaysonbastien Website to learn more Roth-Mosey & Partners LLP: http://www.roth-mosey.com/
Editor's Notes
- #3: Keep to slide
- #4: Keep to slide
- #5: Keep to slide
- #6: Keep to slide
- #7: A second set of eyes – we are removed from the emotions of the business and can provide objective advice and point out things you were perhaps not aware of Risk management – we see many industries and deal with many other professionals which allows us to see current and upcoming risks that you may have overlooked or underestimated Strategic planning – a summation of the above We deal with other professionals on a daily basis in which we develop strong relationships with. We put our clients in contact with other reputable and highly qualified professionals to meet our clients’ needs
- #8: We offer a magnitude of services in which some of the more common ones are listed here. We also can help recruit finance personnel to your team.
- #9: This is on topic that many people do not understand however it is one the foundation stones to financial performance analysis and financial accounting. A simple example is if I sell you an product today and you take it home with you I have earned myself a sale however because I told you, you can pay me back in December I have not yet received the cash and therefore will have to record an accounts receivable from you in the amount of the sale
- #10: We will be going over which bookkeeping technology is the most appropriate to use and then will be going over a specific example I have created on how to use Excel to perform bookkeeping
- #11: For business with up to $5M in sales these are the three most significant pieces of technology to use to perform bookkeeping and financial performance analysis. Discuss that the majority of the clients we see use Sage and Quickbooks though Sage is the preferred accounting software however there is an on-going debate. Discuss that there are multiple editions of each of Sage’s and Quickbooks software in order to meet the needs of each business. Sage and Quickbooks are good for small to medium size businesses. These types of software are good for companies with up to $5M in revenue. There is no need to get something more sophisticated as it will only waste a lot of your time trying to learn the system and it costs tens of thousands of dollars to purchase and maintain the system. Both Sage and Intuit (the makers of Quickbooks) provide online support for a limited time which allows you to obtain assistance when it is most needed in the beginning stages. Most accountants are familiar with these types of technology and will be able to assist you. There are trial’s you can obtain of the different types of software so that you can try which one is right for your and your business before you make the purchase. You will be looking at anywhere from $100 to $1200 depending on which edition you purchase and how many users you have which would be usually up to 5 for the price ran
- #13: Mention that we will not be covering notes to the FS however they provide relevant information – such as adding depth and break downs of information so that the readers of the FS have a greater understanding of the underlying business transactions.
- #14: Refer the participants to the Balance Sheet Example of Starter company and go over that the statements balance. Go over current assets – items that will be turned into cash within the next year – capital assets are long-term in nature – w/p 44-1 & 44-2
- #15: Gross margin is 9% - can use this as an evaluation tool of whether Starter Company is meeting its target. Did not book tax to keep it simple at this point. The participants should be told that this statement is the starting point for the cash flow and that they will see the changes between the net loss and the change in cash which will further illustrate the accrual vs. cash methodology of accounting – w/p 44-3
- #16: Refer participants to the CF statement. Show them that the start to the CF statement is the IS. Inform them that in the next slide they will see how the changes in working capital and cash flows are related. – w/p 44-5
- #17: These are common questions you are or will be asking yourself
- #18: Inform participants that they may need to forecast their cash flows on a weekly or even daily basis in order to keep their business running. Therefore they will need to put more effort in determining the timing of the cash flows – from when they will need to pay suppliers to when customers will be pay you!
- #19: Keep to slide
- #20: Go over CF forecast example – go over each line and explain each assumption made
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- #22: Keep to slide
- #23: This methodology works in $ only. You must be aware that if you discontinue selling one product sales of another may decrease because they are complimentary sales. An example would be the sale of hot dog buns and hot dogs. The money isn’t made on the bread however without selling hot dog buns customers will go elsewhere in order to be able to purchase both the buns and hot dogs for convenience purposes.
- #24: Pricing plays a vital and perhaps one of the most important roles in your business. Having the correct price could mean the difference between earning a profit or incurring a loss. Pricing affects the value proposition as customers will perceive the quality of your product or service based on your price comparing it to competitors. There are four broad categories of pricing – go over each category. Walmart would be an example of Economy, Apple would be considered Premium. When you are first starting your business many of the participants will be in the market penetration category having a high quality however charging less than they should in order to obtain market share. This is very common practice. The category of your business will point you in the direction of where your pricing will be – are you surrounded by many competitors? If so market penetration however if you have a unique value proposition and your customers recognize this than perhaps you’ll be in the Premium category.
- #25: At a high level there are 3 pricing strategies; we will be going to each in a few minutes and I will explain how to determine your costs!– keep to slide
- #26: It is important to know all three of the metrics in order to assess how financially you and your company is performing. It is equally important to know when you will be breaking even and when you will reach your desired profit target – this helps in the assessment of your performance
- #27: Keep to slide – add in that it is very important to understand your business operations in order to determine what processes and activity exists and how you should be organizing your operations. This helps in determining where costs are incurred, what type of costs they are and what drives them!
- #28: Overhead costs include plant supervisor, manufacturing plant utility costs, etc.
- #29: Very important to know what your competitors are doing regardless of which quadrant the participants are in.
- #30: This is the Premium quadrant – not everyone can succeed in this category
- #31: Sole proprietorship – separate form your accountant will fill out with business activities Corporation – less than $500k of TI – 3 months to pay taxes and 6 months to remit return after date of corporate YE which was set on the date of incorporation. It’s important to have a good bookkeeping and record keeping system due to the legality of paying taxes
- #32: Keep to slide
- #33: LCGE – on QSBC shares – obtain $800k capital gains exemption/$400k off of TCG
- #34: Inform participants that there are different rates for goods sold in other provinces therefore need to look into before selling there Inform participants that if they will be incurring many costs upfront that it would be more beneficial to register for HST claim the ITCs which are 100% refundable instead of not registering, including the HST portion paid as an expense and only getting the tax payable reduction of the HST paid times the tax rate.
- #35: Keep to slide
- #36: Keep to slide