Small Business Accounting and Financial Reporting_StarterCompanyRevised
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Transcript of Small Business Accounting and Financial Reporting_StarterCompanyRevised
By: Jayson Bastien, Client Service Accountant
Mentor: Summer/Starter Company Program
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
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
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
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
• Act as an advisor• A second set of eyes
• Risk management
• Strategic planning
• Key contact to connect you with other professionals• Bankers
• Lawyers
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
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
• 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
Software Learningcurve
Customizable Notes Cost
SageAccounting
-Low to medium
4 editions More checks and balances than other softwareRecommended 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
Software Learning Curve
Notes Cost
Xero Accounting Low - Electronictransmission 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
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
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LiabilitiesCurrent and future
obligations
Examples:
- Accounts Payable
- Loans
Assets = Liabilities + Equity
or
Assets – Liabilities = Equity
AssetsItems of value and
future benefit
Examples:
- Accounts receivable
- Prepaid Expenses
- Inventory
- Fixed Assets
EquityWhat you own/what
you have earned
Examples:
- Owner Contributions
- Retained Earnings
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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
Purpose:
To explain the difference between Net Income (accrual accounting) and change in the cash balance.
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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
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?
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
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!
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
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
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
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.
• High
quality/low
price
• Low
quality/low
price
• High
quality/high
price
• Low
quality/high
price
Skimming Premium
Market
PenetrationEconomy
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!
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
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)
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
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?
Charge customers the highest price they are willing to pay
Focus◦ Technological advances
◦ First to market
◦ Creating trends
Examples:◦ Apple Inc.
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!
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
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
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
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
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/