by Andres Primo | Mar 13, 2020 | Uncategorized
This article was originally published on the Early Growth Financial Services.
Monthly close is the process of recording and reconciling all transactions that occurred during the month, then closing the associated temporary accounts: i.e., “closing the books.” The goal is both to deliver a snapshot of your business’ financial position and provide a fresh start to the new period. Your closing figures are the key building blocks for creating accurate financial statements. Not only is a reliable and efficient process important for tracking performance, it’s also a vital part of your financial management. How you handle monthly close is a powerful statement on the strength of your team, your financial controls, and the health of your business. Clearly this is an important practice to get right!
Below, I’ll break down the steps involved and provide some pointers on how to set up your process to guarantee the best results.
First start with a good system. I’m not just talking about your accounting software but also about your system for conducting the close.This includes the people, processes, and timelines involved. Make sure the key steps and tasks are outlined, account-abilities are clearly communicated, and that you’ve put in place a process for higher level management review.
Closing Date — Determine a standard closing date that will be consistent from month to month.
Best practice: Set up a short cycle. You should be able to complete the process within 5 days.
Review — The first step is to review changes to your balance sheet. Start with checking that cash amounts accurately reflect transactions that occurred during the month by checking them against your bank statements. You’ll also review inventory values (if applicable), check A/P amounts against vendor invoices, assess A/R for collectibility, and review debt balances against recent payments.
With that done, you can move on to income statement items, with the objective of making sure expenses are properly categorized and tied to sales recorded. The main ones are costs associated with sales, prepaid expenses (e.g., legal, materials, overhead, rent, taxes), and payroll and benefits accruals.
Best practice: Use checklists to make sure you’ve covered all the categories.
Make Adjustments — Part of closing the books is reconciling/adjusting projected revenues and expenses for the actual amounts incurred so that your accounting entries balance.
Best practice: monitor which areas are consistently driving the largest adjustments to so you can make changes to staff training or your estimation process.
Record/Document — Any changes should be recorded in the general ledger, your master set/chart of accounts, before you close temporary accounts (those set up for use during that month) and create a trial balance (display of all your permanent accounts and their remaining balances). Review these for accuracy and get the appropriate sign-offs.
Best practice: While your accounting software will ensure that debits and credits balance, assign a reviewer to check that your entries are included in the right categories and that they are not duplicated or missing.
Reporting — Needless to say, reports are critical for tax compliance, part of required disclosures to stakeholders and creditors, and indispensable for explaining the business’ performance and value to investors. Generating reports also allows for transparency in your business. You can track where you are versus plan, be alerted to changes in operating trends, identify the key drivers of out/under performance, and refine projections. A clean set of books will also save you time and money by avoiding an expensive clean up effort come tax time!
Best practice: Make sure your reporting captures the performance measures most relevant to your business.
by Andres Primo | Mar 11, 2020 | Uncategorized
Statistically 33% of small and medium sized businesses get fined for not doing payroll the correct way?
Most start up business owners have very little knowledge let alone any expertise of the confusing web of state, federal & local regulations around compensation, insurance and tax compliance, or of how to manage employee benefits programs. And when it comes down to it, founders should focus their greatest energy on product development and customer acquisition efforts — not on compliance and administrative tasks.
Robert cited Y Combinator alum and Amicus CEO Seth Bannon, in advising founders not to cut corners on important infrastructure. Instead, he advises outsourcing non-core functions early. With time being a resource often just as scarce as money is, finding the right professionals to set up your infrastructure correctly will save you time and money in the long run.
Starting Up: Must-haves
- EIN (Employer Identification Number) — Also known as a Federal Tax Identification Number, think of this as a social security number for your business. They’re free to set up and you can apply for them via the IRS online.
- State unemployment Identification Number — The state, or states, you operate in will provide you with a number once you register for your state unemployment insurance account.
- Business bank account — Open an account and get a business credit card. Some good startup banks to consider are PNC, SVB, First Niagara, and Peoples United Bank.
- Workers’ Compensation Insurance — This protects employers from employee claims for injuries arising while on the job. It is a requirement in nearly every state. If that wasn’t enough to concentrate your attention, fines for non compliance are in the tens of thousands of dollars range.
- ACA — Once your business reaches more than 50 employees, you must provide health care coverage. Businesses that don’t meet this requirement could face fines of up to $2,000 per employee for non compliance.
Starting Up: No-nos
Even if you do everything else right, these huge, and sadly very common, mistakes can be make or break.
- Never, ever commingle business and personal assets or accounts — Not only does doing this make it hard for you and any accountant you eventually bring on to properly account for business transactions, it also could expose your personal assets to liability claims arising from lawsuits filed against your business.
- Don’t pay employees’ salaries from your personal bank account — In a worst case scenario, a disgruntled employee could go after your personal assets as part of a legal claim.
Starting Up: Insurance & Benefits
- Find out what your disability insurance obligations are — Requirements vary on a state by state basis.
- Get general liability (Directors & Officers) insurance — Though there are no legal requirements to carry liability insurance, here are a couple of reasons why it is worth your while: 1) it’s the smart thing to do and 2) investors will require it.
- Choose your health plan offerings — Whether for competitive reasons or to meet legal requirements, you’ll more than likely to need offer employee health insurance.Whether you select an individual or a small group plan is a question of preference.
- Decide on a PEO or open market purchases — When it comes to choosing a healthcare provider and coverage, you’ve got a couple of options. You could go with a Professional Employer Organization (PEO). These allow small businesses to pool their resources and benefit from a PEO’s stronger negotiating position for benefits and insurance to get access to better services and much lower rates on plans versus purchasing on their own. Choosing a PEO, will also save on administrative costs.
Option two is to buy your insurance and benefits coverage on the open market via insurance brokers.
Starting Up: Legal and Employment Law Considerations
- Be careful how you classify workers — Going with contractors can be cheaper for employers than hiring employees, but fines for improperly classifying someone as a contractor when he or she meets the legal definition of an employee are very high.If you have any questions as to the right classification for someone, do your research, including getting professional help. More often than not, if you have the question, you should probably classify that person as an employee.
- Get Your Structure Right — While this is a business decision that involves tax and ownership considerations, C Corps are the way to go if you plan on raising money from institutional investors and Delaware C Corps are the most common form.
- Register your trademarks — Protect your proprietary technology, licenses, and any inventions earlier rather than later. You can do this via the uspto or trademarkia.com. Safeguarding these should be part of your broader IP strategy, and it’s definitely something you can expect investors to ask about.
By focusing on your core competencies, bringing in outside professionals when you need to, and dodging rookie mistakes you’ll not only get your startup infrastructure set up as efficiently as possible. You’ll also be laying the groundwork for your business to grow and scale.
– See more at: http://www.thefundwell.com/2014/11/starting-tips-tricks-getting-set-right-way/#sthash.5yPtkZ2M.dpuf
by Andres Primo | Feb 24, 2020 | Uncategorized
It takes a steady and reliable cash income from a business owner to pay their business expenses and growth. That income is thought to come from products sold and services provided. Unfortunately, customers often take more time to pay. Customers, unfortunately, tend to take more time than they should to pay. Entrepreneurs can’t afford to wait on these payments. Customer bills that are not paid for are reflected in business accounting statements as receivables.
Typically receivables will create a gap in a business owners account that need to be filled in with a loan. Companies with business clients that don’t pay for services in advance or upon delivery have these three popular financing options: (1) line of credit, (2) asset based loan, and (3) factoring/accounts receivables financing. Each funding option has its benefits and drawbacks but there is no right or wrong answer. The following is a quick overview of the three product types and their most notable pros and cons:
- Line of credit – A revolving loan facility that allows a borrower to draw down funding as needed up to a maximum amount. The maximum loan amount is typically determined based on a company’s historical business cash flow and its debt to income ratio. Interest is due only on the funds that are currently drawn down not on the maximum loan amount.
- Pros:
- The funds can be repaid at anytime on or before the maturity date without any penalties.
- If a company is very profitable, regardless of how small the receivables are, its maximum loan amount could be very high.
- There are no restrictions on when a business owner can draw down and how she can use the funds.
- The interest rate is typically prime + 2 to 3%, which is the most affordable pricing in the market for short term financing.
- Cons:
- If the business was not profitable in the previous year (i.e., didn’t owe/pay business taxes last year), it likely won’t be eligible for a line of credit.
- If the business owner’s credit score is not 640 or higher, it will be difficult to get approved for a line of credit.
- Banks are one of the only lenders that offer line of credit products. So if a business doesn’t currently qualify for conventional bank financing, it will likely not have access to this product.
- Depending on the size of the line of credit, it can take 30 to 45 days to get approved and funded.
- Asset based loan – A revolving loan facility that a borrower can use as needed up to a maximum amount. The maximum loan amount is tied to the company’s average 90-day receivables balance. Interest is due only on the funds that are drawn down not on the maximum loan amount.
- Pros:
- The funds can be repaid at anytime on or before the maturity date without any penalties.
- The interest rates vary from affordable to moderate, ranging from Prime + 3% to mid teens.
- A business owner’s personal credit score is not a factor in determining eligibility for this financing.
- Cons:
- Business owners can draw down funds only if they have outstanding receivables.
- The maximum loan balance at any time cannot exceed 65% to 80% of the company’s outstanding 90-day receivables balance.
- There is a minimum draw down amount. A company is charged fees based on that minimum draw down amount whether they actually draw down the funds or not.
- It typically takes 10 to 14 days to approve, close, and fund.
- Factoring (or Accounts Receivables Financing) – A cash advance on a company’s current outstanding invoices that are less than 90 days old. The maximum advance amount is typically 90% of the total receivable. The borrower pays interest and fees on the advance.
- Pros:
- The funds can be repaid at anytime on or before the maturity date without any penalties.
- Factoring companies can provide approval within 24 hours and fund within 1 to 5 business days.
- A business owner’s personal credit score is not a factor in determining eligibility for this funding.
- Cons:
- The lender has to underwrite each outstanding invoice.
- The pricing ranges from 1 to 3% of the total advanced amount per month.
- The business owner has to notify their business customers that they have assigned their receivable to a factoring firm.
- The business owner has to setup a lockbox account controlled by a factoring firm and direct business customers to send payments to that lockbox.
If a business is having trouble collecting payments from customers fast enough to pay their bills on time, they should consider applying for either a line of credit, an asset based loan, or accounts receivables financing. There are positives and negatives associated with each type of funding. However, the important thing to remember is that they are all short-term financing solutions. These funding products are designed to give business owners the time to get current with their obligations and make changes (as needed) to their business models to ensure they are able to cover future working capital needs with cash generated from operations.
