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: jbastien@roth-mosey.com

LinkedIN to connect professionally: http://ca.linkedin.com/in/jaysonbastien

Website to learn more Roth-Mosey & Partners LLP: http://www.roth-mosey.com/