Thursday, May 29, 2008

What accounting system should I choose?

One of my MBA classmates asked me if I might be able to create a matrix relating accounting packages to size and industry. In her two paragraph inquiry she mentioned seven different software packages. The reality is that there are likely a thousand or more accounting programs on the market, each with their own set of advantages and disadvantages. What might work great for one company could be a disaster for another.

Choosing the right software is a critical business decision. Get it right and you’ll be extremely pleased. Get it wrong and you’ll spend countless hours doing workarounds and other labor intensive work to get the information and control a good system should provide.

Because there are so many choices in the market, it would be impossible for me to know all of them. As a Certified QuickBooks™ ProAdvisor, I am somewhat biased towards them and often recommend that solution. However, QuickBooks is a terrible program for many businesses.

I tend to recommend QuickBooks because it is inexpensive to purchase, easy to use, offers great customer support, is expandable within limits, and offers a variety of industry specific packages. The industry specific packages cost more to purchase but offer many great features for certain companies.

Being the most widely used makes it easy to find bookkeepers and staff who are trained and familiar with the software which can significantly reduce current and future training costs. There are also a number of third-party vendor options to enhance the package that can be purchased separately.

On the other hand, QuickBooks can only handle average cost inventory pricing. If you need LIFO, FIFO, specific identification or some other inventory pricing system, QuickBooks will not work for you. QuickBooks has other limitations as well but those are for another discussion.

Since there is no one size fits all accounting system, I recommend business owners start by evaluating any industry specific programs on the market. Industry specific software helps address business processes typical to an industry without adding extra customization costs.

I was involved in start-up bakery which selected QuickBooks prior to my arrival on the team. While I was trying to determine how to make QuickBooks cost a loaf of bread and then differentiate that from a sliced loaf of bread, I did some research and found specialized bakery software. The bakery software was admittedly more expensive (approximately $5,000 to buy and another $5,000 to set up) but infinitely more useful. The bakery software provided so many additional benefits that the added cost was more than worth it. The specialized software helped the start-up bakery operate at an entirely different level than what would have been possible with QuickBooks alone.

Sometimes it makes sense to use QuickBoooks for A/R, A/P, G/L and financial reporting while using a different package for inventory, costing, billing, or other specialized tasks. It just depends.

The total cost of the system will include the purchase price, setup, training, operating costs, advisory and support costs as well as future upgrades. All of these costs need to be considered when making a choice and compared to the anticipated benefits of the systems under consideration.

Here is where I recommend the value of a CPA knowledgeable in systems design. Armed with knowledge about your business, goals, plans, operations, processes, transaction flows and critical information requirements, a CPA can help you find and select the software that will be a strategic fit for your company.

Wednesday, May 28, 2008

How important are good records?

I was reading a story from the New York Times this morning regarding the declining value of small businesses during this economic downturn. Not surprisingly, there are a lot more sellers than buyers which is driving down prices.

While it did not surprise me that small business valuations were falling, what I found most interesting and valuable was this little bit of information from the end of the story:

"... an unpleasant truth is that many, if not most, businesses do not sell. For decades, the conventional wisdom was that brokers sold about one out of five businesses they listed. But a new study by Louis O. Vescio, owner of Sunbelt Business Brokers in Melbourne, Fla., found that the percentage was only 10.5 percent.

The main reason, Mr. Vescio and others said, was that 'most small business owners keep bad records,' so buyers cannot get an accurate financial picture."

As I wrote in my blog last week, a good accounting system is extremely valuable to a small business. I see too many business owners who fail to adequately invest in their accounting and information systems because they don't see the value and they don't have the knowledge or expertise. This approach is ultimately costly when the entrepreneur creates a potentially valuable asset that can't be sold.

Accordingly, I recommend that business owners make adequate investments in their accounting and record keeping systems. This aspect of a successful business is no less important than HR, marketing, sales, operations, banking, etc.

A good accounting system is efficient, fairly easy to maintain and provides a number of key functions like reporting, analysis, security and operational control.

Friday, May 23, 2008

Business deductions

I was meeting with a prospective client yesterday and they were talking about deductions. This person owned an upscale retail clothing store and a friend of theirs had told them they could write off almost everything as a small business owner.

Drive to work - write it off.
Laptop computer - write it off.
Cell phone - write it off.
Daily lunch with his business partner - write it off.
Fancy clothes - write it off.
Haircut - write if off.

The list was actually longer but I think you get the picture.

While all of these have some connection to the business activity, that doesn't necessarily make them deductible. While there are many specific rules regarding business deductions, the items noted above generally have a high degree of personal benefit, i.e. non-business, to them. Everyone has to eat, wear clothes, get their haircut and drive to work. These are generally personal expenses and therefore not deductible as business expenses.

Haircuts and clothing are almost never deductible. As a general rule, clothing is deductible only if it is a requirement of the job AND, cannot be worn as street clothes. My friend and his employees who dress nicely in their upscale clothing store cannot deduct their clothing as a business expense. It may be a requirement of the job but the clothes can also be worn outside of work and therefore can't be deducted. If it is any consolation, I can't deduct my suits, shoes and ties either.

Cell phones and laptops are considered listed property and an allocation between business and personal use is required. The business use portion is deductible while the personal portion isn't.

There are a number of ways to handle cell phone accounting and I recommend you do it right with professional help to review the tax implications of your plan. I see too many companies who don't handle this correctly and expose themselves to potential liabilities. The biggest mistake I see is where a company simply provides cell phones to employees and pays the monthly bill without any accounting by the cell phone user. This type of arrangement is allowed but the payment is considered W-2 compensation and should be handled accordingly.

Business meals have a their own set of specific rules but generally, the meal must be ordinary and necessary for your business and directly related to or associated with it as well. Having lunch with a co-worker will not pass the necessary test and is therefore not deductible. Most meals are considered personal unless, you are meeting with a client or perspective client AND discussing business.

The IRS has strict rules for substantiating meal and entertainment expenses. For each expense, you must show the date, place, amount, business purpose of the expense, and the business relationship of the person you entertained. Receipts are required for expenses of $75 or more.

Tuesday, May 20, 2008

The value of accounting

A classmate getting ready to launch a business (, recently asked me about accounting systems. Specifically, what should they do and of course, what will it cost?

I recommended QuickBooks given their size, budget and sophistication. However, while QuickBooks will cost anywhere from $200-$450 for the software depending upon the version, this is really just a fraction of the total investment.

After opening the box and installing the software, the chart of accounts, terms, items, vendors, employees, customers and more must be created in QuickBooks. Transactional systems outside QuickBooks must be designed, tested and implemented so individual transactions ultimately get recorded and summarized properly in the financial statements and other accounting reports.

While all of this costs money, I prefer to think of this as an investment in the efficient operations of the business. A well created accounting system is a valuable intangible asset. It provides a significant level of the internal control environment for a small business. Your accounting system should provide timely and accurate financial reports to help you assess progress, problems and success. A quality financial reporting system should make you more attractive to lenders and investors, all other things being equal and it will save you money when it comes time to prepare your taxes since the data will be easier to work with.

Small business leaders have so many things to think about. Failing to recognize the value and importance of a quality financial reporting system is a costly mistake. You wouldn't start a business without a marketing plan. You shouldn't start a business without an equally robust accounting and financial reporting plan.

How much should you spend on accounting? I don't have a specific number or percentage but the number is larger than many start-ups suspect and is a valuable investment and component of a successful enterprise.

Thursday, May 8, 2008

What are you doing with your rebate?

I have been receiving lots of requests from non-profits to donate all or a portion of my rebate check. While I routinely donate 100% of my Oregon kicker refund, I am not planning to do the same with this federal rebate. I may donate some but have yet to be convinced of the connection between my rebate and my charitable giving.

With the Oregon kicker I know that the money I get back comes directly from the state agencies that benefit Oregonians. I always donate my kicker to public schools.

The federal rebate is different. Half the money comes from the military budget and the other half from federal programs. However, given the federal spending and deficits, does this rebate really impact any agency? I don't think so.

I contribute approximately 10 percent of my income to charity and non-profit groups working to make the world a better place. I don't plan to donate more because of this rebate. Instead, I plan to use my rebate to pay down a loan.

What are you doing with your rebate?

Wednesday, May 7, 2008

The beginning

I met a business associate after work last night and she mentioned how she blogs at work. I love writing and had thought about blogging but never got around to getting started. Today I changed that.

I plan to write about accounting, business and sustainability. As a business advisor, I want to encourage my clients and now my readers (LOL) to be smart, successful and sustainable in all they do.