Working with a CPA from Business Start Up to Maturity
When starting a business or recruiting the members of your team, hiring a CPA or specialized accountant is often an afterthought. Or, a reactionary process in response to tax return needs or regulatory requirements. While these are certainly justifiable reasons, this isn’t the “value” that regularly working with a CPA from start to exit will provide your company. So, what is?
Picture this: You have a unique product or desire to enter a new industry and decide to start a business. You hire an attorney to do the paperwork and a real estate agent to find the perfect location. Next an architect and security consultant to plan build outs, before purchasing equipment and then finally opening your doors. Then what? Where do accounting and CPA services fit into your business’s needs?
Starting a business requires detailed financial planning, focusing on accurate cost expectations and industry specific accounting concerns.
If you operate in an industry with unique legal and financial regulations, working with an experienced CPA or EA is crucial to understanding the tax effects and pro-actively planning for them, as well as any additional financial reporting or compliance requirements. Taxes are often the highest expense a business will face. Businesses operating under the Medical Marihuana Facilities Licensing Act will have even higher than “normal” taxes, with many expense deductions limited by federal regulations. Not planning for tax effects effectively has put many businesses out of business, regardless of the industry.
While formalizing start up capital and investor relationships, it is often beneficial to work with a CPA to help your business prepare financial statement projections, showing all relevant information in a format suitable for presentation. An industry specific CPA can also help you determine if expected costs are allocated properly and tax rates are applied correctly. They can also provide valuable insight on whether projection estimates include all relevant expenses the business could be expected to incur.
A commonly told statistic is that most start up businesses are no longer in business after five years. One reason is because these businesses did not include in their planning phase a focus on costs, realistic budgets, and financial projections. They also most likely did not have a complete understanding of the proper accounting for their activities during these start up years. A business owner may keep receipts or a running tally of expenses to date, but rarely do they apply the right accounting methods to these transactions. Too often this results in cash flow shortages, surprises at tax time, and other problems that the business wasn’t prepared for.
Working with a CPA or accountant can help your business avoid these issues in its early years. With properly prepared financial statement projections, accurate cash flow vs. income expectations, and strong bookkeeping practices, the business will have a fair representation of its performance. This information is useful for financial decision making, growth planning, or product analysis. Cash accumulation and distribution timing, gross margins, expected earnings, and more are all important financial insights to be aware of.
Even if you are not quite ready to work with an accountant full time when beginning operations, one can help you set up your beginning accounting system, including chart of accounts and allocation schedules, so that you have the tools necessary to properly maintain your own accounting information from the start. At LC Solutions Michigan PLLC, we offer clients operating under Michigan’s MMFLA beginning setup like this. This allows proper recording of cost of goods sold and other accounting necessities particular to the industry. Services can be transitioned into full bookkeeping, monthly review, and tax return preparation and planning as your business evolves.
By now most successful businesses will have some formality to their accounting processes and work with a CPA or industry accountant on a regular basis. This is also the time when competition in the market is at full force and growth opportunities arise, especially in a new industry. The need for managing and evaluating financial information certainly doesn’t diminish. Now more than ever does proper accounting become a necessity.
Let’s start with some questions: What is your business’s performance and current worth? Is your business leaking costs? What is your profit margin on the products you sell? How do margins change as your business reacts first to an influx of start up growth and later to a saturated market? Do sales change based on what your business promotes – product, price, quality, branding, or company message? Will your business have enough cash flow to pay taxes, investor returns, and continue to expand? At what rate? When and how will the company pay back creditors? How do you effectively manage employee costs as your workforce grows? How fast is your business growing? Are there any signs that the business is trending toward a decline and at risk of going out of business?
These are just some of the thousands of different financial questions a CPA or accountant can regularly help your business with.
Identifying Problems and Improvements
Another question a CPA who works with your business can help answer is “What went wrong?”
Just like market forces are an external influence on business in both positive and negative ways, so are internal forces. Effective leadership, strong accounting, and ethical business practices can all have positive effects. Internal issues such as fraud or theft however can be a large detriment to a company. Often these issues are recurring when found and have done damage to a business slowly over time.
A heavily cash oriented industry lacking traditional banking options will risk fraudulent activity at at much greater rate. While preventing or detecting fraud and theft is ultimately the responsibility of the company’s management and owners, a CPA can help discover evidence of fraud and bring it to management’s attention so that it can be corrected timely. They can also help your business plan internal controls over financial information to prevent issues like this. In many cases, will act as a component of the internal controls themselves by performing regular review services.
How can my business increase profit or impact? This may be another common question. Having ideas and opportunities for growth or improvements are great starts. Effectively planning and implementing these from a controlled financial perspective is required for successful execution. Helping to strategically plan your next operational move or expansion, or evaluating pricing and cost models to improve stagnant profits are common services a CPA may perform. Financial controllership functions like this are necessary for impactful decision making.
Maturity and Exit
After a business has proven itself and the industry has matured, the owner may start to plan for their exit. The business should present its financial information accurately, including historical and projective figures. Doing so can help the business owner ensure a fair return on their efforts.
At this stage, you’ll most likely have a team who can help with everything from making sure employees and customers transition smoothly, to the legal agreement and transfer of ownership itself. Your accountant should also be an active member of your team! After all, the bottom line is number oriented! A CPA helps ensure current, historical, and projective financial records accurately present the underlying information. They can also act as an advisor and help discuss accounting components of operations. Often business owners are able to have an intelligent conversation on high level financial items. They often don’t understand the detailed accounting effects within or how they relate to one another though. An accountant who is familiar and works regularly with your business is the expert in this case.
At the end of the day, business is about numbers and CPAs know numbers! Work with one knowledgeable of your industry and of effective accounting management and practices. This will help ensure your business continuously remains on the right track.
About our CPA Firm
At LC Solutions Michigan PLLC we provide our clients with unparalleled accounting support, professionalism, and industry specific knowledge that is crucial to their business operations. We understand our client’s needs and the special purpose bookkeeping, cost accounting, tax compliance, and industry standards they require. We also understand business and what it takes to run one. This allows us to provide valuable insight and advice for effective financial accounting management and reporting. Finally, we understand the cannabis industry like we understand assets and liabilities, debits and credits. It’s second nature to our firm and founders! We are excited to help move the industry forward by offering a solid foundation of pro-active accounting and financial service offerings.
Published May 27, 2018
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