Start-up

Now you are ready to sell your first hamburger! Be careful to constantly be looking at your budget. It is critical to pay your vendors and suppliers quickly. If you take care of them they will take care of you and you will look good. In time, you will secure the best and most reliable vendors.

1. Accounting Methods. There are different ways or methods that a business entity can recognize the way it measures its profit or loss. Often a business can have one method for tax recognition of profits versus the book accounting method for recognizing profits. Understanding these differences, and if different methods are necessary, are important decisions a business owner needs to make at the very inception. The most popular methods are:
   
   
   1. Cash. This is a very simple concept. The business recognizes revenue and expenses solely by the movement of cash. Two cash methods are “pure cash basis” where the only recorded asset is cash (and equivalents) and all receipts and disbursements are recorded on a statement of cash receipts and disbursements when received or paid and the “modified cash basis” where modifications are made for items with substantial support, such as significant financed equipment where the asset and liability are recorded. In practice, the pure cash basis of accounting is rarely used as it is not reflective of operations for most businesses. More commonly, businesses would follow the cash method of accounting used for income tax purposes which is guided by tax regulation.
   2. Accrual basis. Revenue and expenses are recognized when an event occurs. Income and loss are created upon events occurring. For example, if a widget is sold in the first month, revenue is recognized in the month regardless of when the cash is received. 
   3. Hybrid. This would be a combination of cash and accrual. If a business has different divisions or operations, there may be an opportunity to have two separate methods. 
   4. Other. Industries such as the construction industry have different methods available such as the completed contract method or the percentage of completion method of accounting.
   5. Income tax basis. Two overall methods of accounting are prescribed by Internal Revenue Code, cash and accrual. With the cash method, income is generally recognized when actually or constructively received and expenses are generally deducted when actually paid. With the accrual method, income generally is recognized when earned, and expensed deducted when incurred.
       
   Be very careful to consult with your advisor at the outset and monitor your method as the business expands. There may be an opportunity to change the method if circumstances dictate.
   
   Challenge – Financial Accounting Method vs. Income Tax Method
   Factors to consider when determining accounting method:
   
   
   • Do you have inventory?
   • What basis of accounting is appropriate for income taxes?
   • Is your business highly leveraged?
   • Are you subject to bonding requirements?
   • Do you have outside investors?
   • Does your cash flow parallel your income and expenses?
   • Do you anticipate going public or seeking venture capital?
      
2. Accounting Systems. Our most successful clients review information on a daily or weekly basis to keep track of sales and cash flow. Then, usually by the 10th of the month, they review accurate financial statements (balance sheet & income statement) that let them know how the business is doing.
   
   
   1. Your minds excel schedule. A business owner should always have an idea for how the business is doing by understanding the relationships of fixed costs, variable costs and sales. Your financial statements should be an affirmation of what you think is happening. If there are any variances then you should reconcile the differences.
       
   2. Accounting software. There are many software packages to choose from that can satisfy most businesses needs and give you accurate financial statements. The key is not the system you buy, but it is the competency of the individuals using the system. Be sure that you have a qualified bookkeeper, controller, etc. It is always good idea to have an outside CPA firm double checking the financial statements for accuracy.
      
      One item of note is that all businesses usually purchase a software package that comes with a financial reporting system. Often these packages are great operating systems for specified industry operations, but they do not necessarily produce the best financial information.
      
      Remember, quality accounting is critical.
       
   3. Payroll. Payroll is a tedious, complex process that if not executed properly can translate into significant penalties imposed by the taxing authorities. There are many outside payroll providers that can assist you with this service. Outsource your payroll function and you will be guaranteed fewer headaches.
       
   4. Emotion vs. numbers. Operate your business by the numbers. Know your benchmarking goals and drill down to productivity goals through your organization. Do not make rash decisions or actions that may be driven by emotion at the time. Always go to the numbers to make decisions.
       
3. Insurance Needs. Be sure you have a good insurance agent that will be sure you have the correct coverage.
   
   
   1. Personal liability. All business owners should have a personal liability policy for extra protection even though you may legally be protected by your entity structure. Two million dollars is a common level of coverage.
       
   2. Workman's compensation. If you have employees, you need to be sure there is protection against any injury incurred by an employee while on the job.
       
   3. Property insurance. You need to be sure that the contents of your premises are protected, such as furniture, equipment, computers, etc.
       
   4. Umbrella liability insurance. The business should have liability insurance to protect the company from liability that may occur.
       
   5. Business interruption insurance. It is important to most businesses to have coverage that protects from the business in the event that business operations are interrupted by a qualifying event.
       
   6. Errors and omissions. If involved in a professional service business you will need insurance to protect any claims made against you for services rendered.
       
   7. Key person insurance. To guard against the financial loss (death, disability) of a key individual, partner, owner. Funds would be provided to allow time to replace the potential effeciencies and revenue that can be lost.
       
4. Internal Control. A good internal control environment goes far in protecting business assets and operations. Internal control is a process, put in place and maintained by owners, management and other personnel, which is designed to provide reasonable assurance related to achieving goals in the efficiency and effectiveness of operations, the reliability of financial reporting and compliance with laws and regulations. Controls such as segregation of duties in accounting and operations, budgeting and routine reconciliation of accounts are important to all businesses. Effective controls provide the owner the ability to run the business operations and manage risk and not have to micro-manage daily functions. It is important to note that no control is 100% “fool proof,” but generally any control is much better than none.
    
5. State, City, County Reporting Requirements – register to do business in applicable states; identify requirements for compliance; outsource to third party providers when more efficient; watch for state tax credits; ask about state tax incentives
    
6. Employees vs. Independent Contractors – It is important that as an employer you correctly determine whether the individuals providing the services are employees or subcontractors. An employee needs to have income taxes (federal and state), social security and medicare taxes withheld. The business also must pay unemployment tax. Independent contractors are individuals who provide services to the public such as lawyers, contractors, subcontractors. The general rule is that an individual is an independent contractor if the person performing the service has the right to control their own work. The Department of Treasury has guidelines regarding these control factors.
   
   The risks involved for misclassifying employees or independent contractors may result in penalties and interest – these can be twice what should have been paid by the business.
    
7. Employee Benefits – Commonly offered benefits include:
   
   1. health insurance
   2. cafeteria plans
   3. qualified retirement plans – such as a 401K plan or a SEP
   4. personal time off (including vacation and sick time)
   5. mileage or travel and other expense reimbursemt plans