Tag: accounting

Accounting Methods for Construction Contractors

 

For construction contractors, there are more options for accounting methods than those available to other business taxpayers due to the unique nature of construction activities and the inherent imprecision that can arise in measuring profit at different points in time during a construction contract. The IRS provides several steps for construction contractors to follow when determining which accounting method is appropriate.

Concept of construction and design.Cash method – under the cash method, revenues and expenses are recognized based upon receipt and disbursement of funds. Contractors are generally eligible for the cash method of accounting, if they have $10 million or less in gross receipts annually for each of the past three years.

Accrual method – under the accrual method, revenue is generally recognized when all the events have occurred that fix the right to receive the income, and the amount of the income can be determined with reasonable accuracy (i.e., as billing invoices are issued). Expenses are deductible when all events have occurred that establish the fact of the liability, the amount can be determined with reasonable accuracy, and economic performance has occurred.

Completed-contract method (CCM) – under the completed contract method, no profit is recognized on a construction contract until completion of the contract.

Although the completed-contract method allows you to defer taxes on your income, it prevents you from deducting losses on unprofitable jobs until the contract ends. It can also push taxpayers into higher tax brackets by bunching income into a single year.

Percentage of completion method (PCM) – the percentage of completion method is a variation of the accrual method, where revenue recognition is measured not by a reference to billing but rather by applying an estimate of relative completion of a contract to the overall contract value. To determine how much income to report for each contract, calculate your project completion factor by dividing deductible project costs for that year by the total estimated cost to complete the project. For example, if you spent $100,000 on a project that will cost $1 million to complete, your project is 10% complete. Multiply that 10% factor by the contract’s total value to determine how much income to report.

Choosing the right accounting method

The choice of accounting method can have an important impact on tax-related disbursements. Effective tax planning relies heavily on the concept of deferring the payment of tax. Construction contractors and their advisors need to consider the optimal method under their specific circumstances provide the greatest benefit.

If you have questions about the accounting method you should be using for your construction firm, contact me at [email protected] or 201.655.7411.

Who’s Really in Control of Your Internal Controls?

As a small business grows beyond its owner or owners, a system of internal controls becomes necessary. We would all like to believe that our business assets are safe from unscrupulous employees and that the financial information we use to make critical business decisions is free from errors and omissions. However, without a system of internal controls, there is little possibility that even the most innocent error or omission will be detected.

Vote equalityInternal controls are the checks and balances that are in place to at least provide a fighting chance that errors, omissions, duplications and misappropriations will be detected and avoided. They can apply to many different aspects of the business.

For example a business can have internal controls over financial processes, IT applications and systems, as well as over human resources. My focus is on accounting and financial internal controls that a small business can put into place immediately without breaking the bank.

The 10 internal controls you need

Ten internal control procedures businesses of all sizes can immediately put into place:

  1. Separate the check writing and check signing responsibilities among two or more individuals. If using online bill pay, keep account passwords secure and only with those authorized to make the online payment.
  2. Have a person who is independent from the check writing or accounts receivable responsibilities open the mail. When opening mail, immediately endorse and stamp checks “for deposit only” and list checks on a log before turning them over to the person responsible for depositing receipts. Periodically reconcile the incoming check log against deposits. Small offices can have the business owner open all mail and populate the check log.
  3. Require paychecks to be distributed by a person other than the one authorizing or recording payroll transactions or preparing payroll checks. Have employees sign for their paycheck and periodically inspect signatures against employee files. Many fictitious employee schemes have been found through “surprise” in person paycheck distributions.
  4. Reconcile bank accounts monthly. Ideally these reconciliations should be done by an independent person who doesn’t have bookkeeping responsibilities or check signing responsibilities. If you don’t have the personnel to segregate these duties, make sure the reconciliation is adequately reviewed by another person or by the organization’s independent CPA.
  5. As part of the reconciliation process, periodically examine cancelled checks to ensure that checks are in sequence, payees are recognized, endorsements are appropriate and signatures are valid.
  6. Set account limits on company credit card use and require employees to submit original receipts for all purchases. Examine credit card statements and receipts each month to ensure charges are business related and authorized.
  7. Compare financial results against budgets, forecasts and prior year results. This comparison should be done monthly and any inconsistencies or variances should be investigated.
  8. Avoid time lags between approval and processing since falsifications can occur after the approval of the transaction. After approval the document should not be returned to the preparer.
  9. Limit access to assets such as inventory, petty cash and equipment. Periodically count the assets and compare the results to the underlying accounting records.
  10. Develop formal policies and procedures for purchasing. Separate the purchasing function from the requisitioning, shipping, and receiving functions. Include the verification of goods and services received to the contract or purchase order and invoice.

Protecting against fraudulent activity

Internal controls are not only needed to help protect a business against fraud or misappropriation by bad employees. They are used to detect innocent errors, duplications or omissions.

Once a business determines formal internal controls are needed it shouldn’t delay in establishing these procedures and protocols; as we all know, the longer the delay in implementing a process the more difficult the buy-in for change.

In the end management is ultimately responsible for the organization’s internal controls. Be aware that any system will be hard pressed to prevent or detect fraudulent activity through employee collusion. A good system of control will help to prevent what could be costly errors and omissions as well as discourage deliberate misappropriation of organizational assets.

If you have questions about setting up internal controls for your business, contact me at 201.655.7411 or [email protected]

What is Risk? How Does it Affect Business Value?

 

risk and business value
What are the risks in your business, and what can you do to reduce them?

According to Dictionary.com, risk is defined as “the chance of injury or loss; a hazard or a dangerous chance.” In the business valuation context, risk refers to the possibility of financial loss or drop in asset value.

In layman’s terms, the risk in buying a business is that you will overpay for it. The more risk that is associated with an investment, the higher the return that is demanded by the investor. The higher expected returns are achieved when the market places a lower value on a business that is perceived as having higher risk.

In estimating the value of a business, the analysis is based on expected cash flows and the risk that such cash flows will not be received as expected. An astute buyer seeks to minimize risk, through careful evaluation and understanding of the business he or she is considering buying or investing in. As I have said in previous blogs, the evaluation of a closely held business is no different than the evaluation done in purchasing 100 shares of a public company:

  • Will the company continue to pay dividends?
  • How much will those dividends be?
  • What will the shares be worth when you are ready to sell them?

Certain risks, such as the economy in which the business operates, are uncontrollable. Some risks, such as future competition, may be anticipated but others, such as technological obsolescence may come as a complete surprise. Many years ago, a client purchased a chain of successful photographic film developing labs and continued to operate them successfully until the advent of digital photography. The client certainly did his homework, but did not see the change that was coming. Neither did Kodak and look what happened to them!

Controllable risks to consider

If you are buying or selling a business, what are some of the controllable risks that you should look out for?  Here are a few of the more common ones:

  • Poor accounting records – A company’s accounting records should tell the full financial story of the business. With all the low-cost accounting software that is available, there is no reason that every business should not have great accounting records. A company’s books should speak for themselves; the more stories, explanations, and exceptions, the greater the perceived risk.
  • Customer concentration – Is the continued success of the business dependent upon a single customer or a few customers? If the loss of any of these customers would negatively impact the business, that is a significant risk.
  • Supplier concentration – Is the business dependent on any suppliers that cannot be quickly and easily replaced? This could be a problem if anything happens to one of those suppliers.
  • Key employees – Is the business dependent on the services of one or more employees? Are there enforceable employment contracts and non-compete agreements in place with them? If the business does not have these agreements (signed by all parties and on file), what would happen if those employees went to work for your competitor?
  • Foreign competition – Can the product or service offered by the business be purchased at a lower cost from a foreign provider? Everything from tax preparation to manufacturing to technology consulting can be outsourced overseas these days. If this hasn’t affected your business yet, chances are it soon will. What are you doing to remain competitive?

Taking these factors into account, what are the risks in your business, and what can you do to reduce them?

Everything you do to reduce business risk will be a step toward increasing your company’s value. If you’d like a fresh look at the risks inherent in your business, or to discuss the business valuation of your company, contact me at 201.655.7411 or  [email protected].

 

 

 

 

 

 

 

Are You Starting a Business? This Handy Checklist Will Help You Get off to the Right Start.

free business startup checklist
Get a free checklist that will walk you through the key steps to starting a business.

Starting your own business is an exciting endeavor but one filled with so many questions. Selecting a name and a location, picking out office furniture, and figuring out what equipment you’ll need are just the tip of the business iceberg.

Getting started on the right track with all the necessary financial details can have even the savviest of new business owners quickly drowning in paperwork and decisions.

Some issues you need to grapple with as you begin your business venture include:

  • Should your company be registered as a partnership, and S-Corp or an LLC? Are you going into business as a sole proprietor?
  • How will you track your daily expenses and financial transactions? Then there’s also:
    • Who will do this in your new company? With so much happening with a startup, are you better served outsourcing your bookkeeping to an experienced accounting firm?
    • Which expenses are mandatory to track in order to develop accurate financial forecasts, budgets, and cash flow reports?
  • Should your company’s accounting be on a cash or accrual basis?
  • What are your new venture’s tax responsibilities?

There is lots of information for business owners available from the IRS and the Small Business Administration. But for easily accessible info that takes you through all the critical accounting pieces of starting up a company, you can download our free business startup checklist at http://krscpas.com/go/business-startup-checklist/. With years of experience working with business owners in New Jersey and New York, we can help get you on the right track—and stay there!

Once you’ve downloaded the checklist and had a chance to look it over, give us a call to discuss your startup’s needs at 201.655.7411 or email [email protected] for a no-obligation initial consultation.

 

 

Does Your Small Business Need Help with Bookkeeping Tasks?

Outsourced bookkeeping
Outsourcing your bookkeeping and back office tasks can free you up to focus on your business

Small-business owners bring expertise and commitment to their companies, but many find they are often too busy running their operations and taking care of their customers to deal with paperwork. We all know how quickly those stacks can pile up, and unfortunately, it’s all too easy to lose track of bills that must be paid. And what about reconciling the corporate checkbook on a timely basis?

Continue reading “Does Your Small Business Need Help with Bookkeeping Tasks?”