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Why Is Professional Judgment Important In Accounting?

Why Is Professional Judgment Important In Accounting?

With the progressively complex nature of today’s global business practices, it’s important to have reliable financial information for your business. Accountants are professionals and due to the nature of their industry, are expected to apply professional judgment. Having the ability to make a professional judgment is essential for accountants, but it can be challenging,

Professional judgment is a required skill for principles-based accounting strategies, including auditors, preparers and regulators of financial statements. That said, making professional judgment calls can be difficult, and there isn’t necessarily one right answer in most cases. There is a learning curve, but it’s possible to recognize and take the logical steps necessary to better navigate through judgment calls, including asking common sense “what and why” questions.

What is Professional Judgment in Accounting?

Professional judgment is the process of drawing a conclusion or arriving at a decision when there are several possible alternatives to choose from. It is a process that is unbiased, logical, consistent and objective.

Accountants make use of pertinent information and balance intuition, knowledge and experience to make the best call. Unfortunately, many accountants don’t have a thorough process in place and fall into common judgment traps. Many of these judgments end up being shortcuts that can help simplify complex accounting tasks but may lead to less than optimal judgments and can cost your business in the long run.

It’s important that you have a good relationship with your accountant so that you can express your concerns and support for professional judgment with your business tax records. Make sure that every item in question is assessed according to the law. If professional judgment is needed, you should work with your accountant to understand the impact that the decision will have on your business.

Following a Sound Professional Judgment Process

Peace of mind comes when you hire the right people for the right job. Accounting is not easy. Your accountant is responsible for providing regulators, directors, managers, investors and others with reliable, up-to-date, comparable financial and accounting reporting information. It’s important that he or she stays on top of the law, receives the training required to make good business calls and follows a consistent process.

By persistently following a good judgment process, understanding risks and vulnerabilities, and having the right competent accountant on your team, you’ll be able to monitor your company’s risks (including fraud) and strategies. Be consistent in your judgment process. If you chose path A for one item, use the same process for the next one in question. Following an expert judgment process equates to improved risk management and business outcomes.

If you need help creating a consistent, repeatable and efficient judgment process for your business, call me today. I can help you implement the right systems and people to take your business to the next level.

Strategies for Operating a Cash-Strapped Business

Strategies for Operating a Cash-Strapped Business

Cash flow is the lifeblood of any business and a fundamental factor when it comes to growth and longevity. Today, cash-strapped businesses are easily forced to the brink of failure with the difficult process of trying to get credit or a bank loans. It’s important that entrepreneurs understand from the get go that they can’t operate for long if their cash outflow is greater than cash inflow. All companies, especially startups, need to conscientiously monitor their cash flow to prevent disruption to the business.

Strategies for Operating a Cash-Strapped Business

A substantial percentage of cash flow challenges arise because business owners haven’t invested enough time estimating the potential revenue streams achievable and balance it against their obligation to pay out expenses. As a business owner, you should know the importance of calculating precise cash flow forecasts. If you don’t appropriately estimate your cash flow for the day, week, month and quarter, you’re going to be putting your company at risk.

From the first day you start your business, you need to track and manage your cash flow, including paying your employees, vendors and others against the time frame in which you collect payment from your clients. Make sure that you time cash inflow to arrive before payments to others are due. You should also set up cash reserves to smooth out the bumpy road.

Quality Product or Service is First!

You should always focus on the quality of your products and services before you decide to cut costs. Your business won’t survive if what you’re offering is fatally flawed. You may decide to outsource some of the work to keep employment expenses low.

Customer Service is Second!

Providing superior customer service will give any business a competitive edge. Sure, most consumers want to save as much money as possible on transactions, but they also expect a positive customer service experience.

Before you cut prices to match or beat the competition, focus on improving your customer service skills. When customers email, message or call, make sure that they receive real help instead of empty promises or excuses. If you have a designated customer service employee or department, ensure that they can quickly and efficiently respond to dissatisfied customers. If you cut employment costs by outsourcing this function make sure that you’ve picked a good agency and that you’re following employment law.

By having a well thought out customer service strategy in place, you’ll give your clients a reason to continue doing business with you, regardless of whether your prices are somewhat more expensive than your competitors. Mistakes are going to happen, but if you have effective customer service strategies along with a great product or services in place, most consumers will be more likely to overlook the occasional mistake.

When it comes to business success, cash is always king and cash flow should always be priority #1. Let’s work together to come up with a strategy for your business. Call me today to discuss.

Why Are Net Income and Cash Flow from Operating Activities Different?

Why Are Net Income and Cash Flow from Operating Activities Different?

It’s important for businesses to understand cash flow. Cash is what keeps a business operating smoothly. You obviously need profit, but equally as critical is your cash flow. You must have a firm understanding all the financial facets of your business, from net income to cash flow from operating activities. Here are the basics.

What is Net Income?

Net income is the mathematical outcome of gains and revenues, minus the cost of products and solutions sold as well as losses and expenses. Net income appears on your income statement as a net gain. If the net amount is negative, it is referred to as a net loss.

What is Cash Flow from Operating Activities?

Cash from operating activities is net cash inflow documented in the first section of cash flow statements. Cash from operating activities is focused on the outflows and inflows from primary activities such as providing services, buying and selling merchandise, etc.

Cash from operating activities doesn’t include the amount of money spent on capital expenditures such as new facilities or equipment, cash garnered from the sale of long-term assets or cash utilized for other long-term investments. `

Here’s How They’re Different

Net income and cash flow from operating activities are different for many reasons.

  • Reason #1: Cash flows from operating activities include specific items that are addressed distinctly on the income statement. Non-cash expenses, including depreciation, share-based compensation and amortization need to be included in order to calculate net profit. These types of expenses are incorporated back into net income on the associated cash flow statement. They reduce net income but do not affect net cash flows.
  • Reason #2: Net income is a line item found in the operating activities area of the cash flow statement. Cash flow from operating activities includes the sum of net income, changes in working capital and changes for non-cash expenses. Increases of existing assets, including accounts receivables, inventories, and deferred revenue are viewed as uses of cash. Reductions in these types of assets are considered sources of cash. In the same manner, decreases in current financial obligations, including accrued expenses, accounts payable and tax liabilities are considered are considered uses of cash.
  • Reason #3: Another reason they are different has to do with timing. Differences exist between the recognition of revenue and expense and the various underlying cash flows.

Once you understand the difference between net income and cash flow from operating activities, you’ll be on your way to fully comprehending the health of your business. But, what happens when your business is cash strapped? I’ll share strategies in my next post so stay tuned.

What You Don’t Know Will Hurt You

Most entrepreneurs don’t start a business because they have a passion for running a business or are an expert on operations. They do it because they’re passionate about their idea and feel that what they have to offer is sure to attract their target audience. Unfortunately, the entrepreneur’s journey is never an easy one.

It’s true that what you don’t know will hurt you. The world is constantly changing, and savvy business owners understand that they need to make time to work on their business instead of in it. To be successful, they must constantly learn and stay current in their field, on employment, in marketing and so much more.

Here are a few tips to keep yourself in the know:

Hire Good Staff With Excellent Communication Skills

Besides having the skills to expertly perform the tasks of the position they are given, having excellent communication skills are a necessity and will also be a reflection of the company. Also, being able to clearly communicate helps keep employees, management and clients in tune with the business.

Hire a Good Business Coach

Business coaches often stay on top of the trends. They’ll be able to help you pinpoint what you’re missing, identify possible roadblocks, help you come up with strategies to address them and help you remain accountable when it comes to following through.

Be Flexible and Responsive

Research your industry and be ready for changes. If you’re not the kind of business owner who can be responsive and flexible to the needs of your business, entrepreneurship might not be for you.

Never Stop Learning

Today there are plenty of ways to maintain the learning process, and you should continually expand your knowledge base. Consider the following easy ways to keep up to date:

Attend Conferences

Conferences and networking events are the perfect opportunity to learn from people in your industry (including your competitors), listen to the speakers and meet people, including potential clients. Even if the presentation is about something you’re familiar with, it will reaffirm what you already know or provide inspiration.

Take an Online Course

There are online courses covering every topic these days, so the possibilities of furthering your education without leaving home are endless. Online courses are also a great way to achieve added business designations that can help improve your credibility.

Read

Read anything that applies to you and your business, whether it’s about improving your sales skills, wealth, communications, cold calling skills or making the most out or email or social media marketing. Even if the topic seems a bit dry, the usefulness may become relevant down the road.

Listen to Podcasts

Today’s podcast technology provides the convenient ability to listen to and take in different content topics during your down time. You can listen to podcasts in the car, on a plane or at the gym. Where ever you desire.

Always spend time learning and continuing to improve your business because what you don’t know will hurt you. But what you do know will set you apart from the competition.

Have you ever had a situation where what you didn’t know, hurt you? What did you learn from that event? I’d love to read your advice in the comments below.

How to Eliminate Profanity in Your Business

From printer jams to project misses, there are times when we all reach the breaking point. It’s easy to resort to cursing in the moment of frustration. Unfortunately, profanity often leads to a reduction in productivity and decreased employee morale. The best companies work hard to eliminate profanity in the workplace.

It’s All About Perception

Profanity influences how investors, managers and other business leaders view not only the employees, but also the workplace as a whole. It gives the impression that the workplace may be hostile or that the business owners and managers don’t care.

Business owners who can’t control their own language or their employee’s language can end up losing key players, capital investment and strategic deals. Even if it’s a rare occurrence, turning a blind eye can lead to harassment lawsuits especially if the person using profanity is in an influential position.

Responding to Profanity in the Workplace

As a business owner, you need to carefully consider how you respond to profanity in your workplace. First, look inward to assess your own language. Do you set a positive example for others to follow? If not, consider working on adjusting your language.

If profanity comes from a specific business unit, try to identify if there’s something about the team or their tasks that cause it. If you can isolate the problem to a specific individual or stressful situation, you have a better chance of eliminating the problem.

Be strategic in your approach and get an outside perspective or talk to someone who has expertise in human resources. Coming down too hard on personnel can result in legal issues. In some cases, you may find yourself dealing with cursing employees who claim that they’re engaging in activity that’s protected by the first amendment or the National Labor Relations Act. As shocking as it seems, you wouldn’t be the first business owner to hear that excuse. You must take steps to protect your business.

Protect Yourself

Make sure that you have a section in your employee handbook that specifically addresses profanity, along with discrimination and sexual harassment. Then create and enforce a zero tolerance policy and provide training for help for those who need it. It will take effort. But if you enforce your stance on profanity, you’ll eliminate it over time.

Hire For Fit

Before hiring someone, consider candidates that have a professional demeanor. This may mean that you pass on the most qualified applicant. You want someone who will represent your business in the best possible light. Hiring someone who’s not a fit can cost your company more in the long run.

What you don’t know can hurt you. At the end of the day, there’s no room for offensive language in your business. Although it’s common to let our temper get the best of us, the key is to not make it a habit. Words are powerful. Don’t let them ruin what you worked so hard to build.

Delegate and Let Go – Overcoming Micromanaging Tendencies

Your job as a small business owner is to set the vision and course for your business, while ensuring the day-to-day

 

operations continue as planned. A strategic plan that sets out your goals, objectives, and timelines is necessary in order for you to gauge where your business is and where it needs to go. The steps in-between let you know if you are making appropriate progress or if you need to pivot. When you’re micromanaging, you’re not focused on the things that move the needle in your business. In order to focus on the future, you must delegate and let go. 

Start Small

Letting go of the reins can seem a bit overwhelming at first. After all, your business is the baby that you’ve raised from birth. Now that it’s time to graduate to the next level, letting others take on portions of your responsibility is like sending your first born off to college. It may help to start small and delegate smaller tasks first if you’re not used to letting go. This will prevent your employees from being overwhelmed with a lot of new tasks and will help you loosen the reigns while still setting the course. As employees display the ability to do the task that you delegated, move on to the delegation of larger projects.

Ask, Don’t Tell

After you’ve trained your employees, try not to nag them about how they’re performing the task. If you find an error, ask questions to see if they can find the error on their own. Then coach them and come to a joint decision as to how this task will be completed to avoid errors in the future. What works for you may not work for someone else. Everyone has their unique way of doing things, and their way may work better for them. If employees are ethical, getting results and meeting deadlines, then let them be.

Don’t Sweat the Small Stuff

Let employees have creative freedom and empower them to make decisions. You may be surprised to discover that this can foster loyalty and pride in their work. They may feel more empowered to provide new solutions and efficient methods of performing their role, which may free them up for additional tasks.

Don’t forget that everyone makes mistakes sometimes. Use errors as learning and coaching opportunities to help build a strong and healthy working relationship that is beneficial to everyone involved.

Perform an Exit Interview

Any time an employee says they are leaving the company, ask them why. This can provide insight into issues that you’re unaware of. Perhaps your wages don’t compare to the same positions in other companies. Maybe they believe that the job is too difficult and that processes need to be improved. Perhaps the culture or environment that they’re working in is causing anxiety. Listen to what they’re saying. Then, ask other employees for their feedback and input into the stated issues so that you can improve the work environment.

It may be necessary to offer further training on job roles or teach a class on working with others and accepting differences in culture, sexuality or race. If you need advice to correct issues consider hiring a coach, mentor, or consultant to help you through the process.

As your business grows, you can’t be everywhere doing everything. Your job is to set the vision and direction while ensuring the smooth operation of your business. Don’t become a micromanager. If you are one, consider implementing a few of these tips to create a better working environment and a better business outcome. I can help you streamline your business processes. Call me today.

Balance Sheet Basics: Long-term Assets and Liabilities

I shared the basics of short-term assets and liabilities and how you can use that information to make sound business decisions in my previous posts. long term assetsLong-term assets and liabilities are just as important and extend past the current year.

Sometimes it’s helpful to assess long-term assets against long-term liabilities to gain a picture of the money coming in to your business and leaving it in the future. To do this, you’ll need to understand what long-term assets you have and compare them to long-term liabilities.

Long-term assets

This asset type is used for things not quickly converted into cash, which cannot be sold or consumed within a year or less. They include:

  • Investments—Investments that are not expected to be sold within the year such as bonds, common stock, investments in assets not used in operation, long-term notes, pension funds or plan-extension funds. These assets are reported on the balance sheet at historical or market value.
  • Fixed assets—Items that have a lifespan longer than one year and are used in operations such as machinery and equipment and buildings. They are depreciated over time.
  • Intangible assets—Intangible assets are things like patents, copyrights, trademarks, franchises and organization costs. These assets may have infinite life and are not amortized.

Long-term Liabilities

Long-term liabilities incorporate items that you anticipate liquidating outside of the current year or cycle of operation. They are reported as the value of all remaining payments and include:

  • Notes payables—This amount usually carries interest and is the amount your company owes to a creditor.
  • Long-term debt—Current portion of a net debt that is payable over a long-term.
  • Deferred income tax liability—Taxes due in the future for income already received and reported in your financials. A future tax liability is created when a company’s tax payable is less than its tax expense.
  • Pension fund liability—Post retirement benefits of current or retired employees as contributions that are necessary for future payments.
  • Long-term capital-lease obligation—This is a written agreement under which a property owner allows a tenant to use and rent the property for a specified period of time.

Understanding your liabilities is important. They are a claim against your business assets. Investors will want to know why you’re issuing new debt so be sure to note the reason why. Debt isn’t bad, especially if you have it because you’re investing in optimizing your processes and becoming more efficient.

The combination of your long-term assets and liabilities gives creditors and other interested parties the ability to see how your business is doing beyond the current year. It can help them decide whether or not they will extend credit to your business.

Running an Ethically Conscious Small Business

Social media has made transparency even more prevalent for businesses all over the world. Ethically Conscious Small BusinessIt’s more important than ever to run an ethically conscious small business because all it takes is one mistake to make a bad first impression. Before you know it, millions of people are reading or watching your blunder online causing you to shut the doors to your dreams.

You may believe that everything you do is ethical especially because you have good intentions. However, you may not be taking the time to pause and think about the ethical ramifications of your business decisions. Quick decisions that aren’t thought through can often leave you paying for things you failed to consider.

Unknowingly Unethical

Imagine that your company is hanging on by a thread. An important potential client is coming to visit your company, which could significantly raise your sales and profit margins and take you from a fledgling company to the top of the mountain of success. You want to appear that you are in demand so this potential client has faith that you are the right person to take on their portfolio.

Prior to the client’s visit, you ask friends and family to call your office to make it look like you are receiving a higher number of business calls than you actually are. You hire a staging company to fill your space with luxury furniture and hide all of the second hand furniture in storage. Your client arrives, sees a thriving business and signs on with your company. You’ve achieved what you set out to, but were your actions ethical?

What happens if that new client decides to visit unannounced to see how things are going? Where is that fancy furniture now? Is your company spiraling out of control and going down the toilet? Did you lie to him? Should he be worried about his faith in you and what you have to offer?

There is nothing wrong with being a company that’s working hard at succeeding. Instead of staging a scene for a play, the best option would have been to display your authentic culture and areas of success instead of providing a showroom of nice stuff you are just going to return.

Making decisions such as the ones in the example above may seem harmless overall because you know that you can handle the work so the client won’t be disappointed. However, misleading anyone about the level of your success is not an ethical way to gain a long term and stable business relationship with your customers.

Every step you make along the way in building the foundation of your business should be done ethically building a rock solid foundation for your business to stand on and for your employees to believe in. An unethical decision here and there may not seem to be that big of a deal, but one small crack leads to employee distrust, customer disappointment and major damage repair.

You want to be proud of what you’ve accomplished and not have to worry that at any time your world could come crumbling down around you. Having a foundation with the cornerstones built on unethical behavior is guaranteed to fall down over time. It may not be today. It may not be tomorrow, but at some point, your decisions are going to be brought forth into the spotlight.

Be an Ethically Conscious Small Business

Making the right decisions allows you to stand proud and firm in the knowledge that whether you succeed or fail you’ve done so on your own merit. You want all of your employees, customers and business connections to take comfort in the knowledge that you are a stand up company who lives by ethical practice standards and will not embarrass them. Not only do you have your own business and reputation to worry about, every employee, client, and business associate you currently have or will make in the future can be put in the negative spotlight and have their businesses negatively affected based on your decisions.

While making an ethical decision may not always put you on the fast track to success, any success you achieve will be a legitimate and true display of how fabulous your company actually is and not a false projection ready to topple at the first bump in the road. Take time to consider all possible ramifications of the decisions you make in your day-to-day business practices. Ask yourself, “Would I be proud of my actions if they were to be displayed on every social media channel in the world?” before you make the final call.

Remain truthful to yourself, your company and your customers. Only with ethical business practices can you be sure your company will stand up when it is closely scrutinized and not suffer a widespread, public, and humiliating bashing that destroys all you’ve worked so hard to attain. The ethics of success are simple, be true to yourself, be true to the vision you have to your company and be true to the people who make your business what it is.

Free Bonus E-book

This month I released my latest e-book for Arizona contractors. If you’re frustrated with the cash flow issues in your contracting business, click here to download this resource for free. I’m here to help your business thrive. Contact me today if you’re ready to take your business to the next level.

Prepare for 2015 by Reducing Your Small Business Tax Today

With the end of year quickly approaching it’s time to consider whether you are taking advantage of the many ways you can reduce your small business tax bill. small business taxHere are seven ways you can take advantage of tax breaks before the year is through. Be sure that you follow up with your CPA or tax adviser before implementing this advice.

7 Tax Saving Strategies

  1. Pay your January bills in December- Invoices that are normally due in January can be paid in December. These could be expenses like rent and utilities or even payments to freelancers and subcontractors. This helps you raise your expenses for the year, which lowers your taxable earnings for 2014.
  2. Implement systems or purchase software– If you’re already planning on changing company software, upgrading existing systems, or implementing additional software in early 2015, just pull in the purchase to December. Purchasing, upgrading, and implementing new software before December 31 will count towards your business expenses and lower your small business taxable income. Not only do you get to take advantage of new software functionality sooner, you’ll be able to claim it as a section 179 deduction if it’s off the shelf.
  3. Purchase training programs in advance – Do you already know you will be implementing new software, procedures, or processes in the New Year? Sign contracts and pre-pay for training program in December. According to IRS publication 970, if you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This reduces the amount of your income subject to both income tax and self-employment tax.
  4. Throw a holiday party- Throwing a holiday party for staff, clients, potential clients and business associates can go a long way to reducing your taxable income as long as it isn’t lavish or extraordinary. Not only will your staff, clients, and business associates be impressed with the generosity of your holiday event, you’ll be able to deduct 50% (if there is a direct relation to getting more business) or even 100% (if it’s for your employees) of the meal and entertainment expenses according to IRS publication 463.
  5. Buy your clients holiday gifts- Yet another great and fun way to save yourself money, the purchase of holiday gifts for your clients can be partially written off as a business expense. If you’re providing the gift to an individual the maximum amount of the deduction is $25 according to IRS publication 463. However, if you’re providing the gift to the entire company you can write off more. This double whammy allows you to not only lower your taxable income; it builds client relationships that will help increase your profit margins in the future.
  6. Donate to charity- Donations to registered charities are a great tax deductible way to contribute to the community you do business in. Giving back to the community that supports you sees not only the money you save in tax breaks, it recognizes you as a business who cares and can foster future client relationships which affect your bottom line.
  7. Take advantage of NOLs- Your 2014 net operating losses (NOL) can be carried back for up to two years in order to help you in recovering taxes paid in previous years. They may also be carried ahead for up to 20 years if you think your future tax rates will increase. NOLs occur when your business expenses exceed your taxable income for any given year, except for the Section 179 depreciation deductible, and can create situations where you recover taxes from previous years or create a NOL for the existing tax year.

Be sure to take advantage of these, and the many other great deductions which can help save your business money. As with all business expenses, be sure to keep all receipts related to any of the items indicated above as they will have to be submitted or kept on record as indicated by the laws governing your state. Happy savings!

The Many Hats of Small Business Success

If you think that you only have to do what you’re good at, think again. Small business owners don’t have the luxury of sticking with one title.many hats They wear many hats. In addition to the CEO, you may have the office manager, accountant, videographer, marketer, cook and janitor title. If you want to spend the next year working on your business instead of in it considering following this advice and wear the right hat at the right time.

  1. Identify the responsibilities of each hat that you’re wearing and set specific goals for that role. Then, track your progress towards the goal throughout the year and assess whether or not you’re headed in the right direction or need additional help.
  2. If you need additional help, consider hiring or outsourcing the role in its entirety. It may be tempting to outsource only one piece of the role, but doing so is likely to cause more problems than resolve them. Giving one person responsibility and accountability for the role empowers them to own all aspects of it, reduces confusion and miscommunication.
  3. Once you assign responsibility to someone on your team, move to a mentoring role instead of a micromanaging role. Empower them to do more by giving them freedom to make decisions within the guidelines that you set up.
  4. Create a culture of open and real communication so that employees or freelancers know they can come to you when they see something that may end up hurting your business and ultimately impacting their job. Over time, you’ll find yourself with a capable, highly functioning workforce and one less hat to wear.

Regardless of the fires that are burning today, make sure to always make time to put your CEO hat on so that you can focus on leading your company. Hours often get consumed by the operations of today and strategic planning gets the left overs or nothing at all. Reverse that mentality so that you can plan for the future and wear the hat of success.

If you’re looking to get more efficient in your business next year, I can help you implement systems and processes that maximize your time and your employees time. Contact me to get started today.