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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.

Do You Have an Entrepreneurial Mindset or Are You Self-Employed?

I talk to many business owners who start businesses, but don’t necessarily have the entrepreneurial mindset. They started their businesses because they wanted to be self-employed, make their own decisions and have the freedom to
choose their schedule, assignments and customers. Unfortunately, they’ve found themselves focusing on the work, managing multiple bosses, uncertain about the future and struggling to pay the bills. If this sounds like you, it’s time to adopt an entrepreneurial mindset.

What Is an Entrepreneurial Mindset?

The entrepreneurial mindset takes self-employment out of the equation and shifts your focus towards value creation and innovation. To transition from the self-employment mindset to the entrepreneurial mindset, you need to start with your vision before you streamline your processes and systems.

Start with Vision

Everything you do starts with your vision, which includes your purpose, values and mission. Even if you’re a solopreneur, you still need to define it and write it down. Having this in front of you will help you through the tough times. More importantly, it will allow you to find the right people, create the right processes and incorporate the right technology to scale your business in the direction you want to grow.

Success Mindset

Once you have your vision in place, you’ll need to assess your business and determine if you’ve set it up for self-employment or growth. Streamlined processes coupled with systems that can reduce manual tasks help you create space to focus on your business instead of in it.

Having an entrepreneurial mindset doesn’t mean you don’t get to do the work that you’re passionate about. You can still enjoy the work. But, to get out of the chaos, you’ll need to spend time above the weeds.

Business needs are different for every industry and stage of business. I can create customized solutions that reflect your company’s current stage. The first step is to get your entrepreneurial assessment by calling me today.

How to Hire the Right Small Business Consultant for Your Business

Hiring the right small business consultant can be tricky. If you have an organized recruitment procedure, your

 

business can gain the expertise of an experienced and skilled small business consultant.

According to Harvard Business Review, 80% of recruitment decisions in small businesses are based on bad decision-making that can lead to skyrocketing costs in the long run. While there is no specific formula on how to recruit the right small business consultant, here are some general guidelines that you can follow.

The consultant that you hire should have expertise in an area that you lack. Once you’ve found a few candidates, you’ll want to assess their goals, aptitude, analytical, management and decision-making skills. Make sure that you have a written job description and a thorough hiring process before you get started.

Create a Detailed Job Description

No matter how small your organization is or how much exposure your company has in your industry, you’ll need to create a perfect job description. This job description should include the roles and responsibilities that you’re looking for. State the skill level, experience, coaching and practical decision-making skills that are the primary requirements for applicants.

The job description for a consultant is different than the job description of an employee. Consultants should know more about the clients needs and be prepared to address them with their expertise.

Thoroughly Interview Each Consultant

Once you have a few recommendations, it’s time to interview potential candidates. Introduce your business to them and ask for systematic suggestions to improve it in both the short and long run. Judge on their answers based on logical reasoning and practical business knowledge. Then consider asking the following questions to assess fit:

  • Experience: What’s the consultant’s experience level? Have they worked for larger agencies in the past? What successes can they share?
  • Specialty: Do the consultants specialize in your industry? Do they understand your target market? Question them about a larger company in the market relevant to your industry to see if they are aware of the competition.
  • Values: Does the consultant share some of the same values that you hold dear to your organization? Are they passionate about your purpose?
  • Support: Will you need to guide them every step after you’ve signed the contract or are they capable enough to work independently in an efficient way?

You may also want to test their analytical, critical and decision-making skills with practical examples. Provide an example of a situation that they’re likely to encounter and ask how they’ll approach the problem.

As you begin to interview consultants, look to see if they have additional recommendations or value added services that you didn’t consider. An expert knows more than you and should be able to identify requirements that you overlooked. Don’t let your ego or personal likes and dislikes impact your decision. You’re seeking someone to help your business, not your personal life.

It’s hard to find one person that matches everything you’re looking for, but you should be able to find someone who matches most of the requirements. Often small business owners overlook the obvious and eventually end up filling the position with an inexperienced business consultant. Use these tips to make sure you don’t or call me to help you get started.

Three Reasons to Hire a Consultant Today

Many companies often think that hiring an outside consultant to complete their projects or to provide insight into their business is expensive. However, they don’t realize the opportunity cost of not hiring one.

Often, consultants can help the business attain results quicker and with less cost because they have specific expertise and can provide proven solutions to challenges and situations. Here are three reasons why you should hire a consultant today.

Consultants Aren’t Permanent

Hiring experts on a temporary basis ensures that a fresh pair of eyes and an uncluttered mind tackles the project in a way that may not have been thought of before. Given the intense competition and the imperative need to get a head start in business, hiring an outside consultant to do a job can prove to be the differentiator.

Consultants not only lend credibility to the organization but also bring a sense of objectivity. They not only validate ideas but are well positioned to analyze and diagnose the situation more critically than the internal staff because they’re often not influenced or tied to work that’s been done in the past.

Consultants Free Up Resources

Sometimes organizations may have the resources to do a good job but the staff may have a tough time handling extra responsibilities alongside their normal job responsibilities.

Staff can and should contribute to the building of the plan because they’re likely to be responsible for executing the plan. However, when they’re responsible for strategy, planning and execution, it’s likely that their daily work will suffer. Hiring a consultant frees up internal resources and allows staff to concentrate on what they were hired to do.

Consultants Improve Efficiency

Consultants contribute immensely by enhancing efficiency within the organization. They can see areas where the business is wasting time, money or other resources. They’re often familiar with systems and new technology that can scale and automate processes, which may eliminate a need to hire another employee.

In an age when in-house skills are becoming scarce and projects need to be completed quickly, organizations need specialized skill personnel who can provide perspective, strategy and execution.

An outside consultant always has the advantage of being able to see things in a different perspective and can identify opportunities that organizations may have overlooked. The consultant supplies the much need skill and expertise that organizations sometimes need and help maximize the potential of the business.

Hiring the right consultant at the right time can save both time and money. When you’re ready to do that, give me a call.

How to Create a Small Business Budget

Creating a small business budget helps you stay within your means and either remain or work towards becoming cash flow positive. A budget helps you understand what you have to use towards growing your business, purchasing new equipment and hiring new employees. Creating a sound budget will prevent you from accidentally overspending and can make the difference between your business staying afloat or sinking. Here are a few things to keep in mind.

Sales

In order to successfully create your budget you’ll need to review your income statements and see how much revenue your company is earning as well as necessary expenses. This will require that you estimate your future revenue based on figures over the last year. Your estimate should be conservative in nature and be a realistic portrayal of what’s achievable. If you are just starting out and haven’t been in business long enough to use data from the previous year, do some market research or speak to others in the same industry to create an educated guess.

Expenses

This part is just as tricky as estimating future sales. Factors like inflation, increases in price, and the need for more of a particular utility, service, or material can vary over time. These costs should be divided depending on their variability into categories such as semi-variable, variable, or fixed.

  • Fixed-These expenses remain the same regardless of the amount of product or service that you produce. Rent, insurance, leased furniture or car payments are good examples of fixed expenses.
  • Variable-This type of expense directly correlates to how much product you are producing and is a reflection of the materials used, freight or inventory.
  • Semi-variable-These costs and expenses may need to fluctuate depending on how your business is doing. They include items like marketing, salaries and telecommunications.

Profits

Profits are variable but can be estimated by subtracting your projected expenses from your projected revenues. This is the amount of money you have to expand your business, purchase new equipment or software, provide employees with bonuses or raises and add staff. If you’re uncomfortable with the calculated amount, contact an accountant, banker or trade association for their input.

Drafting your Small Business Budget

Your budget should be drafted for an entire year. Conservatively estimate your revenues and expenses for each month and list them in your budget. Calculate your gross profit by estimating the cost of the goods sold (goods purchased and/or manufactured, shipping charges, beginning inventory) and subtract it from your sales revenues.

Be prepared to make adjustments to the budget as necessary for things that occur over the course of the year like hiring employees, increasing sales and increasing costs. Should the economy change over the course of the year and result in reduced or increased sales, you’ll need to make an adjustment to your budget. For example, if you estimate that you will have revenues of $120,000 per year or $10,000 per month, but you’re only earning $9,000, then you need to change the monthly figure for future months to $9,000 or get on the horn and sell more products and services.

A budget is a plan and it’s a useful tool to keep you on track. Be sure to adjust it if you see trends that are either financially positive or negative. While this may seem a bit nerve-wracking at first, as you get used to creating and adjusting your budget over time it will become second nature.

Changes in GAAP for Small Business

Most people consider the act of keeping the books balanced to be relatively straightforward for the average small business.gaap As such, any decent accounting system tends to work well in a small business setting initially as long as you keep it current and accurate. However, as your business expands you’ll need to build generally accepted accounting principles (GAAP) compliant financial statements so that your statements can be compared to other companies. This will help creditors and investors as they review your company for potential funding opportunities. There are definite pros and cons to weigh as you determine if you’ll move towards a GAAP based system, all of which you need to be aware of before taking your small business to the next level.

When expanding your business, you may require funding from investors, many of whom will want to compare your financials with that of similar businesses. GAAP-compliant financial statements make comparisons easier. The comparison of your statements with others in your industry is known as benchmarking and is effective at helping you and investors measure your performance. Using GAAP means having a consistent accounting process in place that makes it easier to see how you’re performing over time and how viable your business is.

If you’re looking to grow and become a public company, you’ll need to move to GAAP-based financials. You should begin to plan a transition to GAAP as soon as you’ve made a decision to go public. Making the switch now will allow you to have a solid financial statement process in place and make your expansion that much smoother.

If you are just getting ready to start a business and are trying to decide on an accounting system, you should look at going the GAAP-based route right from the start. Implementing GAAP immediately means spending a little more money and time now, but will save you significantly over the long run. If you decide to wait until it comes time to expand before making the switch you’ll have to bring all of your past accounting details into the picture in addition to moving towards GAAP-based financial statements.

Changes to GAAP

If you use GAAP-based financials you’ll be affected by upcoming changes. The International Accounting Standards Board is planning on converging GAAP with International Financial Reporting Standards, which impacts revenue recognition, leases and financial instruments. These are the most significant changes made in decades. While the current GAAP standards are rule-based, the converged standards will be principle-based. This means more professional judgment and interpretation are necessary. These changes are likely to go into effect starting some time in 2016.

The best way to decide on what’s best for your company is to look at where you want to take it in the future. If you plan on keeping things small, you may be better served with your existing accounting system. If your dream is to expand the business over time, move to GAAP now but meet with an expert to determine how you should best prepare for these changes. If you have any questions about how to move to a GAAP-based system let me know. I’d be happy to help.