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Unitron Business Accelerator Series: Achieving Financial Management Peace of Mind in Your Business (Part 1)

Unitron Business Accelerator Series: Achieving Financial Management Peace of Mind in Your Business (Part 1)
Jeremy Kiecker
September 26, 2011
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This article is sponsored by Unitron.
Editor's Note: This is a transcript of the live expert e-seminar. The recorded course can be accessed here. Part 2 of this series is available here, and Part 3 of this series is available here.

This is a three-part series brought to you by Unitron, dedicated to addressing the financial needs and strategies of business practice, specifically as it relates to hearing care. Today in Part 1, we will discuss the foundation and the importance of management accounting in your practice. In Part 2 of this series, we will examine what your financials should look like, how you should be coding things, and how you can use profit and loss (P&L) statements at your locations. During Part 3, we will go into more detail talking about budgeting, cash flows, and tax considerations. The financial aspect of your business takes a lot of time, and you have to put a lot of thought behind it to come out ahead.

MTK Accounting Solutions, based in Plymouth, Minnesota around the Twin Cities market, has had close working relationships with many manufacturers in the hearing healthcare industry for eight years. We work closely with audiologists and hearing aid dispensers throughout the United States providing different levels of service. The thing that we really strive for, and what you should be expecting out of your accountants or bookkeeper, is timely and accurate monthly financial statements. This is paramount in operating a business.

MTK offers four different service levels. We do quite a few application or software implementations to get people off on the right foot. We do monthly oversight, where you or your bookkeeper might be doing some things independently in your business, but you may still need help with some of the details. We are available throughout the month for phone calls, but we help clean the books up and then talk the owner through those financials. We offer outsource bookkeeping where we help you on a weekly basis as a contracted bookkeeper. Lastly, we also provide accounting systems consultations. We work with a lot of bookkeepers and accountants for businesses on a one-time basis to come in, look at the financials, and give them some key ideas on how to improve the financial statement process and their accounting systems. We do accounts payable, bill payment, payroll services, and P&Ls by location for a fixed monthly fee.

Many practices start doing things on their own, and then they may graduate up to getting some help from an administrator, or sometimes they rely on spouses. It just depends on the size of your practice, and how comfortable you are with the bookkeeping and finances. Ultimately, you have to be keeping an eye on how much time you are spending on it, and how much time could be dedicated to performing the revenue-generating functions of your business. Many business owners get in there and want to understand it, but they get consumed by it, and they spend late nights and their weekends doing the accounting function. You do have to wear a lot of different hats as a business owner, but you have to be careful to balance them all.

Management Accounting

The first concept that I really want to drive home is the importance of management accounting. The technical definition is analyzing the financial statements, but it is basically taking all that financial information from your accounting software like Intuit QuickBooks, the bank reconciliations and financial statements that you have generated once you have closed out the monthly process and using those to analyze your financial statements. From here, you can answer the following questions: What does my cash flow look like? Do I have enough money in the bank? How much do my patients owe me? How much do I owe my vendors? What is my debt-to-equity ratio? A lot of business owners get in there and struggle so much with just getting the records or information entered, that they do not really analyze those financial statements. That information is what can make a difference in your business from a financial perspective.

Obviously you need sales to come through the door; that should be your number one focus. But you really need to be watching your expenses, making sure you are collecting your money and that it is all making it to the bank account, because those are things that may not be happening. Once you get to your financial statements, you can look at profit maximization, monitor your expenses and cash flows, and you can do some budgeting. Budgeting and comparative analysis are really important tools that we will talk about in the third session.

What I would say is the primary cause of small business failure is not keeping appropriate, up-to-date accounting records and not using the right financial controls to manage the business. A lot of businesses are good at selling; they are just not good at managing their funds. There are few business owners who can do it all on their own and intuitively know what they should be looking at. The United States Small Business Administration (SBA) indicated in 2010 that one of the top reasons why small business fail is poor management, and not just from a financial perspective. It could be hiring, selling, or a lot of other things, but financial management is one of the key issues.

The SBA also said that as of 2010 one-third of small businesses fail in the first two years; fifty-six percent fail within the first four years. That is pretty staggering if you ask me. Every year that you put into a practice is an investment, so you have to be very forward-thinking and conscientious of the things that can make an impact on the future of your business.

Management accounting is comprised of two main functions: a management tool and a compliance tool. The management tool gives you knowledge of how the business performs in terms of profit margins and financial statements. You can look at returns and discounts, making sure that your return rate is not too high. If you have a return rate that is 20 percent of revenue, that is too much. You need to try and figure out why those hearing aids are coming back. Profitability by location is key. The management tool is also a diagnostic tool. It is like the dashboard display panel in your car. It will help you identify where the problems lie inside the business. Once you get your financials set up, you keep an eye on the diagnostics to indicate where there may be problems.

The first thing I look at when I have a set of financial statements is the cost-of-goods-sold percentage. If it is not within the normal range for your typical business, then we start to ask questions and look at advertising percentages or return rates. It is also a measuring stick so you can decide when to make immediate changes. You do not want to ignore those problems. As a word of advice, you never want to use a tax return to tell you how your business is performing. You have different motivations for taxes than you do for financial statements. Look at monthly financials.

Secondly, we have the compliance tool. This covers outside financing requirements. We have talked to many banks over that last couple of years, and with the way the economy has been many of their clients are starting to require that outside accountants look at their books on a monthly basis. They want a compilation done. A CPA firm does a compilation. They certify the work with a stamp or letter saying that they have been reviewed and the financial statements are in order. They cannot really tell you if there is fraud or anything like that, but a lot of banks are requiring this to be done before they will finance you as a small business. That is what their boards are requiring.

I think every practitioner's ultimate long-term goal is to sell their business. I have worked on both ends with somebody selling and somebody buying a business. If I am working with a buyer, I am usually going to be requesting at least the last three years of monthly financial statements by location from the seller. If there are multiple locations, I want to know how well each location is performing, because it is going to impact the sales price. If you are looking at selling your business and you have a couple of bad locations, do not be surprised if the person who is looking at purchasing your business asks for all those details on each location. I have also worked with some sellers that provide hand-written revenue numbers or tax returns, and I can guarantee that is going to impact the price you get. There are completely different motivations between financial statements and tax returns. Get the financials in order so that when look to sell your business you can do that. If you are expanding your business, the banks that are looking to help you are going to want to see the detailed historical financial statements.

Then of course, you have to keep Uncle Sam happy. You have to file tax returns. It is so much easier when you are working with your accountant if you have good financials in place. You can just hand them over to your tax accountant, and they can prepare those tax returns.

How to Work With Your Accountant

When you have your own business, we typically see a breakdown of accounting into three categories: the do-it-yourselfers, the in-house bookkeepers, and the outsourcers. Do-it-yourselfers are typically the very small business owners who are financially capable of managing the books themselves. A good thing to have is an accountant who will overlook those financial statements on a periodic basis. They will do a good job of identifying where there may be some problems. The second level is in-house bookkeeper. Depending on the size of your business, you may rely on an in-house bookkeeper. Again, it is a good idea to be working with your accountant so that they keep a periodic eye on what is going on. It is a good relationship when the bookkeeper can contact your accountant and just ask questions as they pop up. Often times that accountant may come in and just clean up the financials at the end of the month and keep an eye on the bookkeeper. Unfortunately, we have seen theft with bookkeepers. It is really important to keep a close eye on your books and make sure your bookkeeper, as well as your sales staff, is keeping things in order. That is ultimately your responsibility as a business owner.

Outsourcing is when an outside accountant is helping you. Basically, you get a higher level of service. A lot of times your inside bookkeeper may be good at the day-to-day data entry, but maybe not so good at cross-checking the financials and making sure that everything is accurate. Outsourcing allows you to get a higher level of expertise that you pay for, usually on a fixed or monthly fee schedule. A lot of times the cost can be comparable, if not sometimes less than having your own bookkeeper. That is becoming very popular.

Technology is very important, especially for the small businesses out there. It is changing, and it is changing fast. I attended a trade show in Las Vegas for the accounting solutions industry. It brought together CPA firms that offer outsourced accounting services and oversight services. We talked about technology, and all the technology experts were emphasizing the need to get clients on the Cloud technology. The Cloud is basically Internet storage that you can access wherever you go, so if you get the accounting books and your office software on the Cloud, you can access it from other places outside your office, and your accountant can have direct access as well.

Log Me In is downloadable software that allows you, your accountant, bookkeeper or employees to drill into that specific computer whenever they are at an Internet connection. We work with a handful of our clients through Log Me In, so if I want to access our clients' books on the East Coast, all we have to do is go through Log Me In and I can drill into their computer. This does mean that the computer needs to be available and connected to the Internet. The second option is virtual desktops. Virtual desktops are becoming very popular. You rent a virtual desktop that is stored in the cloud. California is a hot spot for virtual desktops. But it is all very safe and secure. QuickBooks only allows a handful of vendors to house QuickBooks files remotely. You have to get certified by QuickBooks. They want to make sure that security is top notch, and they do allow their product files to be used on these virtual desktops. You can actually be sitting on a beach, go into your books, and take a look at what is going on. The benefit of that over the Log Me In is that, again, Log Me In still requires QuickBooks to be on your desktop. In the last two months I have had four clients where QuickBooks crashed, and unfortunately they were not doing backups appropriately and they lost their QuickBooks files. Software on your computer is becoming very challenging, especially with all the viruses. I think we are really headed towards Cloud-based systems in both personal and business aspects, so you and your accountant should be open to that. I also think that it is important for your accountant to be technologically savvy and keep up with technology.

Communication with your accountant is one aspect with which you will have to be very comfortable. I think accountants sometimes get a bad rap, but we need certain information to provide accurate financial statements. Your bookkeeper needs certain information, and as a partnership we need to have online access to as much of your information as possible. We prefer read-only access. With the way technology is, you really do not have to wait for any of that information anymore.

What to Expect From Your Accountant

Your accountant should be someone you trust and who provides you with guidance. I think that is a no-brainer. To be successful you really need to surround yourself with successful people. You need to have a good accountant, a good attorney, a good banker, a good financial advisor, and you need to have good employees and partners if you are in a partnership with another person. Sometimes these are not easy decisions to make.

There are some common misperceptions about accountants. One is, "I only need to talk to my accountant once a year at tax time." That is absolutely not true. You should be talking to your accountant once a month. They can really help you run your business on a monthly basis. "My accountant can only help me with taxes." Again, that is not true. They can help you with a lot of the financial minutia; they can help streamline your financial process and make sure that you are using the technologies that you should.

I always like this one. "It feels as if my accountant is working for the IRS." If that is the case, you definitely need a new accountant. I think most accountants would say that we are trying to minimize your tax. We do not want you to pay more than you have to, but we want to keep you in compliance. You probably do not want to position yourself with an accountant who is going to be too risky and put you in a position where you could get in trouble with legal consequences.

"It is too expensive to call my accountant." I think you need to affix a value on this. What is that worth to you? I think they can definitely bring some value to your business. "I do not need a CPA." A CPA is a Certified Public Accountant, and really a CPA is required, similar to audiologists, to keep current on various testing and standards. We had to complete five years of collegiate education and pass a rigorous exam to obtain our license. We have to complete a certain amount of continuing education each year. There are established ethical standards. A CPA will be much more educated and will be able to give you a lot more guidance in our business.

What should an accountant do for you? They should provide you timely and accurate financial statements, number one. There should be mutual expectations that are met on both sides. Your accountant should provide you appropriate tax planning guidance throughout the year, but they can only do this when you communicate and provide accurate information. They can give you some tips on how to save some tax money. They should prepare accurate and timely tax returns for you. Try and avoid extending the deadline on your tax return. Sometimes there are legitimate reasons for extending, but do not make it a habit because either party chooses to procrastinate. Verify that appropriate financial controls are in place. I like to say you get what you pay for. Some new small-business owners will go for the person who costs the least. What I have experienced is if they paid really low fees, they found that their accountant just would not ask questions about their business. So you have a business owner that feels like the financial statements are not correct, they hand it off to their accountant who they assume looks at it, but often times the accountant will just put numbers on a form, send it back to you, and then you file it. You do not know if that information is correct or not. If your accountant is not asking you questions, that should be a glaring red flag. All accountants should ask questions, and no accountant is going to know your business so well that they are not going to ask you a question about an expense, revenue, or a tax. Asking questions is a sign that they are really looking to make sure that things are accurate.

Accounting Systems

QuickBooks is a very popular accounting application with owners of small businesses. There are a couple of different levels of QuickBooks: Pro, Premier, and Enterprise Solutions. I do not usually recommend anybody use Pro. While it is less expensive than some of the other versions, you can get better utility in some of the full-service versions for $400.00, which is very inexpensive when it comes to an accounting system. QuickBooks does a lot for $400.00, but that does not include payroll. The main difference between Premier and Pro is that Premier is a little bit heavier on the financial reporting abilities. It also allows you to do budgeting. Pro does not allow you to do budgeting. Enterprise is $3,000.00. Not too many businesses qualify or need to have an Enterprise version of QuickBooks. Enterprise comes automatically with five licenses. That is usually for a larger business that needs other add-ons. The nice thing about QuickBooks and other accounting packages out there is that they allow you to do accounts payable modules, print checks more securely, provide an organized way to track accounts payable and accounts receivable, numerous reporting capabilities, and financial statements on demand - that is, assuming the accounting system is up to date.

There is also QuickBooks Online, however, it is not as advanced and functional as it should be, and QuickBooks will admit that. It is limited on the reporting capabilities. You can synchronize QuickBooks software with management systems such as Sycle.net, but you do not have this functionality with QuickBooks Online. The online version also only allows one window to be open at a time, so you cannot run multiple reports at once. As an accounting firm, we rarely use QuickBooks Online.

It is also easier to monitor internal controls and reduce the possibility of theft when using a product like QuickBooks. If you have a good accounting system in place, you can dictate what modules your bookkeepers can get into. The key here is using this accounting system the way it is meant to be used. It is meant to streamline every aspect of your finances, so use the modules the way they are intended. If you do not know how to use it, get help.

Accounting System Best Practices

When we are training people and doing QuickBooks implementations, especially in the hearing industry, we are teaching them how to stay current with best practices. One of the first things, and probably most important to keeping accurate financial statements, is weekly bank reconciliations. If you do not reconcile your bank account, I would lose all confidence in those financial statements. You should be doing this on a weekly basis. If you are synchronizing your sales from your patient management system into QuickBooks, you should synchronize once a week. Next, you should reconcile your checking account. You should record your deposits, any electronic funds transfers (EFTs) or automated payments, and cleared checks. Then you should pay your bills once a week.

From here you can identify how much cash you have available to pay bills, and then you can actually pay those bills. It is best to set a schedule so you end up doing the same tasks on the same day each week. Typically we see clients synchronizing on a Monday or a Tuesday. Then they are reconciling and entering all their bills on a Tuesday or Wednesday. Then by Wednesday or Thursday they know what cash they have available. They know all the bills they need to pay in the next week, and they are cutting all of those checks. Make time during the day, not at night or on the weekend. Otherwise, you are going to put it on the backburner and forget about it or rush through it. Chopping it down to a weekly process, especially if you are doing the books on your own, is much easier than tackling the monumental task of reconciling hundreds of transactions at the end of the month.

We talked briefly about synchronization between the patient management system and your accounting software tool. A good majority of patient management systems are now synchronizing with QuickBooks. I have worked quite a bit with Sycle.net to QuickBooks synchronization. This coordinates all your sales information through very detailed journal entries, but it really does a good job of making sure you have entered the information properly into Sycle. If you do not enter it properly, it comes over into QuickBooks and you are going to notice that something is wrong. It also does a really good job at tracking money from your store into your bank account. So somebody inside of Sycle identifies that you receive $500.00. That is going to create a journal entry deposit of $500.00 into your QuickBooks, and from there you need to tell QuickBooks when that money actually hit your bank account. It is a fantastic way of cross-checking to make sure money goes where it is supposed to and does not get lost.

The synchronizers really push your sales staff, or whoever is entering that information, to make sure that they are entering information accurately. To be honest, the first few weeks are a bit challenging, but once you do it and are used to it, it is pretty seamless. It saves a considerable amount of time. The alternative to using a synchronizer would be to enter all those sales invoices individually into your QuickBooks. There are other patient management systems that synchronize with QuickBooks, but no matter the platform, my recommendation is always that you get help so you know what the results should look like.

Next in accounting best practices are third-party payroll providers. I am a strong advocate for a reputable third-party payroll provider. I think that is important. You can waste so much time on payroll. QuickBooks has payroll, but you pay for it, and it depends on what level of service you get. When it comes down to it, you still have to remember to make your payroll deposits. Even if you are only one location, I still recommend using an ADP or a Paychex, because they are going to file all the payroll taxes, returns, quarterlies, annuals, and do your W2s. A third-party payroll service can save you money in the long-run. If you look at it, should you pay $75.00 a month for payroll? That is maybe an hour of billable time for you. You probably spend more than an hour doing payroll in a month. What is your time worth? The nice thing about third-party payroll providers, depending on the size of your business and your locations, is they have general ledger downloads. You can download all that payroll information directly into your QuickBooks through GL downloads. That is pretty slick. Check with your accountant to see if he or she is familiar with the download.

There are some different services available now if you are looking for a way that you do not have to stuff envelopes to pay bills. It is becoming best practice to pay vendors electronically through EFTs. We have partnered with a large provider called Bill.com, which also synchronizes with QuickBooks. You go to Bill.com and see copies of your invoices. It is a document management system as well, but when you go to pay your bills you can drill down into those invoices, see the bills and approve them for payment. You can choose if you want Bill.com to mail a check for you or they can submit an EFT to your vendor. Everything synchronizes with QuickBooks. It is one of those things that I think you are going to see with a lot more vendors.

I already talked a little about Cloud computing. Almost everything is going to be on the Cloud within a couple of years. Virtual CFOs are becoming really popular. Again, you are just paying for the service that you are using, but you are getting a high level of service where you have somebody that is helping you manage your business and look through the financials. But this can happen from almost any location when you use Cloud-compatible software and technologies.

Next is the financial statement overview. The key things that you should be getting from your bookkeeper or your accountant are a balance sheet, which shows all the assets and liabilities of your business, and an income statement. It should be consolidated and by location if you have multiple locations. You should also be getting a general ledger detail, containing the transactions and balances for each account. That is the key financial statement package that all business owners should be getting on a monthly basis to start. Once you get immersed into the financial end of things and you start to understand your financial statements, you can start to add things like graphs and cash-flow statements, but it depends on who the business owner is, how savvy they are, and how long they have been running the business. You do not want to overwhelm them, but there is a lot of information that you can pull out of QuickBooks.

If you are working with a bookkeeper or accountant, you need to require that they provide you with the balance sheet. The importance of that is that the balance sheet is tied so closely with your P&L or your income statement. Your accountant or bookkeeper should be tying down all of these balance sheet accounts. If they do not do that 99 percent of the time, it means your P&L is wrong, or your income statement is wrong. At a minimum, they need to be providing you monthly with a balance sheet. I have heard every excuse from new clients of why their accountants or bookkeepers could not provide them with a balance sheet, but it is not that hard to do. We will talk more about the importance of the balance sheets in Part 2 of this series.

Lastly is the P&L. This is probably the most looked at piece of the financial statement, because this is all the revenues, the cost of goods sold, all the detailed expenses, and the general administrative expenses. But what most people are interested in is the bottom line. You can arrange a review by month or by year. You can do a P&L by location, individually or grouped.

During the next session we will talk a little bit more in detail about not using sub-accounts. I generally I do not like sub-accounts. Sub-accounts really make the financial statements look messy, and I am a firm believer that, cosmetically, the financial statements have to be appealing. When I am reviewing financial statements I make them as visually appealing as possible, because then we can be much more successful in teaching our clients how to look at them and understand them. Time and time again we look at P&Ls, and the P&L for one month is three pages long because of a whole bunch of sub-accounts. You have to try to get it on one page. I think you are just going to be much more successful if you can make them very nice looking. We will talk more about the balance sheets and P&Ls in Part 2.

Lastly, you can find a Financial Responsibility Checklist in Appendix A. This is a useful document that outlines ways to simplify things and think about your business in a different perspective. Appendix B is a sample Financial Statement for a hearing aid practice that may be useful if you have never seen a comprehensive balance sheet. Hopefully in the next session we will have a chance to dive deeper into that. That wraps up this session, and I hope you can join us for the next session. Thank you for attending.

APPENDIX A

Financial Responsibility Checklist

  • Bank Accounts - can any be consolidated/closed to save on banking fees and simplify the accounting function?

  • Accounts Receivable - review outstanding accounts receivable for more timely collection.

  • Inventory - take periodic inventory counts to ensure proper valuation on the balance sheet and to write-off obsolete items. Donations of obsolete product?

  • Accounts Payable - review aging to ensure no bills are past due. Review payment policies to take advantage of early payment discounts (if available). Make sure you are using accounting system properly to help track bills.

  • Notes Due to/from Shareholders - interest must be calculated on outstanding balances. Prepare amortization schedules to accrue interest.

  • Sales - are your sales broken down appropriately on your financials? Can your patient management system synchronize with your accounting system to save time?

  • Cost of Goods Sold - are your COGS broken down appropriately on your financials?

  • Payroll - review your compensation plans (salary, commissions, health insurance and retirement). Reasonable salary for owners? Third party payroll provider to eliminate risk of late filing penalties or borrowing from employee withholding funds.

  • Credit Card Processing Fees - determine what rates you are being charged. Any less expensive alternatives? Actual card swiping versus keying in costs.

  • Insurance - conduct regular checkups with your insurance agent to ensure proper insurance coverage and lowest insurance costs.

  • Office Expense - review for equipment purchases> $500 that should be capitalized and depreciated

  • Telecommunications - minimize extra phone lines. Vendor bundling for costs savings and simplified accounting?

  • Employee Responsibilities - review responsibilities for proper assignment. Maximize supervision where theft can occur.

  • Plan in place in case of incapacitation/death? Will in place? Get spouse involved in business?

  • Make sure you are receiving timely and accurate financial statements. Also, make sure you set time aside to analyze your financial statements and conduct proper Management Accounting procedures.
APPENDIX B - Financial Statement

Click Here to View APPENDIX B (PDF)
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jeremy kiecker

Jeremy Kiecker



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