Write. It. Down.

One of the very first blogs I ever posted was 10 Rules to Surviving Your First Year in Public Accounting.  I wrote it six years ago and while I am not positive it is still relevant to a first year in public accounting, I do know there are things in there that are still relevant to me - a 12th year CPA.

** Attribution for Picture is listed below.

The part that I am currently thinking about specifically is found in rules 8 and 10 - write it down.  Write it down immediately.

The idea that you will remember things at a later date without making a note is one that I have completely given up on as I get older.  But, now and again, I still think I can do it.  Remember what I was thinking.  I am usually wrong.

Other than documenting events and thoughts as they occur, physically writing things down has also been very helpful in strategic planning and goal setting.  If you think about what you really want out of life - tangible or not - and you write it down, I believe that you are more likely to make it happen.

I don't remember where I read this, but I once read that it takes eighteen months to change your life. Google that phrase and note that all the first page items seem to start with "18 months ago, I..."   If you decide that you want something different, you can work towards making different happen in 18 months!  This is enough time to allow you to meet your current responsibilities and at the same time shift towards your new direction.

If you are honest with yourself about your weaknesses during this planning period, you can use the time to shore up those weaknesses and to begin to showcase your strengths.

By giving yourself a reasonable time frame combined with making a plan (writing it down) you can stop thinking I have to change and start the process of making the change.

I know it worked for me:  six and a half years ago, I decided I was going to be my own boss.  I am now in my fifth year of running Romano P.C.

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Are you sad that this post is not about accounting today?  Actually, it is - it is about managing your career  and yourself to get a great return on life.  Which is especially important for accountants.

**The picture used above is from an article that relates to the title of the post - Just Write It Down And Take Control Of Your Money.  I recommend reading this article for a look into writing things down and personal finances.

Charting Your Accounts - NonProfit Version

It seems like a good time to talk about the chart of accounts.

Oh, I know it's not sexy.  And it's not really that fun.  Personally, I  try to have a career goal of never changing a chart of accounts again.  Yet, if you plan your chart of accounts properly, it really can be used for a long time to come.

I have to admit, since I started serving non-profit organizations almost exclusively, I have struggled with the allocation of costs.  There are allocations that are required for grant reports, for tax returns, for financing compliance, for management reporting and sometimes just because a Board member wants to know a random bit of information.

I have spent hours on the phone with colleagues trying to determine if I was really doing these allocations right, when I am making entries that have $0.20 in them.  I am.  Unfortunately.

I have learned, however, the more allocations you can do through initial transaction entry, the better off you are.  And a flexible chart of accounts consistently used aids that process.

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Lets take a look at the basics of a chart of accounts.  Note that this is a discussion of the actual account numbering; it is not about categorizing the chart into revenues or expenses or what have you.  I consider the categorizing a function of reporting and it is beyond the scope of this post.

NATURAL - Your first numbers should match the natural expense categories.  This is expected and necessary if you have to file a tax return or undertake a financial audit.  A natural expense would be Salary.  Or insurance.  Utilities, etc.  It is common for people to use four or five numbers for this category.  Example:  Repairs - 6120.

SUB-NATURAL - This category is not used often, but I have worked with it before and I really love it.  This is when you take a natural expense and give it a sub-category.  Two numbers is generally sufficient for this category.  Example:  Carrying on with Repairs, you might have Repairs on the HVAC System - 6120.02.  Note that you could now do reporting on all repairs or just on repairs related to HVAC.

PROGRAM - This is where you start breaking out different departments or functional areas of expense.  In non-profits, this could be administrative, fundraising and various programs.  Having this segment allows you to report by functional expense and accumulate your administrative or overhead costs for allocation purposes.  Most small and medium size businesses are okay with two numbers here.

Example:  Repairs on the HVAC system at the administrative office would look like this - 6120.02.99.  Repairs on the HVAC system related to a program could be - 6120.02.05.

A note about QuickBooks: 
QuickBooks is a common accounting software that has a some very frustrating limitations to its chart of accounts structure. You can't add dashes or dots in the basic versions and the most numbers you can use is seven. Seven.

With only seven numbers and no breaks, it is hard to properly separate programs (departments) and funders.  In QuickBooks, I generally use classes to track programs, since I am already up to 5 or 6 of the allowable account numbers. However, classes add a complicated element to data entry, as they must also be used consistently to work properly.  If you have too many, you risk errors and "messes."

ACTIVITY - Activity and program could be the same, but it might be used as a sub-program.  For example if you are a theater arts business, your program could be Plays and an activity would be The Taming of the Shrew.  It makes sense in this case to track activities, but unless you are going to recycle charts of accounts (which is not recommended), you will need a lot more number spaces here - three at a minimum, but more likely four.  Example:  Repairs on the HVAC system at our play, the Taming of the Shrew (keep an open mind here as I try to keep my examples consistent) - 6120.02.05.1420.

You will notice that we have gone way beyond QuickBooks limitations at this point.

LOCATION - Location may be more important to your business than activity or it may be an additional area of interest.  Location notifiers are probably sufficient with two digits.  Example:  Repairs on the HVAC system at our play, the Taming of the Shrew, which is held at the downtown community theater - 6120.02.05.1420.06

SOURCE - And finally, we reach the really important area.  Source is when you might want to track funding sources for a program or activity.  This is vital for grant reporting, but is similar to activities in that you may need a large number of digits - I would say at least three.  Example:  Repairs on the HVAC system at our play, the Taming of the Shrew, which is being shown at the downtown community theater and which was funded by the National Endowment for the Arts - 6120.02.05.1420.06.150.

I use customers in QuickBooks a lot to track this information, but it does cause problems as it is very hard to keep it consistent.  Others find job tracking to be helpful here, but again, there are limitations.

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Let's see what we have ended up with, assuming we want everything:  6120.02.05.1420.06.150

Okay, I admit that this account number has gotten a bit ridiculous, but if you look at it, you could run reports on several different aspects just from a download to Excel.

All of these segments are sortable!  It's the Holy Grail of accounting reporting!  You can report on any of the following:

Repairs
HVAC Repairs
Plays
The Taming of the Shrew
Any plays held at the Downtown Community Theater
Expenses funded by The National Endowment for the Arts

It is amazing!  But...

Let's get back to reality.

You likely do not need all of these segments, but you do need some of them.  Regardless of how many you do use, any account separation will give you flexibility as your organization changes and grows.

I beg you - don't just randomly accept the canned chart of accounts that comes with the accounting software.  Take some time, approach it thoughtfully.  Look at your current reporting needs and structure your accounts accordingly.

It will be worth it in the end.

Recession? Or Situation Normal?

I was interested to read in the newspaper last Monday that we are now in a recession.

Apparently, the last one ended in June 2009 and a new one has now begun.  Leaving aside the technical definition of recession, I mentioned this to several people and no one felt they had been a part of any period of economic expansion.  "What?  It ended? When?"

If we can't tell the difference between recession and expansion anymore, then what are we facing as we go forward?

It has dawned on me that this economic environment might be typical for the rest of  my working life.  And my retirement, which I now expect to take when I am 88 or so.  That the world everyone jokingly talked about "leaving for their kids" is here.

Sadly, when I mentioned this realization to a couple of people, no one disagreed.  In fact, one person supported the idea further by saying that the inequities we see with wealth are so divergent that it will likely take decades for them to wash through the system.

Another person showed me a graph of where America stands in investment in social services relevant to investment in medicine and how we are not being efficient with proactive help socially and that we need to do more of that.  (Another post, another day.)

I may be a bit of a Pollyanna, but as soon I acknowledged to myself that this is what I am going to deal with forever, my outlook went through a slight, yet significant, shift.  "Okay," I thought.  "I can work in this.  I HAVE worked in this."  Some people say that we have been contracting since the tech bubble burst in 2001.  I have been out here that whole time.

If things get better, I guess I can be pleasantly surprised.

Meanwhile, over the last four years, I have improved my personal balance sheet and the balance sheets of others.  I have reduced my reliance on leverage and I have contained my footprint.  I have become comfortable and accepting of the home that I possibly will live in forever (because it is so far underwater I can never contemplate leaving).  I have been grateful to work with the organizations I work with.  I decided that if I was going to work for another 50 years, I could slow down just a bit.  I have settled in to life and taken time for the meaningful along the way.

I know there are many who are out of work.  I know there are even more who are underemployed.  I know that I could become one of these at any moment.  For now, though, I am setting my sights on the long haul because if you have no choice, then you work with what you have.

I Don't Like LLC's and Neither Should You

I am taking a break from the affordable housing information today.  I was out searching for information on converting a sole proprietorship to an S-Corporation, and everything I read was pushing the LLC structure.  It turns out that I have things to say about LLC's.

Limited Liability Company's, known as LLC's, are the hottest corporate entity out there.  They are easy to set up.  They are cheaper than a corporate structure and you can "check the box" for any type of tax treatment that you want.  You can be a single member or you can be many members.

LLC's are the most common entity I work with and they have certainly done their part to contribute to the full employment of tax accountants.  I have never liked them.

Let me break down some of the problems with LLC's.

LIABILITY
Let's get the issue of liability out of the way up front.  The name implies Limited Liability which offers corporate protection that you would not have with a sole proprietorship or even a partnership.  But let's get real - if you are just starting a business, no one is going to allow you to borrow funds, use credit or make major commitments with non-existent assets.  You will have to provide personal guarantees.  You will probably also have to list yourself as the Manager or Managing Member, which has less liability protection.   As a practical matter, you will be on the hook no matter what.

In addition to personal guarantees, there is a legal term called "piercing the corporate veil."  This is when the courts allow a plaintiff to disregard your company's liability status and come after the owners.  This is a hot topic right now, because we are seeing it happen more often in the case of LLC's than anyone ever imagined.  I think the reasons for this are partially because of the following discussion.

ORGANIZATION AND LEGAL STRUCTURE
LLC's are ridiculously easy to set up.  In many states, you don't even need an Operating Agreement.  In the cases where you do need an agreement, I have seen one as short as two pages long.  This simplicity may be appealing to you and I get that.  But if you plan on doing business in our world, you should be wary of the simple organizational structure.  If you have additional Members, a two page or no agreement will not tell you how profits will be shared, what will happen in the case of a Member's demise or unsuitability, and it will leave all things open to interpretation.  What if the other Member is your spouse and you get a divorce?  Not many people can maintain reasonability when going through a divorce.

I think it is important to be serious about the work that you are doing.  One level of that is mapping out the corporate structure and how profits, losses and yes, even cash, will be shared.  Laws regarding corporations are complicated, but they exist for a reason.  They help provide a framework for the governance of your new organization.  Mastering these complexities is one step to committing to your new venture.

Yes, as a CPA, I see the value of jumping through hoops in order to be successful.  Go figure.

When you don't have a good foundation for governance and things are handled on a half-baked basis, why would you assume that the courts and any future enemies would take you seriously as a separate corporate structure?  You are not taking yourself seriously.

TAXATION
Under current tax law, S-Corporations and LLC's are handled fairly similarly (with notable exceptions).  Earnings and losses of the business are passed through to the owners - Shareholders in the S-Corporation or Members in the LLC.  If you are a shareholder actively participating in an S-Corporation, the business needs to pay you a reasonable salary and you will need to withhold and pay payroll taxes.  If you are a member in an LLC, you will either get distributions or guaranteed payments.

If you have no operating agreement, you will have no idea which until you, or some accountant, checks a box on the tax return.

Your tax information will either be on a Schedule C or a K-1.  I like K-1's.  They are neat.  They tie back to another tax return.  They represent real numbers that have also been reported.  Schedule C's are messy.  Trust me.  If you run an actual business and are actively involved, there is a good chance that you may have muddled personal and business funds from time to time.  (No judgment.)  With a separate tax return, it is actually easier to keep this stuff clean when it comes to reporting.  Again, take your business seriously.  You don't want trouble with the IRS - they send letters every two weeks.  It is annoying.  And the envelopes are ominous.

Also, I should note that when you pay yourself a paycheck instead of whatever money is left, you are instilling a cash discipline that can only help when times are hard.  You are also continuing to have "earned income".  A W-2.  For many reasons, these are nice to have.  (Have you ever applied for a mortgage?)

I do need to disclose that there has been some discussion about taxing S-Corporations in a manner similar to C-Corporations, and if that happens, I may need to revise my loathing of LLC's, but until then...

EMPLOYEES
If you are planning on hiring employees, it is much easier to be a corporate structure.  You already have to pay yourself, so you can just add employees when the time comes.  When you interview and have to convince good people that you WILL be in business for a long time, it helps to be a corporation.  (People interviewing for jobs don't normally get that stability is a myth.  Even in this economy.  Especially in this economy.  They crave stability.)

I understand that everyone is afraid of doing payroll.  I understand that you don't want to deal with taxes and withholdings and how to track the things you need to track.  I am here to tell you that you can get help with payroll for a fairly reasonable cost - and if you don't know what you are doing, you should get help.  There is nothing that the IRS looks at with less humor than failing to pay payroll taxes properly.

Either way, don't be afraid of payroll.  Thousands of small businesses deal with it every year and so can you.

FUTURE PARTNERS
Are you hoping to have future partners?  Stock options?  Do you want to possibly sell out to a bigger company one day?  A corporate structure helps with this because, by law, they track the equity accounts of all the shareholders.  You can actually value and sell a part of your business if you wish.  You will know the amount of retained earnings if an owner wishes to exit.  You will have actual books, because you will be required to keep actual books.

Again, I understand that it is simpler to drop off the shoebox at your CPA, who I am sure is a wonderful person.  But, at the risk of sounding like a broken record, take yourself seriously.

INSURANCE
If you have no liability, why do you have to buy business liability insurance to rent office space?  To borrow money?

In addition to business liability insurance (and worker's compensation insurance), if you are offering professional services, you must have professional liability insurance.  I got mine about five minutes after I picked up the organizational documents from the attorney.  I pay that bill first every year.  Also, if you are offering professional services, there is a good chance that you have to register as either a Personal Services Corporation or a Professional Corporation - certain professionals can not opt out of liability.

In closing, let me say that I have seen Operating Agreements for LLC's that are in excess of 200 pages long.  These organizations are created for a specific purpose, such as holding one piece of real estate.  Many attorneys are involved and many precautions are taken.  These entities are not going to hire employees and they will cease on a certain date.  These types of entities are not the ones I am talking about.  I am talking about people owning a business and growing it with no foundation.  For those people, I say please, please, please reconsider your decision to be an LLC - or at least take a minute to think through the possible consequences of this decision.  Even the uncomfortable ones - divorce, death, the ending of a friendship - and put those items in your operating agreement.

Okay, there was some tax stuff in here, so I have to say:
Please be advised that, to the extent this communication contains any advice or opinions concerning federal tax matters, it is not intended to be, and may not be, used or relied upon by any taxpayer for the purpose of avoiding penalties under federal tax law.

Strategic Planning - Not Just for the Shower!

How often does your organization perform strategic planning? How much of it happens in the shower in the morning? If you run a small or even medium sized business, you are probably in a constant state of strategic planning, at least in your head. I am here to plug making time to formalize this process.

At least annually, I have connected with a marketing professional that has helped me think through several areas of running a business. He assists me in writing a plan and a calendar for the next period for the growth and expansion of my business and my thought leadership aspirations. In addition to the written plan, I also take time to budget my projected revenues and expenses and to put my dreams into numbers. I am pretty good with the numbers part and my consultant is pretty good at framing my numbers into words.

I usually start by telling him where I think things are going. I tell him about the previous year's successes and failures and what my thoughts are on how to either repeat or avoid them going forward. Then we separate as he starts writing his piece and interestingly enough, that is when my real thinking begins. And before you know it, I am calling him back and saying, "Well, I thought about it and what I REALLY want to do is this." It is that second call that sets me off in the next/right direction. But I never would have crystallized my thought process if I hadn't talked to him in the first place.

Now for the follow-up: much like my original business plan, my annual marketing plan gathers dust on the server; but I truly believe that the value of writing things down absolutely translates into action. Each year when I come back to last year's plan, I find that I accomplished 80-90% of it. In fact, this process happens annually because each year around November or so, I find myself feeling restless, disjointed in my efforts in the community and downright hectic. Then I make a new plan and I am off and running again.

My advice for what it's worth: Figure out what you are good at, find someone who is good at another piece and who can talk you through the crazy jumble in your head and invest the time and money to formalize your strategic plan... It doesn't have to be a lot of either, but without it, what are you doing? Trying to run a business? Or just trying to avoid working for someone else?