Revenue Recognition and the Non-Profit

Revenue recognition has been a hot topic in the accounting world for what seems like a decade now.  In various contract arrangements and sales, it is possible to manipulate earnings pretty dramatically through the timing of recording revenues.

Fortunately, when you work with non-profit organizations, a lot of that hubbub can go largely ignored.  Non-profits deal with (and manipulate) revenue in their own manner, primarily through the application of FASB 116 and 117 or under the codification 958-605.

As with anything, there are complicated issues in non-profit revenue recognition, especially when dealing with split interest agreements, but there is a concept that underlies all of the standards that is easy to grasp.  And once a person knows what to expect, they can move forward from there.

Exchange vs. Non-Exchange Transactions

Arguably, the most important step in recognizing revenue in a non-profit organization is determining whether or not the transaction is an exchange or a non-exchange transaction.

Exchange transactions are very similar to a sale in the for profit world.  You provide a product or service in exchange for a fee or revenue.  The revenues are recognized when they are earned and realizable.  Many program service revenues, like a concert or clinical services, fall in this category.

Earned is generally defined as the exchange has occurred and realizable means that you are likely to be paid for it.

An example would be in the case of a mental health organization where a clinician meets with a client for 30 minutes.  The exchange has occurred, so the revenue can be recorded.  The amount realizable, however, has to be limited to the extent of the insurance contract rate.  So, if your rate is $45 for a half hour, but insurance or the state only allows $36, then you would record net revenue of $36.  The receivable for that service can come from a combination of sources and would be analyzed for collectibility in a separate accounting task.

Pretty easy, right?  Okay, not so easy, but at least familiar to those who work in for profit industries.

Non-exchange transactions are where things get goofy.  Most contributions and support are considered to be non-exchange transactions.  Basically, the person contributing the money gets no service or product in return for giving you these funds.

I can hear Executive Director's and accountants and program manager's everywhere saying, "Wait a minute!  We provide a service!  We are making the community a better place!  Plus, in the case of that one grant from United Way, we have to spend it on a specific program, so that is an exchange."

I hear you, but that is not exactly the right way to look at it.  The fact is that United Way could give you money and tell you exactly how they want you to spend it, but United Way is not the one receiving a benefit.  They have restricted the use of the funds, but they will get no exchange in return for giving you this money.

And because there is no exchange, GAAP (in the U.S.) says you need to record receipt of the funds immediately upon notification that you received it.  And that is where people get grouchy around non-profit accounting.

Most grants are applied for and awarded for future fiscal years or projects. And when you record the revenue upon receipt (notification of the award), the expenses are not there to match it.  This is going to cause a revenue/expense mismatch in your financial reporting that is non-intuitive to those who work primarily in for profit accounting models.

The required handling of this mismatch is to show that award or contribution as a temporarily restricted revenue.  This means that you record the grant, but you do it in a different bucket.  You say, we got this money this year, but it can not be used until either time or purpose restrictions have been satisfied.

If the grant is used in the following period in the manner the donor required, then those funds would be released from restriction to match with the expenses of the program.

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This particular post is not meant to be a comprehensive explanation of how we show all these transactions (I hope to cover that in more detail and smaller chunks at a later time) - it is merely an introduction to the concepts needed to record revenue in a non-profit.  As, such here is a quick review:

Non-exchange revenues:  When you receive revenue for which the grantor or contributor receives no direct services or products.   Recorded upon notification.

Temporarily restricted:  A way of recording non-exchange revenue to show that it relates to a future period and/or a specific purpose.  Note:  ONLY  a donor can impose a restriction.  If a board or management wishes to set aside funds for a future purpose, that is generally a designation and remains in the unrestricted bucket.

Release of restrictions:  The moving of a temporarily restricted item to unrestricted revenue to match the expenses and satisfaction of the restriction.  Note:  Expenses are always unrestricted.

As I mentioned above, this gets even more complicated when dealing with split-interest agreements and reimbursement grants, but that is beyond the scope of this post.  If you can approach the influx of funds with the question of whether or not they are exchange or non-exchange and if non-exchange, whether or not the funds are unrestricted or restricted, you will be on the right path to correct revenue recognition procedures.

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.

How Much Should I Pay for a Bookkeeper? Redux

Almost two and a half years ago, I wrote a post called How Much Should You Pay For Bookkeeping? and it is consistently the most viewed post on this blog.  If I was a blogging genius, I couldn't have named it any better as traffic comes here from that very search term.  I am not a blogging genius - I am just a gal who likes to write and sometimes I indulge that need through this professional outlet.

Anyway, I thought I would come back to this subject today.  That post is longer than I thought and not everyone has that kind of time.  Unfortunately, even two and a half years later - the answer is no easier.  More goes into setting a billing rate than just trying to make as much money as possible.

For those who don't like to contemplate things like I do, here's the short answer:  You get what you pay for.  And sometimes, you pay too much for what you get.

For the rest of us, I am reminded of an illustrative conversation I just had with a client regarding maximum allowable rates on grant agreements.

The grantor will let them source out a deliverable as long the source does not exceed $X per hour.  And they will not allow you to pay a premium from another source over that amount.  My rate is over that amount.

So, like all good accounting consultants, I batted around a few ideas with the client on how to bill to this grant if I was going to help with this deliverable.

In the end, we decided not to do it.  And here is why:

1 - It isn't fair to my other clients.  I bill everyone the same.  It is always nice to get a deal, but it is never nice to be the one paying more - so it is better to be consistent.

2 - My billing rate is a stretch for most when they hire me.  And before too long, they know they are getting more than they even knew to expect.  This isn't hubris - often an organization is going from a bookkeeper to a full service accounting system and the change is valuable.

This client I was working with is still going to have me help with the deliverable, we just will put that part of the grant money towards the salary of the employee I will be working with.  She gets the value.

3 - My actual rate of pay works out to $10 less than $X.  Trust me, I do the math.

The reason I set my rate where I do is because I do aspects of bookkeeping (that you can get for $35 an hour) all the way up through CFO-ing (that would cost you $150 per hour, or more), so I am in a blended area between that.

I am also a CPA and I have extensive experience in one industry, both of which gives me a premium in the marketplace.  One thing I know to be true - if you bill too low, you are treated accordingly.  So, you have to pay attention to the marketplace.  (And if you don't think that is true - tell me, is there a price that you think is too little to pay for a hotel in New York City?  I mean really, if you get a hotel there for under $100, you know there are going to be bed bugs.)

And finally, I think I have a better working relationship with my clients because I don't bill for travel time, or for random phone calls (I want you to tell me that stuff is going to hell in a hand basket before it is too late), or even for a lot of quick e-mail exchanges.  And if I am only visiting a Board once a year, I don't charge for that either.

I don't even charge for random calls and e-mails from the auditor.  My clock really starts when I open Excel and start putting something together or when we spend an hour reviewing a tangible item.  Or when I walk in the door to work for you and only for you.

I could charge a lower rate and I could track all that stuff and I could spend two days putting together a monthly invoice and my client could spend two hours reviewing it and begrudgingly pay it and I would probably make more money, but life is too short for me to run my business that way.

I know how much I work.  And I do track a lot of that stuff that I mentioned above, even though I don't bill it and I know that my actual working rate comes out to $25 less per hour than I bill for my major clients.  And knowing all that, I know that my rate can't change for one strange grant request.

And my client, who is smart, knows that too.  (I try to only work with smart people.)

So when you are trying to figure out how much you are willing to pay for a bookkeeper, maybe some of the points I mention above should be in your consideration.  Billing rates are not really apples to apples and you should not take a number at straight face value.

Speaking of face value, since it is your finances - please meet them before hiring them to make sure you are not paying too much for what you are getting.

Allocations Part II

Last week, I began the unenviable task of explaining expense allocation reporting in non-profit organizations.  I mentioned that there are four common entries and I described DIRECT ALLOCATIONS and SALARY ALLOCATIONS.  Today, I would like to wrap up this topic by writing a bit about the other two types of allocation entries.  If you have a chance to look at Part I, it is helpful to understanding this discussion.

GENERAL EXPENSE ALLOCATIONS

General expense allocations refer to expenses that are not easily identifiable to a program.  Examples include copier leases, office supplies and insurance costs.

Note that worker's compensation insurance would fall in this area even though it is an employee expense - it is not an expense that can normally be broken out by individual and so it would not be considered under the salary allocation entry.

These expenses are typically accumulated on a monthly basis and recorded as either an unclassified or an administrative cost.  As part of closing out the month's reporting, these costs would then be allocated out to the various programs.

The preferred method used for allocating these costs is generally effort reporting.  Effort reporting takes into account the amount of time that employees spend on a program and applies that effort to the general expenses.

The theory behind this method contemplates that an employee is spending 50% of their time doing the After-School work and so they must be using 50% of the copier costs on After-School work.  This method, applied consistently, will survive an audit of cost allocation.

Effort reporting is NOT the same as salary allocations, but you do start in the same place - with the timesheets.  If you remember, we used the hours on the timesheets to generate the percentages for each individual's payroll costs.  The total percentage used for payroll can NOT be used for general expense allocation because it is skewed based on different salary levels.  The total hours in a program can be used.  Here is an example to explain what I am talking about:

S is the Executive Director and makes $4,000 per month.  She spends 80 hours (50%) in Programs and 80 hours (50%) in Fundraising.
T is the Program Manager and makes $2,000 per month.  She spends 128 hours (80%) in Programs and 32 hours in Fundraising (20%).

For Salary Allocations, you would do this:
Payroll Expenses would be allocated 60% to Programs and 40% to Fundraising.

The program expense is S's salary of $2,000 (50%) plus T's salary of $1,600 (80%) to equal $3,600 (or 60% of $6,000 in Payroll Expense).

This fundraising expense is S's salary of $2,000 (50%) plus T's salary of $400 (20%) to
equal $2,400 (or 40% of $6,000 in Payroll Expense).

The Salary Allocation is 60/40 because the Executive Director makes more than the Program Manager and skews the salaries.  You have no choice but to take actual payroll costs on the Salary Allocations, but you do not want to apply this skewing to other costs.  The copier does not cost more to use when the Executive Director is doing it.

For General Expense Allocations, you would do this:
General Expenses would be allocated 65% to Programs and 35% to Fundraising.
This is comprised of the total of S and T's Hours = 320.  Of those hours, the total Program Hours are 208 and the total Fundraising Hours are 112.

While a 5% difference does not seem like much - keep in mind this is a very limited example.  When you pull it out to the population, the difference can be larger.

Volunteers
I have used Volunteer hours when calculating general expense allocations, if it makes sense.  If your volunteers are on-site doing program related work that use up general expenses, then why not include them in the effort reporting?  You can't put them in salaries, but you do want to be reasonable about just how much that copier is getting used for your program.

Let's look at the above example and add in the hours for the Volunteer that runs the After-School program.  If their hours are 20 per month, you now have 340 total hours - 228 to Programs and 112 to Fundraising.  Or a general expense allocation split of 67% Program and 33% Fundraising.

Volunteer time makes sense for some organizations, but not all.  If you decide to use it, you should be prepared to explain why it makes sense and to demonstrate that you used a complete tally of volunteer time (not just the program hours).  Again, timesheets are useful for providing the substantive back-up.

OCCUPANCY ALLOCATIONS

The fourth most common allocation entry is occupancy.  Occupancy costs include rent, interest on a mortgage, utilities, depreciation and sometimes maintenance expenses.

The preferred method for allocating occupancy costs is based on the square footage that a function literally takes up within the office.  If a program is off-site completely, then the allocation might be the costs of the off site location or it might have to come from an application of the general expenses allocation method to occupancy.

Getting a layout of your office is the first step to figuring out how you want to allocate.  Sit down with that layout and calculate the square footage of each area to each function.  Apply that percentage to the occupancy costs on a consistent basis and you're done.

This allocation should be re-visited at a minimum on an annual basis, but may require a more periodic review.  Especially if there is a major shift in office layout or new programming is added.

BONUS ALLOCATION DISCUSSION - ADMINISTRATIVE COST ALLOCATION

After all other allocations are completed, you may want to perform an allocation of administrative costs to the various programs.  Note that this would be for funders that allow it and for internal management reporting purposes.  A full allocation method like this would present a program's contribution to the overhead of the non-profit.  On tax returns for non-profits, general and administrative expenses must remain separate.

This is very easy to do - again, after everything else is allocated, just take your general and administrative expense total and apply it using the formulas that you used to do the general expense allocations.  With one tweak.

If your General Expense Allocation was 10% Administrative, 10% Fundraising and 80% Programs; then you would want to allocate all Administrative between Fundraising and Programs.  Your allocation would be based on Fundraising being 10 of 90 or 11%.  The allocation to Programs would be 88% or 80 of 90.

General Expense allocation is normally shown as a separate income statement line item - it is a lump adjustment at the bottom of reporting and it should add up to zero for top-level and tax reporting.

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I know all of this is a lot to think through objectively while staring at a computer screen, but it is the way we do it.  And once you get these allocations set up and start running through them a few times, it becomes very systematic and can easily be done by a solid general ledger accountant.

Knowing that your allocations are correct and supportable will give you credibility within your organization and within the various funding communities that you operate.  It will also give you a lot of information for when you are building budgets.  Allocations are worth understanding, setting up properly and vigorously maintaining.

Allocations Part I

In my post last week on Charts of Accounts, I mentioned that since I started serving non-profit organizations almost exclusively, I have struggled with the allocation of costs.  I noted that there are allocations 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.

Allocating costs is a function of taking the expenses of an organization and assigning them to a program or cost center.

In non-profits, the three areas that MUST be tracked and reported for the annual tax return are administrative, fundraising and program expenses.  All non-profit tax returns are considered public information and can be downloaded with ease from the Internet through a provider such as Guidestar (which is free to join).

In addition to these three areas, an organization may want to track the expenses of several individual programs to roll into that "program expenses" on the tax return.

It is the disclosure of expenses that provides the non-profit, and other interested parties, information on how much money is spent performing its exempt function.  You will commonly hear this phrased as "Eighty-two cents of every dollar goes to help..."

It is worth noting that the bigger an organization gets, the smaller their administrative costs should be.  I work with primarily small organizations who don't benefit from large organizational efficiencies.  As such, it is expected that administrative and fundraising costs together will equal between 23 and 28% of total costs.

That percentage will vary depending on the type of services the organization performs, but I would venture to say that if you see a small organization that gets these costs below 10%, they probably aren't doing their allocations properly.

I thought today I would begin going through the four most common allocation entries that we see.

DIRECT ALLOCATIONS

Direct allocations are the easiest to track.  This is when an expense is readily identifiable to a program.  If you buy supplies for an after-school camp that you put on, those supplies would be coded and entered directly to that program.

If I was using QuickBooks for a client in this case, I would have an account called Program Supplies and I would use a class code called After-School.  The invoice would be entered directly to the program and you are done.

The more direct allocations you can do, the cleaner and easier it is to track expenses by function.

SALARY ALLOCATIONS

The largest expense in most social service organizations is generally salaries.  Salaries and related costs need to be allocated based on actual time spent on a task.  This means we have to have timesheets.  There is no getting around it.  Unless you have a person who is 100% in one program and one program only, a luxury most small organizations do not have, then you will need to have an understanding of exactly where each person is working.

If you receive funding from government sources, or if you just want to do salary allocations properly, then you have no choice but to get this information.

Related costs of salary include payroll taxes, employee benefits, 403B matches and vacation or PTO accruals. All of these costs can be specifically identified to an employee and should be allocated based on that person's work.

I take timesheets periodically from the staff at my clients and I enter them into an excel spreadsheet, summarizing each person by program.  I then convert the hours to a percentage for application of the salary costs.  I apply that percentage to the employee's costs and record the allocation.

In this case, you would probably enter payroll either to administrative costs or unclassified costs and then go through and clear out the payroll entry through the allocation entry.  That way you can match the payroll payment to the payroll reports (good for audits) without having to add up all the allocations.

An example would be:

1. Pay Jane
Debit Payroll Expense    2,000.00  Unclassified
Debit Payroll Taxes           200.00  Unclassified
          Credit Cash or Salary Payable   2,000.00  Unclassified
          Credit Cash or Taxes Payable       200.00  Unclassified


2. Allocate Jane - 50% to After-School, 25% to Before-School, 25% to Administrative
Debit Payroll Expense   1,000.00  After-School
Debit Payroll Expense      500.00  Before-School
Debit Payroll Expense      500.00   Administrative
          Credit Payroll Expense    2,000.00  Unclassified

Debit Payroll Taxes          100.00   After-School
Debit Payroll Taxes            50.00   Before-School
Debit Payroll Taxes            50.00   Administrative
          Credit Payroll Taxes           200.00   Unclassified

If you draw a T-Account you will find that you still have $2,000 in Payroll Expense, but now it is in three different buckets.  The back-up for the second journal entry would be Jane's timesheet matched to the allocation workpaper.  You may also have to provide payroll records to a government auditor.

Allocating salaries is expected to take the most amount of time and effort in non-profit accounting.  It is also the most important activity; because, as the biggest cost, it is going to have the most direct impact on that percentage that I spoke about above - the amount of costs that go to providing services.

If you are hoping to be or are funded through large foundations or government sources, this allocation should always be prepared carefully, so that you can maintain credibility in the funding community.

A note about volunteers and salary costs:  Unfortunately, you can not allocate volunteer time in Salary and related cost expense.  Volunteers are often helping provide services and are rarely performing administrative functions.  This is one of the reasons that smaller organizations have higher administrative costs - they may only have two staff that do 100% of the administrative work, but they have a large volunteer pool helping with the programs.  The volunteers are not recognized in these expenses.

While that does not seem fair, it is a situation that most people face, and it is understood by grantors and other knowledgeable financial statement readers.  It is also something to keep in mind when you are writing your narrative to go along with your financial presentation.  A note describing your wonderful volunteer support (and the savings you obtain from not having to hire employees) is always a good idea.

In Part II, I will give an example of when volunteer time may be used to impact the cost allocations as we discuss the other two common allocation entries:  GENERAL EXPENSE ALLOCATIONS and OCCUPANCY ALLOCATIONS.

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.

The Yin and the Yang of Accounting

It is probably too much to say that accounting is really a haven of balance in a world of chaos.  But I honestly believe this is true.  I am going to try and explain why.

The underlying foundation of our bookkeeping and reporting system is the idea of double entry accounting or more commonly, debits and credits.

Every transaction that is recorded has a debit and a credit.  This is a brilliant concept that is simple in execution and which has proven effective over time. It is also a concept that causes no end of confusion in the world of business.

Balance is a repeating event found in nature - for every action, there is an equal and opposite reaction.  If you use cash (credit), then you must have had something else change (debit).  You must have.  No ifs, ands or buts.

Theoretically, and I actually like to ponder this from time to time, if the entire world combined their books, the answer would be zero.  If I pay cash out, you receive cash.  Net effect, zero.  If I borrow money, you lend money.  And so on.

Why is this so difficult?  Over and over, I speak with a person that manages the books at a client and I ask where a check was posted and they will look at me confused.  "It was posted at the bank."  Yes, I will say, changing my face to be a bit more understanding, but what did you buy with it?

Accounting systems have automated the double entry nature of the business, but it is still happening - it's just that you are not having to enter the transaction.  Maybe a vendor is assigned to a code which is creating the debit or maybe you just put everything in an account called "Ask My Accountant".  But whatever code you put on the check entry creates a transactional record of a debit and a credit.

At this point, I guess you might be thinking "Who cares?"  Well, if I may be bold, I would say, you should care.  If you are contemplating a business deal - it might be interesting if you paused for just a moment and thought - what is the credit here?  Does this create value?  If I move resources here, where am I moving them from?  If I use liquidity here, what is now not solvent?

Look -  I freely admit that there are great strategic thinkers in our world, ones that have truly changed things, the doers.  These people are not accountants (obviously).   They do, however, understand the concept of balance.  The fact that our world hangs on that balance.  And they have found a way to shift the world while maintaining balance.

Accountants, at their best, see the balance and report it.  And they use the reports to communicate the truth of what really happened and to make their own contribution to the events.  And, yes, this is all starting to sound a bit touchy feely for a profession that is often considered punitive, stuck in the past, and costly.

But really, if you have ever worked with an inspired accountant, one who whispers numbers, one who can show you stuff, then I guarantee you have worked with someone that feels the balance.  The debit AND the credit.  The Yin and the Yang of accounting.

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.

Instant CPA - Just Add Coffee

There is nothing instant about finding a CPA that both understands your business and that, ahem, you can afford.  Well, I am going to let you in on a little secret, from the CPA side, there is also nothing instant about getting the good referrals - the clients that match your personality, your skill set and that, ahem, want to pay you.

CPA's are continually targeted by people that want to help them market - they say we need to advertise, do mailers, do monthly newsletters, etc.  I think there is value in a newsletter when there is news and we really don't need to become part of the noise that fills your inbox each day.

And ultimately, is your financial information something you generally trust to a name that shows up on a postcard in your mailbox?

I don't think so...

Well, then how do people find their perfect CPA?  And how do CPA's find their good clients?

I am not sure that there is an easy answer to that, but I would like to propose the idea that it starts with coffee.  Coffee with a friend in your industry.  Ask them who does their work and do they like them?  Coffee with a mentor, same questions.  Get a couple names from friends.  Call those names.  See who calls you back.  Meet them for coffee, pick your favorite and begin the relationship. 

I believe that financial services is still an industry that works best through personal referral.  There are good on-line matches, but one should not overlook the personal relationships.  I am not saying finding a CPA is like getting married, but I suspect that your CPA (the right one) will understand and communicate about your finances better than most spouses.

By the way, when I choose to market, and I do choose to market, I do it through community events - a table at a non-profit event; a hole on a golf course for charity, a sponsorship of a festival for kids who don't have festivals. I calculate that I get about as much return on this marketing as I would get on sending out mailers (nearly none), but at least I feel a whole lot better about where the money went.

I have written a companion piece to this called How Much Should You Pay for Bookkeeping if you would like to read more (much more - it was a tad wordy).

I Suffer From Depreciation

Some time ago, I was speaking briefly with a Board Member of an organization and he mentioned that “we don’t ever record depreciation during the year.  Do whatever you need to get the books in shape, but don’t ask or make us look at depreciation.”

“Depreciation doesn’t matter.”

“GAAP entries?  Oh, you mean like depreciation.”  (Big sigh follows.)

Depreciation is technically the recognition of a capital expense over the life of the asset.  In other words, if you buy a building for 3.6 million dollars and you believe it will last 40 years, then each year, you will have an expense of $90,000.  Ninety thousand dollars that you have to cover with support, revenues or some other offset on your way to positive net assets.  Ninety.  Thousand.  Dollars.

Oh, and you are probably paying debt service on that building in which the interest is also creating an expense.  Another expense (this time real cash) that you have to cover with support, revenues or some other offset.

Depreciation can cause confusion among non-financial Board and Leadership people in the organization.

Every good cash analysis and operational/management tool adds back depreciation in the first step.

EBITDA – Earnings BEFORE interest, taxes, depreciation and amortization.

Depreciation, depreciation, depreciation – I suffer from depreciation.

So, why do we record it?  Why do we make you look at a large number that represents money already spent?  Why do we set you up to have to explain you have a net loss, but only because of depreciation?

There are some good reasons to record depreciation:

First and foremost, it IS generally accepted accounting principles and if I know that you are handing out “board approved” interim statements for Grant applications or financing or whatever, then I am going to make sure that those interim statements are as close to accurate as possible within an accounting framework.  And that includes depreciation.  This just protects you.

Second,  it can loosely represent future capital needs and if you are covering it with your support in this year, theoretically, you are increasing your cash to meet those needs.

Third, if you are doing a tax return, depreciation is actually the law for certain listed assets.  (Note that tax depreciation and book depreciation can vary widely – one is legislated and one is based on estimated actual life).

Finally, well…  I can’t think of any other reason to record depreciation because, I also don’t like depreciation.  I also add it back at the earliest opportunity. And I also generally think it doesn’t matter.  For my clients, I often take it out of the main expenses and give a net income before depreciation – it is still there, but it is way below the operational data.

BUT, I work with service entities, arts based and community services organizations.  These organizations do not have large capital expenditures for production.  The number one cost on most of my financial statements is payroll – not inventory, not production cost, not warehousing.  There is a place for depreciation in the world of manufacturing, etc. and for those, please carry on.

In the meantime, we will keep recording it because we should and then we will add it back to find our important ratios – debt coverage, operating cash, income from operations.

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.

Managing the Management Company: Cash

When you own a real estate project, affordable or not, you will have to determine how you are going to manage it.  The majority of owners look to third party management companies to assist in the collecting of rents, paying of expenses and dealing with tenant issues.  In addition, for affordable housing units, a third party management company can assist in meeting compliance requirements around income and rent limits and other items.

Selecting a management company is always a challenge.  An investor I work with has commented that every time there is a hot, new, really good management company, everyone will switch their projects, they will get too busy, and then they won't be as good anymore.  I always thought that observation could apply to a lot of small businesses.

Assuming that you are going to use a management company, there are a few things that you should know.

The management company is going to report to the budget.  In the management world, asset managers are held acountable to an operating budget.  In fact, they are often paid bonuses based on their portfolio's performance to budget.  And they are trained to move around expenses until they meet that budget.  I urge you to look closely at the budgets you approve, because that is a map of the results (assuming no unusual events).

I worked with one management company that put any items not on the budget in capital expenditures (balance sheet).  I once found a billing for marketing brochures in the fixed asset account.  Obviously, this is to meet their bonus guidelines, and is not really useful for your internal reporting and analyzation of financial benchmarks.

The management company can not be trusted with cash.  I am not saying that they will steal the cash (although fraud is always something that you should be on the look-out for); rather, I am saying that if a property is performing and there is a lot of cash sitting around, well, operations will eventually decline.

It's human nature to pay closer attention to expenses and make decisions based on cost/benefit when the cash situation is tighter.  If a project has a lot of cash in it, then the asset manager is saved from having to worry about it too much and may not watch expenses as closely.  This same attitude may affect the owner's side as well.

I generally recommend that owners sweep cash above a certain amount out of the management company trust account.  This ensures that current expenses are being paid from current operations.  If, for some reason, there is not enough cash to pay one month's expenses, you will know it immediately.  If you have a pile of cash, you may not realize there has been a change in operations for quite some time.

I work with one company that had a lot of developmental money locked into a project.  By locked, I mean, they forgot to take it.  One of the first things we showed them was the project's negative operating cash flow.  In fact, this project had been operating at a deficit for a few years.  This had not been closely monitored before, because the project had a $100,000 in the bank, so no one worried about it.

Had this owner swept the cash, they would have been able to implement some changes to the budget in a much more timely manner and been able to recover all of the development money that they forgot to take.  As it was, they left money on the table.

SWEEP THE CASH
In affordable housing, sweeping the cash does not mean that you have come into a windfall.  There are generally provisions in your Operating or Partnership agreement with the investor that stop you from taking cash until the annual audit is complete.  So, in this case, the owner should have a bank account in the entity's name where they keep the sweep of money from the management company.  That bank account would show on the project's books at the owner level (after recording activity from the management company).

The management company will reflect this sweep as one of two things:  an owner distribution (most common) or an other expense (I've seen this too).  In fact, it is merely a cash transfer, so you would record the cash received and credit whichever account the management company used to ensure that this sweep does not erroneously show up as revenue, expense, or a change in equity.

Tax Exempt Bond Financing and Mortgages

Note: This post is technical in nature and not necessarily intended for the accounting faint of heart.

In today's finance world, developers of affordable housing often leverage LIHTC projects with other forms of public financing. (For more information on LIHTC's see previous posting "What the Heck is LIHTC? (Lie-Tech)".)

One form of financing that is commonly used it the tax exempt bond. Tax exempt bonds are issued by government agencies as a means of underwriting affordable housing. There is normally a series of bonds issued to cover both the construction and permanent loan phases of a project (approximately 30 years on average). The construction loan phase is paid at or near "conversion" to permanent financing with equity contributions from the LIHTC investor and the permanent bonds are paid off in phases over the life of the debt service. Interest rates will vary for each of the bonds depending on the length of the bond terms.

Being involved in a bond financed project comes with additional costs, including but not limited to annual Trustee fees, regular arbitrage calculations, state agency monitoring fees and remarketing fees. Not all issues have the same fees, but it is important to understand that interest and principal are not the only period costs incurred in the case of bond financing.

Despite the underlying debt being composed of bond financing, it is becoming more typical to structure the debt service on the Project in the same manner as an amortizable mortgage to cover all of the interest, principal and related fees. It is at this point that the accounting can get tricky.

When a servicer is used for the purposes of collecting the "mortgage payment", the Project will often get a monthly mortgage statement which covers debt service and monthly additions to the required reserves. Sometimes this statement will break out all the fees and reserve payments in addition to the interest and principal and sometimes it won't (believe me, I have seen everything!); but either way, that mortgage payment is not recorded in the same manner as other mortgages.

For a very basic example, here is what’s happening:

1. The Project pays the mortgage and escrow payments to the Servicer.
2. The Servicer transmits payments to the Trustee under some schedule they have and you don’t. Sometimes they keep a portion for their fee (called “interest”) and sometimes they don’t.
3. The Trustee puts the payments in reserve accounts typically labeled as follows: Replacement Reserve, Debt Service Reserve, and Operating Reserve.
4. The Trustee pays interest earnings on the Reserve accounts and sends statements to the Project.
5. On January July 1st, the Trustee makes interest and bond pay downs as required on the face of the bond coupon.
6. Throughout the year, the Trustee either makes payments or sends invoices to the Projects for payments on fees.

If you were following this narrative above, you might consider the fact that the Project has paid its mortgage, but it has ended up in bank accounts on the Project’s books (the Trustee accounts). And because bond pay downs are typically made around January 1; at a December year-end, a number of accountants would show large cash balances held by the Trustee (confirmed) and a large accrued interest and bond payable (due to the bondholders the next day).

If you are already lost on the accounting technology, turn back now!

Now consider this: the Project has paid its mortgage payments on time. There should be at most one month of accrued interest for January's payment in accordance with the mortgage agreement (if the servicer keeps a portion of the interest, none if they don’t). However, the bondholders are still owed their interest, so there would be up to 6 months of accrued interest according to the bond documents.

Both these statements are true, but you have a conflict if you try to account for both since you can’t have both one month and six month’s of accrued interest. That would be weird. So, here is how I have handled this situation in the past (with auditor blessing):

Assuming the servicer is not being paid out of the mortgage payment, the accrued interest is zero. The bond principal (debt) should be reduced to reflect the payment that the Trustee will make the next day. Interest expense should equal the amount paid to the bondholders on July 1st and January 1st (of the next year). The offset for this entry would be a contra-account to the Trustee balances for the amounts due to bondholders. The entries would look like this:

Monthly Mortgage payments:
Debit Trustee Accounts
Credit Cash

Debit Interest Expense
Debit Bond Payable
Credit "Due to Bondholders" (Contra to Trustee Accounts) in accordance with the bond pay down schedule (yes, you need this schedule)

January 1 and July 1 Bond Payments:
Debit "Due to Bondholders"
Credit Trustee Accounts

Monthly Trustee Statement:
Debit Trustee Accounts
Credit Interest income

Debit Any fees (Note: Fees should be analyzed for prepaid accruals as needed)
Credit Trustee Accounts

At year-end, there should be no accrued interest, the balance on the bonds payable should be reduced by the next day's payment, and the Trustee accounts should be shown net of the payment of principal and interest due January 1. This reflects that the required payments have been made by the Project, and there is no other period expense to the project requiring operating cash. This also reflects that the money paid, while still in the Project's name at the Trustee, is not under the Project’s control and is therefore reduced by the TRUSTEE'S obligation to the Bondholders.

I would like to say that the preceding example covers all situations, but alas, each one is slightly different, so you will need to use your noggin. My general advice would be – make sure you get activity statements regularly from both the Servicer and the Trustee. Once you have those, you should FOLLOW THE CASH.

Before submitting financial statements for audit, step back and do a reasonableness test – does interest expense make sense based on the underlying debt obligation and the mortgage payment? If no, go back to the statements and trace it through again until it does make sense.

Next time: Why you should sweep cash from the management company and how you should record it.

What the Heck is LIHTC? (Lie-Tech)

Low Income Housing Tax Credits (LIHTC's) are a tax program used commonly over the past 15 years for affordable housing developments. Pronounced most recently Lie-tech, these so-called tax credit deals are responsible for pushing affordable housing out of the old Section 8 stigma and into a world where you don't always know that you are walking into affordable housing. With notable exceptions, the construction is generally better, the management is more high-class, and the apartments are nicer than what we had previously seen in affordable housing.

Tax credits are generally allocated by various State agencies on behalf of the federal government and can be obtained through a rigorous application process. While there are several very good developers involved in LIHTC housing, the trend has been for not-for-profit corporations to act as developer and owner of these projects. A benefit of having a not-for-profit involved (typically called a CDC or Community Development Corporation) is that they often provide some type of resident services programs that contribute to the stability of the rental population, which in turn keeps these properties more pleasant, livable and healthy. When you are involved with your residents, you can identify and respond more quickly to problems as they arise, before the whole community is affected. Problems can be of both a social and/or livability nature.

The LIHTC is a tax credit that never shows up in GAAP financial data. Rather, it is taken as a dollar for dollar reduction in tax on tax returns. The credit is issued for 15 years with related compliance requirements, but generally received on the return for 10 years.

As a tax exempt entity, CDC's have no use for a tax credit and so they sell their allocation to banks and other consortiums to raise additional financing to complete development of affordable housing projects. In exchange for purchasing the credit, the investors typically retain 99% ownership in the project on a limited basis during the compliance period. Because of the government's involvement and the now typical leveraging of the credit with other types of tax-exempt and federal financing, LIHTC projects should never be undertaken without the assistance of competent professionals versed in these matters.

My Dream Job is a Nightmare

NOTE: Every so often, I write about a different topic than accounting/affordable housing. This is one of those times. I personally believe thinking about other things is relevant to a well rounded business approach and I hope you enjoy my thoughts. However, I feel compelled to disclaim that most of my blogs are of a more business oriented nature. For whatever that is worth.

On my personal page, I follow http://www.dumbemployed.com/, a sometimes funny site that allows people to post snapshots of their day in the format, "At work today, I... (insert funny story) ...I'm dumbemployed."

On March 22, 2010, someone posted the following, "At work today, I did beta testing for a video game. Sounds fun, right? Well, why don't you try running into a wall 50 times in a row? My dream job is a nightmare. I'm dumbemployed." This made me smile and I started thinking of all the times I have heard from the kids that their dream job is to test video games.

I have the same problem in my office all the time. I hear employees expound on what they want to do, and I look at them and think, no you don't. You really don't. The same thing happens with clients.

When faced with this situation, I try to listen to the desire and work with that desire in any way I can, but the reality sometimes crushes the person when it happens. Dreams can cost money and dream jobs can still be, well, work.

The old saying "be careful what you wish for, as you will surely get it" comes to mind. I remember the day I took the words "seeks challenging position" off my resume. I didn't need to seek any challenge, it always seems to land right in my lap. But I do embrace the challenges now, and when I start to imagine that my current dream job (owner of a CPA firm) is a nightmare, I remember the lessons I have learned:

1. Identify the problem and then either finish it first, pay someone else to do it, or get rid of the job. That's it. 3 choices.
2. You chose to be where you're sitting. I know that sometimes it feels like you are wandering down some pre-ordained path; but in reality, you make choices every day to be right where you are. You could change.
3. Living really is about the path. If you have "arrived", start looking for the new path (the next dream) or you will stagnate.

Okay, you have the three lessons I apply when faced with the prospect that My Dream Job is a Nightmare. To continue in the cheesy quote tradition - I never said it would be easy, just that it would be worth it.

Managing Your Affordable Housing Portfolio (A Brief Introduction)

Real estate development has slowed over the past years and the focus for developers and owners of Affordable Housing has turned to managing the assets that they do have. Frankly, the cost of managing projects was never contemplated as a Company cost and was never underwritten when the deal was put together. In the past, the Managing Member or General Partner just provided administrative support and the Company paid for its audit.

In the current environment of accounting regulation, it is clear that the management company financial information, while useful for determining cash flow, is not sufficient for producing GAAP financial information on a quarterly/annual basis. Additionally, there are important development milestones that are met during the course of the compliance periods which need to be monitored for both the Investor and the Manager and the Manager is charged with monitoring the management company and on-going operations.

When these duties are performed by qualified individuals, an additional cost to the Company is incurred, and then the negotiating begins. Who pays the costs to manage these properties? Is it really the Manager's job to fund this from their "Partnership Administration Fees", a cash-flow fee that they may never actually generate? Or do we need to budget in these costs the same as we budget in the organization's audit?

In light of the fact that many non-profit Community Development Corporations are scrambling to fund operations with no development fees, and many Investors are reluctant to take back the management and ownership of the Projects, it is becoming more commonplace to bill this work directly to the project. Fortunately, occupancy for most projects has been stable in the down economy and cash flow can cover these expenses. However, as mentioned above, these were not underwritten costs and cash flow for these costs may not be sustainable.

Further education, discussion and decisions are going to have to be made on how a Project is expected to pay for the costs of Asset Management by the Company during the compliance period and going forward.

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?

Business Plans - it's the Journey not the Destination

There is some question about whether business plans are a good use of your time and energy. They do eventually go on a shelf and there they gather the dust. I don't know all the answers, but I can share my story. I started my firm on October 15, 2007. For the months of July and August, I spent every spare second working on a business plan. I started with a template from http://www.score.org/ and went from there.

I have always been a creative writer, but the template I used would not let me skip around the parts where I was most weak. Marketing, marketing, marketing. I can sell a client on what I do, but can I identify who that client is and make them come to me? Truth be told, I have been fortunate in referrals, but without the plan, I would have been less focused and really gotten myself in trouble early on with some work that came my way that was not in the "plan". As it was, I turned some of those jobs down, and actually earned some respect from my peers who thought I was really "brave". I look back now and laugh - it was a risk, but I had a plan, and it is in my head and I stick to it. As an aside, I did end up hiring a marketing consultant who was really helpful and who kept me on track. Hire to your weaknesses!!!!

I think the point of the business plan is the process of figuring out what you can do and what you are going to need to buy. I also believe that the discipline required to write the plan is an important indicator of your commitment to the business. Running a business is not easy - I often consider it my second marriage. In the business plan stage, I was planning the wedding - with so many things to think about and do, and yes, a lot of trepidation about what this type of commitment would mean going forward. But on the day I left my "job" and woke up, I knew what to do first because I had the plan. And just like in my marriage, we just went forward and did it. And we keep going.

Oh, and the important information - I did secure funding with my plan, and the loan officer relayed his supervisor's words, "They have to have a comprehensive plan or they have NO chance." I am not sure that is true, but it sure helped me.

Employee Turnover - Only Cost or Possible Opportunity?

I was at lunch today with my husband who works for another CPA firm as their IT Director. As often happens when we lunch, our discussion turns to firm management (yes, we are an exciting couple). One of the things we discussed was the companies we know that appear to be "overpaying" for audit and tax services. In each of those cases, the CFO at the company is alumni from a Big Four firm that "gave" the work directly to their old firm. Sometimes without a bidding process. I wondered aloud how many firms are seeing a return on their former employee's new companies?

There are many reasons that former employees are so loyal to Big Four firms. One is the clubbish atmosphere that there are certain things only a Big Four firm can accomplish. Even large local and regional firms can successfully push this atmosphere. In real life, there are small firms everywhere that specialize in various industries and transactions that can also get the job done, but until you have seen that in person, it is easy to believe that if you want quality service you have to go to a Big Four firm. (I am not going to get into all the reasons that your actual experience may differ from this assumption - under-trained staff, inadequate supervision, etc. Conversely, in some cases, it may absolutely be true.)

Another reason the big firms engender loyalty is the on-going offering of CPE to alumni, the alumni phone books and the general attitude that once you are family, you are always family. Whether or not they do it on purpose, these firms seem to plan that people will leave and work towards having them as walking marketing people even after they go. You can hate public accounting, but you don't hate Deloitte. Ever.

Other large firms that I know of don't do this well. When they turn over their staff, for whatever reason, they choose to be wounded that the individual would choose to leave the firm and they "cut all ties". Firms like that do not seem to pick up as much business from former employees as they should or could. The lesson here seems to be that public accounting, as great as it is, is not for everyone and in your marketing plan, you should determine how you can turn the employees that leave into future business for your firm. Turnover is always a cost, but I believe that there is also opportunity for recovery in future business.

10 Rules to Surviving Your First Year in Public Accounting

The first year for a public accountant can only be described as extremely difficult. (It sucks!?!?!?) An over-acheiver with excellent grades and superior intellect is the type of person that is going to land in public accounting. And then they are going to find out that they don’t know much. And they are not going to like that part. And even if they are doing really well for a first-year professional, they are going to become depressed, stressed and angry. They will question their intelligence, their career choice and the sanity of all these other idiots who have somehow risen to the top of this “profession”.

While the profession is attempting to change the “hazing” of the first year, unfortunately there are people like me. My heart is in the right place, but unfortunately, in the middle of busy season (aka tax season), there will be a stressful moment. And in that stressful moment, I might revert to how I was taught. By screaming, irrational idiots who didn’t think I knew anything. Hey, it made me good at what I do, didn’t it? No excuses, it is just tough to turn that ship around and behave better in the heat of the moment. Sorry.

Which brings me back to my original point. You have decided to enter the public accounting profession. Maybe you are just here to get a license and get out. Maybe you think this is your career. Maybe you have no idea why you are here and you are looking for a quick exit. The stress, drama and trauma your head and physical body are experiencing may be helped by taking some time to understand the term professional. You are in a world that requires a lot of education AND a lot of experience. You have the education part done and done well and we are truly excited to have you in our profession, but now you have to dig in and get the experience. You will succeed if you learn how to get along with who you are working for and who you are working with and work will be rewarding. Both spiritually and financially.

Here are 10 rules that will help you to not only survive your first year of public accounting, but to succeed:

1. Use last year’s workpapers. If they found the number last year, you can find it this year. (This rule will be reversed in a later year.)
2. Do not try and finish the whole project perfectly. This is an unattainable goal and will only keep it from ever getting finished.
3. Do EVERYTHING you know how to do, even if there are other items on the very same workpaper that you don’t know how to do.
4. If you have reached a question that is stopping you in your tracks, let your in-charge know. Trust me, if you can get a hold of 50 friends at any moment in time, you can get a hold of your in-charge if you are truly stopped.
5. If you have reached a question that is not stopping you in your tracks, put it on a list.
6. Check in every day and let someone know what is going on.
7. Do not check in with every single thing that you do.
8. If you have questioned a client on a complex accounting transaction or some such item, document it immediately. You will not remember it in one week or even the next day. You will not have time to write it next week or even the next day.
9. Shut up and listen when someone with more experience is sharing information. Sorry to be so blunt, but over-acheivers are usually pretty bad at this one, myself included.
10. If that person is telling you something and you have absolutely no idea what it has to do with anything, write it down! You will need that information later.

I believe these 10 rules will get you through the first and most of the second year in public accounting. Before you know it, 3 or 4 years will have passed and you too will be the idiot who somehow managed to rise up through the ranks to make life miserable on first years. Hopefully, you will do a better job than I am doing. And hopefully I am doing a better job than those who came before me.

A final note (warning): If you do really well or even kind of well, you will not get an A as you are accustomed. No, you will only get more work. Good luck!

NOTE: Originally written in October 2006.