The document provides information and guidance for youth entrepreneurs on topics such as the role of accountants, bookkeeping technologies, financial accounting, cash flow forecasting, cost accounting, pricing, taxes, and more. It also includes an introduction to the author and his experience as an accountant and mentor for youth entrepreneurs. The goal is to help youth starting, expanding, or purchasing a business with relevant financial information and advice.
Small Business Accounting and Financial Reporting_StarterCompanyRevised
1. By: Jayson Bastien, Client Service Accountant
Mentor: Summer/Starter Company Program
2. Main goal is to provide relevant and useful
information to youth entrepreneurs starting,
expanding or purchasing a business
Provide guidance, answer questions and
become a contact for future inquiries
3. Topics:
1) Introduction
2) Role of the accountant
3) Types of services
4) Accrual vs. cash
5) Bookkeeping technologies
6) Financial Accounting
7) Cash flow forecasting
8) Cost Accounting & Pricing
9) Income taxes & HST
4. Current
Mentor: Summer Company
Staff Accountant at Roth
Mosey & Partners LLP
◦ Provide accounting, assurance
and tax services
◦ Act as advisors to our ongoing
client needs
◦ http://www.roth-mosey.com/
Previous
◦ Summer Company 2008
participant
◦ OSB graduate
5. To measure the success of your business
To help you make better business decisions
To anticipate cash flow / financing needs
Comply with income and other tax laws
6. • Act as an advisor
• A second set of eyes
• Risk management
• Strategic planning
• Key contact to connect you with other
professionals
• Bankers
• Lawyers
7. Financial statement compilation (NTR)
Assurance services (review vs. audit)
Tax compliance and planning
Cash flow projections (create/revise)
Evaluating financing alternatives
Starting a business
◦ Business plan development
◦ Shareholder agreements
Purchasing a business
◦ Due diligence
8. Accrual accounting is recording transactions
and events when they “occur or expected to
occur”
Cash accounting is recording transactions
and events when “cash” is paid or received
Accrual accounting is the required method
and provides the most realistic representation
of the underlying business transactions
9. • You do not need to be an accountant to
perform bookkeeping
• There are simple and effective bookkeeping
technology available at affordable prices for
all sizes of business
10. Software Learning
curve
Customizable Notes Cost
Sage
Accounting
-Low to
medium
4 editions More checks
and balances
than other
software
Recommende
d by
accountants
$100 -
thousands
Quick-books -Low to
medium
Multiple editions Easier to use $100 -
thousands
Excel -Flat to
low
Yes – pivot
tables, etc.
Highly prone
to human
error
$0 to $100
11. Software Learning
Curve
Notes Cost
Xero Accounting Low - Electronic
transmission of
invoicing
- Easy bank reconciling
- Access anywhere
- Accountant has access
$20-$50/month
Fresh Books Low -Time keeping and
expense tracking
- automatic payment
for recurring
- PayPal integration
$20-$50/month
12. The process of collecting and reporting financial
information.
Financial Statements consist of the following:
• Balance Sheet
• Income Statement
• Cash Flow Statement
• Notes to the Financial Statements
13. Date
Pa
ge
13
Liabilities
Current and future
obligations
Examples:
- Accounts Payable
- Loans
Assets = Liabilities + Equity
or
Assets – Liabilities = Equity
Assets
Items of value and
future benefit
Examples:
- Accounts receivable
- Prepaid Expenses
- Inventory
- Fixed Assets
Equity
What you own/what
you have earned
Examples:
- Owner Contributions
- Retained Earnings
14. Date<footer>
Pa
ge
14
Important concepts:
• Revenue Recognition
- when it is earned (i.e. goods are delivered or
services rendered) which is not necessarily when
you receive the cash
• The Matching Principle
- match your expenses to your revenue
Revenue – Expenses = Net Income
15. Purpose:
To explain the difference between Net Income (accrual
accounting) and change in the cash balance.
Date<footer>
Pa
ge
15
Add Back:
- Non – Cash Expenses
(i.e. Amortization)
Adjust For:
- Changes in working capital (A/R,
A/P, Inventory)
- Purchases of Fixed assets
- Proceeds from debt
-Repayment of Debt
- Owner’s drawings/injections
16. Questions you are asking yourself:
Where to begin?
What should I include?
Am I on the right track?
How often do I revise my forecast?
17. At first it will feel like a guessing game
Plan out operations using a timeline
Mark each point in which costs will be
incurred and when you expect to receive your
first sales
Do this for each month up until you have 6 to
12 months
Input the information into the cash flow
projection template
See whether you have a shortfall in cash
18. Add in any financing obtained and forecast
out payments (including principal and
interest)
Revise cash flow forecast each period (weekly,
monthly, etc.)
Run an actual and forecasted cash flow
Determine where and why there were
variances immediately!
19. Be realistic about your forecast... you are only
hurting yourself if you are not
Continuously revise your forecast and
determine explanations for variances
Ensure you have valid supported reasons for
each number
You should be able to explain every
assumption made
20. Enables you to determine how much products
cost in each stage of production
Provides a base and a key ingredient in
determining price!
The Basics:
- Variable vs. Fixed Costs
- Contribution Margin
- Direct vs. Indirect
21. Variable Costs
Costs that vary in direct
proportion to the
changes in the level of
activity.
Examples may include:
- The cost of paint per sq. ft. of
house
- The cost of strawberries per
basket
Fixed Costs
A cost that remains
constant, regardless of the
changes in the level of
activity.
Examples may include:
- Rent
- Employee wages
- Advertising
22. Important ! - a $10 sale of apples does not equal a $10 sale
of oranges
Consider your Contribution Margin when determining your
sales mix!
Selling Price - Variable Costs= Contribution
Margin
Contribution Margin (CM) contributes toward covering fixed
expenses and profit.
(CM x # of units sold) – Fixed Costs = Profit
Looking at your costs in terms of variable and fixed helps you
identify inefficient product lines, establish your minimum selling
price and hopefully, maximize profits.
24. Cost plus markup (15%)
◦ Process
◦ Job-order
◦ Activity based
Competitor
Customer willingness to pay
Remember the pricing quadrants and where
your business is at/where you want it to be!
25. 3 key pricing metrics
◦ Gross margin
Sales – direct costs (variable and fixed)
◦ Break even
Fixed costs/(price per unit – variable cost)
◦ Target profit
(Fixed costs + desired profit)/(price per unit – variable
costs)
http://www.readyratios.com/reference/analysis/break_even_point.html
26. Process
◦ Manufacturing costs are tracked by process (sum all
costs in process and divide by # of units produced)
◦ Complete for each separate process
Job-costing
◦ All costs are tracked to specific jobs (ie. Hours,
materials used)
◦ Good for any custom work (ie. Custom home,
special consulting project)
Activity costing
◦ Costs are tracked based on activity (ie. Machining,
quality inspections)
27. Overhead costs are grouped in cost pools (ie.
machining, service department, warehouse)
Total overhead costs per pool divided by cost
driver (ie. labour hours, square footage)
equals overhead costs per unit produced
28. Charge your customers based on
competitors’ prices...
◦ Reduce prices to obtain greater market share
Focus:
◦ Increase volume to generate greater income
◦ Reduce costs to increase margins
Where do you want
to be relative to the
pack?
29. Charge customers the highest price they are
willing to pay
Focus
◦ Technological advances
◦ First to market
◦ Creating trends
Examples:
◦ Apple Inc.
30. What is a deductible expense?
Basically it is any expense incurred to earn income. Expenses
incurred for personal benefit are not tax deductible.
It’s a write-off!..... does not mean it’s free! You still
have to pay the expense!
As a business owner, you pay tax on
your net income, not your revenue…
……..so keep track of your expenses!
31. Whether income is earned personally or
through a corporation, the amount of income
tax payable is virtually the same.
The most significant tax benefits of
incorporating are due to “tax deferral”
Sole Proprietorship Corporation
All income earned through the
business is taxed at personal tax
rates
Two-tier – income is first taxed at
the corporate level and then
personally once money is taken out
Personal assets exposed to creditors Owner removes money from
corporation by way of:
-Salary or bonus (deductible)
-Dividend (not deductible)
Each has its own advantages and
disadvantages
Less expensive to setup and maintain Easier to transfer ownership
Can set their own year-end
32. Sole Proprietorship Corporation
Tax rate Personal marginal tax
bracket (see next slide)
15.5% on first $500k of
active taxable income
Advantages - Losses can be used
against other personal
income
-Defer income tax by
leaving money in
company to grow
- Shelter income from
creditors
- Can pay combination
of salary and dividends
for optimal tax strategy
-Utilize capital gains
exemption upon sale of
business
Disadvantages - All income is taxed at
marginal tax bracket
- Losses cannot be used
against other personal
income
33. What you should know:
HST of 13% applies to most goods or services sold in Ontario
Generally, all HST “Registrants” have to collect and remit HST on all
taxable goods and services
You do not have to register if your rolling four quarter sales are less
than $30,000.
Unfortunately, if you do not register, you can not claim a refund on
the HST you paid for previously purchased supplies, therefore it
may be beneficial to register early on to obtain the ITCs
Taxable Supplies Remitting Frequency
< $1.5M Annual
$1.5M to $6M Quarterly
> $6M Monthly
34. Keep documents going back 6 years plus the
current year you are in
Keep all receipts, invoices, deposit slips, bank
statements, letters, etc.
Store hard files in a dry and
fireproof container
Ensure backup copies exist for
any electronic files
35. Email for inquiries and to sign-up for
newsletter: jbastien@roth-mosey.com
LinkedIN to connect professionally:
http://ca.linkedin.com/in/jaysonbastien
Website to learn more Roth-Mosey & Partners
LLP: http://www.roth-mosey.com/
Notas del editor
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A second set of eyes – we are removed from the emotions of the business and can provide objective advice and point out things you were perhaps not aware of
Risk management – we see many industries and deal with many other professionals which allows us to see current and upcoming risks that you may have overlooked or underestimated
Strategic planning – a summation of the above
We deal with other professionals on a daily basis in which we develop strong relationships with. We put our clients in contact with other reputable and highly qualified professionals to meet our clients’ needs
We offer a magnitude of services in which some of the more common ones are listed here. We also can help recruit finance personnel to your team.
This is on topic that many people do not understand however it is one the foundation stones to financial performance analysis and financial accounting. A simple example is if I sell you an product today and you take it home with you I have earned myself a sale however because I told you, you can pay me back in December I have not yet received the cash and therefore will have to record an accounts receivable from you in the amount of the sale
We will be going over which bookkeeping technology is the most appropriate to use and then will be going over a specific example I have created on how to use Excel to perform bookkeeping
For business with up to $5M in sales these are the three most significant pieces of technology to use to perform bookkeeping and financial performance analysis. Discuss that the majority of the clients we see use Sage and Quickbooks though Sage is the preferred accounting software however there is an on-going debate. Discuss that there are multiple editions of each of Sage’s and Quickbooks software in order to meet the needs of each business. Sage and Quickbooks are good for small to medium size businesses. These types of software are good for companies with up to $5M in revenue. There is no need to get something more sophisticated as it will only waste a lot of your time trying to learn the system and it costs tens of thousands of dollars to purchase and maintain the system. Both Sage and Intuit (the makers of Quickbooks) provide online support for a limited time which allows you to obtain assistance when it is most needed in the beginning stages. Most accountants are familiar with these types of technology and will be able to assist you. There are trial’s you can obtain of the different types of software so that you can try which one is right for your and your business before you make the purchase. You will be looking at anywhere from $100 to $1200 depending on which edition you purchase and how many users you have which would be usually up to 5 for the price ran
Mention that we will not be covering notes to the FS however they provide relevant information – such as adding depth and break downs of information so that the readers of the FS have a greater understanding of the underlying business transactions.
Refer the participants to the Balance Sheet Example of Starter company and go over that the statements balance. Go over current assets – items that will be turned into cash within the next year – capital assets are long-term in nature – w/p 44-1 & 44-2
Gross margin is 9% - can use this as an evaluation tool of whether Starter Company is meeting its target. Did not book tax to keep it simple at this point. The participants should be told that this statement is the starting point for the cash flow and that they will see the changes between the net loss and the change in cash which will further illustrate the accrual vs. cash methodology of accounting – w/p 44-3
Refer participants to the CF statement. Show them that the start to the CF statement is the IS. Inform them that in the next slide they will see how the changes in working capital and cash flows are related. – w/p 44-5
These are common questions you are or will be asking yourself
Inform participants that they may need to forecast their cash flows on a weekly or even daily basis in order to keep their business running. Therefore they will need to put more effort in determining the timing of the cash flows – from when they will need to pay suppliers to when customers will be pay you!
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Go over CF forecast example – go over each line and explain each assumption made
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This methodology works in $ only. You must be aware that if you discontinue selling one product sales of another may decrease because they are complimentary sales. An example would be the sale of hot dog buns and hot dogs. The money isn’t made on the bread however without selling hot dog buns customers will go elsewhere in order to be able to purchase both the buns and hot dogs for convenience purposes.
Pricing plays a vital and perhaps one of the most important roles in your business. Having the correct price could mean the difference between earning a profit or incurring a loss. Pricing affects the value proposition as customers will perceive the quality of your product or service based on your price comparing it to competitors.
There are four broad categories of pricing – go over each category. Walmart would be an example of Economy, Apple would be considered Premium. When you are first starting your business many of the participants will be in the market penetration category having a high quality however charging less than they should in order to obtain market share. This is very common practice.
The category of your business will point you in the direction of where your pricing will be – are you surrounded by many competitors? If so market penetration however if you have a unique value proposition and your customers recognize this than perhaps you’ll be in the Premium category.
At a high level there are 3 pricing strategies; we will be going to each in a few minutes and I will explain how to determine your costs!– keep to slide
It is important to know all three of the metrics in order to assess how financially you and your company is performing. It is equally important to know when you will be breaking even and when you will reach your desired profit target – this helps in the assessment of your performance
Keep to slide – add in that it is very important to understand your business operations in order to determine what processes and activity exists and how you should be organizing your operations. This helps in determining where costs are incurred, what type of costs they are and what drives them!
Overhead costs include plant supervisor, manufacturing plant utility costs, etc.
Very important to know what your competitors are doing regardless of which quadrant the participants are in.
This is the Premium quadrant – not everyone can succeed in this category
Sole proprietorship – separate form your accountant will fill out with business activities
Corporation – less than $500k of TI – 3 months to pay taxes and 6 months to remit return after date of corporate YE which was set on the date of incorporation. It’s important to have a good bookkeeping and record keeping system due to the legality of paying taxes
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LCGE – on QSBC shares – obtain $800k capital gains exemption/$400k off of TCG
Inform participants that there are different rates for goods sold in other provinces therefore need to look into before selling there
Inform participants that if they will be incurring many costs upfront that it would be more beneficial to register for HST claim the ITCs which are 100% refundable instead of not registering, including the HST portion paid as an expense and only getting the tax payable reduction of the HST paid times the tax rate.