What is a P&L Statement?

A P&L Statement is a whole lot easier to explain and understand than you might think.

I remember the first time I heard the term P&L statement from my accountant, I thought of the consumer goods corporation Procter and Gamble. Trying not to embarrass my accountant I pulled them aside and said, “It’s P&G, do you need inventory on their products that I have for my business? I didn’t think that particular brand would be worth noting. Should I be keeping track of that kind of stuff? I guess I have some tissue paper and paper towels?” My accountant stared at me in disbelief and repeated himself, “No, I mean your Profit and Loss statement.”

Luckily for me, my mouth is big enough for both my feet to fit in. I’m not proud of that conversation, but hey, hindsight is 20/20 and I have an up-to-date prescription because of it that I will be more than happy to explain to anyone who needs to know.

I will start with a simple graph (shown below)

The Situation

For the sake of discussion let’s say that you have two kids, both of them come up to you and say, “Parent of mine, it’s the first of the year, we’re feeling ambitious and us as siblings want to open up a lemonade stand so that we can make some money for ourselves.” You being the loving and kind parent that you are understand that you’ll be the person providing the property and finances for them to start their new business that they’ve decided to call “Lively Lemonade, LLC” (You have some smart kids, that’s a name I would have thought was clever).

You take this information and you make a deal with them. Saying that you’ll make them a list of rules that they have to follow to the T.

  1. They have to keep track of the amount they make on a daily basis (Total Revenue).
  1. They have to keep track of how much they spend on lemons, sugar, cups and the occasional bottled water to sell to any passerby runners (Costs of Goods Sold).
  1. They must stay on top of how much waste they have at the end of each day (Depreciation).
  1. You can’t forget about the pitcher, the stirrer, the sign, the paint to paint the sign and the chairs to sit and relax on when business is slow (Utilities).
  1. Since they’re using your front yard as a point of sale, it would be ludicrous not to charge them monthly rent (luckily for you in this story you live in a wealthy neighborhood). Your kids are charging $.75 a pop. You put together $2.00 a month just in case there’s a slow month here or there.

If they follow this list of rules you’ll loan them $10.00 apiece. Being that it’s a loan, they have to pay you back.

A Year Later

Your kids have put forth an A effort, they have the looks of true hard workers on their face (the look of defeat and accomplishment all at the same time). They come to you with a problem, they want to grow their business and bring on their friend Sam, who lives down the road as an equal partner, but they aren’t sure if it would be worth it, financially, to bring on Sam.

Thank goodness you had them keep track of everything you had them keep track of, because now, they get to draw out the super, awesome, rocking, cool graph we have listed above.

The Facts

The Lively Lemonade, LLC has a Total Revenue of $250.00 with a Gross profit of $220.00.

The gross profit is calculated by subtracting the Costs of Goods Sold which is of course $30.00, from the total revenue.

The Operating Expense of ($79.00)= rent ($24.00) + utilities ($15.00) + loan ($20.00) + depreciation ($20.00).

The net Income is $141.00 = Gross profitOperating Expense.

We come to the dreary total of $141.00 made over the course of the year. They have to split right down the middle between the 2 of them to a whopping $70.50. That’s a grand total of $0.06 an hour for 4 hours a day, 5 days a week, for 52 weeks. As a kind parent looking at your kids P&L statement, unless they’ll be opening up a second location in another neighborhood, you should probably advise against adding Sam to their business, but I’m not going to tell you how to parent your imaginary kids.

As you move forward in your business for this 2017 year, utilize the P&L Statement as a compass to navigate to a direction of financial growth.

‘Twas the Night Before…

‘Twas the week before Christmas, when all through your small business,

all the employees were settling down, enjoying the holiday stillness.

Your reports are ready and filled out with care,

knowing good and well that tax season soon will be here.

When out on the floor there arose such a clatter,

you spring from your desk to see what was the matter.

Away to the door you fly like a flash,

it’s finally happened, your computers have crashed.

Laying your face down, smooshing your nose,

You’d planned everything out and now your office expenses just rose.

It’s too late you think to yourself, the timing is uncanny,

it’s too late in the year for any more tax planning.

Is this your Christmas tale? Don’t worry, it’s not too late for you! In fact, it’s never too late to do tax planning for your current tax year. As this year comes to a close, consider some opportunities your business may have when it comes to deductions and write offs (depending on the tax structure of your business of course.) Like the story above, perhaps you know that you need to purchase 3 new computers sometime soon, why not purchase the computers before the end of the year to receive the write off for this tax year (assuming you meet certain requirements)?

Take an honest look at this tax year, and ask yourself, would it be better to purchase these assets this tax year or next tax year. If you’re a small business and will have made $10,000 this year and are projecting to make $100,000 next year, the deduction will be more beneficial for you next year.

Further questions to think through when you are considering the end of this year:

  • What is your business income for this year?
  • What are you projecting it to look like next year?
  • Are you considering prepaying certain expenses?
  • When will your assets add value?

When tax planning, remember to remain calm; you’re not alone in feeling like this is a scary thing. This is the season for joy and peace on earth (regardless how cutthroat Black Friday was) and let that soothe you… then set up a consultation with us to help you finish this tax year strong.

Jillian Smith Wins Practitioner Excellence Awards- Millennial Award

Jillian Smith Kuberneo CPA Accounting Tax Senior

 

We are pleased to announce that our own Jillian Smith has won the 2016 Practitioner Excellence Awards- Millennial Award this year!

The Accountex Practitioner Excellence Awards are a prestigious recognition by a distinguished panel of judges. Honorees are helping to shape the profession for the future and display excellence in service to the accounting community.

Please join us in congratulating Jillian!

More about the award here.

Life-Stages of a Successful Business

As a business owner or manager, you face countless decisions in the day-to-day operation of your enterprise. You’ll experience better success when you understand how each decision, policy, procedure, or process relates to your long-term goals and current business stage.

“He’s a zero to two guy!”

“She’s great at three through five, but don’t get her involved any sooner.”

Have you heard phrases like this and wondered what on earth someone was talking about? In all likelihood, they are describing the lifecycle of a successful business.

Every business operates across a continuum of stages – typically described using a scale from zero to ten. Having a proper perspective provides you with the confidence that you’re not making decisions in a vacuum and that you’re helping to keep your business on track.

Business Lifecycle - 0 - 10 Linechart

As you’d expect, no business goes from zero to ten without at least a few other steps on the continuum. Thinking about a business in terms of its life cycle stage gives a business owner or manager a healthy perspective from which to evaluate decisions and priorities.

Think of the scale of stages in four primary groupings:

Business Lifecycle Stages (0-2: Startup, 3-5 Operations, 6-8 Expansion, 9-10 Exit)

The stages of any given business are NOT necessarily linear, but the vocabulary of stages helps you couch your understanding in the overall context of your business’s life cycle.

Helping Your Teen Budget

Teen With Piggy BankIt’s back to school season and as your kids get older, it gets MORE expensive. (Sorry to break it to you parents of kindergarteners. You’ve only just begun!) In honor of everyone heading back to school, we thought we’d veer away from our typical business and entrepreneur discussions and offer some practical money advice for older teens and college students.

If you have teens, you’ve had the experience of them coming to you with their hand out for money… a lot. It might be general school supplies, another novel for English class, a laptop computer, lunch money, clothes, movie night – we could go on for days, but instead let’s focus on a possible solution to always being greeted by the outstretched palm. This magnificent strategy is a life skill we can all benefit from – learning to live within a budget.

We realize the idea is not new, but how many of us actually hold our kids accountable to their budget? (Do your kids have a budget? If so, do they really understand what a budget is and how it applies to them?) This strategy is one we actually have seen implemented quite successfully by a client with four kids – three of whom have now successfully graduated from college. We’re going to say that’s evidence of victory!

It’s a very straightforward process:

Step 1 – The student and parents sit down together and make a list of the student’s monthly needs and how much each should cost.

(The debate over what is a “need” and what is a “want” is an entirely different topic you’ve hopefully previously established boundaries around.) These needs should be split into categories and they can be as broad or specific as you prefer. For teens just starting out, think: driving age, we’d recommend no more than five categories.

Perhaps, as a starting point:

  1. Food
  2. Gas
  3. School Supplies
  4. Clothing
  5. Entertainment

Step 2 – Decide when (and how) the student will receive their funds.

If they are old enough to drive, perhaps a debit card linked to their own checking account is a wise choice? Many banks and credit unions offer ways to transfer funds from parent to student via online banking or apps as well as fee-free accounts for teens. If your goal is to help them learn to budget and plan, we suggest a monthly deposit.

Step 3 – As the student proceeds through their month, it is their responsibility to track their spending.

That includes how much they have spent, where and when the money was spent, and how that compares to their budgeted amount.

In the beginning, this step may need some coaching from a parent or other trusted adult. It can be as simple as two columns in a spreadsheet or on a piece of paper: my budget & my spending. Or, for the more ambitious and technically inclined, you can use a full scale money management program.

Whatever your choice of tracking method, step 4 is the one that provides motivation for your teen to use the system.

Step 4 – DO NOT give your student next month’s money until this month’s funds have been accounted for.

This is a great time to talk through the differences in their plans and their reality. Have they overspent? Were any categories under budget? Is it okay to borrow money from the gas fund to buy more clothes?

Getting Started

Are you ready to get started? We’ve got two pdf’s for you – one is a blank sample of a monthly tracking spreadsheet and the second is an example of how one teen used it. They may not meet your exact needs, and we certainly can’t guarantee your teen will agree with the numbers in the example, but they’ll at least get you thinking and talking. If you’d like a copy of our spreadsheet with formulas and calculations built in, comment below or send a note to: info [at] kuberneocpa.com.

Happy budgeting!

Click on either image below to open the PDFs:

Teen Budget Worksheet

Teen Budget Worksheet Sample

Woman Working on Papers and Laptop

Should you set up a LLC or Corporation or Sole Proprietor?

If you were an “entity” what would you be, and why?

Not exactly something you, as a business owner, enjoy contemplating is it? But it is a decision that must be made when you are setting up a business.  The options are Sole Proprietorship/partnership, LLC (Limited Liability Company), C-Corporation, or S-Corporation. The decision you make has many implications. Start by asking yourself some questions:

  • How much personal liability are you willing to risk?
  • What do you anticipate as the income cycle over the next few years?
  • Do you think you’ll need to raise money in the form of investors or loans?
  • Do you have resources to help you with payroll, taxes and legal matters?
  • What are your ambitions to grow your business?

It almost seems like the deep questions of the universe, doesn’t it? But to truly figure your right fit, the first step is to understand where these questions fit in to the different structures.

Sole Proprietorship

A Sole Proprietorship is basically an individual business owner. This is the simplest and cheapest form of operation. All the ins and outs of the money just flow through to the owner’s personal tax returns on a Schedule C. There’s no true requirement to maintain separate business records, but of course it’s recommended. As the business owner, you are then subject to paying self employment tax on the earnings.

Doesn’t sound so bad right? The primary cons to this structure are:

  1. Liability – If you are sued or creditors come after your business, then you as the owner and all your personal assets are at risk.
  2. Tax savings – Generally speaking, there is an income threshold that usually makes it tax-wise to switch to a corporation.
  3. Business Growth – If there comes a time when you are hoping to get a loan or investor backing, its harder to prove your the financial worth and credibility of your business with intermixing of personal and business assets.

LLC or Limited Liability Company

An LLC or Limited Liability Company is similar to Sole Proprietorship as the income flows into your personal tax return but it provides personal liability protection. The downside is that there are state filing fees, some accounting complexities, and legal services that you should obtain to properly elect this entity.   In some cases LLC’s have even more legal/accounting complexities for compliance than corporations.   Also, since the entire profit is subject to the self-employment tax, it restricts your ability to defer income to later years and avoid higher tax brackets (as with the Sole Proprietorship).

Corporation

As a Corporation your business is its own “legal entity.” Business income, for a C Corporation, is taxed at the corporate level and the money taken out of the corporation by you as a dividend is taxed.

Primary pros and cons to being a corporation are:

  1. Only corporate assets are exposed to financial liability. (Your personal assets are protected.)
  2. A corporation may be given more credibility in the market place and additional capital may be more easily secured.
  3. State filing requirements to complete annual documents, pay annual fees, and hold officer meetings.
  4. Detailed record keeping in order to be in compliance with Corporation laws.
  5. C -Corporations endure “double taxation.” A corporate income tax on profit in addition to the personal income tax that you as owners have to pay on your dividends must taken into account before making the choice to be a known as a corporation.

Another election could be made to be what’s known as a S-Corporation (vs the normal C-Corporation described above).   The biggest advantage is that as an owner, money can be taken out of the business as dividends and there is no corporate income tax so there’s no double taxation. There are limitations on types and number of partners as an S-Corp though. Also, once this election is made, no change in entity form can be made for 5 years, so long-term planning is crucial.

Good news: it doesn’t have to be complicated if you have the right information. Bad news: There’s no one right answer for every situation.

As you can see, there are huge implications from this decision and we are more than happy to help you sift through the information and point you in the right direction. Contact us today! We promise to make it as painless as possible so you can get back to doing what you do best…making money!

 

Abacus Accounting

Why Every Business Owner Should Have a Relationship with an Accounting Firm

A Certified Public Accountant or CPA is a trained accounting professional who has received a license to manage, audit, expert opinion, and the analysis of financial records and general ledgers.

To become a CPA, an individual must pass the Uniform Certified Public Accountant Examination, managed by the American Institute of Certified Public Accountants (AICPA), along with meeting education and experience requirements.

Abacus Accounting

Did you know…? The abacus is one of the oldest accounting tools used in commerce and trading, with origins in ancient Mesopotamia in 2700 BC.

CPAs must also follow and adhere to the Generally Accepted Accounting Principles or GAAP, which provide standards for financial accounting to be followed for compliance and consistency in the accounting profession.

With this in mind, business owners working with a CPA gain access to a wealth of experience and knowledge that can help them manage their business efficiently, reducing risks and improving everyday decision-making.

Entrepreneurs often start businesses from a simple idea that creates a solution through innovation and creative genius, and while they can get by for a while on their own, there comes a time when the business can become too complex to manage on their own.

From payroll management and filing taxes to deciding on how to grow and expand, business owners should always consult a CPA to gain perspective on their decision-making, using a CPAs knowledge and objectivity to prevent costly mistakes.

Now, filing business tax forms and making the calculation of tax rates are only a small part of the filing process, since most business owners—no matter how smart or knowledgeable they are—are not tax experts and are not required to complete extenuating continuing education requirements.

In addition, business owners commonly find themselves at a crossroad when they get a certified letter from the IRS or when their business starts to thrive and keeps them away from everyday management tasks, which leads to spreading themselves too thin—and this can cause inefficiencies that pile up until it is too late to deal with them.

Consider working with a CPA who can take some of the weight off your back, managing your bookkeeping and tax filing—so you don’t have to—and start focusing on what’s really important in your business: your customers and their satisfaction.

Contact Kuberneo CPA today to learn how your business can make better decisions for growth and development—you’ll be glad you did.