Ingredients for Success

In documenting your expenses.  Catchy title though right?

Don’t roll your eyes, this is one of those often overlooked areas in business – especially since a large number of receipts are sent to us via email these days.  The fact that some of these expenses are possibly limited as a tax deduction also diminishes the urgency behind providing sufficient documentation.  But, it is still essential that you always document your spending in business, no matter how tedious.  And the biggest headache of all is meals and entertainment.

It begins with the basis: Who; What; Where; When; and why.

Who did you eat with?

If you have invested in a simple expense tracking app, then this should be one of those mandatory fields.  Provide the names of the people and their businesses.  If you have a CRM, identify the participants there and add new contact information in they don’t exist.

What did you talk about?

You don’t need to record the meeting but provide your employer (or you if you own the company) with enough information about the meeting to decide if it is something worth pursuing.  If you discussed a sale opportunity or potential prospects, again, update your CRM for this, especially if it is a new opportunity.  Don’t wait until your lunch guest decides to call you.

Where did you discuss business and where did you eat?

Sometimes the meal is the meeting and others the meeting happens before or after.  For instance, I often go to a referral sources office to meet with the entire staff, but my conversation is with, say, their sales manager.  I like to document that we met at their office and then walked to the restaurant and name the restaurant.

When did you have the meeting and lunch?

Day and time of both are important but really it is about tracking how much time you spend in meeting with the other participants.  It is also good to track when you have to explain your day to your boss (or wife as the case may be).  And, it is also helpful in understanding how you use your time: was it a 3 hour meeting about a sales opportunity that never arises?  Is it your 3rd such meeting this month?

Why did you meet and decide to eat?

The why is oftentimes the most important issue to document for your business.  Was it a business opportunity?  Did you meet to discuss their new business line and how you might be able to share its benefits with your referral network?  Was it an intentional lunch meeting or was it because your meeting ran over and you felt it was an appropriate goodwill gesture?  Be clear.  I do many lunches with my referral network simple to stay in contact – especially those who take a clear interest in what we do.  And sometimes, especially with potential customers who could generate substantial fees, if a meeting runs long I think it is appropriate to recognize the value of their time by saying thank you over a burger and fries.

And for those who love the biggest question of all?  How?

How did the meeting and lunch benefit your company?

I love talking with people.  But the reality is, it is often more effective and efficient to have a video chat than to drive to someone’s office and then go to lunch.  It is a cost/benefit analysis which simply begins with you recognizing that your time is extremely valuable.  So, be honest with yourself when you document your lunch meeting by asking how your company benefitted.  Is it a lunch with your top referral source or a lunch with a friend that couldn’t care less what your company does but likes talking about his kids?  I am not saying that having a deep personal relationship isn’t worth it, but be clear that the business benefit is probably not there.

Tax deductibility should not change your overall business approach.  If you make money through lunch meetings I recommend continuing them.  But be ready to analyze how these meetings, and expenses, are working for you and make smart strategic choices that satisfy your needs and also your company’s.  You will be happy by possibly saving money, but more importantly, your very valuable time.


Understanding Why Financial Reporting Exists

I was asked to answer a question on financial accounting concepts on Quora.   I felt that it is an issue worthy of sharing on my blog as well as we don’t often discuss why we have expectations when we prepare and audit financial statements – other than to say GAAP requires it.

The most basic concept underlying financial reporting (and the accounting procedures used to accumulate the data) is investment decision-making.  Everything Mahesh spoke to, and what I am going to elaborate on, is premised on the need for some information for investment decisions.

FASB and IASB have concept statements.  I am most familiar with US GAAP which is put out by FASB.  But I believe both standards setters agree overall on the concept of information necessary for decision making.

Ask yourself, if you were ready to make a decision to invest in a company, what information would you like to know?  Conceptually, the argument goes, you would like to know the business’ financial position – its balance sheet; its operations – profit and loss statement; and its cash flows.  These collectively make up the general purpose financial statements.
Oftentimes, the information presented on the face of one of those statements does not tell the whole story.  Take inventory as an example.  Lets say the statement of financial position says only that inventory is $1.0 Million.  As an investor, your decision to invest might change if you knew that the inventory was all finished goods: Or perhaps it is all work-in-process.  Knowing additional details which can impact an investment decision might still be necessary, the standards require additional disclosure – footnotes – to help investors put those statements into context and provide details that otherwise do not exist.
These statements do not exist in a vacuum.  They are the accumulation and summarization of thousands and millions of transactions.  And to ensure the necessary information is presented timely, is a faithful representation of what actually happened, and is relevant, the standard setters created accounting principles.

And to ensure that investors receive accurate information based on these guiding concepts, it is important that reported information be verifiable (can be audited successful) and comparable to others in similar situations.  This is why there are industry-specific principles and there is a focus on establishing an effective audit trail.  Investors should be wary where there is first, not an independent examination of the statements and second, where the underlying accounting is totally dissimilar to everyone else in the industry.  Sadly, it happens all too often.

If you are a small business and your bank requires you to prepare GAAP financial statements, it is important to understand that this is what they are looking for: Investment Decision information.  It doesn’t matter if the financial statements are prepared by your bookkeeper or audited by an independent CPA.  Your business is responsible for sharing financial information that the bank can use to make an investment (loan) decision.  You have an obligation to ensure it is accurate, tells the whole story, can be compared to other businesses that are in the same industry as you, and ensure that whatever is recorded can be independently verified.

You, management, are responsible for the accumulation, summarization and reporting of the information.  Management decides when to recognize revenues; or to have it be reported as unearned because the job isn’t done; Management decides if a product was actually sold; or was actually shipped to another warehouse across the country.  There is an undeniable tension between management sharing accurate accounting information and investors receivable actionable investment information.  You see this played out frequently in the press when you see a stock slide because a company missed its revenue target.

Accounting principles exist to put the concept into context.  Accounting principles are not complex or difficult to employ, business is moving farther and farther away from simple transactions of shifting values from producer to consumer.  Complex transactions make for challenging financial statements as investors cannot see where value begins and ends.  So ask yourself, do you really want to invest in a company where you can’t tell who owns what and who is owed what?  If not, demand that GAAP be followed; otherwise:

Caveat Emptor baby.



Potential Changes to Tax Depreciation

Tax Depreciation

Another key change potentially coming in 2017 is to the write off of “Capital Investments”.  Think about this as §179 deductions on steroids.

Currently under tax law, businesses can accelerate their depreciation by writing off up to $500,000 in the year of purchase. The problem, for larger businesses is that it phases out if you put more than $2,000,000 in assets into service in the year.

So for smaller businesses which can already take full advantage of §179 there is going to be a negative trade off coming.  You see, today, if the business needed new assets we would encourage the Company to borrow the funds from either the seller or the bank to buy the equipment.  Then we would take the full write off and also get to deduct the interest expense in the following years.

This may be going away as part of the 2017 tax restructuring.

If businesses want to take the full write-off of unlimited asset purchases but use debt, interest may no longer be deductible. This could be a big set back for small businesses as most prefer to match long lived asset purchases with long term debt. It has, until now, made more sense.

Congress may carve out an exception but I do not see an easy work around.  It may be they only deny deductions for term loans but that doesn’t seem workable.

There would also be the potential headache of defining a capital asset. Obviously a computer qualifies but what about real estate?  Expect to see some restrictions on what qualifies or perhaps on what “businesses” can take advantage of this potential change.

We have a monthly series that we hold here in downtown Vancouver, WA called the Currie & McLain Lunch and Learn. This months topic is on the potential tax law changes and how to start planning for it. I will post a copy of the Powerpoint after the presentation along with thoughts and the Q&A which come out of the conversation.

In the meantime, consider having a conversation with your tax and accounting professional about what might be coming as part of the new tax changes for 2017. Make no mistake, the changes are coming. If you are not currently working with an accounting professional or are interested in a second opinion, feel free to contact me for a free consultation.



Thoughts on change

Happy Friday.

Have you noticed that many people are afraid of change?  That somehow the way it was is good enough and so should be continued into the future unnecessary.  Or worse, because it didn’t work before it can’t work today.   While looking back at history is a decent guide to making a decision, it cannot be the only tool we use when deciding how we should do things today.  Or tomorrow.  Things are changing and small business has to get on top of this or suffer the consequences.

Last night Kubae and I had dinner with Wes and Dianne – good friends for many years.  We got onto the topic of change – technically we were discussing the Brexit and the Trump issue – and the things that both sides had in common.  Dianne pointed out that that the supporters of both movements lived in fear of the change that is happening.  Kubae then pointed out that it isn’t just the change but the pace of change that is possibly a driver.

The pace of change. I think they are onto something.

Look at the last 100 years. in 100 years we have gone from being essentially foot-mobile to autonomous vehicles.  We have gone from handwritten letters to text messages.  We have gone from biplanes to space shuttles. All this in 100 years.

Look at the last 50 years. We have gone from 3 major automobile manufacturers to 15. From leaded gasoline to electric and solar. From princess phones to Bluetooth.  From large global mass manufacturing to 3D printing of single pieces.  Amazing changes in my lifetime.

As an accountant, I am a trained historian.  Historians look at the past and try to make sense of it.  All accounting is really is ensuring that the business history (its transactions) are recorded clearly and concisely for future use.  History is useful but I have found that history alone is insufficient to help chart a course of action.

As a business developer, I am a futurist.  A futurist looks at today and asks how it might look tomorrow.  A futurist needs history to provide a starting point and trends that can help guess what tomorrow will look like.  Guessing about the future is fun, although it is often seen as science fiction or worse a waste of time.

And yet, a futurist is a planner.  Businesses must plan what their future is going to look like and then remain flexible enough to adapt to the unforeseen changes and also record things so that the historical reality can be compared to that future guess.

And this is the rub isn’t it?  I have often joked that I think most small business owners are frustrated accountants. They love the history of their business -how hard they’ve worked, how much money they’ve made.  But when asked what the future holds for their business, the response is typically, “same as last year but add 10%”.  That might have worked in 1960, but I don’t think this is going to hold true in 2020; and that is only 4 years away.

That’s right. four short years.  Are you asking yourself what your business is going to look like with

  • Drones doing delivery
  • cars that drive themselves
  • trucks that drive themselves
  • equipment that warns before it malfuctions
  • a printer that can make parts by adding and not subtracting raw materials
  • energy without being connected to the power grid
  • food grown locally instead of on large farms and trucked
  • and a million other things

This is the easily predicted future because most of this is here now.   What about the things we haven’t even dreamed of yet?  Are you positioning your business to be part of these changes or are you going to defiantly wave your buggy-whip until the end?

Typically, I would sign off by suggesting you have a conversation with your accountant, but not today.  Take someone two generations removed from you out to lunch and ask them these questions.  Find a good science fiction book and read about what their vision of the future looks like.  Let your mind explore the fascinating potential that your business has before it and start thinking about your future. Because it doesn’t have to be about fearing the change – it can be about embracing it.

Have a great weekend.