Tag Archives: Accounting

Should You Use Project-Based Accounting? Five Thoughts

Situation: A company has been using the accrual method of accounting. As they approach the fourth quarter of the year, they are looking at project-based accounting to reduce year-end cash reserves and taxable income. How do you create and manage a project-based accounting system?

Advice from the CEOs:

  • The PeopleSoft Division of Oracle offers a project-based accounting package. There are a several issues that accompany a shift to project-based accounting: do employees work on more than one project, how do you plan to account for shared services such as administration and Human Resources, and do you plan to share revenue and costs across projects? These can entail a fundamental change in how the company is organized and behaves. If your primary motive is tax avoidance rather than organizational change, why would you pursue this level of change in the organization?
  • Looking at hundreds of companies with which the CEOs in the group have worked, nobody has seen any that utilize project-based accounting.
  • The company’s objective is to better understand the various projects that the company manages, and to have revenue travel with cost. A far simpler option from an accounting standpoint is to look for ways to pre-pay future expenses and thus reduce year-end cash reserves.
  • Another option is a hybrid between cash and accrual accounting.
  • If you have a strategic reason to pursue project-based accounting, look at firms that serve the construction and entertainment industries. These industries have similar challenges to those faced by the company.

Which is Preferable C or S-Corp Status? Six Suggestions

Situation: A company’s accountant advises them to transition from a C Corporation to an S Corporation. Remaining a C Corp would force them into accrual accounting with significant tax consequences. The accountant also advises that it is easier to sell an S Corp to a buyer, and S Corp status would relieve problems with retained earnings. Which do you think is preferable, C or S Corp status?

Advice from the CEOs:

  • Accountants disagree. Get a second opinion. Also consult a tax or corporate lawyer who will provide another perspective.
  • Another company looked at S vs. C status and found two key factors:
    • S Corp status is great if you expect to lose money for a few years because of the benefit that it can offer to personal taxes. Over the long-term you should look at the difference between personal and corporate tax rates and set your strategy so that it makes the most sense.
    • An S Corp cannot have non-U.S. shareholders.
  • There is more flexibility with C Corp status in your ability to grant options, sell shares, etc. For a suitor, purchase of C Corp shares prior to a full acquisition is like a date before deciding on marriage.
  • C Corp status is good if you are building an empire. S Corp status is better if want to have employee ownership under an ESOP as an option for exit.
  • Since taxes are a significant part of this decision, think carefully before you shift from cash accounting.
    • Once you commit to accrual accounting you can’t go back to cash basis.
    • To the extent have an accrued tax liability you can extend payment of this liability over multiple years.
  • You also may want to consider a hybrid accounting method:
    • Accrual for sales
    • Cash for service
    • Look at whether there are tax advantages to a hybrid model.

How Can You Reduce Costs By Consolidating Services? Four Suggestions

Situation: A small company wants to reduce costs by consolidating accounting and operational communications between remote divisions, with home office coordination. Can you more effectively reduce costs by consolidating services or is it better to set up parallel but complimentary accounting and operational communications in each division?

Advice from the CEOs:

  • There are a number of things that need to be considered, including:
    • Whether the existing legacy system is off the shelf with modifications or was custom designed for your operation.
    • Does the current system meet your needs, and do operators understand it? Is operational understanding diffuse or can only one or two people operate it?
  • How similar are the divisions in terms of product, customers and operations?
    • Do divisions serve distinct, non-overlapping customers with different product lines?
    • Are there important operational differences, for example are some divisions union, and others non-union?
    • On an ongoing basis, except for accounting, do divisions function as complimentary or distinctly separate businesses?
    • How complex are the product and pricing offerings? Could you consider a simple solution like QuickBooks or are there are complexities to your business model and accounting that the off-the shelf or web-based systems can’t address?
    • How much historical data from your current system is needed to support ongoing and future operations?
  • The simplest solution may be to run your current system off of a server, with multiple nodes connected to the system – a direct connection at your home office, and point-to-point lines connecting your remote offices. This will solve both your data transfer and communications needs.
    • Hire a computer consultant to set this up and assist you in establishing a link. It will cost some money, but will save you time and money in the long-run.
  • If you decide to change your accounting system, do so at the end of your current fiscal year. Trying to change accounting systems in the midst of a fiscal year creates an accounting nightmare for a small business.

How Do You Structure Your Bookkeeping Function? Four Suggestions

Situation: A small company has a long term clerk employee. This individual is responsible for AR/AP, Payroll and also HR manuals and reports to the CEO. This individual has been a good employee, but doesn’t perform well in this role. How would you structure accounting and bookkeeping in a small company?

Advice from the CEOs:

  • This is a key role, but there are a number of options. One is for the individual to continue reporting to the CEO, but train someone else to back them up. This will enable you to either shift the individual to another, more appropriate role within the company, or to continue with minimal disruption if the individual leaves.
  • Because of history and loyalty, this is a difficult emotional issue for you as CEO. It is important to consider what you would do if you could remove your emotions from the issue. If the answer is that you would eliminate the clerk position and hire a qualified, experienced bookkeeper at the appropriate salary, then this is your answer.
  • Packard’s Law – from one of HP’s founders – is that no company can grow beyond the capabilities of their employees. Hire the right person. This individual must be process-oriented – someone who routinely checks their own work to make sure that it is right. There is an adage in accounting that good accounting is 20% knowledge and 80% double checking the work. Hire a person who loves to do this.
  • Take care of this position in the best interests of the company, and look for another, more appropriate within the company job for the clerk.

How Do You Update Your Accounting System Without Losing Data? Four Thoughts

Situation: A company has used the same accounting system for over 10 years. The current system produces information quickly and easily, and empowers management and sales to make good decisions. However, it doesn’t respond to customer information requests as well as newer packages. What are best practices for updating your accounting system without losing data?

Advice from the CEOs:

  • One option is to keep your legacy system, but migrate to a user-friendly platform designed to work with a CRM system that can better meet customers’ needs.
    • Keep both systems up live until you no longer need the old system, except as an archive of your historic data.
    • Be sure to cross-train other employees so that your current system doesn’t become worthless if your key administrator gets hit by a truck.
  • Before you decide which direction to pursue, ask what your employees like the current system.
    • What do they find most useful?
    • What accounting features do you need to support your growth plans?
    • What key functions of the current system would you have to emulate?
    • How expensive is it to maintain your current system?
  • Is your business so unique that no off the shelf alternatives exist?
    • Could you adopt an 80-90% solution and customize the rest?
    • It may be difficult to do this on your own. Look for a consultant with a background in accounting applications to analyze your needs.
  • If you feel that you must make a change, but are not ready to do so, develop your solution gradually.