Category: small business performance

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Lease Accounting Rules, Small Business Financing and the Cloud

Lease Accounting Rules, Small Business Financing and the Cloud

Cloud Service FinancingThere are changes in lease accounting rules that may have broader implications than expected.  Lease accounting, or accounting in general, isn’t exactly an exciting topic and generally doesn’t come up in conversation.  But the changes to how business equipment and other leases are accounted for and reported could become additional fuel for cloud adoption by businesses – small business looking for financing, in particular (= lots).

First, what does accounting for leases have to do with small business financing?  Quite a bit, actually.  The balance sheet is one of the things a lender will look at when considering a small business for a loan, and if lease obligations and leased assets are on the balance sheet, they’re going to want to talk about them.  They’ll also possibly look at asset turnover – trying to understand exactly how much in assets it takes for the business to make “x” amount of money.  Banks and other lenders like to know they’re loaning money to a business that is going to pay it back, and in a reasonable amount of time.  They will limit their risk potential as much as possible, and they do it by looking through the financials and related information.

Business value is generating sustainable cash flow.  If you run a highly efficient business, the more top-line growth you deliver, the more cash flow you enjoy.  For capital-intensive businesses (either through the need for capital equipment or working capital), growth can actually lower your cash flow and diminish your business value.   To understand which side of the equation your business resides, accounting professionals will often look at the return on total assets calculated over time, dividing the operating income for each period from the P&L by the appropriate period values of total assets from the balance sheet.  The resulting metric describes how efficiently assets are applied to creating earnings.

https://coopermann.com/2013/01/22/why-is-asset-management-important-to-a-business/

This can be a difficult conversation with the banker for new businesses, as they have little to go on in terms of historic data to show the bank.  The P&L (profit & loss, or Income Statement) only reflects current business performance, not what it can do in a few months or years.  By putting leases on the balance sheet, businesses are now reflecting a more realistic view of things, but are also introducing additional items for scrutiny and question by the lender; things which are often described more in terms of business strategy than in proveable numbers.  That makes getting the loan just that much tougher.

Previous rules relating to business leases didn’t necessarily require that the business recognize operating leases (leased items and lease obligations) as assets and liabilities on the balance sheet.  This is among the reasons why businesses lease equipment – they are able to obtain the item without having to record a single large capital expenditure.

The FASB changes demand that accounting for leases should be standardized, forcing the lesees to report all leases on the balance sheet, reflecting both the benefit (asset) and the cost (liability) associated with the lease.  Stated in a press release on the subject: “The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities,” stated FASB Chair Russell G. Golden. “It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions.”

“a capital lease creates a tangible right where you own the equipment; the liability in a capital lease is true debt…”

http://www3.cfo.com/article/2013/9/gaap-ifrs_lease-accounting-elfa-fasb-iasb-global-convergence

By understanding how these changes in accounting for leases impact businesses, cloud solutions providers now have an additional lever to use with prospective customers: leasing equipment isn’t necessarily the way to keep capex off the balance sheet any longer.

One of the big value propositions offered by many cloud solution providers is that their service is paid for as a monthly business expense rather than a large up-front capital expenditure and investment.  Businesses are able to use the solution and benefit from it without actually “buying” anything, it’s just subscribed instead.  All of this is really a fancy way of saying “renting but not owning”, but the result to financial reporting is the same: it’s not on the balance sheet, it’s on the P&L in chewy chunks.  This used to be a preferred treatment for leases, too, allowing businesses to reflect the usage and payment in little parts rather than a big one.  It was “gentler” on the balance sheet.  But leasing equipment and software for on-premises use won’t be competing with the cloud and subscription service any longer, closing off the “impact to the balance sheet” conversation entirely and making cloud IT just that much more important to small businesses who need cash to fuel business growth.

Make Sense?

Joanie Mann Bunny FeetJ

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The Cloud for Your Firm: 3 Initial Considerations for Cloud Enabling Accounting and Bookkeeping Firms Working With Small Businesses

The Cloud for Your Firm

3 Initial Considerations for Cloud Enabling Accounting and Bookkeeping Firms Working With Small Businesses

dscn0903.jpgThe potential benefits of a real-time, lean collaborative working model are too great to argue with.  Accounting professionals, bookkeepers and their small business clients are all hearing about the value of working together in the cloud, and how cloud technologies and solutions can reduce cost and improve efficiency.  There is a great deal of truth in these statements, just as there was a truth in the value of implementing computers, networks and other technologies in business.  What is not clear is exactly what businesses need “in the cloud”, and how they should approach this shift from local IT to outsourced managed service.  Initially, there are 3 issues which warrant consideration, if not deep discussion, prior to making any significant move to relocate internal IT and shift business applications to the cloud: internal use systems, client interaction, and operational support for both.

With all the discussion about cloud computing and remote access, it would seem that all the applications and solutions businesses need are now available online and paid for in low monthly subscription fees.  Anyone working with small businesses, however, comes to understand that the vast majority of these businesses are still using more traditional modes of information management and computing.   For the most part, these businesses are using PCs and local networks, possibly with a little hosted email thrown in.  Almost certainly they have a website and maybe even a fairly sophisticated e-commerce system that allows them to sell products online.  But when it comes to general office functions, and particularly back-office functions like bookkeeping and accounting, the software and the data generally reside on the office PC and server.

Accounting and bookkeeping professionals who work with small businesses are often in the same position as their business clients when it comes to information technology.  Since so much of the work involved requires the same programs and data formats as those used by the client, service providers find that they spend as much in management of software licensing and systems to support working with client data as they do on systems intended for internal use only – sometimes more.  Many of these service providers are also small businesses, and it becomes challenging to find a way to handle internal IT needs while at the same time trying to address those of the client. Where e-commerce solutions are readily available to handle operational aspects of product based businesses, the best tool set for a professional accounting firm or bookkeeping business working with small business clients may not be so easily defined.

The solution for many providers has been revealed through cloud computing and hosted application models.  With Cloud Servers, Remote Desktops, and Virtual Desktop Infrastructure now widely available as affordable alternatives to capital-intensive implementations of locally installed products, businesses are finding new abilities to manage applications and data, provide mobility and enhance collaboration.  The additional benefit is in how accounting service providers may engage with their clients in more efficient and effective ways, without the burdens of replicating data or trying to share access to a single machine or application resource.

There are a number of elements to consider before taking the file server to the parking lot and running it over with a truck.  Moving to the cloud is not a one-step process, and it is important to do a little research and collect some important information before making the final decision on how to proceed.

Internal Use Systems

Among the first of the questions to ask when considering a change in IT management approaches is “which software do we need”?  Implementing an outsourced IT arrangement, which is really what “cloud” is about”, does not necessarily mean throwing away all the existing software and starting with new.  The software in use within the firm may be exactly what it needs right now and adding full IT management, fault tolerance, and remote or mobile access could be the main scope of the requirement.  Moving from locally installed solutions to hosted solutions provides quite a number of benefits while removing many of the direct costs and frustrations of IT management and administration. The greatest benefit of this type of approach is the ability to preserve the “body of knowledge” existing in the business, knowledge invested in the people and processes already developed.

On the other hand, there may be new tools or services only available as “cloud” service, and it makes sense to explore how they may benefit the business more than the in-use applications.  The important element is to remember that the solution must address real business problems, and whether it runs in the cloud or not isn’t the first or most important thing to ask.  For example, a discussion about whether QuickBooks Online might be a better choice than QuickBooks Pro, Premier or Enterprise should be focused on the functionality provided by the applications and not which servers they are running on.  With application hosting for QuickBooks now being an available option, there is a managed IT and remote access capability for both solutions, rendering the fact that QBO is a SaaS solution almost irrelevant in terms of being a differentiator.

Client Interaction

An important aspect of adopting new technologies or working models is the consideration of how the firm and the client businesses will work together, and whether or not there is (or could be) a standardized approach that might work for most clients.  Certainly, it makes sense to standardize as much as possible.  Treating every issue or engagement as a singular event – a one-off – is the least efficient way to do business.  The key to profitability is in the firm’s ability to produce high quality work consistently and in a timely fashion.  This requires that the business be well-structured in terms of the standard processes and methods which will be used to work with client information.  When the firm and the client can work seamlessly together as and when required, and when each is responsible for their own systems and data, it is a best-case scenario. The questions relating to client interactions focus on how the firm works with clients and which tools or solutions are required to improve that situation.

It is likely that the firm will need to be able to address working relationships with various client and engagement types – where clients do some of the work, where the bookkeeper does the work, or where the participants work collaboratively together in the same systems.  While it may seem that the best way to create a dependency on your services with the client is to keep them out of the systems, empowering the client is really the key to a close and long-standing engagement.  This means that the client needs to have their own solutions and approach to cloud-enabled IT, and the accounting or bookkeeping service provider should be able to access and work within that environment.

It is rare that a small business can effectively operate without computers and software to manage information and support operations, so it makes sense that the business should have its own accounting and financial systems, too.  For the accounting service provider, it is essential that a level of understanding be gained around the use of today’s available remote and mobile access technologies, as it is with these solutions and tools that participation in client systems will be enabled.  When the client accounting solution sits on their office PC, there are limited options for working together in any real collaborative form.  Connecting to their PC via remote control is a widely recognized means of gaining access to client systems, but if the bookkeeper is on the system when there is a problem of some sort, all eyes go directly to that remote user as the likely cause of the problem.

The considerations relating to remote access to client systems focus not just on enabling a collaborative working environment, but also on mitigating risk and improving client perception.  The risk issue comes in when the accounting service provider is exposed to systems and information not relevant to their task, and the perception issue becomes material when the accounting professional becomes the software or IT service provider.  It makes sense for the accounting professional to make recommendations or suggestions about software and IT service which might benefit the business, but not to necessarily be the reseller or direct provider of the product or service.  The moment the accounting professional attempts to sell the client a software product or IT service, the relationship is changed and the client is more likely to view their accounting pro as another vendor rather than a trusted advisor.  It’s also not necessarily a great move to start a new client engagement by telling the client they have to switch accounting products to allow the accountant to work closer.  Rather, professionals need to help their clients position those products for more efficient use, which may include enabling remote or mobile access granted via deployment in the cloud.

Operational Support

When businesses outsource their IT management and administration, there is often an initial belief that all responsibilities in these areas will be handled by the IT service provider.  What is often overlooked is the reality that the firm still needs to have people attending to IT related tasks, just doing different levels of work with the technology. It is important to recognize that someone in the firm will end up dealing with various IT and process support issues, and it still makes sense to have personnel dedicated to these tasks (*Note: here’s where I suggest that the cloud changes the focus of internal IT personnel, but it doesn’t eliminate the need for them).  The service provider and solution evaluation and selection process, as well as the actual deployment and administration of services, will take valuable time away from actually performing client accounting or bookkeeping work, and there should be people attending to these issues while the business continues operating.

Where an internal IT department or contract technicians may once have supported internal systems, an operational role within the business is still required to manage outsourced IT activities, including and particularly those where clients are involved with the firm systems.  Delivering new benefits with a minimum of business disruption is the goal, and can be achieved through proper planning and coordination with team members and clients alike.

Closing Thoughts

“The Cloud” is just another way to run software and implement computing resources.  It still takes servers and software, it uses processors and storage and networking, just like more “traditional” computing models.  The difference is in how these resources are purchased and provisioned, and the impact is a change in how businesses of all types can benefit from technologies which enable collaboration, lean process, and mobility.  The Cloud for Your Firm addresses your internal business requirements, lends itself to client collaboration, and has internal operational support to ensure the firm is fully leveraging the available benefits to improve business performance and profitability.

Make sense?

J

Read more about Accountants and Bookkeepers Working With QuickBooks Clients: App Hosting Approaches That Work

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Predicting Outcomes and Providing Guidance | Being Nostradamus| Proformative.com

I have a gripe with the accounting profession.  My gripe is with the fact that accounting information delivered to most business owners is old news.  Stuff happened, the professional properly recorded it and reported on it,  you paid your taxes, and that’s that.  Game over.

Once upon a time, accountants had to work with book ledgers, pen and pencil (mostly pen, putting that single line through incorrect entries), and stacks upon stacks of paper documents.  Just keeping up with the process of recording transaction information, adding it all up (and making sure the footing totals jibe), and then summarizing the information into usable form took all the time available, and the focus was on the accuracy of the work – not necessarily the timeliness of it.  With the advent of computers and computerized accounting systems, the process of creating and storing the data became easier, but the volume and nature of information increased and thus the complexity and time to process increased (the “everlasting gobstopper” problem.. it never really goes away).There isn’t any argument over the critical value and importance of that work.  Every business owner understands that not properly accounting for business activities can mean increases in tax burdens, penalties and interest, and more.  It’s good work… but what do you do with it?  My intent is not to try to diminish the value of today’s approach to accounting.  Rather, I’m trying to point out how the accounting profession could make a huge impact in today’s pathetic economy, help businesses get financially healthier, and help put the small/medium business market on a path to growth and success.  It involves seeing into the future.

These days, technologies exist which facilitate acquiring the information (even in paper form), converting that information into digital data, and then actually interpreting the data to arrive at a transaction.  Traditional software and cloud service providers alike are recognizing that mechanical data entry is passé, and do-it-yourself solutions for accounting and bookkeeping will rely upon “smart” engines which can read and properly understand what each scanned document means.

So – once the accurate data entry problem is solved… what’s the next logical step?  Analytics!  It’s only really possible now that online solutions have brought the business information to the accounting professional in real-time, and have allowed the accounting professional and the business owner to collaborate and share data faster than ever before.  If information is power, we have a lot of power in our hands… but do we really know it?  This is where BI (business intelligence) and analytics come in, and where the opportunity exists for the accounting profession to become a guiding force in rebuilding our economy.

What if an accountant could not only tell his client that the business lost money last year or last month, but that they’re going to lose money through this month and year if they don’t change their behavior?  And, what if the accountant could run a variety of scenarios which would help forecast the most positive business outcome based on certain choices which could be made, or certain activities which could be handled in different ways?  What if the accountant could help his client peer into the future, and get an inkling of what the business could look like if certain economic or business conditions continued… changed… ?

Maybe I’m a little overzealous when it comes to believing that the accounting profession could have recognized the economic trauma which was coming, or that they could have prepared their business clients for it.  But I don’t believe I’m very far off the mark in believing that not nearly enough “analysis” occurs in the typical public accounting engagement, and even when it does… is the suggested path the right one?  I would submit that BI is new enough to so many people that it may not be.  Learning what the numbers are telling you is one thing… staving off disaster is quite another.

I would encourage all BI and Data Analytics fanatics to check out an article on CFO.com on this subject:  That New Big Data Magic  http://www3.cfo.com/article/2011/8/analytics_that-new-big-data-magic

A few memorable takeaways from the article:

“you may be spot-on about a problem, but the solution doesn’t magically appear out of the data.”

“what you do with [data] is a people-based activity, a skill base you have to mature.  And it doesn’t come quickly.”

“CFOs have a gut sense that there’s money out there in all that data… The challenge is how to turn that data into new opportunities.” The good news.. is that new technologies are making it more economical to make sense of Big Data… The caveat is that those technologies will not provide those opportunities. That’s still up to the people who make business decisions.”

jmbunnyfeetMake Sense?

J

reblogged from Proformative.com  Being Nostradamus – Predicting Outcomes and Providing Guidance

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Financial Literacy and Small Business Success

Businesses and individuals alike must make complicated financial decisions throughout their lives.  Sadly, the volumes of research which explore aspects of financial and debt “literacy” among individuals and small business owners reflects that a growing portion of the population lacks the understanding to make these decisions.  Questions surrounding this issue often focus on the educational aspects, and the positive impacts which might be created through greater levels of understanding of accounting fundamentals and the basics of financial management.  Particularly in smaller businesses, where there is a much closer relationship between business and personal finances, understanding even basic financial concepts is likely to lead to “better financial decisions and household well-being”.

a strong relationship between debt literacy and both financial experiences and debt loads[1]

Because many educational offerings tie to specific training approaches and methodologies, it becomes very difficult to measure the usefulness of the skills developed separately from the effectiveness of the training methodology.   Trainers may employ specific devices or tools which facilitate their delivery, and often times these tools become more of a focus than the actual educational content.  On the other hand, a program might provide a great deal of information in a fairly raw form, yet this information is unlikely to deliver a useful result if the participants do not understand it or cannot grasp the concepts introduced. The challenge is not only with providing the education, but finding a balance with the information and the outcomes; understanding how basic the training might be and still provide a measurable, beneficial impact.

In the study Keeping it Simple: Financial Literacy and Rules of Thumb, the authors discuss the benefits of teaching small business owners a series of fundamental “rules of thumb” for management of the business, rather than delving into the complexities of comprehensive business accounting and finance.  Teaching participants about the basics of double entry bookkeeping, cash management and investing, and then coupling that information with instruction on essential processes to follow resulted in significant improvements in financial management and improved the accuracy and consistency of reported data.

the rule-of-thumb training changes actual business management practices[2]

 

Outcomes show consistently positive when a simpler approach to developing “financial literacy” is provided to small business owners, and particularly when the training and content is oriented towards the characteristics of the participants.   The highest level of result was achieved with business owners with a low level of financial “sophistication”, with a limited interest in financial or accounting training, and with limited baseline business practice structure.  These were the participants who were found to be most likely to implement what they learned in the “rule of thumb” training.

The conclusion drawn from these discussions is that financial education and basic accounting training can become a key factor in helping business owners not only account and report better for their businesses, but provides an essential foundation for understanding how to grow the business and create profitability.   Accounting professionals working with small business clients should recognize that an effort to provide a level of education to clients is likely to not only help those clients make better business (and personal) financial decisions, it will also increase the chances that the client will keep better books and provide the accounting professional with more consistently useful information to work from.

After all, the goal of the accounting professional working with small business clients is to help those small businesses become successful businesses, isn’t it?

Joanie Mann Bunny FeetMake Sense?

J

[1] http://www.nber.org/papers/w14808.pdf

Debt Literacy, Financial Experiences, and Overindebtedness | Annamaria Lusardi and Peter Tufano| NBER Working Paper No. 14808|March 2009

[2] https://www.poverty-action.org/sites/default/files/kis-dfs-march2013_0.pdf | Keeping it Simple: Financial Literacy and Rules of Thumb | By ALEJANDRO DREXLER, GREG FISCHER, AND ANTOINETTE SCHOAR

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Bookkeeping Needs Better Reporting Tools

There are many articles and papers available which discuss the rapidly increasing “volume and velocity” of electronic information moving through businesses these days. The focus of the discussion in most cases is on how businesses need to adopt tools and solutions to help them with the management of this electronic data flow. What isn’t being discussed at length is the visceral business intelligence which is lost due to less direct interaction with the raw data.

By manually working through each item, the person regularly processing the information would often develop somewhat of a picture of the business simply through a level of intuition, a gut reaction to the information. This is a rapidly declining model, thanks to intelligent technologies and direct system integrations.

With the plethora of electronic information sources, data collection tools, and transaction download facilities, many bookkeepers and business owners are finding that their gut instinct and business intuition is being lost in the shuffle of managing and matching up all this electronic data.

Focusing on small business bookkeeping, the processes are now being oriented more towards matching up electronic transaction data points than on entering the information from the raw source. Where bookkeepers were once perceived as “mechanics” in terms of performing the bookkeeping data entry, the activities of these professionals is becoming even more mechanical in nature as the primary requirement shifts from entering the information to importing it and then matching it to source documentation.

Even decisions regarding categorization of the transaction are often made by software solutions, eliminating more involvement by the bookkeeping or accounting pro. At the same time that bookkeepers and accountants find themselves having difficulties communicating the value of the service they deliver, technology trends in the industry are weighing even more heavily on that value proposition by providing users with do-it-yourself tools and self-service solutions.

The answer to the challenge of demonstrating value in the bookkeeping and accounting processes is for accountants, bookkeepers and business owners is to focus on the result of the work rather than focusing on the work directly.

Small business owners will challenge their accountants and bookkeepers to explain why processing a limited number of transactions per period would cost much, and the professional ends up fighting a battle which cannot be won; there is far more value in the work they perform than simply entering the data. It’s this explanation of WHY bookkeeping and accounting takes skill and has value which become arguable to the business owner, and is a discussion which the accountant or bookkeeper is more likely to win if they were to in a position to provide their client with proof of this value.

Too often, accounting and bookkeeping service providers attempt to prove their worth to the client by espousing the quality, accuracy, and timeliness of their services and say too little about the value of the result they will deliver. Additionally, many professionals introduce their clients directly to the accounting software and try to engage the client to work cooperatively with the bookkeeping, as there is a perception that the client may see more value in the work if they can a) see it being done in real time and b) see how complicated it could really be.

Unfortunately the accounting and bookkeeping solutions often implemented by small businesses actually look pretty easy to use and are intuitive, which serves to even further diminish the value proposition as the client perceives that they could likely operate the software just as well as the bookkeeper.

In order to deliver the proof to the client that the bookkeeping work has value, the result becomes the focus of the effort. Rather than providing balance sheets, profit and loss statements and bank reconciliations, those involved in the bookkeeping and accounting process for the small business should also focus on reports which demonstrate the value of PROPER bookkeeping and accurately reflecting business activities.

Would the client know the real difference between cost of goods sold and a regular business expense? Reflection of that single transaction with two different treatments could be the trigger to get the light bulb to light up. How best to demonstrate the variation? Not in pure written report form, that’s for sure. Numbers alone don’t generally trigger real understanding, but painting a picture might.

Today’s dashboard and reporting tools – solutions which use information from the accounting system to reflect visual trends and representations of business performance – can deliver far more meaning and easier understanding than a columnar report with numbers and percentages. Further, these tools can address the task of revealing critical insight into business value, demonstrating (for example) the difference between cash flow and profitability, or identifying trends which indicate patterns in how the business is causing or reacting to change.

As small business owners feel continued pressure to improve performance and profitability, and as lending sources for business credit remain difficult and costly to engage, the necessity for quality bookkeeping and accounting services does not diminish, it increases. The challenge is in finding ways to read the data and discover the insight and meaning it reveals.

The value of bookkeeping and processing accounting data for businesses is ever-increasing in these days of global markets and global competition, and the forward-thinking professional will recognize that deeper insight into the business – insight enabled through the use of realtime reporting and analysis tools – delivers an ongoing opportunity to work closer with the client in addressing challenges identified and presented, and allows the accounting professional, bookkeeper and business owner to be guided by real information rather than emotion or intuition.

jmbunnyfeetMake Sense?

J

 

read the original posting at  The Progressive Accountant.

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The Small Business Borrower | Biz2Credit

In order for regulation and legislation to work in favor of small businesses, it becomes essential that accurate and complete information be available for analysis. Too often there are details not recognized in the information used by various agencies to help guide policy and action, and particularly in the world of privately held small business, the quality of data is often in question. This is where structured accounting software and the public accountant come in to play, and where a difference can be made not only with the individual client, but at a higher level by facilitating more accurate data production to support various research initiatives, such as those sponsored through the SBA and the Fed.

Overall, these research studies highlight two things: the important role that financial institutions play in lending to small business owners, and the value of quality data sets in ascertaining financing issues faced by small businesses and their owners.

Charles Ou, Ph.D. | Senior Economist | Office of Advocacy | July 2009

With the availability of highly useful tools for monitoring various key performance indicators and metrics in the business (with analysis of cash flow being an essential part), business owners and their accounting professionals alike are able to use real business data to reveal not simply the trends in business performance, but to identify areas where direct action could improve results in one aspect or another. By paying closer attention to managing business finances and analyzing key aspects of business performance, the “discouraged” or “denied” business borrower may become a successful or (even more valuable) a non-borrower.

via The Small Business Borrower at Biz2Credit.com.