Using historical data, benchmarking to develop a financial forecast

A financial forecast is a rolling monthly assessment of a company’s performance compared to its budget goals. By tracking progress monthly against an annual budget, a company can determine what it needs to do to stay on track and meet year-end goals.

“It’s also a decision-making tool management uses to guide a business,” says Michael Stevenson, managing partner at Clarus Partners. “It can help determine if and when equipment, head count, etc., should be added to manage the timing of any such moves, and it helps companies better understand their cash needs.”

Smart Business spoke with Stevenson about creating financial forecasts, what information to include and what not to do.

Who should be involved in the development of a financial forecast?

Whoever is responsible for company finances is essential to the process. And if there isn’t someone, consider bringing in a consultant to help. Either person should know the tax implications of any financial investments and the impact on cash flow. That can be used to temper conversations around investments so that the full financial consequences can be understood before action is taken.

Additionally, the company’s management team should participate because they have knowledge of the strategic plan and the budgeted financial goals for the company over the next few years.

What data should be used to assemble a financial forecast?

It’s typically easier to pull together fixed/variable expense information and then add revenue projections. Use as a base three to four years of historical data to reveal seasonal fluctuations in both revenue and expenses.

As for revenue forecasts, use the company’s current sales forecast — what’s in the pipeline and where the company wants to grow revenue — to make revenue projections. Balance that against economic, public and industry data to determine if the forecast makes sense.

What is the important historical data to gather when forming a financial forecast?

Consider at least three years of historical data from a profit and loss (P&L) perspective. Look at the cost of sales and determine whether gross margin is stable, increasing or declining. What is a target gross margin percentage? If the company is selling work at lower gross margin than targeted, is it worth it? Ask these questions in the context of gross profit percentage; selling, general and administrative expense as a percentage of revenue; and how these expenses grow with revenue.

Tie your P&L projections into a balance sheet forecast and check the cash balance and working capital. In a financial forecast, it’s best to have working capital that covers expenses on P&L for two and a half months in case revenue is lower than expected.

What is the important benchmarking data to include in a financial forecast?

When benchmarking against industry data, do so against companies that are of similar size and in the same geographic region. The important data to consider is revenue growth, gross margin percentage, EBITDA, and benchmarking working capital and receivables in terms of day sales outstanding.

Collecting receivables every 60 days but paying bills every 30 days creates a ‘cash gap’ or a cash flow problem. In a growing company that cash gap between assets and liabilities can get big enough that it must be funded with either a line of credit or a loan.

What are some common financial forecasting mistakes?

It’s a mistake to create hockey stick projections without the related infrastructure increase. For example, a company may be growing at 5 percent annually then decide it wants to grow at 15 percent, but does so without acknowledging the necessary increase in expenses to meet that goal. Infrastructure and personnel must grow to support higher revenue goals or a company won’t have the resources to make the climb.

Many companies also fail to consider the tax impact of an investment. Any time money is made there are tax implications, even in a pass-through organization.

Budgeting and forecasting help companies make good decisions. Sticking to them gives companies a higher survivability rate than those that fly by seat of their pants.

Insights Accounting is brought to you by Clarus Partners

How to manage risk and counter crises with a corporate response plan

The goal of any incident response is to minimize the impact of the negative event on the organization’s objectives.

This involves responding to the incident as quickly and efficiently as possible, making good decisions to limit further damage and repairing any damage that has been done. In order to accomplish this, an organization should have a corporate response plan (CRP) in place that is ready to go at a moment’s notice.

Smart Business spoke with James P. Martin, Managing Director at Cendrowski Corporate Advisors LLC to discuss the finer points of a corporate response plan (CRP).

What sort of events should be addressed with a corporate response plan?
Different organizations will have different risks depending on their operations. A CRP is a natural extension of the organization’s risk management process. Where the organization identifies a risk that has a high likelihood of occurrence, and a high impact if it were to occur, the organization should consider if a CRP would be useful in managing the risk occurrence.

Some hot-button issues today are frequently described in the newspaper headlines, such as cybercrime, fraud, business interruption, and other public relations disasters. An organization might have several CRPs, each designed to address a specific event type.

Why does an organization need a corporate response plan?
Risk management attempts to identify and mitigate risks. However, it is impossible to completely prevent risk occurrence or even to identify all risks facing the organization; this is why the organization needs to be ready with a plan.

The goal of the CRP is to make sure the organization has a mindset of preparedness and the basic tools that are essential to manage a risk occurrence when it does occur.

What are the basics for setting up a CRP?
Plans need to be developed to address the details of the organization’s response. When a risk actually occurs there will be no time for planning and coordination; this needs to be done up front. Consider who should be involved, both from a company perspective, and any outside experts that would be required.

Identify the types of information that will be essential in order to evaluate the extent of the threat and analyze an appropriate course of information. Consider procedures to ensure that data and information is adequately preserved and available for the CRP. Setting up the CRP involves deep planning around what tools will be needed for the specific threat type and proactively ensuring they will be available.

Who should be involved?
The Corporate Response Committee will tailor the CRP for the company situation and determine who should be involved with the operation of a response team. The team is responsible to go out and operate the CRP when an event occurs.

Of course, for IT security events, the committee should include members of the technology team. The members of the committee should be senior management such that they can authorize the CRP and provide members of the team with the authority to examine transactions and events on behalf of the committee.

What are the keys to success?
Planning needs to be done to progress from threat identification to a desired outcome: the organization needs to determine the acceptable end resolution.

This will also vary by threat type but should consider the overall goals of: 1) minimizing business impact, 2) resuming normal operations and 3) restoring any damage done. Consideration should always be given to the need for confidentiality.

For certain threats, such as a report that fraud has occurred, the CRP should involve confidentiality during the process to ensure that the investigation can proceed appropriately and to protect the rights of those parties that might be involved.

As with any other risk management activity, the CRP should also include an evaluation process at the end to evaluate the effectiveness of the response and identify improvements that should be made for the future.

Also, the risk occurrence and mitigation information should be used to check if prior risk evaluations for risk impact and likelihood ratings need to be updated. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Manage your tax obligations when conducting out-of-state business

Most large states have dedicated departments or programs in place designed to find out-of-state companies that have done business in their state but have not paid the required taxes. While that has been in place for some time in the larger states, many smaller states are implementing the same or similar programs.

“States look for companies with economic presence in their state,” says Jeff Stonerock, tax director at Clarus Partners. “Economic presence is defined by a company generating revenue and earnings on sales into a state but does not have a physical presence in that state.”

There are tens of millions of dollars in unpaid tax that states are working to collect, he says. For example, the Ohio Board of Tax Appeal is currently hearing many commercial activity tax cases, which could lead to millions of dollars in back taxes for each noncompliant company.

Smart Business spoke with Stonerock about ways companies can track their out-of-state tax obligations to avoid getting surprised by a large bill for missed payments.

What are the tax obligations companies will likely encounter if they do business outside their home state?

The major tax obligations are income, sales, use, property, payroll, business license and privilege taxes. The tax that most often trips up businesses is sales tax on purchases, which some companies believe is the vendor’s responsibility.

Often when a company begins operations in new states, their vendors make one of two mistakes. They either do not charge sales tax for the new state or they incorrectly charge the sales tax for the home state of the company that they have charged in the past. During an audit, the purchasing company is liable for the unpaid tax in the new state.

Why might companies have trouble managing the tax obligations that are part of doing business in multiple states?

There are three common reasons companies have trouble managing their out-of-state tax obligations:

  • Different states have unique tax obligations. For instance, while Ohio companies don’t have business license obligations, in Tennessee they do at both the state and local levels.
  • Out-of-state tax requirements for the same type of taxes are unfamiliar. Though a company may understand the tax law in its home state, other states apportion or tax income differently.
  • Companies don’t have systems and processes in place to track employees, property or sales in other states, so there’s no system to account for the associated tax obligations.

How can companies better manage their out-of-state tax obligations?

Know your operations: where and what you sell, where you have property, where employees are working or traveling to, and have systems and processes in place to track all of those. It’s critical to track where people and property are located and the location where revenue streams are being earned.

If, for instance, the company is in the construction industry and operating in multiple states, it’s important to know where all sales and assets have been earned and located, and where employees have worked during the year. Determine when to start filing taxes in all of the states and cities in which there are sales, assets or employees outside of the home state, or have a clear understanding why there’s not a requirement to file in the new state.

Without a plan, companies can’t have a full understanding of their tax compliance obligations, and that puts them at risk for interest and penalties for nonpayment. Be proactive and not reactive with taxes. Companies wouldn’t get a building permit after a building is constructed. Know the tax obligations before business is undertaken.

As long as companies understand their tax obligations before doing business in another state the taxes are rarely, if ever, prohibitive. But not knowing the obligations and finding out down the line that years of back taxes are owed can cripple a business, making the out-of-state venture not only unprofitable but dangerous to the life of the business.

Insights Accounting is brought to you by Clarus Partners

How an experienced investigator performs background due diligence

When trying to learn about an individual, many companies turn to online background checks. However, this could be a mistake as much of the available information may not be fully verified, which is why many businesses turn to a licensed investigator to help provide a more complete and accurate picture.

Smart Business spoke with Theresa Mack, Senior Manager at Cendrowski Corporate Advisors LLC, about working with a licensed investigator to help your business uncover the information you need.

Why hire a licensed investigator?
Most online or database-driven background checks are actually ‘record checks.’ In other words, data from records are compiled and the quality of the source information is not thoroughly verified.

This cursory check may be sufficient in some cases. However, depending on the information found, the nature of the background check, the check’s intended use and the access to confidential/proprietary information that a potential employee may have, a complete background due diligence investigation by a licensed investigator may be warranted.

An investigator uses multiple resources to verify data accuracy and corroborate information. Thus, background due diligence investigations help reduce the risk of client reliance on false information.

How do investigators perform background due diligence activities?
An investigator generally works on a six-step methodology: prepare, inquire, analyze, query, document and report.

This methodology is highly applicable to background investigations. An accurate and comprehensive investigation is based upon existing, determined and verified information, leaving no rock unturned.
Investigators will tailor their activities to suit the needs of their clients, which typically include attorneys, businesses and individuals.

Client needs will define both the records checked by the investigator and the type of documents that can be released to the investigator and the client.

Where does an investigator begin?
An investigator often begins by examining open-source information, which refers to sources that are overt and publicly available. These are available through online data warehouse applications, which house data from disparate sources.

Open-source information includes public documents that are created throughout a person’s lifetime, allowing the investigator to follow a paper trail leading to a complete history of the individual being searched. These may include court filings, property tax documents, vehicle registrations and social media sources.

Open-source intelligence is a form of intelligence collection management that involves finding, selecting and acquiring publicly available information and analyzing it to produce actionable intelligence.

How does an investigator evaluate sources?
Any record is only as good as the chain of events involved in its creation. Online record checks simply provide information on an individual. Investigators go further by evaluating the veracity of the source data.

Record maintenance, storage and dissemination procedures can often impact the accuracy of the information. Typos, misprints and mistakes introduced by human error can also affect the accuracy of records. These latter items are often seen on personal credit reports, criminal convictions and even civil litigation histories. While these are official records, they can contain errors nonetheless.

Processes for updating records can also compromise the accuracy of information, as records are only as accurate as their frequency of updates. Some records are never updated and may provide stale data if the user is unaware of this underlying issue.

Finally, the method that data warehouses employ for acquiring information critically impacts information integrity. For instance, the provider may have purchased information from a secondary source. In such an instance, it is essential that the provider have accurate retrieval processes and is knowledgeable about handling special data items. An investigator evaluates each of these issues over the course of conducting background due diligence activities. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How enterprise risk management can impact a company’s value

Business operations are subject to a number of internal and external risks, as are ownership interests in businesses.

How organizations and their owners address these risks can have a significant impact on the value of businesses and interests therein.

An enterprise risk management (ERM) process involves identifying risks relative to an organization’s objectives, assessing them for likelihood and impact, developing a response strategy and monitoring progress. A well-defined enterprise management process framework can protect and create value for organizations and their owners.

Smart Business spoke with John T. Alfonsi, managing director at Cendrowski Corporate Advisors LLC, about how ERM processes can mitigate risk and increase a company’s value.

Where is risk addressed in a business valuation?
The most common method of valuing a business is the ‘income approach,’ which requires a valuation analyst to project a business’s future cash flows, then calculate the present value of the sum of these cash flows by employing an appropriate discount rate.

The valuation analyst must address risk in two primary areas: projected future cash flows and the discount rate. Effective ERM processes can help businesses increase value by affecting the estimates for these quantities.

How does risk impact projected cash flow?
There exists a risk that an organization will not achieve its projected figures. As such, the process by which management projects future cash flows can impact a valuation analyst’s assessment of the business.

A key risk in the process is information integrity, the quality of information generated through monitoring and data assimilation. Information integrity allows management to make well-informed decisions and should provide a valuation analyst with greater confidence in a business’s projections.

Valuation analysts can analyze information integrity by examining historical projections and assessing elements of the internal control environment.

A valuation analyst should also examine the variance between historical projections and a business’s actual performance. If a strong correlation exists, a valuation analyst can be highly confident in current projections, if the process employed by the organization remains constant.

If not, the analyst must examine the variance between the past projections and actual performance to discern whether bias existed in past estimates and current projections.

What about risks in the discount rate?
The discount rate is the yield necessary to attract capital to a particular investment, given the risks associated with that investment. A project with relatively high risk will require a relatively high yield to compensate an investor for bearing these risks.

In determining the discount rate, there are two sources of risk that need to be quantified: systematic and unsystematic.

Systematic risk is the risk one must bear for taking on a risky investment in the market. However, systematic risk is estimated by calculating the return to public equities due to availability of data. The ERM process has little impact on systematic risks unless the business’s performance is heavily tied to market performance.

Unsystematic risk is sometimes broken down into two components, industry risk and company-specific risk. Industry risk reflects the risks identified with the industry in which a business operates.

Company-specific risks encompass all other risks, including size, depth of management, geography of operations, customer and/or vendor concentration, competition and financial health.

How can ERM processes mitigate company-specific risks and increase value?
An ERM process should quickly gather and assimilate high-quality information for use in the organization’s decision-making process, allowing the organization to rapidly assess the impact and likelihood of risks associated with changes in its internal and external environments.

Early assessment and mitigation can help preserve value and capitalize on risky events when competitors do not react as swiftly to environmental changes. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Knowing the value of your business can improve decision-making

It’s not uncommon for business owners to know or have an estimate of the value of their business. What’s more common, however, is not being able to fully justify how that value was reached.

“Business owners have their finger on the pulse of their business, but they don’t always understand valuation metrics,” says Courtney Sparks White, J.D., LL.M., ASA, CVA, partner, business valuation and forensic accounting, at Clarus Partners. “There is a tendency to overvalue a closely held business, which is understandable as it’s often the largest asset the person owns.”

She says understanding a business’s value and the metrics that drive that valuation are essential to many decisions business owners make. Putting all the valuation elements together within a framework can help business owners be better decision-makers.

Smart Business spoke with White about business valuations and their usefulness.

Why should business owners understand the value of their companies?

Fundamentally, business owners who understand the value of their company are in a position to make better decisions. It allows owners to make plans based on facts and it can be beneficial to risk assessment — discovering, for instance, that having only three large customers is a risk that decreases the company’s value.

Many business owners think value is determined by revenue and top-line growth, but that doesn’t always directly translate to value. There are other, unique factors that contribute.

A valuation can be required in some situations — upon an owner’s death, when making a gift, during a litigation proceeding such as shareholder disputes or divorce. In those situations, people often just want a number. But as a planning tool, a valuation can be a strategic asset as owners work to grow their business. It can help business owners understand the key metrics that drive value for their companies.

How does a business owner determine the value of his or her business?

The easiest way to determine a company’s value is to work with a professional who’s skilled in business valuation. But to explain the process with a little more specificity, there are three main approaches to valuation: asset, income and market. Within each are various methodologies that are applied, not all of which are relevant for every business in every situation.

Many business owners talk about multiples of revenue or earnings as the central components that determine a business’s value. That approach can lead to inflated valuations that obscure a company’s actual value because the multiple may not be relevant for that business, or it’s the wrong multiplier or base to use.

The three main valuation approaches are considered a staple regardless of industry, but the choice of which to use hinges on the company’s industry, life cycle and asset-intensity. That’s why working with an experienced adviser is the best approach.

How often should valuations take place?

Valuations that are used as planning tools to make better decisions should be conducted every two to three years. In a rapidly changing market, valuations may be conducted more often, but annual valuations aren’t often necessary.

Conducting a valuation at the startup and exit phase of a business’s life cycle is standard. A lot is in flux with a company at the outset, so valuations should be performed relatively frequently. For owners of startups, it’s good to understand how the business is valued as it progresses.

At the opposite end of the spectrum, a business owner planning his or her exit should keep the valuation updated. Businesses in the middle of their life cycle should have valuations conducted based on what’s happening in the market or with the company.

Valuations are a valuable tool for business owners at any stage of a company’s life cycle because it can be the basis of a conversation about the business that uses very finite terms. When considering a valuation, speak with a skilled valuation professional to understand the process and ensure that the valuation can be an effective tool.

Insights Accounting is brought to you by Clarus Partners

Identity theft: What it is and how to avoid it

Of all the things that can be stolen, your identity is probably the most damaging.

While material items can be replaced, your identity can cause an array of issues — not to mention the emotional strain and expense that accompanies a breach of your personal information.

Smart Business spoke with Donna Holm, a senior tax manager at Sensiba San Filippo LLP, for more insight into the effects of identity theft and the ways in which victims can begin to rebuild their security.

What is identity theft and who is affected?
Identity theft occurs when someone uses your personal information to commit fraud and/or open new accounts or use your existing accounts to make purchases.

Fraudulent tax filings are still the most common method of identity theft. Each occurrence brings a ripple effect of problems that could take years to remedy.

Because of the influx of new technology, smartphones, Internet dependency and the pure mass of personal information readily available, identity theft is on the rise, particularly among those between ages 20 and 29.

Of the approximate 17.6 million Americans victimized by identity theft in 2014, the young and the elderly are most susceptible because of a minor’s information going largely undetected and the elderly falling victim to government benefit and medical identity fraud.

Also note that two-thirds of identity fraud victims in 2014 had previously received a data breach notification, with over 1 billion records being leaked in 2014 alone by large companies.

How can you avoid identity theft?
To avoid identity theft, minimize, monitor and manage. It’s critical to keep documents secure, particularly Social Security cards, birth certificates and passports.

Be mindful of credit card use and keep your card visible during purchases. Protect passwords and create unique passwords for every site, changing them regularly. This helps keep perpetrators from acquiring a skeleton key to your online identity.

Avoid opening unfamiliar links or downloads. Limit the information you share on social media. When traveling, inform your bank for credit/debit card use and stop your mail delivery. Review your medical explanation of benefits.

File taxes early. Don’t share personal information on the phone with anyone and understand that the IRS will not call you. Lastly, keep your PIN number secure, shred receipts, and check your credit score routinely to monitor sharp changes.

What should you do if your identity is compromised?
The IRS processed $5.8 billion in fraudulent refunds for 2014. If you think someone has stolen your refund or used your Social Security number, complete Form 14039, Identity Theft Affidavit, and be sure to respond promptly to correspondence from the IRS.

In order to truly recover from identity theft, there are several steps requiring immediate attention. First, generate an Identify Theft Affidavit through the Federal Trade Commission.

Once completed, file a police report. Note that 32 percent of victims do not notify the police. You will need both the affidavit and police report to send to your credit agencies.

Next, pull a credit report from one of the three credit bureaus, which can be done at no charge, and request that the reporting agency place a fraud alert on your file. The bureau with which you file the fraud claim will notify the others.

Write letters disputing each charge and send certified mail with a copy of your credit report highlighting the error.

Next, send the same letters and credit report copies to the companies where the fraud took place so that the fraud is recognized; they can block the information and stop reporting the transaction for debt collection.

Lastly, request copies of the documents that were fraudulently used so that you can obtain a copy of the signature that was forged. ●

Insights Accounting is brought to you by Sensiba San Filippo LLP

Improving your cash flow through effective tax planning

If you have an interest in real property as an owner or tenant, a cost segregation study may be one of the tools to increase your cash flow or help manage your tax liability.

“These studies have saved both businesses and individuals hundreds of thousands of dollars,” says Walter McGrail, Principal at Cendrowski Corporate Advisors LLC.

Smart Business spoke with McGrail about these studies to better understand how companies might best utilize them.

What is the focus of the analysis?
A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations.

The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life than the building.

Generally speaking, personal property assets identified in a cost segregation study might include items that are affixed to the building, but do not relate to its overall operation and maintenance.

What are the phases of the study?
The process will usually begin with a meeting between management and the firm conducting the study.

During the next phase, or the scope phase, the engineering professionals and tax accountants walk through all areas of the property with a site representative to develop a general overview.

Engineers also examine the architectural renderings or blueprints to produce an in-depth analysis. In addition, a review will be done on any construction contracts, capital expenditure budgets and reconciliations.

Next, the tax accountants take the engineers’ work and put it in format acceptable to the IRS. A report with documentation supports how the cost recovery was arrived at and takes into account any stipulations on allocations.

How is the amount of benefits determined?
First, the benefit is dependent upon the income tax savings generated from depreciation deductions claimed for income tax reporting purposes.

The costs incurred by a taxpayer in any capital expenditure program or property acquisition are recoverable as deductions in arriving at federal and state taxable income. Costs attributable to depreciable assets generate annual depreciation deductions reducing taxable income.

Second, the tax savings occurs for both federal and state income taxes. Depreciation deductions generally result in tax savings of approximately 40 percent of the deduction claimed.

Third, cost segregation studies identify categories of costs that have a shorter cost recovery period for income tax.
The actual savings is the reduction in current tax payments with resulting increases in taxes payable in subsequent periods, i.e., the ‘time value of money’ attributable to a sound treasury cash management program.

As with any treasury cash management program, a businesses’ cost of capital is the appropriate discount rate to measure the ‘present value savings’ of deferring cash charges for income taxes.

The higher an entity’s cost of capital, the more significant the present value savings attributable to deferring such tax payments.

What are the benefits of this study?
These studies have helped maximize tax savings and increase cash flows on current, future or past property purchases by maximizing tax deferrals.

Put another way, the benefit is the ‘present value savings’ attributable to the deferral of income taxes achieved via the acceleration of depreciation deductions resulting from shorter cost recovery periods identified during the study.

Generally, the depreciable tax life of most commercial buildings is 39 years. Recovery periods for personal property and land improvements range from five or seven and 15 years.

A cost segregation study identifies items that can be classified properly into categories with shorter tax recovery lives, which allows individuals and businesses to save hundreds of thousands of dollars through effective tax planning and improve cash flow. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC.

Tips for craft brewers

Today’s beer industry is undeniably shifting in favor of the emerging craft brew movement that has brought thousands of options to taps across the nation.

With ever-growing market presence and seemingly limitless business potential, it’s no wonder small-scale brewers are jumping at the opportunity to start their own brewery and get their beer to the market.

Smart Business spoke with Brandon Scripps, a senior audit manager at Sensiba San Filippo LLP, for insight on what critical financial factors lead to the success and failure of startup breweries.

Why would someone want to open a brewery?
As of 2015 there are more than 4,000 breweries in the U.S., that’s up from 3,500 in 2014. While the industry increased less than 1 percent last year, craft beer sales rose nearly 20 percent.

Craft beer has caused big breweries like Budweiser and Miller to decline by more than 25 percent in the last six years.

Craft beer’s growing presence in the $100 billion industry is resulting in a significant amount of acquisitions of craft breweries by some of these larger breweries, with huge associated valuations.

What are the main reasons why new breweries fail?
Failure usually stems from undercapitalization and lack of understanding of the operational aspects of the business. Having a successful brewery is more than the quality of beer you are selling.

It’s having the right financial understanding to keep it afloat. This includes implementing smart branding strategies, planning for distribution, expansion, and impeccable inventory and costs tracking.

Failure to understand these elements has been a major downfall of many breweries.

How can a brewery set themselves up for success?
A good, realistic business plan is critical. In order to make a profit you must know how much money goes into your beer and how much you get out.

Careful cost tracking will help you identify exactly what you need to sell in order to be profitable, which will in turn tell you which product is successful and if you need to raise prices, up production or reevaluate your vendor budget.

You must understand the key financial ratios, such as breakeven point, matching production runs with projected sales, and the costs and margins of different products.

Additionally, a good inventory tracker may be a hefty investment, but it’s a crucial expense if you plan on growing and keeping your label alive. Before starting, factor in extended time for licensing and permits since that could affect your market schedule.

What is the best advice you could offer someone opening a brewery?
Understanding the financial ratios of your business and looking at information in real time is a must.

There are three statements that are essential: your income statement, your balance sheet and your cash flow statement. Looking at only one of these will lead you to false assumptions or even a skewed idea of how well, or poorly, your business is doing.

Your income statement showcases your profit margin and ultimately shows efficiency over time. Because it shows income, owners often mistake this as the only piece of the puzzle they need to assess their success.

However, you need all three statements to gain a complete picture. The balance sheet is a snapshot of your business at a single moment in time and is important when looking at ratio calculators and key performance indicators.

Lastly and arguably most importantly, your cash flow statement shows how money flows in and out of the company, not only operationally, but also through investments and financing.

Monthly evaluation of these documents will help keep your brewery accountable for your financial goals while maintaining a healthy and accurate financial perspective while making critical decisions throughout the year. ●

Insights Accounting is brought to you by Sensiba San Filippo LLP

What has the PCC done for your business lately?

It’s tough being a midmarket business.

Accounting and reporting requirements can be a significant burden for companies without the vast human and financial resources of larger enterprises. One organization is hard at work to make things just a bit more manageable for these middle market companies: The Private Company Council (PCC).

Smart Business spoke with Karen Burns, assurance partner at Sensiba San Filippo LLP, about the PCC and the beneficial changes they are making that could impact your business.

What is the PCC?
Accounting standards are not intended to create difficulty for private companies. But with needs and profiles that differ from those of larger public companies, it can often feel that way to midmarket businesses as they struggle to meet onerous compliance responsibilities designed with public companies in mind.

In order to address this problem, the PCC was established in May 2012.

The PCC works with the Financial Accounting Standards Board (FASB) to determine when and whether to modify U.S. generally accepted accounting principles (GAAP) for private companies.

Based on advice from business leaders and financial professionals, the PCC proposes alternatives to particularly cumbersome GAAP standards, which become accepted practice after input from multiple stakeholders and final FASB approval.

The 10-member PCC seeks ongoing input from private company CFOs, CPAs and representatives of financial institutions across the country to gain a clear understanding of the accounting challenges these businesses face. This input can come in the form of solicitations to comment, or regional roundtables.

What changes has the PCC already made?
Since its inception, the PCC has achieved several notable changes that deliver welcomed alternatives to many private companies.

For example, last year the FASB approved a change that allows for alternative goodwill accounting. Under this option, goodwill can be amortized over 10 years — or less, if a shorter life is appropriate beginning in calendar year 2015.

This is important because the goodwill generated from private company transactions often does not extend beyond 10 years, yet companies previously had to complete a complex calculation annually to test for impairment of value.

Another significant accomplishment is an easing of the guidance regarding consolidation of variable interest entities (VIE) under common control leasing arrangements. Effective for calendar year 2015, this change allows entities to elect not to apply VIE guidance — i.e. not to consolidate — when all of the following are true:

■  Common control of the leasing entity exists.

■  Substantially all activity is limited to leasing.

■  The principal amount of obligation at inception does not exceed the value of the asset leased by the company from the lessor.

If elected, the alternative rules must apply to all leasing arrangements that meet the above conditions. Early adoption is also allowed.

What anticipated changes are in the PCC’s pipeline?
Recently, the PCC made additional recommendations to the FASB to ease the burden on midmarket business regarding:

■  Other comprehensive income.

■  Liabilities with characteristics of equity.

■  Cash flow classification.

■  Financial statement presentation.

The PCC presented these topics as immediate priorities, so it’s reasonable to hope for exposure drafts regarding alternative standards in the near future.

It’s easy for business leaders to regard those who set accounting standards as opponents because of their sometimes unnecessary complexity. While that’s understandable, the intent is for transparency to the users of the financial statements.

With the PCC’s ongoing work, aided by input from CPA firms that understand the private company sector, accounting for this market segment may continue to become increasingly user-friendly. ●

Insights Accounting is brought to you by Sensiba San Filippo LLP.