How to effectively wrap up your business’ financial year

How well prepared a business is to close out the year varies a great deal from business to business, says Nancy E. Supowit, CPA, MAS, director at Clarus Partners. Some don’t prioritize closing or thinking ahead, while others have procedures in place to ensure that closing and planning take place at appropriate times throughout the year.

Smart Business spoke with Supowit about strategies that help businesses and owners stay on top of their financial health.

What should be the focus for businesses in December?

December is a great time for businesses to check their accounting records and make sure that the books accurately reflect business activity and position. It’s also a time to do preliminary work, review year-to-date records to identify trends and unusual activity, and make corrections if needed.

Year-to-date records are a good reflection of the year’s activity and can be used for decision making and year-end planning. Most businesses aren’t able to finalize everything before the new year since they depend on reports that aren’t available until the following year. However, they can check over their own records and year-to-date reports in December so that when the outside reports arrive, there will be fewer surprises and the final entries can be done quickly.

What happens if a business fails to wrap up its current accounting year?

When businesses don’t close the books on time, the owners can’t read the story of the year’s successes and failures. They might need to rush through a late closing for reporting or tax filing purposes and they might incur higher outside accounting bills to accomplish the task.

Owners also miss out on an important tool for understanding their businesses and for decision-making. If accurate records aren’t available in December, the owners don’t have useful information for tax planning.

What do you suggest businesses do to be better prepared for next year’s year-end planning?

Businesses should consider the following:

  • Make sure accounting records are in good shape. Read the records and consult with an adviser to suggest tax savings strategies.
  • Consider large fixed asset purchases. Businesses can often use accelerated depreciation to reduce taxable income.
  • Set up retirement plans to optimize retirement savings for owners and employees. Keogh plans for self-employed owners have to be set up before Dec. 31.
  • Consider whether the company can qualify for tax credits such as the Research and Development Credit or Work Opportunity Credit.
  • Adjust compensation and year-end bonuses to reflect performance and optimize tax results. This is especially important for owner-employees.
  • Communicate fringe benefit information to payroll departments, including S corporation owner health insurance costs.
  • Check that board meetings and corporate minutes are up to date and revisit big-picture issues such as line of business, choice of entity and succession decisions.

What do business owners need to do at year’s end to wrap up their financial year?

Business owners should meet with their tax advisers in December to discuss their anticipated tax position. They can:

  • Set up retirement plans for self-employed individuals.
  • Optimize security sales to harvest gains or losses depending on the year’s results.
  • Adjust withholding or the fourth tax estimate to avoid April surprises, including the penalty on underpayment of estimated tax.
  • Utilize the annual gift tax exclusion, which is currently $14,000. A married couple can gift another married couple up to $56,000 tax-free.
  • Utilize your wealth to make deductible charitable contributions or contribute to 529 educational plans for family members. There are many ways to optimize charitable giving, including donating appreciated property. The Columbus Foundation and other organizations offer convenient donor-advised funds.

Insights Accounting is brought to you by Clarus Partners

What ASC 606 means for the restaurant industry

The new revenue recognition standard issued in 2014 is finally here. ASC 606: Revenue from Contracts with Customers will affect nearly every company in America — including restaurants.

It replaces multiple pieces of revenue recognition guidance with one overarching principles-based standard that any company in any industry could apply to its revenue transactions, converging for the most part with the international standards.

“One downside is that it’s a one-size-fits-all, which we all know doesn’t always work as well as customized guidance might,” says Angela Newell, national assurance partner with the BDO Dallas office.

In the restaurant space, franchisors are going to feel the change the most.

Smart Business spoke with Newell about the new revenue recognition standard and its impact on restaurants.

What changes will the restaurant space see?

The new standard will result in a significant change in the accounting for upfront franchise fees and area development fees charged by franchisors.

Franchisors typically recognize franchise fees when a franchise opens. Under the new standard, franchisors will likely defer that upfront franchise fee and recognize it over the franchise term, which can be 10 or more years, putting the fee on the balance sheet and amortizing it into revenue over the period. The thought is that the value to the franchisee doesn’t end when the store opens, it continues over the life of that franchise agreement. Going forward, franchisors will report a deferred revenue liability on their balance sheet. This new liability needs to be communicated to stakeholders.

While franchisees and owner/operators aren’t expected to experience the same far-reaching changes, they may have to make changes to the accounting for their gift cards and loyalty programs.

Everyone — franchisees, franchisors and owner/operators — will have to comply with additional footnote disclosures. They need to ensure they have access to the information and then be prepared to report it regularly.

When do the new rules go into effect?

The new standard is effective for calendar year-end public companies on Jan. 1, 2018. Private companies get an extra year. Calendar year-end private companies won’t have to adopt until Jan. 1, 2019.

What should companies do now?

Many restaurant companies, especially smaller private companies, haven’t spent much time on this, because it’s not effective for them until 2019. While restaurants are impacted less than some, the change may be painful because they’re not used to dealing with complicated revenue recognition.

Start by making sure you understand the standard and what it entails for your company. Accounting firms have published short implementation guides that help explain the impact. Even if the standard isn’t effective for you until 2019, plan ahead and, to the extent you can, do a dry run to work the kinks out. If your company uses systems to account for franchise revenues, make sure the system can handle the new accounting rules. No matter how easy it seems, it takes a while to get those changes pushed through an IT system and tested. If you’ve never needed such a system, it may be time to think about one in order to add efficiency.

Some franchisors are thinking about their current structure and whether or not there’s a business case for changes, such as shorter franchise agreements or a different fee.

Franchisors also should consider how this may impact their external metrics. Financial statement changes need to be communicated to investors, owners, private equity, lenders or even a management team with bonuses connected to earnings. If debt covenants are tied to EBIDTA metrics, EBIDTA in the current period obviously goes down when revenues are deferred. The new standard has been well-publicized, though, so it shouldn’t be a surprise to most lenders.

In addition, a new leasing standard is effective for public companies in 2019 and for private companies in 2020, under which lessees must put all of their leases on their balance sheet. This change will be even more impactful than the changes to revenue accounting. If companies need to talk to their lenders about the impact the new revenue standard will have on debt covenants, consider including a discussion of the new leasing standard, as it will be easier to address the impact of both at once.

Insights Accounting is brought to you by BDO USA, LLP

Revenue doesn’t always equal success in the eyes of investors

Startup companies that seek funding for growth are not the type of companies banks tend to see as the best candidates for loans.

“Banks know that most startups fail,” says Michael Stevenson, managing partner at Clarus Partners. “Startups and small businesses tend to have little capital at the outset and banks are leery of lending money that might not come back.”

Investors are experienced business people who are looking for specific metrics to determine a valuation. That often surprises most entrepreneurs who rely too heavily on revenue projections to generate a value.

Smart Business spoke with Stevenson about the importance of an accurate business valuation and what investors look for in early-stage companies.

Why does a business valuation matter?

For a startups looking for capital, a valuation determines the share of the company they have to give away to an investor in exchange for the money they need for growth.

There are three common valuation approaches: asset-based approach, market approach and income-based approach.

Asset-based valuations are based on the assets a company holds — real estate, inventory, or machinery and equipment, for instance.

Market approach uses proxies, which are comparisons of similar types of companies and what those have sold for in multiples of revenue or EBITDA.

Income approach uses a company’s historical or projected earnings to make assumptions about future earnings.

The income approach is the most common, but often two of the three approaches are used to determine a company’s value.

Who should perform a valuation?

Independent valuation companies and most larger accounting firms will perform a business valuation.

Accounting firms can help companies develop an investor deck that lays out its value, its growth history, key staff and their influence on the company, the market and direct competitors, competitive differentiators and strategies for future growth.

It’s usually the entrepreneur who has a valuation performed on his or her business. A potential investor will ask to see the assumptions used to make the valuation, typically looking at revenue, net income and gross margin growth.

Investors like to see valuations put together by experienced professionals as it gives credence to the numbers. CPAs are particularly valuable for this reason. Investors are more confident when they see that a CPA with experience making projections and modeling has helped the entrepreneur create a forecast. It can be beneficial to have that person on hand when pitching to investors to explain the numbers and how they were reached.

What numbers should entrepreneurs watch to get the most accurate sense of their company’s value?

Gross margin, net income and cash flow are the more important figures. Many startups think sales are the only measure, but if those sales don’t make any money, they don’t matter.

If a startup is seeking funding for more inventory, economies of scale suggest that buying more will drop material costs and improve gross margin. That’s often seen as a good investment.

But looking purely at a revenue increase and ignoring gross margin, which could go down and create ‘empty calories’ rather than generating cash, is a red flag and investors will balk.

How can advisers help business owners understand their business’ value and help improve it?

Most of the time business owners think their company is worth way more than the valuation, so an adviser has to explain how the value was calculated and how the owner can get to where they want it to be, often by devising strategies to increase profitability.

Before approaching investors, entrepreneurs should know their business and industry inside and out, have a realistic value of their business and understand that an investor’s primary concern is to make money. Otherwise, they’re in for significant disappointment when no one is interested in funding their venture.

Insights Accounting is brought to you by Clarus Partners

Succession planning is just one piece of the talent development whole

Succession planning is tied to career planning. But business leaders often approach succession planning in isolation and treat it as a singular event — what was a retirement party back in the day, is a often recruiting frenzy today. To do this right, take a good, hard look at how you are positioning succession planning, and how to make it part of your overall talent management strategy.

Succession planning should not be done in a vacuum. When business owners connect succession planning with their recruiting, training and talent development initiatives, then the organization can consider itself truly prepared for the next chapter.

“Succession planning is one component of the larger system for managing talent,” says Stacy Feiner, Psy.D., business psychologist and coach at BDO USA, LLP. “The lifecycle of talent goes hand-in-hand with the lifecycle of the business. If the company is growing and you need to promote people, you should develop talent behind to backfill their former roles.”

When succession planning is viewed as a strategy for growth, you see how the key talent management components, like recruiting, onboarding, performance management and leadership development, are intricately related.

Smart Business spoke with Feiner about how to approach succession planning.

How does succession planning fit into the overall talent development picture?

Succession planning at only the executive level is a very short-sighted approach. Sometimes it has a ripple effect and other times it starts a complete domino effect.

Succession planning is part of a system intricately tied to talent acquisition. You need to build bench strength to have the right people to promote, and you need consistent, reliable processes to find talent externally. Otherwise, succession planning can tie up the organization, and it may prevent business owners from transitioning their businesses to the next generation of leaders. On an operational basis, not having a strong bench of talent makes it challenging to implement strategic plans. Meeting business goals correlates with the ability to hire well, develop well and promote well.

One way to get started is take a step back and perform a talent inventory across your enterprise. Where does the strongest talent sit? Where are you held back by perpetually low performers? Where are ready employees who could be developed and eventually deployed to meet future needs? Define your most critical positions that relate to your growth goals and strategic plan. Also, consider which employees are ready to move forward. If you don’t have opportunities, promising employees could be a ‘flight risk’ to move to another company.

What else is important to understand about succession planning?

Often when people think about succession planning, they imagine a business owner or CEO winding down his or her career and getting ready to move on. In reality, succession planning is about ensuring the company is positioned for success for the next 30 years. Building a strong bench of talent at every level means when one person is deployed, movement and advancement for others is possible. At a high level, succession planning should give people the best likelihood of success to grow in pace with the company’s growth. Succession planning is a strategy for growth and is connected to the other levers of talent management.

How should employers set up their talent development system?

An effective, reliable talent management system starts with the business owner’s full involvement. Historically, owners and CEOs have been detached from talent strategies, which may leave leaders frustrated when their standards of productivity and expectations of engagement fall short.

Start by viewing talent endeavors as an investment. Budget for talent resources, empower the head of human resources and stop throwing money at talent problems with a wait-and-see approach.

Once the talent development system is built, managers should execute and own the talent in their departments, while human resources facilitates the system and utilizes key performance indicators that support managers. A viable succession plan should be the natural outcome of a system that’s built to deliver precisely the standards of performance you want.

Insights Accounting is brought to you by BDO USA, LLP

Best practices for a more impactful nonprofit board

While there are no official “best practices” that can be applied universally to every nonprofit, organizations should consider a few basic steps to ensure they stay aligned with their mission and put themselves in a strong position for the future.

“Some of these practices are internal, while others involve going out into the community to find those who might help an organization grow beyond what it once considered possible,” says Steven Dieringer, an audit manager at Barnes Wendling CPAs.

Smart Business spoke with Dieringer about steps nonprofits can take to improve their organization.

What can nonprofit board members do to be more effective in their positions?
It’s crucial each year for a nonprofit board to review the organization’s mission statement and ensure its operations are supporting it. This enables the board to focus its efforts on supporting the mission.

Consider asking board members to formalize their own objective. This exercise can help orient each member, and the board as a whole, with the nonprofit’s direction when planning events.

Drafting an objective from scratch can give each member of a board a strong sense of pride and ownership over their roles and responsibilities. It also leads to clearly defined roles and lines of authority, and better communication.

In what ways can nonprofit boards better manage an organization’s finances?
There are several best practices nonprofit boards can incorporate to ensure effective financial management to cover program services and administrative costs. The most effective practice is budget monitoring.

Budget monitoring gives an organization the ability to identify and explain the causes of budgetary variances, and that allows boards to adapt as necessary. Reporting revenues and expenses properly is important for public monitoring because sites such as Charity Navigator rank organizations based on financial metrics. An organization’s rank on this or similar sites can have a noticeable impact, both good and bad.

How can board members help their nonprofit build for the future?
Young professionals can be a valuable resource for nonprofits. Some communities hold workshops in which nonprofit board members, young professionals and leaders from diverse backgrounds can gather to discuss processes, issues and best practices to collaborate and help each other solve problems. These are not-to-be-missed events that, if mined carefully, can help nonprofits improve their board representation today and into the future.

There are several reasons a nonprofit should have board representation at young professional meet-ups. For instance, young professional groups serve as a pool of valuable future candidates for nonprofit boards.

Further, some organizations rely on their heavy-hitter donors and ignore young professionals, assuming they aren’t in a financial position to donate as much. Yet, as a recent study shows, the average millennial has a network of 250 people. This is important for nonprofits because it’s a means of securing future donor pools, especially if their current base may not be able to donate more in the future.

How can nonprofit boards be more effective recruiters?
Assign a member to the position of lead recruiter, which will help an organization hone in on the skills that best align with the group’s needs.

The lead recruiter should be someone who is proactive, can easily identify the organization’s needed skillsets, and is able spend time with new and prospective members. Formalizing the recruitment process also ensures everyone has an equal opportunity to apply.

Nonprofits should talk regularly with their staff, board, volunteers, donors and other stakeholders to share best practices and review current strategies. This will go a long way toward ensuring all facets of the organization are operating uniformly and in a way that keeps the mission at the forefront.

Insights Accounting is brought to you by Barnes Wendling CPAs

Sales tax implications for sellers in the Amazon Marketplace

It’s reported that some 2 million sellers are using Amazon Marketplace today, which represents a 50 percent increase over the past two years.

Unfortunately, not all who conduct business through the online retailer understand that sellers are legally responsible for collecting and remitting sales tax based on where they have a sales tax nexus. Some assume that because Amazon has a system to automatically calculate and collect sales tax for sellers that there’s nothing else to do. But companies that don’t keep track of their sales tax obligations may miss payments and be subject to fines and penalties.

Smart Business spoke with Jeff Mallory, tax partner at Clarus Partners, about keeping up with tax obligations as a seller on Amazon Marketplace.

Why might collecting and remitting sales tax concern Amazon Marketplace sellers?

Sellers are increasingly being required to house merchandise in one of Amazon’s warehouses as the company pushes its Prime membership program, which is predicated on having an order shipped to the buyer within a day or two. With Amazon recently adding warehouses in Ohio, Massachusetts, Minnesota, North Carolina and Kansas, sellers could have their inventory placed in any of these locations. If their products are located in any of the Amazon warehouses, the seller would be required to collect and remit sales tax to the location from which the goods were sent.

This has become more of an issue for businesses because some sellers might not realize that their inventory is in a state outside their headquarters and that they subsequently need to pay sales tax to the state holding their inventory.

Additionally, states have been losing billions of dollars in sales tax revenue as online retailing has grown. States are crafting legislation that targets online retailers to ensure they collect and remit sales tax on goods sold within their borders.

What should companies know about the sales tax implications of selling through the Amazon Marketplace before they get involved?

The legal burden is on sellers to collect and remit sales tax to the states or localities in which they have a sales tax nexus, which, generally speaking, is a physical presence in a state — typically an office employee or a warehouse — but it also means where company inventory is stored. A feature of the Amazon program is that Amazon collects sales tax where applicable, then passes it to the seller through disbursements where the seller is required under the law to file a sales tax return and remit the tax to the respective states or jurisdictions. But that doesn’t mean Amazon’s automated reporting and collection processes are always accurate.

How can sellers ensure they’re complying with states’ sales tax obligations?

Sellers can track where their products are located and the taxes Amazon has collected through the online retailer’s website. A monthly report can be generated that shows all sales, their destination and the amount of tax collected.

It’s advisable for sellers to periodically review this information so they are clear on where their products are housed and that Amazon is correctly calculating the taxes owed in each state. Maintain a record that’s kept independent of Amazon’s tracking and reporting features. Every seller should have processes and procedures in place to not only review what Amazon has collected, but make sure that if it was not correct, the seller remits the right amount of tax on time with its sales tax filings.

Sellers need to register in all the states in which they have a nexus and file returns on a periodic basis. That could mean submitting monthly or quarterly sales tax returns and payments, depending on the state or jurisdiction.

It’s a good idea for sellers to consult with a tax adviser to make sure it is clear where they have a tax nexus, and that they know the laws and the rules for individual state’s tax collection and remittance procedures.

Insights Accounting is brought to you by Clarus Partners

An A to Z overview of 401(k) plan sponsorship

As both a primary vehicle for retirement savings and a key component to a company’s benefits package, 401(k) plans have become ubiquitous. That doesn’t mean they’re without challenges.

“Employers have a number of obligations as a 401(k) provider, especially for those that choose to administer their own plans,” says Debra Pitschman, CPA, a partner at Case | Sabatini. “Some can manage these responsibilities themselves, but most use a third-party provider.”

Smart Business spoke with Pitschman about the major considerations for companies as they choose, institute and manage a 401(k) plan.

What should companies look for when choosing a 401(k) plan?

The quality of the 401(k) plan has a direct impact on an employee’s ability to retire. Keeping this in mind, companies should be sure to look into three main areas when choosing a 401(k) plan.

First, structure your company’s 401(k) plan in a way that encourages the maximum amount of savings. Doing so requires an understanding of the tax savings for the employee and employer contributions.

Fees and structure are other aspects to explore. Ideally, fees should be reasonable, well monitored and clearly communicated to participants. Smaller employers may prefer bundles that provide all the investment, record-keeping, administration and education services into a packaged fee.

Third, looking at diversification for fund selection is important. A good plan offers investments that help employees build high-quality portfolios. A company should aim to offer at least 20 different choices of core assets that include stocks, bonds and mutual funds, along with cash equivalents.

What are the employer’s obligations?

Employers have many obligations when administering a 401(k) plan. Those include:

  • Plan compliances with the plan document and any adoption agreement.
  • Ensuring that the company follows the requirements with the plan for contributions, loans, forfeitures and distributions.
  • Understanding and communicating the service provider’s agreement for maintaining the plan.
  • Keeping the plan up to date with current regulatory rules.
  • Making sure the plan is properly maintained to prevent penalties.

This is not an all-inclusive list of all the responsibilities of a plan sponsor, but it should give employers a sense of their myriad obligations, some of which carry the threat of penalties if rules aren’t followed or deadlines are missed.

How can companies ensure they have adequate employee participation?

Ease of entry and exit improves employee participation in the company 401(k) plan. Implementing auto enrollment for new hires is one way to accomplish that.

Another way to boost participation is by increasing the matching contribution.

Companies could also simplify investment options for employees by including fund options that have a target retirement date and a coinciding investment schedule.

What are the common mistakes 401(k) plan sponsors make?

It is often the case that the plan sponsors fail to remit the employee and employer contributions in a timely manner. They also tend not to follow the plan document correctly when it comes to participation, contributions, loans and distributions.

Problems also arise when employers do not calculate the deferral on the correct wage base. Another complication is not reallocating forfeitures to participants in the calendar year incurred.

What should companies look for in a third-party provider?

Among the core competencies to look for is how the provider processes information. This would include how the provider processes enrollments, allocates contributions, distributes loans, issues statements and manages customer support.

There are a variety of companies that can help. The key is to find someone with experience managing 401(k) plans or working with an auditor to ensure the program is complying with all the applicable laws and regulations.

Insights Accounting is brought to you by Case | Sabatini

Why EBITDA matters in M&A

Business leaders are used to the scrutiny of audits, but that doesn’t compare to the fine-toothed comb of due diligence before a sale. A transaction team has a tighter scope, says Ross Vozar, managing director of Transaction Advisory Services at BDO USA, LLP.

EBITDA, or earnings before interest, taxes, depreciation and amortization, is a typical business metric. Generally speaking, the value of a company is a multiple of that EBITDA, based upon the industry you’re in. But buyers don’t want to pay for a non-recurring event and sellers don’t want to be penalized for a one-time expense.

“There needs to be clear expectations on both sides. When these aren’t identified upfront, it can slow down or kill a deal,” Vozar says. “There can be hard feelings, because one party feels like the other is hiding something.”

To avoid confusion, sellers are hiring transaction teams to get a credibly backed and true value on the business before they put the company on the market. This “sell-side quality of earnings” provides a clear understanding of sustainable earnings that supports valuation in a M&A process.

Smart Business spoke with Vozar about the difference between reported EBITDA and adjusted EBITDA and how it impacts value.

How might EBITDA change?

Let’s say a company that manufactures roofing products has an EBITDA of $10 million. The industry multiple is six times EBITDA, so the business owner expects the business to be worth $60 million. The owner settles on a buyer. However, during due diligence, the buyer performs a quality of earnings analysis on that $10 million EBITDA, which in part seeks to understand how the company earns that $60 million value — who are the customers and what is recurring and non-recurring income.

The year prior, several hurricanes hit the southeastern U.S. This company, which sells its roofing products through Home Depot, sees sales spike in that region. The quality of earning analysis determines $1 million of income isn’t sustainable; it’s from a non-recurring event when people replaced roofs. The EBITDA is adjusted from its reported number, and value drops to $54 million. The problem is that the seller expected to get $60 million.

What are other areas that commonly cause EBITDA to be adjusted during a transaction?

Depending on the size of the business, sometimes owner personal expenses are charged to the company. Sellers want to identity those because going forward the business will not incur those types of expenses, which will increase EBITDA.

Another item that will be missed in reported EBITDA are professional fees. For example, a $100,000 legal settlement was correctly reported, but the accompanying $25,000 in professional legal fees could be buried in another line item. Both expenses are non-recurring and can be taken out.

An area to watch is self-insurance reserves used for workers’ compensation and health insurance, which fluctuate. Certain large claims could be justified as non-recurring.

In the case of audited financial statements, some expenses and incomes may be below an auditor’s scope and, as such, aren’t adjusted as part of the audit. Typically, the concept of scope isn’t used in a quality of earnings and the threshold of significance is lower. When multiples of EBITDA are used, a $100,000 item, for example, may impact valuation by $600,000. It needs to be correctly recorded and classified.

Also, most income statements have an ‘other income and expense’ line item that is either a catch-all or kept separate to identify the amounts as non-operating. Other income and expense needs to be scrutinized to understand if these items are, in fact, non-operating or non-recurring in nature.

What else do business owners need to know?

Hire the right adviser, or risk being left in the dark. These kinds of transactions aren’t familiar to many successful business owners. They don’t understand how reported and adjusted EBITDA differ. Instead, they rely on key advisers to point them in the right direction — and that doesn’t always happen.

It’s worth the cost, time and effort to hire a transaction professional. Northeast Ohio is undergoing the most robust transaction environment of the past 10 years. Buyers and sellers both need a clear understanding of a company’s financial history, in order to consummate a transaction.

Insights Accounting is brought to you by BDO USA, LLP

Plan now to create the life you want in retirement

The word retirement takes on different meanings for different people, making retirement planning unique in each case. The commonality is that individuals are responsible for making sure they have enough money saved to fund their retirement.

“Retirement planning can be complicated and stressful,” says Christopher D. Bart, managing director and partner at Aurum Wealth Management Group, a Skoda Minotti firm. “The difficulty has increased as people are living longer and in some cases spending more years in retirement than working. This is why people need to approach retirement planning with realistic expectations of what life for them will look like in their retirement years.”

Smart Business spoke with Bart about preparing financially for their retirement years.

What, generally, can be said of the state of mind of people as they think about how they’re positioned for retirement?
For many, the concern is determining how much money they’ll need to retire and be able to maintain their lifestyle or even meet their expenses through their retirement years. One study found that only one out of every five people believe they’ll have the money they need for retirement.

Business owners have a unique challenge when it comes to retirement. They’re accustomed to drawing money from their businesses for personal needs. But once that source of income is sold, they’re left with a pool of money and often uncertainty about how they’ll continue to generate an income from that liquidity event. It can be a difficult transition to make.

How can people ready themselves for retirement?
There is what’s referred to as the retirement equation, which is really just thinking through the factors affecting retirement that can be controlled, that can’t be controlled and those factors that can only be somewhat controlled.

For example, no one can control the performance of the markets or future tax policies. People can have some degree of control over employment earnings and duration, and can completely control their savings, spending and investment decisions.

A sound plan involves making the most of the factors that can be controlled and not being overwhelmed by what can’t be controlled.

What is the value of an adviser for those who are working out how to fund their retirement?
There is an element of fear involved in retirement planning that makes it a difficult exercise. It can be overwhelming for some with all the decisions that need to be made. Someone who plans to retire at the age of 60, according to current life expectancy, could live to age 84, which is a lot of years to consider.

The value of an adviser comes from his or her experience, knowledge and ability to provide guidance that aids the planning process. An adviser can help prevent investors from making the wrong decisions at the worst times.

The right adviser can help a person create a retirement plan and keep them accountable to it, so the earlier an adviser can get involved the better.

What are the characteristics of a good adviser?
It’s important to find someone who can be trusted. Understand the type of clients he or she deals with — is it preferable to be a big fish in a small pond or a small fish in a big pond?

Also, understand how that person is compensated. Determine if there are conflicts of interest and how they might affect the person’s advice.

Find out if they are held to a fiduciary standard or a suitability standard. This will dictate what liability that adviser has for the advice he or she gives.

There are many factors someone must consider to ensure that they’re able to live the way they want in retirement and not run out of money. Whether working alone or with the help of an adviser, it’s critical to have a plan in place sooner than later.

Insights Accounting is brought to you by Skoda Minotti

Revenue recognition standards are changing. Here’s what you should know.

Revenue recognition standards determine both how much and when revenue is recognized on the income statement. Any company keeping their financial statements under generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) that enters into contracts with customers to transfer goods or services would follow the revenue recognition standards. And those standards are changing.

“Revenue is one of the most important measures used by management and investors in assessing a company’s performance,” says J.W. Wilson, CPA, director of accounting and auditing services at Clarus Partners. “So it is important to record revenue correctly and consistently.”

Smart Business spoke with Wilson about the changes to revenue recognition standards and what companies should know.

What should companies know about the new revenue recognition standards?

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued new accounting standards for recognizing revenue from contracts with customers. The old rules were based on industry-specific guidance, which resulted in different industries recognizing revenue differently for similar transactions. The new guidance is industry-neutral and therefore more transparent. It should improve comparability of revenue recognition across entities and industries.

Who is affected by the change?

Any company that keeps its financial statements under GAAP or IFRS will be affected by the change to the revenue recognition standards. Companies that have not done so already should determine if the changes affect their business. This is especially vital if a company’s financial statements are given to outsiders, such as banks, regulators and investors.

The changes also affect any business that has contracts with customers to transfer goods or services. Technology sectors, such as software, engineering, construction and automotive are examples of industries that will certainly see a change.

How do the new standards affect how companies recognize revenue in contracts, in certain transactions and in financial reporting?

The new standards established the core principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

One example would be software companies. The new rules will replace the current software recognition guidance under GAAP and may accelerate the timing of revenue recognition compared with today’s rules. That’s in part because under the old rules revenue was recognized once the risks and rewards of ownership transferred to the end consumer. Under the new standards, revenue is recognized when a customer obtains control of the product, even if they have a right of return or a price protection option.

When will the changes go into effect and when will companies need to implement the new reporting?

For private companies and nonprofits, the new guidance will be required for annual reporting periods beginning after Dec. 15, 2018, and interim and annual reporting periods after those reporting periods. Private companies and nonprofits may elect early application, but no earlier than the effective date for public companies.

For public companies, the new guidance will be required for annual reporting periods beginning after Dec. 15, 2017, including interim reporting periods within that reporting period. Early application is not permitted.

No business owner likes surprises. Companies should take it upon themselves to determine sooner, rather than later, whether the new standards affect their business. It not only affects their financial reporting and accounting procedures, but it also could affect other areas, such as company commission polices and how customer contracts are written.

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