Profit Matters | AccountingWEB

Profit Matters

by Alex Vuchnich, CPA, CFE - Alex Vuchnich is the developer of Controlzkit an internal controls anaylsis tool and shares his perspective on how audit and accounting theory, technology and professional ethics interrelate to create forward thinking profitable firms.

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If you like many businesses are going through a workout, turnaround or reorganization, either out-of-court or pursuant to a Chapter 11 petition be sure to consider the impact of cancellation of debt income in your workout plan. Loan forgiveness or modifications can give rise to cancellation of debt income which can result in negative income tax consequences for your business or in the case of a pass-through entity at the shareholder level.
If you work with or are an organizations that enter into leasing transactions as lessors you may find the following method of recording leases in Quickbooks helpful. This is appropriate for leasing companies with 50 or fewer tenants who have not already invested in ledger software specific to that industry. Consider this for organizations that own small office buildings, office parks, retail outlets or shopping centers. 
Designing internal control procedures is often met with much reluctance. It can be hard to see the long term payoff of implementing a procedure when faced with the upfront time investment. This is especial true when comparing the costs of implementation to the individual transactions themselves which may each be highly immaterial. However, the payback has to be viewed in the aggregate to appreciate what the long run gains in efficiency that designing and implementing controls provide.  
 Internal controls are one of those things in accounting and finance that are almost guaranteed to cause an immediate loss of attention when presented to small business owners. Bare with me though, as I have a good reason why you should pay attention to them other than the commonly cited prevention of fraud.
A frequent complaint I here when working with small business owners and not-for-profits is that GAAP accounting is too academic and doesn't provide any practical value to their organization. This typically comes up in conversation concerning stock option expensing, straight-lining rents or discount pledges receivables. Granted many of the more esoteric aspects of GAAP do come across as academic even to accounting professionals. {C}
As a follow up to my post early this week regarding the need for business owners to make monitoring their financial statements a priority I wanted to specifically address the issue as it relates to business start-ups.  I have worked with many entrepreneurs so I understand that in the early stages of a start-up all of the attention gets focused on developing the market, making sales, promotion and so on. Many small companies just starting out let this be an excuse for shoddy recordkeeping and a general disregard for monitoring their finances. It's an easy trap to fall into, after all there usually isn't all that much money to track early on so do you really need to monitor it?
 It would seem elementary that monitoring the accounting and finances of your business is an essential control for effective management. But why then are so many business owners guilty of having no idea of the financial position of their company? I see case after case of business owners who are shocked to find that their company is insolvent, that obligations which they personal guaranteed are in default and that they are liable for an assortment of unpaid trust fund payroll taxes?
When I talk with clients regarding why they have not implemented certain internal controls over their accounting system a common response I get is that they implicitly trust their employees. Trust is not a replacement for internal controls (see Trust But Verify ) however many times that is not a compelling argument for business owners. So here is another reason I use to explain why ethical and responsible owners and managers should implement internal control procedures. The reason is simple. Your employees want you to!
 It has always been one of my greatest pet peeves to hear highly intelligent CEOs and CFOs proclaim "We don't do accrual basis except for the audit, we're a cash basis company" or any  other ridiculous statement to the same effect. It as if they think that by uttering this nonsense that suddenly all of their legal obligations, commitments and contingencies just disappear. Of course the reality is that this kind of statement is the result of years of business schools teaching their MBAs and undergrads the 'cash is king' mantra. Since accrual basis accounting and GAAP in particular, from a technical standpoint are generally alien to these individuals the result is to bury one's head in the sand and ignore economic realities. Of course for many companies this often proves fatal to the continuity of the business enterprise.{C}


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