CPA Archives | Page 2 of 15

Business Security in an Insecure World

Over twenty-five years ago I met with a new client who told me why he fired his last accounting firm. He received a phone call from a good samaritan that the person had found
my client’s tax records in a phone booth. Apparantly, his CPA (from one of the largest CPA firms) had left my client’s tax records when he stopped to make a call in a phone booth.

There are so many opportunties in every business week, to compromise security. The article, 3 big security blunders You don’t know you’re making by Angela Stringfellow set up some blunders, guidelines and solutions:

Not implementing a mobile security policy. Protable devices are a security nightmare. In our CPA firm, nobody is to keep client’s records on a USB drive. We require that if a CPA (or bookkeeper) transfers information from a client’s computer to a laptop computer to be worked on later, we require their USB drive be erased and access to the laptop have a password. In addition, if the CPA (or bookkeeper) are accounting records, the access to those records be secured by a password. The mobile device referred to in the article are devices like cell phones and ipads that can log into a company’s server. For those kind of security breaches, the author recommends NQ Mobile to secure all mobile devices across the board.
Using cloud-based applications without security precautions. More and more CPA and accounting applications are developed on a cloud. You wonder how secure they are, and how secure your connection is. The author recommends that you understand that a cloud has 24/7 security with an adequate staff. As CPA’s we are the hub of clients’ information, so our security should be deliberate.
Failing to test third-party applications. This flaw is more technical than most CPAs can understand, but what the author states is that eventhough third-party applications test for security, a company’s internal security system can be compromising them. “The most common—and most dangerous—security flaws introduced by third-party apps include SQL injection and Cross-Site Scripting (XSS),” according to the author. The bottom line is to hire a company to assess your security protocols, and how that interact with third-party software.

Your company’s data is your lifeblood. But your concern must go beyond the company’s computers and to those who share your data like your attorney and CPA. The analysis should also work its way to your company procedures and empolyees. As a CPA firm, we have different measures to secure client’s check stock, tax returns, financial statements, personal information, etc.

The Art of the 21st Century Certified Public Accountant in Business

Twenty-five years ago worked in a CPA firm with a woman whose father directed orchestras for major films. She informed me about an orchestra director secrets like the isometrics he would perform to build up his arms, the focus of his eyes, and the rhythm of his body language. The artistic part obviously was the message he was projecting the orchestra to play. The “business” though, was the set of tools and discipline that he had mastered in order to project his musical vision. Both were equally important.

When people think of a CPA, they usually think of a tax preparer, a bookkeeper, or on rarer occassions, a business specialist. This limited view is partly the profession’s fault, but for those who are creative, the CPA profession has changed to an art.

One definiton states that “Art is any field using the skills or techniques of art.” Or better, ” Art is the quality, production, expression, or realm, according to aesthetic principles, of what is beautiful, appealing, or of more than ordinary significance.”

Some businesses dwell in the arts, but all businesses can be run artfully regardless of their industry. In the past, the CPAs have exercised only a skill set to managing a business. Like the orchestra leader, they honed in mechanics to achieve a certain end. This is very left-brain, and analytical. The CPA of the 21st Century is creative, right brain, though most CPAs don’t know or understand this yet. They are a dying breed.

What 21st Century business NEEDS from a CPA is a “whole brain” approach. Not a CPA that can just produce historical financial statements, prepare tax returns, and do payroll. Those pieces are the musical score of a business. What 21st Century business needs from a CPA is the business tempo, dynamics, and feeling. In other words the strategic plan and its execution. So how does a CPA do this? Pretty much by following some simple rules like any business:

Focus on what the customer needs and not what you can deliver.Listen to the customer. What pain do they have? The CPA has the the firstaid kit to help it, but most CPAs just take out the same band-aids because that is what they know best. By strategically addressing the client’s vision, a CPA can develop a strategy and monitor its execution.
Do it today. Like any business, a CPA should not put a client’s strategy on the back burner. Telling the client what they did last month is going to have limited effect on how the client can grow tomorrow.
Train your staff to their level of incompetency. I have seen too much talent wasted because CPA partners refuse to use skills of their employees on all levels. This leads to a lack of employee motivation, and reluctance to join in the CPA’s vision, and the vision of the client. People want to “matter,” and the matter with unmotivated people is sometimes their stogy bosses. Develop each person and the CPA firm will provide the clients with value that meets the client’s needs.

The new CPA is artful, and not just methodical. No other profession sits at the core of business decisions in almost any industry than the CPA. But, the old style CPA will not adapt and will die off as they retire. Already the market is shrinking for the traditional services with new tax software, better bookkeeping software, and encroaching professionals from other disciplines.

The new breed is artfully right-brain, and methodically left-brain, and so are our clients.

To Be, Or Not To Be an S-Corporation, THAT is the Question:

Whether ’tis Nobler in the mind to suffer the stings and angles of outrageous tax planning, or to take hold against a sea of tax pitfalls, and by addressing them : to not cry, to sleep more soundly.

As CPAs, we come across some pretty poor tax planning and accounting with new clients. Sometimes we had to amend tax returns prepared by another CPA.

Jose Zabrano, CPA addressed the need for better planning concerning the C-corp/S-corp question in How Changes in Corporate Tax Rates Can Affect Choice of C vs S Corp

Any time you make decisions of this type, you should always work with a CPA, but you should know the basic differences in the two types of tax designations:

Who pays the Taxes? Normally the main difference between the two is that C Corporations pay their own taxes at their own rates. (This of course is the main deciding factor in Jose’s article.) An S-corporation income or loss passes through to the shareholders’ individual returns where the taxes are paid at their rate.
Medical Deductions:We usually deal with closely-held or sing shareholder companies so medical deductions are an issue. C Corporations usually allow the owner shareholder to deduct their medical insurance and out of pocket medical costs. S Corporations do not with one exception: If 2% + (ownership) shareholders want to deduct their medical insurance deductions, they can if you do a tricky W-2 maneuver allowing them to take the deduction on their personal returns. As CPA s, we still struggle with payroll companies to get this right. This must be done by December of each year.
Tax Basis:Shareholders who want to deduct losses that pass through from their S-Corporations must be careful. In order to deduct these losses, you must have a “tax basis.” In other words, you must have “skin in the game.” In its most simplest form, what this means is that in most cases, you cannot deduct losses if your capital account is negative. As a CPA, we compute basis and at-risk calculations to determine if a loss is partially or totally deductible, or does it get carried forward.
Reasonable Compensation: What’s reasonable? “Reasonable” is what the IRS says is reasonable, so a CPA must consult you as to your salary and draws in an S Corporation. This is a hot button for the IRS because shareholders skirt paying payroll taxes on draws. C- corporations do not pay draws, but dividends which are taxed currently at capital gain rate if they qualify.

As CPA s we see a lot of the same mistakes in S Corporations and C Corporations. We stress that clients plan during the year so as to not have any surprises.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

S-Corporations: Watch out for those Glacier Crevasses

Have you ever watched a mountain climbing movie or documentary where they have to cross a glacier that is covered with snow. The climbers move at a snail’s pace checking the ground in front of them for a hidden crevasse. One bad step and they can drop a hundred feet into a icy grave. Certainly not the environment for a mild mannered CPA.

Maybe this is too dramatic for operating an S-corporation, but the wrong moves can send you plummeting into tax despair. Here are a few CPA tips if you are a closely held company:

Make a timely and valid election. The IRS has eased up on the deadlines for S-corporation elections, but don’t take them for granted. Always make your elections timely, and if not, try to fit into one of the exceptions that gives you a grace period.
Pay yourself a reasonable salary. As CPA’s we see many owners trying to take a disproportionate amount of draws as opposed to salary. The IRS doesn’t like this because the owner/officer is skipping out on paying FICA and medicare withholding. Make sure your salary is reasonble for the service you are providing.
Report medical insurance deductions properly. A 2% + owner cannot deduct the medical insurance in its S-corporation. There is a tricky manuever that you have to add the insurace to your W-2; deduct it as part of your salary; lastly take the insurance as a self-employment health insurance deduction on your personal return. It usually takes a CPA to discuss this with your payroll service.
Don’t Be Second Class. S-corporations cannot have more than one class of stock. Do not inadvertantly create a second class stock by having different voting rights, or disproportional draws.
Watch out for your Tax Basis when Deducting a Loss. Just because you have a loss does not mean you can take it. You must have a tax basis to do so. In other words, you cannot take out more losses than what you have invested plus profits. The basis calculation should be updated every year.
Have your CPA plan your tax strategy each year. We find many new clients whose CPA’s ignore the S-corporation in tax planning. You must dive into it during the year, not March of the following year.

These might seem tough, but your CPA should automatically monitor the things above. To not do so could present shocking surprises in April. Check with your CPA before implementing any of these points.

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Bad Strategies are Like Undercooked Pasta…Nothing Sticks

I worked in my family’s Italian restaurant as a pizza cook during my teen years and even today I still have to taste pasta to know for sure that it is done. Another way is to throw it against the wall and see if it sticks. That’s too messy.

So it is with a bad strategy. No matter how hard you try in implementing it, it will remain a bad strategy. Charles Roxburgh tackled this problem in his article, Hidden Flaws in Strategy, and why executives back them. His article addresses the problem from the point of veiw of the human brain function. I refer to that article from time to time, but will point out other practical aspects:

Overconfidence: Roxburgh’s article discusses the overconfidence of companies like start-ups. In other words, “rose-colored glasses.” We prepare business plans in addition to strategic plans. I always try to interject a business strategy for those companies that hire us to prepare business plans. I have found that entrepenuers that are trying to impress their investors usually fall into this category. So, as a CPA, I have to gently bring them down to earth. One of my approaches is to lay out all assumptions so potential investors in order to inform potential investors. Another approach is to have the client embrace their weaknesses. Most clients ignore that, but want to dwell on their strengths. In several instances we were able to turn their weaknesses into strenghts. In any event, as CPA’s we have a special point a view because we see both the big picture and the minutia.
The Sunk-cost effect: I like this concept from Roxburgh because I have seen so many small companies continue on a bad strategy until they implode. I have found it very hard to change the course of an executive whose company is plummeting downward. The gambling instinct comes out and they refuse to address the problem. I refer to it as the “ostrich stage,” because they will stick their heads in the sand and not make the hard decisions that usually require a different strategy. I have found the solution to this is to closely monitor your startegy with metrics, and if the metric(s) start pointing south, do not hesitate to explain it. This is why it is imperitive to have a current set of accurate accounting records, a condition we don’t find very often with new clients.
The herding instinct: Roxburgh cautions about following the herd off a cliff. The situation that comes to my mind are bankers in the United Kingdom who backed the Southern Confederacy’s “Cotton Bonds” in 1863. Due to the taking of New Oleans and the Union’s victory of Vicksburg, the price of cotton skyrocketed because of the Union blockade. Some UK investors of that time herded together to buy the Confederate Bonds presumably backed by cotton) which supported the war. Unfortunately, they usualy couldn’t get their hands on the cotton collateral, the South lost, and so did the investors. This is a simplistic view of the events, but Illustrates how the herd can lead others into financial ruin.

Another example of the “herd” factor was when my brother-in-law tried to get my wife and I to buy into a ponzie scheme where people were doubling their money in a week. We laughed, but didn’t like hearing of family and friends who “bought” into the hype and lost their $1,500 investment within thirty days.

The main takeaway from this article is to measure. Like many say, “If you can’t measure it, you can’t manage it.” These points can help you to measure your strategy and to make the necessary adjustments.

CPA Advice on How to Grow a Business of Any Kind

I grew up in a family of entrepreneurs. Most of my uncles were some form of contractor: General, electrical, and plumbing. Prior to becoming a CPA, I learned a little about these trades from them which helped me when I built my own house. They were (and are) masters at their trades and deserve the greatest of respect.

Yet, as a CPA, I have learned that a great tradesman does not necessarily translate into a successful entrepreneur. In fact, they can be completely opposite. A tradesman may focus on detail and create a great product, where an entrepreneur would focus on the vision and produce products to fulfill it. I always joke that a small business person usually wants to know two things: 1) What are my sales? and 2) Do I have enough cash to make payroll?

CPAs run into this issue, too. Many of us tend to focus on the minutia of getting a job done and not on the big picture of running the business towards its long-term vision.

If this sounds familiar to you, here are some pointers and sources:

Be a hedgehog. The hedgehog is not as cunning as the fox, but does something that makes it the world’s best defender against the fox. It rolls up into a little ball and sticks out its spikes. According to Jim Collins in Good to Great, you can be a hedgehog if you do three things: 1) Be deeply passionate about what you are doing, 2) Do something that makes money, and 3) Be the world’s best at what you do. The intersection of these three requirements will brand you into a specialized business in which others will struggle to compete.
Focus on your customer needs, not the industry. The Blue Ocean Strategy by Kim and Maugorgne shows you how to extrapolate unnecessary services that the industry provides, but the customer doesn’t need. The strategy book also describes companies that have transformed their businesses to a level to make competition irrelevant.
Manage the business, don’t let the business manage you. Michael Gerber’s E Myth describes entrepreneurs that let their businesses run them into the ground, and destroy their quality of life. This is the most common problem with trades people.
Know where in the cycle your business is at all times.Les McKeown’s Predictable Success discusses the cycles as: Early struggle, fun, whitewater, predictable success(balance), treadmill, the big rut, and death rattle. Predictable success stage has the right amount of systems and processes to tame a company.

Though we are CPAs, we look at out client’s businesses through the lenses of strategy and planning. Small business entrepreneurs must be measuring their businesses in light of their visions and short-term objectives in order to accomplish their goals and desires.

What Are You Worth? Or, Are you a Guppy in a Red Ocean, or A Whale in a Blue Ocean?

Two respected strategist friends and I had lunch discussing new service businesses. Erik asked how much a person should charge when creating a newer field. Robert responded that there is no magic “price,” but that you should base it on the value you are creating (or saving) the client. In other words, if your services are saving the client $1 million dollars, a fee of $50,000 is not unreasonable, especially if nobody else has your skill set.

Being a CPA/Strategist, The Blue Ocean Strategy popped into my mind. In a blue ocean, you are selling a unique product or service in an “ocean” that was not previously inhabited. If your product or service is offered by others, you are swimming in a red ocean where sharks are eating each other to lower their value and personal worth. These concepts are outside the normal business mentality usually used by CPAs.

In other words, when you swim in a red ocean where you compete by price, you have reduced yourself to the level of a commodity. When that happens, it is time to change your product or service. Even though you might rely on your CPA (as your business consultant) to tell this, he/she probably won’t be able to because they deal in historical financial statements.

Very few people look at their careers in such a light. Their strategy, if they even have one, is sometimes to do what someone else has done, but cheaper. Sure, you can say they want to perform “better service,” but even that has limitations. As a CPA, I have seen companies wither away because they cannot get out of this commodity rut. Eventually they lower their prices so much, they lose sustainability.

So in this economy when everyone is changing so quickly, what can a person do in business? One way is to follow Jim Collin’s business suggestion, The Three Circles of the Hedgehog Concept. One circle is “What you are deeply passionate about,” the second, ” What drives your economic engine,” and third, ” What you can be the best in the world at.”

Consulting as a CPA, I have found these circles to work with personal careers, not just businesses. Where the “hedgehog” part comes in is the hedgehog outsmarts the fox by just doing one thing: rolling up in a ball. The fox is very intelligent and tries many things, but the hedgehog just does one and survives.

But what is the intersection of the three circles? Jim Collins could say that it is the Big Hairy Audatious Goal mentioned in his Built to Last book.

I am not saying that the metrics that you CPA provides to your company are not valuable. But, these are indicators of whether you are following your vision. You need the vision, the strategy, the tactics, and then the benchmark metrics. To do otherwise is running your business blindly.

As a CPA, I tell young business and individuals, that you must find your Blue Ocean before waisting money on a business plan. To dive into a Red Ocean is an hour glass for failure. Once you find your Blue Ocean, you can measure your value to the client and adjust your fee accordingly.

Strategic Leading, A Task Not for the Timid

Recently I led a strategy meeting for the Association for Strategic Planning, Los Angeles Chapter (ASP). What made this exercise unusual is that even though was the Chapter President, I was not the only strategist in the room. In fact, there were several proven strategists who had more experience in me in the area of strategic planning. Moreover, I am a CPA, a profession that usually doesn’t embrace strategy and deals in the past of historical financial statements. So, what is a Strategic Leader?

Cynthia Montgomery’s article How Strategists Lead in the McKinsey Quarterly addresses this question. She offers a few points on what makes a strategic leader:

Meaning Maker: “It is the leader–the strategists as meaning maker–who must make the vital choices that determine a company’s very identity…” There is more to this than strategy charts. The leader has to tap on the personal gifts of key people to implement the vision.
Voice of Reason: “A leader must serve as a voice of reason when a bold strategy to reshape an industry’s forces reflects indifference to them.” At the ASP meeting, we chose not to “check the box” strategy style. We asked the hard questions to arrive at our vision.
An Operator: “A great strategy, in short, is not a dream or a lofty idea, but rather the bridge between the economics of a market, the ideas at the core of a business, and action.” Inadequate implementation is the single biggest failure of strategic plans. The blame would seem to fall on the leader, but leaders, too, sometimes have limited power in corporate culture.
Consistency and Follow-thru: “…facing an overhaul can be wrenching, particularly if a company has a set of complex businesses that need to be taken apart or a purpose that has run its course.” I recall so many “systems” of implementation that are just a regurgitation of the same cyclical analysis. You think, plan, act, re-assess, think, plan, act, reassess, etc.

All of this is fine, but what really makes an effective leader? Jim Collin’s book, Built to Last answers that in five steps:

Level 1: Highly capable individual
Level 2: Contributing team manager
Level 3: Competent manager
Level 4: Effective leader
Level 5: Executive

It seems Ms. Montgomery’s article stops at Level 4 which Mr. Collins defines as a person who “catalyzes commitment to and vigorous pursuit of a clear and compelling vision, stimulating higher performance standards.” Mr Collins goes a level higher which defines Executive as a person “who builds enduring greatness through a paradoxical blend of personal humility and professional will.”

Mr Collins seems to go beyond the function of an individual and focuses on his or her attitude. A lot of his book dealt with those leaders who humbled themselves to lead by serving. Any small business leader should keep this in mind. As Mr. Collins puts it, ” Level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company.” In other words, their ambition is for the company, not for themselves.

Child and Dependent Care Tax Credit

I remember the days when our young ones were in childcare. We would allot the maximum amount allowed under my wife’s flexcare (or cafeteria) plan in order to deduct as much of childcare on our tax return.

However, there are also tax credits you may be able to declare. Always check with your tax advisor before making any decisions, but here is a list of requirements to get you started:

1. Children must be under age 13 in order to qualify.

2. Taxpayers may qualify for the credit, whether the childcare provider
is a sitter at home or a daycare facility outside the home.

3. You may use up to $3,000 of the unreimbursed expenses paid in a year
for one qualifying individual or $6,000 for two or more qualifying individuals
to figure the credit.

4. The credit can be up to 35 percent of qualifying expenses, depending
on income.

5. Expenses for overnight camps or summer school/tutoring do not
qualify.

6. Save receipts and paperwork as a reminder
when filing your tax return. Remember to note the Employee Identification
Number (EIN) of the camp as well as its location and the dates attended.

This list should be considered anytime of the year, not in April for the previous year. Proper tax planning with a CPA can save money. Discuss this with a professional before taking any action.

Source: IRS Publication 503

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Are You Anti-Social Networking, or Is Your Social Networking, Not Working?

Almost two years ago, I invited my social networking guy, Gregg Towsley (of WSI Quality Solutions), to speak at the Association of Strategic Planning, Los Angeles Chapter dinner. He showed my CPA business consultant company’s social profile before and after I hired his him. The screen shot that got a big laugh was my Facebook photo as a CPA business consultant. The before picture was me and my family hiking in Costa Rica. The after picture was me with a blazer, open shirt, leaning against a tree. People laughed and said it was a a make-over.

Afterward, I spoke to Gregg and another social network provider and labelled their industry as individual companies acting as street “criers” proclaiming the benefits of social networking to a world who was passing by them. Every now and then, they would get a shilling tossed into their hat, almost never from CPA business consultants.

That day has gone, and the advent of social networking is about to mature. And you, like the CPA business consultants of the world, can benefit. The article Why You Can’t Escape Social Media Marketing Any More by Brian Proffitt speaks of the current trends. Brian speaks of the social media management tool, HootSuite.

Now Brian cites some “experts” who say that “inbound marketing” is the new thing because it negates the law of who pays the most gets the most from SEO (search engine optimization-bringing people to your site.) Inbound marketing is the concept of earning the attention of prospects by driving them to your site.

They state this fact because with “inbound marketing, there is really a greater value placed on developing relevant content and being genuine.

In other words, the content of this business consulting article will drive people to your web site like it may have done to you.

The experts article advises that you take a deeper cost/benefit look at the following in regards to inbound marketing:

1. Inbound Marketing Strategy and Analysis: They state to review, analyze, and adapt your strategy to improve results. (2 hours per month) As a CPA business consultant, I look at my traffic frequently. However, I could do better.

2. Blogging: As I am doing here, blog. It is a big part in lead generation. My topics as a CPA business consultant include: business finances, strategic planning, personal finances, tax planning, and health care.

3. Search Engine Optimization (SEO): This includes key-word research. As you can guess, CPA business consultant would be a key phrase that would identify us.

4. Pay Per Click (PPC): We don’t pay for my leads, we can’t afford it. I bet the terms CPA, or business consultant costs a lot per click.

5. Social Media: The experts state two hours a day. That is too much for a small business, unless they can hire people to do it for them.

6. Advanced Content/Social Media Campaigns: Webinars, videos, etc. We started monthly videos teaching business concepts called The LA CPA Video blog.

7. Lead Nurturing: This is hard to do even for a CPA business consultant. It takes time and organization to follow up on leads.

If this is all new to you, then you can’t waste any time. You must hire a consultant or teach yourself. You main competitor will be one who has already done this, and you will be shocked on why customers are flocking to his business, not your business.