Finally, we reached the last part of the “7 Basic Things You Need To Know During Start-up Year”. It was so much fun writing the last 6 issues, and hopefully they have been helpful information for new entrepreneurs, and for some existing ones.
Again, here’s the complete list of the 7 Basic Things You Need To Know During Start-up Year:
(1) Types of Business Organizations
(2) Choosing Business Products or/and Services
(3) How to keep business records
(4) Hiring Employees or/and Contractors
(5) Year-end requirements
(6) Dealing with the tax authority (IRS)
(7) Preparing for the next fiscal period
Preparing for the Next Fiscal Period
New fiscal period is just like New Year. It’s a fresh new start for some things that you wanted to accomplish in the last fiscal period, but just didn’t happen. Whatever they are, this is your new chance.
Things to Do during the Next Fiscal Period:
a) Consistency in record keeping
b) Reconciliation of prior year’s amounts
c) Meeting company’s obligation to governing agencies and others
d) Interim financial statements reporting
e) Managers finding better ways of reaching goals and objectives
Consistency in Record Keeping
There should be a consistency in business record keeping. It is required by law, for fair presentation of financial statements, and in accordance with generally accepted accounting principles (GAAP).
To start the new accounting cycle, last year’s financial records will be used as the opening balances, except for income and expenses amounts. Last year’s Income and Expense amounts which have been brought down to zero balances, and closed Income Summary to Retained Earnings will be applied. Closing last year’s books is a way of separating accounting business activities for each year. Balance Sheet accounts are considered as permanent accounts, so there will be no closing entries required during end of fiscal period, ending balances will be the opening balances for the new fiscal period.
Reconciliation of Prior Year’s Amounts
Reversing entries for certain adjusting entries performed during end of prior period are reversed on the first day of the accounting period, except for depreciation, bad debts and other estimated amounts adjusting entries. Though reversing entries process is considered optional by most accountants, however reversing entries are applied for the sake of simplification of subsequent transactions, as if adjusting entries were not recorded in the prior year. This method is more like a bookkeeping mechanics than an accounting’s concepts, principles, and more on accrual than cash method basis of accounting.
Year-end book and bank reconciliation should be performed, making sure that all deposits in transit, outstanding cheques, and bank charges are accounted in prior year are matched and reflected in the financial statements. In addition, all prior period accounting errors and adjustments are accounted as well. Depending on each transaction, they are either added back/deducted in the beginning balance of the current fiscal period’s Statement of Retained Earnings, to correct/adjust balance presented in the current Balance Sheet of the company.
Meeting Company’s Obligation to Governing Agencies and Others
Just like in our personal life, we have to make sure that we have the necessities to perform our daily activities. The same thing with business, it has to make sure that it pays its rent or lease (if it doesn’t owned its business place). Also, the company has to have licences to operate the business, thus the company has to renew its business licence and insurance, renew incorporation certificate, vehicle licence and insurance, pays its utilities, and other related due accounts.
Also, making sure that the company files its income tax related to the business, as an owner, partner, or shareholder, as a partnership (if needs to file) or corporation itself. Please refer for more detailed information in dealing with tax authority in my last article, part 6 of 7.
Interim Financial Statements Reporting
Besides the usual gathering of raw data, like monthly bank reconciliation, and recording of other business related transactions, management will always have to find ways of improving the performance of the company. Financial statements serve as indicators of company’s performance, an end product of the bookkeeping cycle, and applicable laws applied during the preparation. Sometimes management will use external auditors too, for additional credibility to financial statements presented.
Management will likely use the most recent financial statements or have an interim financial statements generated each month or every quarter for decision-making purposes. Interim Financial Statements are more for internal use and for specified parties only, not all phases of accounting cycle are performed, thus adjusting entries, closing entries, and post closing entries trial balance are not included.
Managers Finding Better Ways of Reaching Goals and Objectives
Each business is different, thus it is important for managers to make decision according to company’s goals and objectives. Usually managers’ performance on their day-to-day operation of the business is reflected on financial statements presented. Financial statements are usually influenced by users’ requirements, preparer’s role and intentions, complexity of business, and the company’s needs of funds. Thus, managers should consider accounting policies that fit for the company’s situation. They should be able to find ways of solving issues through the ability of evaluating the situation and applied appropriate solution.
Managers should always focus on objectives, facts and constraints for every situation. They have to be able to interpret the financial statements properly, as to the preparer’s criteria used, materiality level placed on each transaction recorded, and to use it appropriately in the decision process. Also, there should be consistency on criteria and policies applied in order to established credibility on the financial statements.
Furthermore, managers should find ways of designing a system how to deal in times of inflation and price changes, which historical data and the accrual method might not be the best basis for decision making for financial statement users. It is important for managers to see the true picture of its financial statements, especially for non-cash items. They should be able to find alternatives and apply measurement that make sense and address the issue.
Managers should monitor items in the balance sheets that are susceptible to fast deflation, like long-term assets such as fixed cost, investments in stocks, and derivatives (financial instruments). Also, keep an eye on your stocks and bonds for dilution and higher interest on long-term liabilities. Though owners enjoy the tax deductibility of interest on borrowed funds for investment, but for how long you can pay these higher interests. Market risk can definitely affect your business, especially when it becomes larger, thus extra monitoring is crucial.
Also, managers should be able to monitor profits generated and the liquidity of the assets acquired. They have to make sure that before directors can declare dividends to shareholder or owners can withdraw funds, that funds are coming from company’s earnings and not from owners’ investments. This is to ensure the long-term existence of the company. Thus, application of certain ratios are encouraged as to profitability, liquidity, activity and coverage ratios of the company’s financial statements amounts, especially ratio analysis such as return on investments, debt-to-equity ratio, and so on.
In times you might expand your business and have subsidiaries. As a parent company, though overall you have healthy net income showing on your consolidated financial statements, but keep an eye on subsidiaries that are losing money and deal with them separate for improvement. Likewise, in some cases, your income statement might be showing a net loss because of a huge amount of depreciation or/and losses related to your fixed and related assists. Keep an eye on the difference between costs vs. expenses that affect your net income.
Running a business can be so exciting if you have the know-how-to-survive-and-succeed kit. A good manager can easily detect problems, prioritize their importance to the organization, always finds effective solution or best alternatives in solving the problems. They are always able to provide answers to questions such as: Is the company bringing enough funds to meet its obligation? Is the company making healthy profits? Are the shareholders satisfied with their returns on their investment? At what level does the company credit rating is? Is there any room for improvement and expansion?
Most managers are problem solvers, but there will be times when they get burn out and lost their motivation. Therefore, directors should be able to step in this situation, encouraged and inspired managers and all staff working under them to always think the best for the company. The company might be able to generate additional income through expansion of the business, produce and sell other related products, hiring more people for support. Always remember, good people are assets to your company. Try to help and support them when they need you. So, if the business is doing well, probably an increased in wages, or provision of added benefits, like bonus plan, stock options, or other incentives on productivity are not too much to ask. They are definitely a few of driven factors in the retention of staff, long-term existence and profitability of the company.
I hope all the “7 Basic Things You Need To Know During Start-up Year” have been helpful to you, either you are just thinking to start your own business, or even for current businesses that just need some extra pointers.
Hope you like browsing the inserted pictures. They came from the 1000s of photos I collected. Also, make sure to "click" all the "caption/wordings" at the bottom of each picture (you'll be surprised where they are linked to!:) They are not related to the topic of this post (of course). I thought it would be nice to insert them, just to give you a break while reading this post. Until then.
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Contact:
Earla Riopel, BSCom(USA), DipAcc(UBC)
