Account Organization – Making more sense of your numbers

The Chart of Accounts…YAWN!  BORING!  WHO CARES? Could we discuss anything that puts us to sleep faster?!

While this topic may not keep you awake at night, paying attention to how your general ledger chart of accounts are setup and organized can go a long way in getting more meaningful information from your financial reports. Think of your chart of accounts as a system of buckets to hold specific information, each bucket and the proper placement of them making it easier to understand how your company is performing.  For instance, combining fuel and maintenance costs into one bucket do not allow you to track how much each may be costing you individually.  Therefore, it is important to account for these expenses in separate buckets, or general ledger accounts.

Use of a standard chart of accounts from an accounting software results in an alphabetical listing of accounts by account category. As a result, your expense account listing looks something like this:

Expenses

Accounting

Administrative Wages

Bank Charges

Bus Insurance

Depreciation

Driver Wages

Fuel

Interest Expense

Office Supplies

Office Wages

Payroll Taxes

Registration Fees

Repairs and Maintenance

Software Expenses

Workers Compensation

But wouldn’t it be better if similar expenses were grouped together?  Would that make it easier to evaluate the company’s performance?

Expenses

Administrative Expenses – All

Accounting

Bank Charges

Office Supplies and Expenses

Software Expenses

Payroll and Related Expenses – All

Administrative Wages

Driver Wages

Office Wages

Payroll Taxes

Workers Compensation

Revenue Vehicle Operating Expenses – All

Fuel Expense

Registration Fees

Revenue Vehicle Fixed Expenses – All

Depreciation Expense

Interest Expense

Insurance Expense

Revenue Vehicle Repairs and Maintenance – All

Repairs Expense

Scheduled Maintenance Expense

There are many variations for grouping accounts, the above being a simple example. What matters to your company is to understand how the various accounts relate to each other. Generally, all payroll is best grouped together, allowing for key functions to track separately, such as shop, cleaner, driver, dispatch, sales, etc. Revenue vehicle maintenance costs are grouped separately from the costs of operating the vehicles. The point is to be better able to use your financial data to pinpoint what areas of your operation need attention.

A thoughtful expansion of general ledger accounts and the subsequent meaningful groupings of those accounts can help you monitor the overall trends of your company’s performance. Also, the implementation of an industry specific chart of accounts will assist management in preparing, monitoring and evaluating the company budget. (See the previous post about budgeting.) As is with most accounting modifications to your business, it is best to update your chart of accounts in preparation for your next annual accounting cycle.

Let us at BUSBooks help you develop your chart of accounts to get more out of your internal financial reports! Together we can make accounting more meaningful, and certainly not boring!

The next Nerd News will discuss Asset Depreciation.

Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator

BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.

Budgets – Why they are an invaluable tool for your continued success

“We spend more than we make! We need a budget.” We have all had that conversation with our partner. We begin the process, argue about who spends too much on what, make spending cuts, put it on paper, and blow it within six months. Good people find themselves in a worse spot, continuously short on cash and long on debt. In any event, many attempts fail the process because the goals are unrealistic, no cushion is planned, discipline to see the changes through is lacking, or all the above. The cycle continues, with many continuing life paycheck to paycheck. When we do that in business, the business is destined for failure. It does not need to be that way.

Budgeting for business can be a tedious process.  However, once prepared and used to monitor and evaluate actual results, it can yield great benefits to identify what is going well and what is not going well in your business.  Knowing that will allow management to take corrective action and move a company closer to its goals. Plan for success. And once you complete the process, it becomes easier, and yes I am going to say it, fun to use!

Budgeting is the process of determining your desired future financial performance and creating a plan to achieve that result.  Many times, the use of historical data aids in establishing baselines and determining reasonable relationships among revenues and expenses.  However, desired changes may require the budget to reflect different future relationships. For example, your personnel related expenses normally run 35% of gross revenues and you are planning to add another revenue stream that is more labor intensive. Keeping your budgeted personnel cost at 35% may not be adequate. You must accept a higher personnel cost percentage or increase the cost of the new service to overcome the additional labor requirement. Either way, understanding your budget and the relationships between revenue streams and related costs will help you prevent financial surprises.

There are four steps in the budget process:

  • Determining Financial Goals
  • Budget Development
  • Monitoring Results
  • Evaluating Results

Determine Financial Goals

What do you want your future financial performance to be? Are you focusing on controlling your expenses? Or do you have plans to grow your revenues or market share?  Knowing what your financial goals will go a long way in putting together a meaningful budget. “I want to make more money” needs a plan.

Budget Development

Using the financial goals determined in the first step of the process, create the budgeted results.

For example, if your financial goal is to control expenses and you are expecting no significant growth in revenues from the current year, your budget would show revenue similar to your prior year amount with a focus on controlling key expenses that when reduced, would lead to higher net income for your budgeted period.

Alternatively, a budget for a growth-oriented year would reflect the desired increase in revenues.  The expense accounts related to that revenue production would then be based on the budgeted revenues reflecting any expected cost increases to produce that revenue.

How can you grow revenue without spending it all as expense? Can you withstand a reduction in revenue without reducing net income? Knowing the relationships between revenue and expense can help you obtain your desired results.

Monitoring Results

As the year progresses, reports comparing actual numbers to budgeted are necessary tools to help management monitor company results.  Differences between the two sets of numbers identify what revenues or expenses exceed, meet, or come in under budgeted amounts.  Whether or not those results are good or bad depends on your financial goals and how the difference flows to the bottom line, your net income. Evaluate these differences to determine if operations are being managed to achieve the financial goals set in the budget.

Evaluating Results

Evaluating the over and under budget amounts is the key step in determining what processes are working to achieve desired results and more importantly, which ones are not.  Knowing which financial goals are unrealized and then determining why, will help steer management in taking corrective action that will get the company back on track to achieve its desired results.

Importantly, you must have the discipline to stick with your budget plan. Monitor and evaluate your progress with each set of monthly financial statements. As time goes on you will have a better feel of your financial performance and be able to make informed business decisions, not decisions based on a hunch.

Many modern accounting software systems have features that allow users to obtain reports which can be useful for budget development, and budget to actual reporting options that can make the monitoring and evaluation steps a little easier. An Industry CPA is trained and experienced to assist you in this process.

Let us at BUSBooks help you develop and monitor your budget! Together we can move you toward your next goal.

The next Nerd News will discuss your Chart of Accounts: Making more sense of your numbers.

Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator

BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.

Cash: Do you know where it comes from? Where it goes?

Your new salesperson just landed a new client. Happy days! However, she promised the customer two new buses to be used exclusively for the account. For a young company this creates a bittersweet emotion. The potential income is exciting, but can you afford the payments? Looking at last year’s income statement you determine that you are profitable enough to afford a 10% down payment and the monthly payments. It is close, but you are willing to take the risk. So you eagerly order the buses and prepare to make more money!

You are crushed and confused when the lender, who was so eager to take your business, only approves you for one bus. How can that be? He tells you that you will not generate enough cash to make the payments on two buses.

He explains that when you figured your net income to pay for the new buses, you did not subtract the annual debt portion of your existing bus loans, your property mortgage, and the money you owe your original angel investor. Even when you add back the depreciation expense you are short.

Disgruntled, you leave with “I am making money, but I don’t have enough cash!” We have heard this any number of times. Well, “making money” or “being in the black” is interchangeable with making a profit. However, having a profitable enterprise does not always correspond with positive cash flow. Conversely, businesses showing a loss can generate cash.

Many times your numbers are just this close. An industry CPA understands this and will prepare you for such expansion requests so that you can plan accordingly and without surprises. Are you ready for the expansion? How much can you afford to borrow? What will the expansion do to your operation? Perhaps this new opportunity and the expected revenue will generate enough additional cash to make the new payments. Was this figured into the loan request? Did you prepare a proposed income statement adding in the new revenue and expenses attributed to the new opportunity?

The Statement of Cash Flows is just one of the basic financial statements provided in CPA prepared financial statements. This is one of the reports that you really can’t get through QuickBooks without significant analysis and manipulation. Let’s look at the components that determine cash generation and uses.

Transactions that PROVIDE or BRING IN CASH include the following:

  • Cash sales
  • Accounts receivable collections
  • Borrowing cash
  • Cash sales of owned equipment
  • Expense refunds
  • Income tax refunds

Transactions that USE CASH include the following:

  • Maintenance payments
  • Sales refunds
  • Cash used for bus purchases
  • Taxes paid
  • Fuel payments
  • Debt and interest payments
  • Wages paid
  • Insurance payments

Common income statement items that DO NOT PROVIDE OR USE CASH:

  • Credit sales
  • Fuel and other expense accruals
  • Taxes accrued
  • Depreciation and amortization expense
  • Unrealized gains or losses

Let us at BUSBooks help you learn where your cash comes from and where it goes! Together we can move you forward.

The next Nerd News will discuss Budgets – Why are they an invaluable tool for your continued success.

Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator

BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.