Transcript Startup Accounting & Taxes

STARTUP ACCOUNTING & TAXES
LUELLA SCHMIDT
[email protected]
608-220-9266
AGENDA
• Legal Entities
• Hot Tax Topics (your oxymoron of the day)
• Financial statements & terms you should know
• Internal Controls
• KPIs & other cool analytics
• Projections, Budgeting, Forecasting
LEGAL ENTITIES
LIABILITY
TAXES
INVESTMENT
C- Corporation
Liability is limited
Pays taxes
Preferred by venture
capital and more
sophisticated
investors
S-Corporation
Liability is limited
A flow-through
entity; Does not pay
taxes; income flows
through to owners
One class of stock
allowed; less than
100 shareholders
allowed
LLC
Liability is limited if
more than one
member (not
necessarily if a
single-member LLC)
A flow-through
entity;
Does not pay taxes;
income flows
through to owners
Can take investment
capital with
restrictions
PAYROLL TAXES
• EMPLOYEES VS. INDEPENDENT CONTRACTORS
• I don’t want to pay payroll taxes so I’m just going to hire independent contractors.
• Three audits!
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IRS
•
Wisconsin Department of Revenue
•
Wisconsin Department of Workforce Development
• Penalties
•
Back taxes
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Unemployment compensation
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Worker’s compensation payments
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Penalties, fines and interest
EMPLOYEE OR INDEPENDENT CONTRACTOR?
Behavioral Control
Do you direct or control how the worker performs the work?
•
You set the hours
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You provide the tools or equipment used
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You determine where and how the work is to be performed
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You provide the training about required procedures and methods used
Financial Control
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Does the individual control whether or not their work results in a profit or loss?
Relationship of the Parties
• Is there a written contract between the parties?
• Is the worker covered by the business’ insurance, pension, benefits?
SALES & USE TAX
• Nexus
• Use Tax
• Marketplace Fairness Act
QUALIFIED NEW BUSINESS VENTURE
ACT 255 TAX CREDITS
Administered by Wisconsin Economic Development Corporation
QNBV Requirements
• HQ in Wisconsin
• 51% of employees in the state
• Fewer than 100 e’ees
• In operation for < 10 years
• Significant potential for increasing jobs or increasing capital
investment
• Have < $10M in private equity investment
PRINCIPALS OF ACCOUNTING
• EVERY transaction must be recorded
• Chart of accounts
• Double entry accounting
• Matching Principal/Accrual Accounting
CHART OF ACCOUNTS
Sample Chart of Accounts
Checking
Asset
Equipment
Asset
Accounts Payable
Liability
Note Payable
Liability
Common Stock
Equity
Advertising Revenue
Revenue
Salaries Expense
Expense
Rent Expense
Expense
Travel Expense
Expense
DOUBLE ENTRY ACCOUNTING
Grant Awarded, Funds Received
Cash
Grant Revenue
Pay Rent
Rent Expense
 Cash
CASH VS. ACCRUAL EXAMPLE
• I provided service to ABC Company on June 30,
2012. I sent an invoice that day for $5,000, and
was paid on July 10th, 2012.
• Cash Basis: I have revenue in July (when cash was
received).
• Accrual Basis: I have revenue in June (when
service was provided).
CASH VS. ACCRUAL CONTINUED
• I spent $1000 in labor that I used to complete my $5,000 job in this example. I
wrote a check to my subcontractor in May for the job that I completed in June.
Cash Basis
May
Accrual Basis
June
Revenue
Expenses
Profit
July
$5,000
$1,000
($1,000)
$0
$5,000
June
Revenue
$5,000
Expenses
$1,000
Profit
$4,000
PROFIT & LOSS STATEMENT
SHOWING GROSS PROFIT
Google Inc.
(In millions)
Three Months Ended
September 30,
2012
Revenue
2013
Nine Months Ended
September 30,
2012
2013
$13,304
$14,893
$35,756
$42,967
Cost of revenues
5,955
6,413
14,421
18,420
Gross Profit
7,349
8,480
21,335
24,547
Gross Profit %
55.2%
56.9%
59.7%
57.1%
Research and development
1,879
2,017
4,858
5,841
Sales and marketing
1,710
1,806
4,392
5,127
General and administrative
1,020
1,213
2,719
3,535
Total Expenses
4,609
5,036
11,969
14,503
Net Profit (Loss)
$2,740
$3,444
$9,366
$10,044
Expenses:
BALANCE SHEET
Google Inc.
(In millions)
Period Ending 12/31/2012
ASSETS
LIABILITIES
Current Assets
Short-term Investments
Accounts Receivables
Inventory
$14,778
33,310
9,729
505
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
2,549
895
Other Current Assets
2,132
Total Current Assets
60,454
Long Term Debt
2,988
1,469
Other Liabilities
2,786
1,972
Long-term Investments
Total Current Liabilities
$10,893
Property, Plant and Equipment
11,854
Deferred Long Term Liability Charges
Goodwill
10,537
TOTAL LIABILITIES
Intangible Assets
Accumulated Amortization
Other Assets
TOTAL ASSETS
7,473
2,011
$93,798
14,337
$22,083
STOCKHOLDERS’ EQUITY
Common Stock
22,835
Retained Earnings
48,342
Other Stockholder Equity
TOTAL STOCKHOLDER EQUITY
TOTAL LIABILITIES + STOCKHOLDER EQUITY
538
71,715
$93,798
CASH FLOW STATEMENT
A SIMPLIFIED EXAMPLE
LUELLA’S SUPER AWESOME WIDGET COMPANY
Net Income
YEAR ENDING 12/31/13
$1,000,000
Change in Current Assets (not including cash)
-$500,000
Change in Fixed Assets
-$500,000
Change in Current Liabilities
$250,000
Change in Long-term Liabilities
$500,000
Change in Stockholders’ Equity (not including net
income)
$1,000,000
Cash Flow This Year
$1,750,000
BURN RATE AND CASH RUNWAY
BURN RATE
• $1M on January 1
• $250k on October 1
• Burn rate = $750,000 / 9 or $83,333/month
____________________________________________________________
RUNWAY
• $250,000 cash left / $83,333 burn rate = 3 months of runway
INTERNAL CONTROLS
• Cash
• Payroll
• Fixed Assets
INTERNAL CONTROLS
• Cash Collection and Disbursement
• Monthly cash flow forecast to manage timeliness of
payments and availability of cash to make payments
• Monthly bank reconciliations
• At least two individuals receiving cash for segregation of
duties: 1 opens the mail, #2 makes the deposit
• NEVER mix business and personal accounts
• All expenses should be paid by check or credit card and
only if supporting documentation and proper approval are
present (avoid a petty cash fund)
INTERNAL CONTROLS
• Payroll
• System to track employee activities
• Time and attendance records
• Activity logs
• Paychecks should be supported by timesheets
• Approved by supervisors
• Reconciliation of payroll records with accounting system
and filed returns
• Periodic review of employee records – personnel file audit
INTERNAL CONTROLS
• Safeguarding Fixed Assets
• Ensure that all newly acquired assets are tagged
• Policy to review and update equipment inventory annually
• Reconcile equipment inventory with accounting records
• Ensure that equipment purchased is capitalized according
to organizational policies
KEY PERFORMANCE INDICATORS
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Great companies are almost always run by great management teams
Think of your company as a machine that has Outputs
Which levers can your team pull to affect business results
Designed to help us manage our business better
“What Gets Measured Gets Managed”
Characteristics of a KPI, definition by David Parmenter
• Non-financial in nature that can be measured daily and can have
a significant impact on operations
• Your team WILL RESPOND when accomplishments can be
measured and rewarded
5 GREAT KPIS
• Number of Prospective Qualified Leads
• Daily Revenue Goals
• Top 10 Products, by revenue AND by gross profit
• Operational Efficiency, e.g., Ratio of timely
completed orders, returns, system downtime,
overtime hours, supplier on-time percentage
• Cash Flow
DESIGNING STARTUP METRICS TO DRIVE
SUCCESSFUL BEHAVIOR
• Hope is not a strategy
• Peel the onion!
DESIGNING STARTUP METRICS TO DRIVE
SUCCESSFUL BEHAVIOR
Revenue = Average deal size x Number of Deals

1/3 of sales force missed their targeted Number of Deals

Number of Deals = Number of trials from marketing x conversion rate

Number of Trials = Number of Visitors to site x trial conversion rate

Conversion rate lower than expected

Trial Conversion rate = Advertising Campaign x advertising conversion rate

Which campaigns?
3 TYPES OF PROJECTIONS
• Projections
Long-term
• Budgets
Short-term
• Forecasts
Real-time
PROJECTIONS
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Aspirational
What could be!
Used for raising capital
NOT budgets
Big Picture Exercise
3 Scenarios: Best Case, Base Case, Worst case
It’s not the results, it’s the process and the learning
3 years minimum, maybe 5
BUDGETING IN A SMALL EARLY STAGE COMPANY
• A Refinement of the Projections Process
• Present budget to your board at the
December board meeting
• Focus = hiring and people costs
• Measure yourself against it monthly
• Share with your team
FORECASTING
• Done intra-year to use all your latest knowledge
• Purpose: to estimate actual results
• Don’t throw out your original budget
• Cash!
• Re-forecast every month or every quarter or every
time a major change in results demands it
• Use forecasting process to make next year’s
budget better