Hey Reader,
I once had a client hire me to clean up his books.
Great! I said, can you send me your bank & credit card statements?
And he then sends me over his credit card statement…
Like…his personal credit card statement. 😳
I was like, "Thanks, but where's your business's credit card statements?"
And he was like, "Oh, I don't have that…I just run that all through my personal card…"
Oh boy…this was gonna get interesting.
🔥 The email course for fractional CFOs is in full swing!
Day 1 kicked off with the foundations of transitioning from employee to owner with minimal risk. Today in lesson 2, we explored proven strategies for landing your first clients and building a steady stream of referrals.
After you have found clients with the strategies learned in lesson 2, tomorrow I will show you how to correctly pitch your leads
Missed the first two lessons? No worries - sign up now and I'll send you everything you missed, plus you'll be right on time for tomorrow's blueprint for pitching clients.
|
|
If your clients aren't setting up a separate legal entity for their business and running all their business transactions through specially created company accounts…the government won't really like that. 😬
See, businesses get tax deductions for business expenses, and they also get certain types of protection…say if they get sued.
The idea is that they should be able to separate their business assets from their personal assets.
But when they have both business and personal transactions in one account…it's kinda hard to make the case that their business is too different from their personal life.
It's what's known as piercing the corporate veil.
And it's not just the government that won't like it…we as accountants won't like it either because there's SO MUCH more work now involved in tracking down which transactions were personal
….and which were for the business …then we need to trace all sorts of receipts to prove these transactions are even real.
In short, advise your clients not to do it.
Instead, recommend they get a separate card for their business.
When they have a business bank & credit card in the name of their company, this all becomes a breeze!
Once your clients have their business accounts set up, they'll need to choose an accounting software.
And even though I'm a die-hard Excel fan, this is one of the few times I'd advise against recommending just a spreadsheet to clients (don't worry, we'll still have fun with Excel later in this series).
With accounting software, everything is more streamlined.
We can run various reports, automatically feed in bank transactions, book adjustments, and download pretty much whatever we need.
In my fractional CFO business, our clients mostly use QuickBooks Online.
It's one of the cheapest options and what most small businesses use. (And no, they're not sponsoring this, but hey, QuickBooks, if you're listening... 😉)
QuickBooks isn't a full-blown ERP (Enterprise Resource Planning) system, which is much more robust but also costs tens of thousands of dollars a year.
For most small business clients, QuickBooks is more than enough to handle their accounting needs.
Once your clients have their accounting software, they need to choose between cash or accrual accounting.
Let's break it down with a quick example you can use when explaining to clients:
Imagine someone orders an iPhone for $1,000 but won't receive it for 30 days. They pay now. How do we record this?
Cash Basis Accounting: We record the $1,000 as revenue immediately when we receive the payment.
Accrual Basis Accounting: We'd record the $1,000 as "Deferred Revenue" now, and only count it as actual revenue when we deliver the iPhone in 30 days.
Small businesses often opt for cash basis because it's simpler - we just need to categorize their bank and credit card transactions.
Accrual is more complex, requiring us to study contracts and book journal entries.
But here's the thing: accrual accounting gives us a more accurate picture of a business's financial health. That's why public companies are required to use it.
This last point may be the ultimate factor in producing your clients' financial statements…
Here, look at this table. Can you tell me what's happening here?
Well…yeah, this pretty much makes sense, we can see they're selling iPhones and now subscriptions, and then they're spending money on advertising
…great.
Now what about this report? Can you follow what's happening here?
Well..we have another business expense…and I don't really see why they're spending money on hairpins even though it's pretty minimal.
This is pretty frustrating. I'm gonna now give the client a call to ask what this all means.
And that's because they didn't set up their chart of accounts correctly. But what exactly is a chart of accounts, you ask?
A chart of accounts is like the backbone of financial record-keeping.
It's a complete listing of every account in an accounting system, organized to give you a bird's-eye view of the entire business.
These accounts show up on both the profit & loss statement and balance sheet, helping categorize all transactions.
Think of it as the filing cabinet for a business's financial information. Each drawer (or account) has a specific purpose, making it easier to store and retrieve financial data.
