Every small business owner has goals that they would like to achieve for themselves. However, in order to do so, they first need to make sure that all their finances are in order. Having an organized and clear understanding of your finances will not only help you build a plan for the future, but it will also give you the credibility you need when you approach banks or lenders for additional capital. So what can you do to get a better handle on your business’s finances? In this episode, Jon Aidukonis and Gene Marks, along with Andrea Harrington, a CPA and partner at Fiondella, Milone & LaSaracina, offer several strategies that will enable small business owners to take control of their finances.

Executive Summary

2:27—Today’s Topic: What Can Small Business Owners Do To Get Their Finances in Order?

3:02—The first step in getting your finances in order is to set up a budget. This will not only give you a clearer understanding of your cash flow, but it will also show you whether you’ll need to raise some additional capital.

4:24—While a budget focuses on your existing income and expenses for the next few months, a forecast will span an even longer time frame and include more financial variables.

5:26—In order to predict your business’s cash flow, you need to know both your fixed and variable costs.

6:10—You need to keep track of the amount of revenue that you’re generating so that you can determine whether it is enough to sustain the growth of your small business.

6:57—If you plan on working with a bank or another lending institution, you will need to provide them with a balance sheet, an income statement, and a cash flow report. You might have to give your personal guarantee on the loan as well.

8:01—A bank or lender might also ask you to agree to some form of debt maintenance or a covenant when you apply for a loan.

8:19—There are three levels of documentation that an accountant can provide: a compilation, a review, and an audit.

10:32—Utilizing QuickBooks or any other bookkeeping software is one of the best ways to establish a strong foundation for your financial system. As your business grows into a more mature company, further segregation of responsibilities within your accounts department will help ensure that every aspect of your finances is receiving careful attention.

12:04—As a business owner, you need to set up an internal review process to ensure that every financial decision is being properly evaluated.

14:04—During an audit, an agent will check your balance sheet to make sure that all your assets and liabilities have been recorded and that you have the appropriate documents to support their validity.

15:19—If you are an emerging small business with no history, it’s best to bring a business plan with you when you apply for a bank loan; another good idea is to bring records of any previous loans you’ve acquired through either the SBA or personal relations.

16:19—Banks also appreciate it when business owners have documented their fund flow, particularly if they’ve been adhering to a regular repayment schedule for their loans. Many banks have a small business group that can assist you with your loan application packet.

17:15—It’s important to have a specific legal structure in mind as you grow your business, as well as an exit strategy.

18:13—Because of all the remote work that’s been emerging during this pandemic, small business owners need to pay extra attention to the different state tax laws since these will impact their employees, their operations, and their sales.

22:03—To minimize tax exposure, every small business owner should be keeping detailed records of all their major expenses.

23:12—Don’t forget to maintain frequent communication with your financial advisers, especially if you have to make quarterly payments.



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Gene: All right, everybody and welcome to another episode of The Hartford’s Small Biz Ahead podcast. My name is Gene Marks. I’m joined today by Jon Aidukonis. Jon, hello, it’s good to see you again.

Jon: For those of you who have been following our journey, Gene and I have been together virtually all day so on hour, six or seven.

Gene: Yeah, I agree. And we were supposed to do this live and in person together and hopefully the next time we do a series of these interviews we’ll do live, but the streaming platform has been working well. We’ve been talking to some great people.

Jon: Yeah, for sure. And it’s an interesting series of conversations. If this is your first, or first of a few, you might have known, we have a theme of money week. So here’s where we kind of learn about different ways to maybe access capital and funding and excited to kind of have this conversation because without preparation, you probably pursue none of it.

Gene: Yep. That sounds great. So let’s bring Andrea on right now and I’m going to let her introduce herself, but just very briefly, Andrea Harrington is our guest today who is a CPA and a partner at Fiondella, Milone & LaSaracina which goes, everybody, I just want you to know this, they refer to themselves as FML, which I absolutely love because as a accounting profession, I hear that a lot among fellow accountants. So Andrea, thank you so much for joining us. Could you tell us a bit about yourself, your background and also about FML?

Andrea: Sure. Love to. Thank you for having me, both Gene and Jon.

Gene: Sure.

Andrea: Happy to be here. So FML, which we love, because it gives us lots of traction with the college kids when we’re recruiting. It has been around for about 19 years, a firm that was formed by three entrepreneurial founders who were at Ernst & Young at the time and saw an opportunity in the market. And since that time has grown from those three entrepreneurs to about 85 individuals. So it’s been a pretty great trajectory. I’ve been with the firm for almost 16 years. I’m on the tax and advisory side. So I deal narrowly with middle market, closely held businesses. I like to work with owner operators. They’re passionate about their business, I’m passionate about being their business advisor. That’s where I come from.

Gene: That is great. We have a lot, I mean I don’t know if you’ve figured this out just by, if you look at this whole picture here, I am also a CPA, right. Is that pride, right? So, yeah. And we’ve been, as Jon has said, when we first started this, that we’ve been talking with people related to money, it’s a week about money and financing and capital and all that. But you can’t even go about raising money and growing your business without making sure that your books are in orders and your finances are in order. And so this is just going to be like a financial conversation, you and me, some of the things that we recommend to our clients, some of the best practices, all that kind of stuff.

Gene Marks: I’m going to start with this, so, you do love when you said with small and mid-market clients or whatever. So, Andrea, what, if you were running your own business, tell me about some of the numbers, the metrics that would be really important to make sure that you’ve truly got a pulse on your cashflow. Give me some of your favorite ideas here.

Andrea: Well, so the first thing that we always advise people to do is to make sure that they have a budget. You have to understand your cash needs, your inflows and your outflows, and you have to understand what’s going to support your business. And if you’re, let’s say you’re all in, you’re entrepreneurial, you’re just starting out. You don’t have other sources of income. You need to understand how that business is also going to support your life. Can you pay your mortgage? Can you pay your kid’s tuitions that you have to do additionally. And I’m Italian so you’ll see a lot of this. So the first step really is a budget. Cash in, cash out. Cash is king. It’s a cliché for a reason. Make sure that you understand what your spend is going to be. Are you renting a facility? Do you have billed hours? Is it a product or a service? Are you hiring people? You need to understand all of the costs that go in to that. And at what point are you going to need to look outside for capital, either from the bank or from investors or from friends and family.

Gene: Okay, I’m going to stop you right there. So we talk about a budget, which of course is important. And every business really should have a budget regardless of the size. Even if it’s in summary form, you got to know what your plans are for the year. What’s the difference between a budget and a forecast? And do you have clients forecasting on a regular basis?

Andrea: You know at some point you do need to look at a forecast. A forecast has a lot more variables and uncertainty to it, of course, because you’re looking a little further down the road. When I think of a budget I’m thinking of the next 12 months. What is going to happen in the next 12 months and want to compare it to what actually happens to see where my fluctuations are. When I’m forecasting, I’m looking maybe five years down the road for that sort of thing.

Gene: Right. Yeah. It’s funny. Because I’ve been going back and forth about that with a lot of my clients as well, mainly because I don’t know if you’ve found the same thing, but my best clients themselves, they have an idea of where their cash is going over the next 90 days. You know? I mean, they do the budget for the year, but then they’re like, okay, well, budgets change the day after you finalize them, you know? But the forecast is sort of like this fluctuating document that you can really rely on to see where your money is going to go.

Andrea: Mm-hmm (affirmative).

Gene: And I don’t know if you had any advice for people for at least projecting out what their cash flow is going to be. And I’m going to get back to some of the other metrics in a minute, but I’m just kind of curious about your thoughts on projecting cash flow. Some of the thoughts they should be doing.

Andrea: Yeah. I think it’s important too, to try to identify what your fixed versus your variable costs are. But the things that you know you have to pay regardless of the cash that’s coming in. Whether that’s rent or employees, if you have them, that sort of thing. So your fixed costs are really important to know and to project out. And then you want to understand your variable costs of doing business that are going to move with your revenue and the services or product that you provide. So it’s important to just map those out on the budget.

Gene: Yeah. It makes sense. Okay. So let’s get back to some metrics though. So we did talk about having a budget which goes into your business plan. I talked briefly about a forecast. What other numbers do you think are really important that a business owner should be keeping track of, almost on a daily basis or a weekly basis?

Andrea: I mean, I keep going back to cash because you just, you can’t run a business without cash and understanding cash flow and you don’t want to put yourself in a position where you haven’t looked far enough down the road to when that capital raise needs to happen and you’re out of money. Because if you’re out of money, you’re out of business. So it’s just really critical from a daily basis at the beginning to really watch your cash burn to know that, okay, in six months I’m going to be out of money. So I need to start thinking about that now. We look really closely at that with clients.

Gene: How about bankers? I mean, we’ve been talking, Jon and I, throughout the day with potential financiers. Now you’re coming on the side of the client and you’re as a financial advisor to your clients. So when a client comes to you and says, we’re going to go out and look for some financing, what advice do you give them as to what numbers they should have ready, what they should be prepared to show a potential lender?

Andrea: So a lender’s going to want to see financial statements. So if you’ve got a business that’s got some level of operation already, they’re going to want to see it. An internal may be okay. They may want something that’s on a CPA letterhead, depending on the amount of financing that you’re looking for or the type of financing that you’re looking for. But they’re going to want to see something that looks like a traditional balance sheet, income statement, cashflow. They want to know that you understand the numbers behind your business. And oftentimes if you’re starting out, and even in mature businesses, there’s a good possibility that you’ll need to put in a personal guarantee on the loan, just the reality of it.

Gene: Yeah. They also ask for things like debt maintenance as well, and they have covenants. Right?

Andrea: Right. So they may want you to have a certain debt-to-equity ratio or guarantee a certain amount of cash, or they may attach certain assets of the business. It may be collateralized by the assets of the business.

Gene: Okay. Fair enough. I know you’re on the tax side, not necessarily on the attestation side, but can you talk a little bit about the importance of having a financial statement done by an accountant and maybe the differences between the types of accountant’s reports or compilation or review and audit, what a business owner might need to know about that?

Andrea: Sure, sure. So there are three basic levels, as you’ve mentioned, of financial statements that an accountant can issue for you. A compilation is the lowest form. A compilation provides no form of assurance. It’s simply we’re taking your numbers and putting them on our letterhead with certain processes and procedures that we do to do that. The next level is a review where we’re going to look at your numbers and we’re going to do an analysis. We’ll run analytics, fluctuations, does it look like it makes sense? And then an audit provides the highest level of assurance that we’ve kicked the tires on all the numbers, it’s appropriately presented in conformity with General Accepted Accounting Principles and we’ll provide an opinion on it.

Gene: All right. Yeah. That’s great. Usually I always joke about how the review is you’re asking questions and then you take the responses as long as they’re reasonable and that’s part of your analysis. An audit is when you ask the questions and you get the responses. Andrea, when you look at a financial statement of a client, what type of red flags, what type of things would you potentially see in a financial statement that you’d be like, okay, this might mean, this could be potential trouble, or this was an indication that a company might not be in great financial shape? What are some of the things that would jump out at you?

Andrea: Yeah. I mean, if you’re looking at it and there’s a history of losses and that’s not unusual when you’re starting out, of course. There’s an investment to beginning a business. So the history of losses isn’t necessarily indicative that there’s a problem, but you want to understand how that’s going to turn and when that’s going to turn and you want to look at how it’s capitalized. It’s important to see how much debt versus equity and what the plan is for that.

Gene: Yeah. That makes sense. And Jon, I’m going to turn over to you soon, but I just have a couple, I’m just beating Andrea up with all these questions. They’re so important to me as a business owner. And it’s just, let me ask. We’re talking about getting your finances in order Andrea. So what do you recommend as far as having a good financial system in place in your business? Tell me, when you walk into a client, what makes you think ah, these guys have their act together, they’ve got a good financial system in place. Tell me what makes you think that?

Andrea: Sure. I mean, the gold standard is if they’re using some sort of a software package that will assist them in properly recording their finances. For smaller businesses and emerging businesses, we think QuickBooks is a great solution. It’s easy to use, easy to navigate. And the online function allows mobility, which is nice. Also, if you walk into maybe a more mature company, if you see a segregation of responsibility. So you’ve got an accounting department where someone collects the revenue and someone else reconciles that, that’s an important function as well, as you become a more mature company.

Gene: Yeah. I would think that if you, as a business, can pass your accountant’s sniff test as to a good control environment, a good financial environment, then you’re going to be in good shape to then go to a potential lender and have them feel that same level of comfort. You mentioned segregation of duties as well. Give us some thoughts about requiring vacations. We’re talking about controlling cash flow. From an internal control standpoint, do you guys ever, have you ever bumped- whenever I see fraud cases, it’s always because some bookkeeper didn’t take vacation for 10 years, but it turned out she was driving around in a Maserati on the weekends. Do you have thoughts about vacations and other internal controls that a business should have?

Andrea: I mean, I think it’s important just in life to disconnect and if someone’s not then clearly there’s maybe some underlying issue to that. Yeah, I mean, other internal controls, really just making sure that there is a review process, an internal review process that the signer, maybe there’s multiple levels of signature on certain disbursements. So if it’s over a certain dollar amount, you’ve got multiple signers. That’s another important one, especially as companies grow. And just making sure you’ve got a good accounting system that will hopefully automate that approval process for you as well to make it more efficient.

Gene: Yeah. That makes sense. All right, Jon, I’m going to turn it over to you for the time being. I still have more questions, but, and I hope we can cover, I don’t know if you’re planning on asking- Andrea’s a tax person. So I don’t know if you’re going to get to that. Taxes are only, what, 20/25% of our income, no big deal. They’re like our biggest expense. So the whole conversation about money this week. So I think it is relevant. But anyway, Jon, go ahead.

Jon: Yeah. I actually want to probably start on everyone’s favorite word that you said is audit. So Gene and I joke because I’m a restaurant person by blood. It never fully gets out of me, but I also have served a fair amount of time in different nonprofit organizations and on some leadership teams. And what I always kind of find interesting is in, I think five different organizations at about the same point in their maturity, so usually around year two or three, you start to look for kind of grant money that’s unrestricted and kind of big, right. And the first thing is like, do you have a full audit of your books? And these tend to be organizations that are run by people with passion. They don’t really have a ton of tax expertise or bookkeeping expertise. And the ones I’ve touched specifically have to do with kind of like culture, some kind of social justice work.

Jon: But can you talk a little bit about what an audit really entails? Because the kind of crossover to me is I find that most nonprofits are actually small businesses who end up in this spot and just kind of knowing our audience is going to touch both. I think it’d be interesting just to kind of give them a little bit of a background on what a full audit really looks like.

Andrea: So an audit typically is going to look at your balance sheet, right? It’s going to start with your balance sheet and it’s going to say, is cash valid? And what’s the support for it? Is accounts receivable valid? Where’s the subsidiary listing? So it’s going to go down all of the aspects of your balance sheet to make sure that there’s validity to all of the assets and liabilities and that everything’s been properly recorded. So it’s going to- we would request a lot of underlying data, the support for how the balance sheet was built. And then from that the profit and loss statement falls out. And then we’ll do a review of the income and expenses on the profit and loss statement and presentation as well.

Jon: Yeah, I think it’s, and I think you hit on a good point there is you’re requiring a lot of kind of background information and supporting documentation. So I think it just goes, especially if you’re working in anything that has to do with fundraising or kind of these projects that could become more of an organization when they save every receipt. Right. And understand every event that you’re using and everyone you’re reaching out to, because you might have to answer for something you didn’t touch years from now in order to kind of take your world to the next level. So definitely an interesting one.

Jon: And I think the other kind of thing in my noggin right now is really around, for less mature businesses or maybe for emerging businesses, right. They want to kind of think about how to get their finances in order so they can secure money, but maybe they have really no history. So are there kind of best practices or things from a personal perspective they can bring in? I think about when you’re trying to build your credit, right. You want to try and get a credit card and sometimes it’s a store card and maybe get your first car loan. Are there steps that person can do to set them up to look or be more favorable from a business finance kind of lens?

Andrea: Sure. So I think a business plan is critical. We’ve talked about budgets and forecasting and just a business plan to present to a bank and to pursue the financing that’s provided by the Small Business Loan Administration is always important for emerging businesses and sometimes you got to go to friends and family and those close to you and say here’s my idea. And get support from them as well.

Jon: Do those things kind of help you look more favorable to more kind of large scale lenders or is your kind of thinking about taking your next step? Are there things you could do if you are making personal loans or kind of taking personal loans from friends and family that, if someone was to come to a firm like yours and say I want to kind of get in shape for the next level of lending, or I want to kind of think about organizing my books that they should really keep in mind? So it’s not just a check that gets lost.

Andrea: Yeah. I think documenting the funds flow is important, documenting if you’ve got friends and family that are investing or loaning you money, having a document around that, having a repayment schedule maybe around that if it’s a loan shows credibility I think to banks. And even the larger banks have small business groups. So don’t be afraid to go to a large bank because they’ll have a group that’s designed to help you and they want to help you get a business off the ground because it’s a great investment for them.

Jon: And are there common mistakes you see that some small businesses make, or kind of recurring themes where you’re like, if they only would’ve known before they called me the first time, that seem to be overlooked as people kind of start to think about how they want to keep their chart of accounts or kind of manage their finances internally?

Andrea: So, again, coming from the tax world, we look a lot at legal structure. So a lot of companies don’t necessarily think about that, but you want to make sure you’re organized in a fashion that’s going to help you grow. Do you want to be an LLC, a Limited Liability Company that is maybe easy to bring on investors? Do you want to select S Corporation for a different liability insulation? And there were restrictions with that. So we look a lot at the structure and the plan for the continued growth and ultimate exit strategy, because we really like to be involved with the business from its emergence to the ultimate end game. And sometimes that’s a hockey stick and sometimes that’s real, slow, steady growth.

Jon: Right. That’s interesting. Yeah. And I think, Gene did mention, you’re kind of the tax professional. So I think, depending on where you live in the country or where you operate, there could be very different opinions on tax, especially when it comes to business tax. What are your kind of thoughts there? Is it- you hear a lot about people who might live in, maybe they’re in the State of Washington, but they’re opening their LLC in Nevada. And they’re kind of operating in other states. How do you kind of advise people to think about what their companies are, where they operate, how they’re formed? Because I don’t know that it always has to be geographically tied to where the person lives. Right?

Andrea: Yeah. You just have to be careful with that because states are going to impose an income tax or a Nexus Standard on you. If you are organized in Delaware, which is a popular place to organize because it’s an easy state to organize and a lot of LLCs are set up there, but you are actually operating in Connecticut, you’re liable for Connecticut taxes. If you’re providing services to a customer in California, California looks at is the benefit derived there, and they’re going to want a little piece of that apple as well. So you just, you have to be aware of the fact that just where you are incorporated or organized doesn’t dictate your state tax compliance requirements or liabilities. It’s really, it’s broader than that and it’s state by state.

Jon: Right. And it’s not just your kind of general operational fees and kind of your employment tax. I think a lot about sales and use and people even kind of where your customers are and if that requires what you need to pass through to them. And I think sometimes that gets a little bit lost, but it’s also more and more interesting, I think, as people are thinking in kind of a more hybrid way, right? So I think post-pandemic, even just workforces can be distributed. And even for small companies, how people are selling their goods and services has changed a lot. So it feels like it makes sense to get advice on that, if you’re in a world that’s kind of probably not as brick and mortar as it used to be.

Gene: If you got employees that are working remotely, you just distributed workforce, Jon, that you just has mentioned, Andrea, I mean you as an employer need to make sure that you’re responsible for filing taxes in the state that the employee might be working from, if the employee is resident in that state. So there’s a whole bunch of- COVID has brought up all these work-from-home issues that were much less before, and now they should be front of mind and this can cost cash. Right?

Andrea: Definitely, definitely. And like I said, every state has the ability to make kind of their own rules around things. And the remote workforce in some states was if you typically worked in New York, right, but you went remote for COVID or other reasons, we don’t care. You still need to source that to New York because that’s that person’s primary place of business for income tax purposes. For withholding purposes, you might have to withhold in the person’s state where they’re working. It’s a very tangled web. So getting advice on all the different components, sales tax can be extremely confusing and have different rules across all the different states. It’s always good- and a lower threshold for requirements to file an income tax. If you’ve got employees, payroll and withholding taxes and unemployment insurance come into play and can be very confusing and difficult to navigate on both the federal and state level.

Jon: Right. And I think, especially now even with paid leave, right. That’s a conversation that isn’t going away and where are you eligible? And is that really the state of the employer or the employee or both? And how do you kind of build your own policy as an employer if you have employees in different states? But it’s definitely an interesting world, but I think considerations to make, especially if you are kind of in this wanting to grow your business, or maybe you’re thinking about starting one, is there a place that’s more favorable to do that? Or is there a way to build your business because of where you’re located to make sure that you’re not incurring unexpected costs?

Andrea: Correct. Yep, definitely.

Gene: Andrea, this conversation is about getting your finances in order too. So from a tax perspective, I mean, what do you wish every one of your clients were doing when it comes to organizing their finances so that you can do your job as best as possible, which means advising your clients on how to minimize their tax exposure. What should we be doing?

Andrea: So you want to just make sure you’re keeping detailed records. Because you have to remember the burden of proof for any deduction is on the tax payer. So if you walk into an IRS audit, which, hey, it happens, and you don’t have documentation or support for an expense that you’ve taken, even if it’s a perfectly legitimate expense, then you may not be able to take that deduction. And it’s unfortunate in those cases. So keep the records, keep the mileage logs. I know it’s a pain. There are apps that will help you do that when you’re traveling. So just, it’s very important to keep record retention for seven, sometimes 10 years.

Gene: Yeah. And if you don’t do that, I guess it’s FML, right Jon?

Andrea: Well put.

Gene: I’ve been waiting this whole conversation.

Andrea: Well put.

Gene: Awesome. Well Andrea, I mean kind of thinking on that too, aside from detailed records, are there best practices when you do own a business that you could kind of approach from a tax perspective? Doesn’t make sense to kind of try and get ahead and pay estimated things quarterly. What should you kind of say so someone doesn’t end up at your desk with the shoebox, right, and be like, here’s everything that I’ve ever done and two things in that are maybe valid.

Andrea: Sure, sure. Definitely. So, at FML and what I really strive to do is, we try not to be that one-stop, here’s my shoebox, once a year type of stop. We want to talk with you regularly, as you have questions on your business and certainly quarterly, because if you are a business owner, you should be making quarterly payments. The IRS and the other taxing authorities want that money on a regular even basis. And there are certain safe harbors that we can help you with as your business is growing so that it’s based on the prior year and not the growth year, perhaps, but it’s good to have a conversation with your accountant much more than once a year.

Gene: Yeah. I feel like you can never discount the value of a relationship with a good lawyer or a good accountant who knows your business.

Andrea: Agreed.

Gene: Awesome. Well Andrea, thank you so much for joining us. I think this is a helpful reminder to folks about the importance of being prepared and really kind of staying organized and on top of your books. I think especially the past couple years with the emergence of so many grant programs and new funding applications and sources for businesses, it kind of made everyone re-look at their ability to answer these questions quickly and processes that they might want to implement. So if ever again they need to look for access to capital, they can do so efficiently and really appreciate your insight on these topics.

Andrea: My pleasure. Thank you so much for having me.

Jon: Thanks, Andrea. You were great. I’m sure we’ll see you again.

Andrea: Great. Thank you.

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