Frequently Asked Questions About Financial Statements
Preparing financial statements is essential to assess the status of your company. However, as there are several aspects to sort through in terms of expenses, income, debt, and credit, working on your financial statements can be tricky. If you are new to financial statements, you’re probably going to have a ton of questions on your mind. To clear your doubts and arm you with the most accurate information on the subject, Numbers Up, LLC has answered some of the most frequently asked questions about financial statements.
1. Why do my financial statements indicate a net profit, but my cash balance is much less than my profit?
This is the difference between accrual-based accounting and cash accounting. In accrual-based accounting, revenues are matched with expenses regardless if the expenses are paid or if the revenue is received. Accrual accounting provides a much better insight as to whether or not you are operating at a profit. If your statements are accrual-based statements, this means some of your current month’s sales may be tied up in receivables, and some of your expenses may be tied up in payables. In other words, you may receive more or less cash than invoiced and pay more or less for bills and other expenses than what was incurred for the given period.
2. What is the best organizational structure for my company?
The answer to this question depends on your goals for the organization and personal tax planning preferences. If you are looking to set yourself up as an employee to receive wages and have taxes withheld, you would want to consider filing as a corporation, or an LLC (Limited Liability Company) taxed as a corporation. Many business owners further elect S-Corporation status for the tax benefits related to pass-through entities. But, there are shareholder limitations around S-Corporations. Another option is to set up an LLC that is disregarded for tax. Here, the entity income is included in the member’s individual tax returns. The business income is treated as individual income to the members for tax purposes. Business owners, that is, you generally need to make estimated payments throughout the year if you are running at a profit, regardless if you are a multi-member or single-member LLC.
3. What is the best process for 1099 reporting?
Ensure you have a process in place to procure a W-9 from each vendor with whom you are doing business. These forms should have fields to enter the vendor’s EIN information, address, etc. Most systems will allow you to flag the vendor as 1099 eligible. Then, you need to enter all of the expenditures or bills into your accounting system for payment. Every bill or payment should include the vendor’s name. This ensures every expenditure is attached to a vendor so that their 1099 information can be generated with a simple report at the year-end.
4. How do I obtain better insights into future cash flows?
You can obtain better insights through projection modeling. But this starts with solid financial information. So, you want to be sure you have good financial statements that you can rely on. You can build a projection model using the actual historical information as the foundation. Through analysis, you determine the key metrics that provide for variable input fields to be used in projecting results. Then review the income statement and balance sheet activity, as both affect future cash flows. The projected balance sheet and income statement exhibits are used to build the projected cash flow statement. Here you can see how variable assumptions in one period will affect future cash flows and allow for adjustments as necessary.
5. What happens if I get a notification about my tax return?
It is very common to receive notifications in the mail from the IRS requesting information or notifying you of changes. It is essential to address these notices as soon as possible. When you receive a notification, please contact our office or send us a copy of your notice immediately. We can provide you with guidance and help you decide if you should address the notice or have us solve it.
PLEASE NOTE: The IRS or other tax authorities will generally send a letter to you if there is a problem or question about your tax return. So NEVER give your information over the phone or the internet. There have been many ongoing scams where someone will pose as the IRS and make threatening allegations of claims or liens. If you get these calls, hang up and report it to your local authorities.
6. How can having an outsourced accounting department help me manage my business?
By outsourcing your accounting position(s), your company doesn’t have to endure the hiring process and lose valuable time and money training bookkeepers, accountants, or financial controllers. Additionally, an outsourced accounting department gives your company access to a team of employees and resources without the need to hire multiple employees at various salary levels, thus saving costs. Similarly, outsourcing is beneficial If you find that your business needs more experienced and skilled resources for higher-level work but not on a full-time basis. You also benefit if you find that part-time employee support at these levels is hard to find. Outsourcing to accounting professionals like Numbers Up gives you peace of mind as an experienced team of professionals will be managing your accounting operations within a budget that works for you.
If you have any more questions about your accounting needs, get in touch with the experts at Numbers Up, LLC. As a professional accounting company in Westerville, OH, we work together with you to take your business to the next level. Our staff has served in a variety of roles for both public and private companies ranging from senior financial and tax positions to general accounting support functions. Moreover, we have over thirty years of experience in assisting people with their tax preparation and accounting needs and have been instrumental in helping businesses reach their financial goals. To learn more about how we can help you, please click here or contact us by clicking here.