Equity vs. Debt Financing: What to Consider

Equity vs. Debt Financing: What to Consider

Whether you’re crafting an initial business plan, expanding into new markets, or focused on meeting this week’s payroll, solid funding decisions can keep your company on the right trajectory.

In addition to cash generated by operations, small businesses often get infusions of cash from two primary sources: equity and debt. Which type of financing makes the most sense for your business? Take a look at the possible pros and cons of each:

Equity Financing
Pros:
  • No interest. Unlike a loan, the company isn’t paying for the use of money.
  • No immediate repayment. You’re not required to pay investors until the business generates a profit.
  • Expertise and connections. With investors who possess experience and contacts in your industry, you can gain assistance with operational decisions, strategic planning and networking.
Cons:
  • Lost independence. If your uncle contributes hard cash, he may want a significant role in decision-making —whether or not he understands the business.
  • Longer funding cycle. Pitching your venture to friends and family or sharing the business plan on crowdfunding sites may not generate cash quickly enough to meet your needs.
  • Complicated relationships. No matter how specific your explanations, contributors may be dismayed if they fail to get expected rewards.
Debt Financing
Pros:
  • Many available sources. Your business can borrow funds from banks, suppliers, friends and from strangers through crowdfunding sites.
  • Many debt structures. You can borrow a lump sum or create a line of credit. You can vary the repayment terms and structure the interest rate as fixed or variable. If you are willing to do the math, you can determine the best structure for your needs.
  • No dilution of ownership. Unlike equity, you are not giving up your ownership to bring in funds for your business.
Cons:
  • Interest charged. You pay for the privilege of getting the money. And it is not just interest, there are often fees involved. This is especially true when using programs like SBA (Small Business Association) loans.
  • Sometimes hard to qualify. Lending officers will scrutinize your credit score and financials before agreeing to loan money, especially for a startup business. Even worse, qualifications don’t end after you receive the money. You must often meet ongoing loan covenants or the lender may call the note or require collateral.
  • Security required. Banks will want personal guarantees and security when they lend money. This can make it more difficult for you to make other business decisions.
Questions to ask when considering finance options

When determining which available financing options are the most suitable for your business, consider asking yourself these questions:

  • How much money does the company really need? Cash flow must support loan payments. Run detailed projections to determine whether you’ll really need that funding for additional equipment.
  • Can the business qualify for a loan or line of credit with reasonable terms? Some lenders may gladly offer funding, but if the interest rate is exorbitant or the terms are otherwise onerous, beware.
  • Am I willing to relinquish a measure of control? Some investors make great business partners. Others may want or expect certain levels of control. Figure out how much control you’re willing to share.

While your financing choice will ultimately depend on what’s available to your business, understanding the nuisances of both debt and equity financing will help guide you in making a more informed decision.

 

Equity vs. Debt Financing to keep your company on the right trajectory

 

As always, we hope you find our tips and news for businesses valuable, and look forward to receiving your feedback. Companies focused on growth have sought the help of Insero & Co. for more than 40 years. During that time they have consistently experienced the peace of mind that comes from knowing their CPA firm takes the concept of integrity seriously. Should you have any questions, please contact us directly.

4 Reasons to Outsource Your Accounting

4 Reasons to Outsource Your Accounting

Outsourced accounting, bookkeeping, and other financial management services are becoming more common—and for good reason. Businesses and nonprofits that used to rely solely on internal accounting departments are finding that outsourcing some or all finance-related tasks results in significant benefits.

 

Lower personnel costs

There’s no getting around the fact that bookkeeping and accounting are time-consuming tasks that require ongoing staffing costs (including employee benefits), as well as equipment, facility, and IT costs.

Outsourcing finance-related tasks can be a cost-effective alternative that frees organizations to devote more time and resources to business-critical tasks and programs. Plus, some outsourcing costs can be increased or decreased as business fluctuates.

 

More expert assistance

Hiring a trusted on-site team with all the expertise you need is not easy, and every time an employee leaves, you have to repeat the time-consuming process of hiring and training a new employee.

Outsource accounting and financial management firms specialize in providing outstanding service, and they typically provide a dedicated team with the expertise you need in bookkeeping, accounting, controller services, reporting, and other tasks. Most are also familiar with the latest technologies and software to produce real-time reports, customizable dashboards, and more.

 

Less risk

Fraud is a concern for any organization, especially those that have only one internal person in charge of accounting. With outsourced accounting services, multiple people look at your data and reports, which can help you reduce errors, as well as risks.

 

Support for business growth

By outsourcing finance-related tasks to external experts, you can free internal staff and leadership to focus on running—and growing—the organization. With less time devoted to data entry or learning the latest software programs, organizations can focus on finding new ways to grow the business.

Experienced outsourced teams can also provide a valuable outside perspective. For instance, they might be able to spot an overlooked issue with cash flow or expenditures or point out an opportunity to save time or money.

 

Explore your outsourcing options

Insero & Co. is one of the premier public accounting firms in Western, Central, Upstate, and the Southern Tier of New York. We offer deep experience across a variety of outsourcing services from bookkeeping to outsourced CFO services.

 

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Use Data to Make Better Business Decisions

3 Ways to Use Data for Better Business Decision-Making

Businesses today have access to more data than ever before, which you can use to measure metrics, track trends, and gain insight into just about every aspect of your customers, products, and services.

Although gut instincts still come into play some of the time, the availability of so much data—and advanced software to calculate key performance indicators (KPIs) and issue real-time reports—makes it imperative for businesses to use data to inform their key decisions.

Following are three ways you can use data to make better, faster business decisions.

 

1. Use data to optimize pricing

One of the basic questions for businesses is whether they have priced their products or services too low or too high. Just because items are selling doesn’t mean the business is profitable, or that a different price might not lead to better sales and margins.

To optimize pricing, you first need up-to-date data on all costs related to each product or service. An item that is selling fast, generating a high level of revenue, may also be expensive to produce, resulting in low profits. Raising the price to reflect those higher costs might be necessary—and any price change can be closely monitored to see how it affects sales.

 

2. Manage your margins

Total revenue is not a true indicator of business success. What matters more are profit margins, including both contribution and gross profit margins.

Contribution margins are revenue minus variable costs. Gross profit margins are revenue minus the costs of goods sold. By following both, you can better understand what your profits are and where your break-even point is for every product and service you sell. Using those metrics, you can then look for opportunities to increase your margins—which could mean scaling back low-margin products, promoting the sale of high-margin goods, or other steps.

 

3. Evaluate your revenue stream

To properly evaluate your revenue stream, it is important to run individualized profit and loss statements on every client. Gut instinct might suggest that your oldest, biggest, or most renowned client is your best client. But when you run the numbers, you might be surprised by what you find.

By running individual reports, you can identify low-margin clients that are damaging your cash flow or limiting your growth. Spend too much time on serving those clients, and you might lose others. Then too, there might be an opportunity cost if you fail to reach new, higher-margin clients because you’re working so hard to maintain low-margin clients.

 

Use Data for Better Business Decision-Making

 

Get the insights you need

Insero & Co. is one of the premier public accounting firms in Western, Central, Upstate, and the Southern Tier of New York. Contact us to learn about our outsource accounting services, audit services, employee benefit plan audits, and how we can help your business use data and the latest accounting software to make more informed decisions.

Keep Your Nonprofit Board Motivated and Engaged

The Challenge of Board Engagement

Just about every nonprofit understands the need for a motivated and engaged board of directors. So why doesn’t every nonprofit have one? Because it’s challenging to develop—and maintain—a healthy board.

The good news is that you can take a number of concrete steps to motivate both new and existing members of your board of directors, including these:

  • Engage board members in the mission: Involve members in as many programs and activities as possible, so they can better understand and value the organization’s mission.
  • Set high expectations: People rise to the level of expectations set for them, so set high expectations for new board members. Otherwise, you risk losing their attention.
  • Set specific goals: By setting yearly financial goals, and revisiting them regularly, you can keep members on track.
  • Use the latest technology: Provide board members with easy-to-read reports, marketing material, and other information to help them stay engaged and informed.
  • Provide the right direction: Make sure the executive director manages the board but doesn’t lead it. If the ED is too directive, the board will not fully develop.
  • Interview board members: Once a month, check in with each member. Are they pleased with their role? Have their needs or interests changed? Give them an opportunity to express themselves.

 

Conduct impactful board meetings

Another critical tool for building a better board is conducting impactful board meetings. Meetings set the tone for members, so plan them well, run them on time, and give members a chance to feel heard and valued.

To help board members appreciate the organization’s impact and mission, consider bringing in clients or program participants to speak or perform at meetings. You might also designate a subcommittee or person to monitor the dynamics of the group during meetings to identify issues and tensions, such as who is talking too much, who needs to talk more, and how to involve everyone.

 

The Challenge of Board Engagement

Don’t overlook the small things

When it comes to building a successful board, details matter. Along with all the steps mentioned above, pay attention to other seemingly small things that can make a real difference:

  • Collect personal information about board members (birthdays, anniversaries, etc.) and acknowledge them as part of building a trusting relationship.
  • Provide training on fundraising and other important board roles. Even members with skills and experience in a particular area can benefit from further training.
  • Create fun contests or other incentives to encourage board members to hit their fundraising and other goals.
  • Be creative to help board members succeed. If, for instance, they’re not comfortable asking for donations, send them out with an experienced staff member.

 

Learn More

For more than four decades, Insero & Co. has served nonprofits of all sizes. Our experienced experts provide outsource accounting services, audit services, employee benefit plan audits, and other services to help organizations achieve their missions.

Board Orientations Set Boards Up for Success

Build a Better Board with a Better Board Orientation

Every job needs a job description, and every new member of a nonprofit’s board of directors needs a board orientation. The reasons are similar: In both cases, you want the new member of your team to know exactly what is expected of them, so they can be successful right out of the gate.

 

Key information in a board orientation

Make sure that, at a minimum, your board orientation provides new members with:

  • A written description of the position
  • A review of organizational operations (mission, bylaws, organizational chart, recent Form 990s, etc.)
  • A summary of board goals, with a review of recent meeting minutes
  • Fundraising obligations
  • Attendance expectations and when and for how long the board meets

 

Motivate and inform

The board orientation provides an opportunity to do more than simply inform members of their roles and responsibilities. It also provides a chance to let new board members know how important they are to the organization’s success.

When members know that their skills and experience are valued, and they know exactly what’s expected of them, they’ll feel more confident when talking to friends, family, and potential donors. They’ll also be more likely to value their position and feel empowered to use their skills and experience to help the organization meet its goals.

 

Build a Better Board with a Better Board Orientation

Build a better board

Another advantage of conducting a thorough board orientation is that it can help the entire board of directors run more smoothly. If a new member comes on board who does not understand the organization’s mission or is confused or surprised by member responsibilities, the disruption can disrupt operations for both the board and the executive team.

In contrast, the arrival of a new member who understands the organization’s mission knows exactly what is expected of them, and feels empowered to tackle new challenges can breathe new life into the board and the organization.

 

Get Started

Insero & Co. has served nonprofits of all sizes for more than 40 years. Our experts provide outsource accounting services, audit services, employee benefit plan audits, and other services to help organizations be more productive and efficient.

Ideas to Help Control Health Insurance Costs

Ideas to Help Control Health Insurance Costs

As health care costs continue to rise, businesses are facing some tough decisions to stay profitable while maintaining this important employee benefit. With insurance renewal season right around the corner, now is the time to evaluate your plan. Consider these cost-cutting ideas:

  1. Review your current plan and shop around. The first step to shoring up your health care benefits is to review your current insurance plan. What do you like about it? Where do you have issues? Engaging your employees and asking for their opinions can provide you some insight, as well. Having a full understanding of your plan allows you to effectively compare the costs of other insurance providers. In many cases you can save costs and add benefits simply by changing insurance companies or coverage options.
  2. Move to a high-deductible health insurance plan. The upfront savings realized by high-deductible health plans (HDHP) make them an enticing option for employers and employees alike. The monthly premiums for HDHPs are lower compared to traditional plans, but the employee has to pay more out of pocket for their health expenses because of the higher deductible. To offset the extra cost to employees, you can offer a health savings account (HSA) to pair with the HDHP. With this approach employees can pay for medical expenses with pre-tax dollars. You, as the employer, can help offset the cost of the higher deductible by making tax-free contributions to your employees’ HSAs.
  3. Consider self-funded options. If properly executed, self-funded insurance plans can save your business money and improve cash flow. The basic concept is that you (the employer) pay the medical claims directly, instead of paying premiums to an insurance provider. Switching to a self-funded plan involves hiring a third party administrator to process the claims, creating a reserve fund to pay the claims, and purchasing stop-loss insurance to protect your company from catastrophic events. All in, a self-funded plan can cut your health benefit costs by up to 10 percent, according to Hub International.
  4. Encourage alternatives to traditional doctor visits. When setting premiums, health insurance companies factor in the cost of covering the claims made by your employees. One way to help control these costs is to educate your employees on the alternatives to traditional clinics and emergency room visits. For example, there are now alternatives such as nursing lines, online doctor consultations and remote monitoring apps that can cut your costs and save your employees some money. With a lower claim history, your future insurance premiums may not be as impacted by skyrocketing health insurance costs.
  5. Promote employee wellness initiatives. Another way to lower medical expenses is to promote the health of your employees. Wellness programs can be as simple as offering flu shots, onsite cancer screenings or organizing a company 5k run. The options are endless, but choosing the correct approach is key to your program’s success. According to a study by Knowable Magazine, an effective program starts at the top. Before rolling out a wellness initiative, present your plan to your company’s leadership team to get them on board.

The proper approach to cutting health care costs is different for every company, so take the time to research your options to ensure the correct fit for your business.

Control Health Insurance Costs

As always, we hope you find our tips and news for businesses valuable, and look forward to receiving your feedback. Companies focused on growth have sought the help of Insero & Co. for more than 40 years. During that time they have consistently experienced the peace of mind that comes from knowing their CPA firm takes the concept of integrity seriously. Should you have any questions, please contact us directly.

How to Successfully Implement Change

3 Tips to Implement Change Successfully

You know what’s hard for organizations? Change. You know what’s worse? Standing still. Whether you need to implement a new corporate process or a new technology, it is critical to not only get the solution and strategy right but also to implement it in a manner that wins over skeptics and ensures long-term success.

Here are three tips for implementing change successfully.

3 Tips to Implement Change Successfully

Tip #1: Recognize that a great idea is only the beginning

Let’s say you know—quantitatively, unequivocally—that your organization needs to automate its accounting system. It’s an absolute no-brainer. If you think your work is done, that all you have to do now is implement your wonderful automated solution, you’re making a mistake.

 

Anytime you’re going to change something at your organization, recognize that there will be hesitancy and resistance. There always is when it comes to dealing with change. So you have to be prepared to tackle several issues that are not about the product but about the culture:

  • Win over management, so you have their support
  • Engage and educate employees
  • Identify opportunities for collaboration across affected divisions
  • Make sure it’s clear who is in charge and accountable

 

Tip #2: Make it a two-way conversation

Employees are less likely to get onboard with a new technology or other solution—again, regardless of how great it is—if they’re simply told after the fact what it is and why it’s good for them.

 

Avoid employee resistance by engaging, as many of them as possible in the full process, from strategy development through implementation. Often, they’ll have valuable, on-the-ground insights into what’s working and what’s not—and they’ll feel more empowered, valued, and engaged.

 

When you announce a forthcoming change to employees, make sure that you explain not only what it is but also why, how, and when it’s being implemented. If you’re not ready to answer all those questions, you’re not ready to announce the change.

 

Tip #3: Review and refine your change processes

After implementing a new process or tool, it’s important to evaluate how well it worked—not the solution itself but the change process. Ask questions such as:

  • Did management adequately support the change?
  • Was there employee resistance? How could it have been better avoided?
  • Was the implementation plan followed? If not, why not?
  • Did the change process move fast enough? Are greater efficiencies possible?

 

About us

Insero & Co. is one of the premier public accounting firms in Western, Central, Upstate, and the Southern Tier of New York. Contact us about our outsource accounting services, audit services, employee benefit plan audits, and how we can help your organization be more productive and efficient.

Bad Debts Cause More Trouble than You Think

How to effectively use your bad debt allowance

When your business extends credit to customers who don’t settle accounts, their debt becomes bad debt. For businesses using the accrual basis method of accounting, establishing the correct bad debt allowance (also called an allowance for doubtful accounts) can bring the asset section of the balance sheet into focus.

 

The basics

The bad debt allowance (balance sheet) and related bad debt expense (income statement) accounts were established to help level out the impact of an uncollected invoice on any one particular financial month. By booking a reasonable estimate of bad debt expense each month, the roller coaster ride of writing off an account in any one month no longer materially impacts a business’ income statement. Instead, you build up a bad debt reserve on your company’s balance sheet to account for the actual recognition of writing off uncollectible sales on the balance sheet.

 

Here’s an example: Assume your accounts receivable totals $500,000. After careful consideration, you determine that only $440,000 is likely collectible this year. By creating a monthly bad debt expense of $5,000 on your income statement, the bad debt allowance on your balance sheet will build up to $60,000 over a year. Then when a write off is required, the reduction is in the allowance account NOT on your income statement. By doing this, you’ll gain a more accurate picture of the company’s monthly financial health, unaffected by one or two large bad debts.

 

Many businesses use a percentage of prior credit sales to calculate bad debt allowance. If your company’s credit sales totaled $100,000 last quarter and bad debts over the same period amount to 2 percent of sales revenue, you could establish an allowance of $2,000. As an alternative, you might assign risk factors based on individual clients, especially if the firm relies on a few large customers.

 

man writing debt

Managing your bad debt allowance

Regardless of the method chosen to calculate bad debt allowance, monitoring it should be a priority. Use these guidelines to help you manage your allowance:

  • Understand the tax implications. Only debts that are considered completely worthless and uncollectible can be taken as an expense on your business tax return — the allowance approach described here is not allowed. Some additional analysis and adjustments to the bad debt on your books will be required when it comes to filing your tax return.
  • Diligently track your allowance. Watch for rising and falling allowance levels, as they will help determine your course of action.
    • Allowance is climbing. A bad debt reserve that’s routinely increasing might highlight the need to adjust policies for extending credit or collecting payment. It means your estimate for bad debts is much higher than actual uncollectible debts. Perhaps you are not being aggressive enough in identifying actual bad debts. Lack of attention here could negatively impact your net asset condition and cause unneeded attention from your bank.
    • Allowance is falling. A declining allowance may indicate you are writing off more uncollectible accounts than you estimated. You need to understand the underlying cause. Perhaps a major customer went out of business or your account receivable group is not pursuing collection aggressively enough.
    • Allowance is holding steady. The initial indication here is that your estimate of bad debts might be appropriate. However, you should still conduct periodic reviews of your accounts receivable aging report to ensure your expectations of credit management are being met. Adjustments should be made as the collectability of specific receivables becomes clearer.

Understanding the bad debt allowance and how it works in conjunction with bad debt expense can really help you manage your financial condition and quickly see if your accounts that pay on credit are being managed to your expectation. Contact us if you have questions.

 

As always, we hope you find our tips and news for businesses valuable, and look forward to receiving your feedback. Companies focused on growth have sought the help of Insero & Co. for more than 40 years. During that time they have consistently experienced the peace of mind that comes from knowing their CPA firm takes the concept of integrity seriously. Should you have any questions, please contact us directly.

Why Automate Accounting Processes

5 Reasons to Automate Your Accounting Processes

Many businesses begin using manual accounting processes and continue to do so as they grow, often because of the appeal of maintaining the status quo. The problem is that at some point those manual processes can slow organizations down, hindering growth and innovation.

 

If you’ve been on the fence about transitioning to automated accounting processes, it might help to consider the following benefits of automating your accounting processes with Sage Intacct or other cloud ERP solutions.

 

  1. Save time
    Are your month-end closes taking up most of the month? Have you missed payment deadlines? Manual data entry is tedious and time-consuming, with employees spending hours on mind-numbing manual tasks instead of focusing on strategic tasks that add real value to the business.
  2. Be accurate and consistent
    Even highly skilled employees will occasionally make mistakes. Automation alleviates common data entry errors and ensures that every action is performed identically, so your customers, clients, and internal departments receive a consistently high level of service.
  3. Reduce costs
    Manual tasks almost always take longer than automated tasks, which means they demand more employee hours every week, month, and year. Automation reduces those work hours and helps prevent errors that can lead to unexpected additional costs.
  4. Increase visibility
    Using manual accounting methods, it can be extremely difficult to monitor, update, reconcile, and report on every internal process across the organization. When you automate billing, collections, sales, and other processes, you can automatically record and report on key metrics, in real time, so the information you need is always at hand.
  5. Reduce risk
    Automated processes can help you reduce the risk that you are out of compliance with the latest regulations or vulnerable to data breaches and other security concerns. Automated, cloud-based accounting solutions are automatically updated to adhere to the latest guidelines, and top providers follow strict security guidelines to protect your business and its data.

Automate Your Accounting Processes

Where to start?

If you’re convinced of the benefits of automating your accounting functions but overwhelmed by the challenge, remember that you can start slowly. For instance, you could automate your accounts payable workflows or audit documentation first, and move gradually to a completely automated solution.

 

Insero & Co. can help you weigh the benefits of automating your accounting processes and help you make the transition to best-in-class software. Contact us to talk about the relationship-based services we provide and how we can help you improve your processes to be more efficient and productive.

Considering Employee Raises? Review These Ideas

Considering Employee Raises? Review These Ideas

Deciding how to administer employee raises can perplex even the most seasoned managers. How often should raises be given? Should they be given across the board to all workers? If staff turnover is increasing, can you turn back the tide by granting raises to the most productive workers? There’s a lot to consider.

As you create or update your plan for giving out employee raises, here are some ideas to consider:

  • Pros and cons of merit raises. You may think that giving everyone the same raise (either percentage or dollar amount) seems impartial and will produce harmony. But there’s a downside. Your top performers — workers who sell more widgets, meet customer demand more often, and maintain a great work ethic in the face of additional responsibility — often leave if they’re recognized the same as employees who show up late, have a bad attitude, or perform poorly. To solve this, consider establishing specific goals along with tiered raises for employees who meet or exceed published goals whenever possible.

 

  • Always with budget in mind. Raises mean higher labor costs, expenses that a company’s cash flow must support month after month, year after year. As you create your annual operating budget, incorporate expected labor cost increases. In addition to planning for standard cost-of-living adjustments (COLAs) and performance based wage increases, set aside funds for bonuses, commissions and “spot awards” (lump sum payouts for superior performance). You may also set guidelines for rewarding staff members whom identify operational improvements or generate goodwill in the community.

  • Reward existing staff first. When companies grow, they often face the prospect of hiring additional staff. If you’re in that enviable position, remember to review your current employees. A business that’s gaining customers and market share may load additional responsibility on existing workers. Plus, your more experienced employees may be asked to train new staff or work longer shifts. This current compensation review is especially important if the job market requires hiring new employees at or above the rates of your current, seasoned staff.

 

  • Communicate expectations regularly. Clearly state and routinely emphasize performance goals. Consider separating personal performance discussions with salary action. That way if revenues are down and you’re faced with the tough choice of freezing salaries, there is less chance an individual’s performance will be solely linked to pay. Then you can creatively use incentives and spot awards to reward behavior and ideas that help your business turn the corner.

 

A highly structured system for granting raises may allow your company to stay within budget, but if your best workers become dissatisfied and leave, labor costs can skyrocket. A well-managed payroll system that rewards great performers on a regular basis and is understood by all employees can be an effective tool to retain workers and help keep morale high.

 

As always, we hope you find our tips and news for businesses valuable, and look forward to receiving your feedback. Companies focused on growth have sought the help of Insero & Co. for more than 40 years. During that time they have consistently experienced the peace of mind that comes from knowing their CPA firm takes the concept of integrity seriously. Should you have any questions, please contact us directly.