Bottom Line 14

BOTTOM LINE Vol. 14 Vol. 12 Cerini & Associates, LLP, Certified Public Accountants Bringing a unique understanding of ...

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BOTTOM LINE

Vol. 14 Vol. 12

Cerini & Associates, LLP, Certified Public Accountants Bringing a unique understanding of key issues facing your business.

The Essential Guide to

Expanding to a New State

Developing and Using

Key Performance Indicators for Your Business

Calculating the Future of Accounting:

C&A’s Summary of FASB’s 2016 Accounting Standards Update

Copyright © 2016 by Cerini & Associates, LLP. All rights reserved. Please request permission to reprint or copy any part of The BottomLine.

From the Editor - Timothy J. McHale Welcome to the summer edition of the Bottom Line, the newsletter designed to provide insightful advice to local area businesses. This issue of the Bottom Line is chock-full of insightful articles that can help you to elevate your business to new heights. Whether you are just starting out or have been in business for years, we’ve got you covered. At some point, almost every business plans to expand out of state and we have included an article that outlines the fundamentals of the expansion process. If you would like to better measure your business’ performance, there is a handy article on developing and utilizing key performance indicators. Last but not least, we have put together a list of the most important FASB updates of 2016 thus far to help you keep your reporting practices healthy and up to date.

3340 Veterans Memorial Hwy, Bohemia, N.Y. 11716

631-582-1600 www.ceriniandassociates.com

If you visit our website at www.cerinicpa.com, you will find even more information to help you run your business more efficiently and effectively. Remember, while articles can provide a host of valuable information, there is no substitute for live assistance. Give us a call; we are here to help. We look forward to making a difference in your business. Sincerely,

Tim McHale, Partner

Connected to your business...



connected to your goals...

connected to your success

Contributors

Editor Timothy J. McHale, CPA

Cerini & Associates, LLP Partner

Associate Editors Ken Cerini, CPA, CFP

Cerini & Associates, LLP Managing Partner

Lisa Epstein, CPA

Cerini & Associates, LLP Director of Audit

Writers Jacob Lutz, MBA

Cerini & Associates, LLP Senior Accountant

Edward McWilliams, CPA Cerini & Associates, LLP Manager

Sean Wilkinson, CPA Cerini & Associates, LLP Supervisor

Page Layout & Design Kristina Laino Cerini & Associates, LLP Graphic Designer, Marketing Assistant

As your business grows, you may inevitably find yourself selling goods or services to customers outside of your home state, opening new facilities out of state, or perhaps even hiring out of state employees. Conducting any of these actions as well as a multitude of others may result in the need to register your business in the state, make certain filings, and pay the state’s taxes to which your business is subject. Each of the 50 states as well as the District of Columbia have their own unique requirements for registering your business and paying taxes. It is imperative to understand the state’s requirements before conducting any activities and doing so could help prevent significant financial and administrative burdens in the future.

Registration: Once you have confirmed that your actions will require registration in a new state, the next step is to register with the state’s Secretary of State (SoS). Doing so will officially allow you to conduct business in the state. In order to register, you will need to have a physical address within the state and most states also require a certificate of good standing or its equivalent from your home state. If you do not have a physical address, you can hire what is known as a registered agent to act as your in-state mailbox. For a fee, they will collect and forward you any mail that the state sends to you and in some cases, they may even make certain state filings on your behalf. Certificates of good standing can be acquired from your home state’s SoS for a nominal fee. Once you have these items, you will need to complete the actual registration application, which for most states can be done online. After registering with the SoS, you must register your business with the state’s Department of Revenue (DoR), for tax purposes. Similar to the SoS registration, the DoR registration, for most states, can be completed online. Prior to completing the registration, we highly recommend consulting a tax professional. Each state has a variety of tax types and registering for the wrong ones could cause significant issues. Following the DoR registration, some businesses, depending on the type of business, their activities, and the state, may be required to register with other state departments, such as the Department of Labor.

Recordkeeping: Now that you have successfully registered to do business in a new state, you will need a solid recordkeeping system to keep track of your activities. Primarily, you will want to be able to keep track of revenues earned in the state, payroll paid to employees working within the state, and

fixed assets located within the state. Most states will use at least one, if not all three, of these factors in determining how much of your net income should be allocated to the state for tax purposes. Maintaining good records can help to eliminate a lot of the administrative burden at tax time and also reduce exposure in the event that the state decides to audit your return.

Compliance: Although each state has different filing requirements, most states require the filing of an annual report with the DoS and an annual tax return with the DoR. The annual, or biennial, reports in a state like New York are relatively simple filings. These reports generally ask for the current business owners and officers, the address of the business or registered agent, and for corporations, they request stock information such as the number of shares authorized, issued, and outstanding. A fee is also required at the time of filing. The information provided is used to update the SoS public entity records which, in many states, are available online. Failure to file the states’ required reports will result in the SoS displaying outdated information about your business and may cause your business to no longer be in good standing with the state. For these reasons it is incredibly important to file these reports timely and accurately. The annual tax return you are required to file will largely depend on the legal structure of your business. In most cases, a payment will be due with the return as the result of a net income tax, a franchise tax, an excise tax, or a different type of tax imposed by the state. As previously mentioned, most states use revenue, payroll, and fixed assets to determine your taxable income and your tax preparer will need to utilize your records of the aforementioned items to ensure that your tax return is accurate. If you are looking to expand your business into a new state, we highly recommend consulting a tax professional to assess your business and the requirements it will be subject to in the new state. In addition to the items listed herein, a tax professional will be able to assist with other considerations such as sales tax, payroll tax and withholding requirements, unemployment insurance, nexus determination, and revenue sourcing, to name a few. We at Cerini & Associates are very familiar with the nuances of operating multi-state business enterprises and can provide you with excellent professional guidance to grow and expand your business.

Jacob Lutz, MBA Senior Accountant

Cerini & Associates, LLP - BottomLine 

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A Key Performance Indicator or KPI is a metric that business owners and decision makers (collectively referred to as owners) can use in order to help evaluate the current performance of their operations, allowing them to set strategies and identify areas where they can set goals to fuel growth. Often, a KPI can be thought of as a question that an owner will have, with the resulting output being an answer to that question. With the abundance of data available, it is important that your business develops and monitors the right indicators in order to succeed. KPI’s generally should have a set target for which to benchmark against, whether it be from industry data, executive experience, or other expectations an owner may have. Once there is a set target, owners,

their management team, and their advisors should help develop and implement strategies that drive the KPI toward the target. For owners, it is also important to pick the right KPI. Certain industries will have specific KPIs that are extremely important to their organizational growth, such as gross margin for a wholesaler or retailer or cost per lead for an online centric user platform. Owners should look to develop metrics they feel will have the most impact on their final measurement (which itself is a KPI). While this may sound like an overly complicated and challenging task, many owners already are looking at certain common numbers as KPIs and not even realizing it. Below are examples of common KPIs and in what organizations and settings they may be useful.

KPI

Type

Industries

Sales Volume

Financial

All

Gross Margin Percentage

Financial

Manufacturing, Retail, Wholesale, Construction

Sales are the lifeblood of all business operations. Measure what percent of sales are left after costs are covered. Drives profit.

EBITDA

Financial

All

The profitability of the business.

Debt Service Coverage

Financial

Leveraged Firms

Measures the ability of a firm to meet its debt costs.

Realization

Operational

Professional Service Firms

Utilization

Operational

Professional Service Firms

Customer Acquisition Cost

Marketing

High Volume & Mass Market Services

Measures how much it costs to obtain a customer.

Marketing Costs/ Total Customers

360 Degree Feedback

Human Resources

All

Measures employee feedback on management.

Employee Turnover

Financial

All

Measures how often employees are replaced.

Employee Feedback Score Per Manager Separated Employees/ Average Number of Employees

Many KPI’s often will often look towards drivers of the businesses operational bottom line, however, this does not have to be the case. KPI’s can be used in non-financial matters to measure success, such as Carbon Footprint, Waste rates, Quality Index, or Social Networking Footprint. The key to developing a KPI is as follows.

1 Determine the final output for which you are trying to measure. This may not always be financial or profit oriented and often can be an operational measure such as output per period. For example, an organization may be concerned with its operating profit, and feels that its customer service costs are a key driver in the profit. 2 Together with key personnel, develop an understanding of the inputs needed to reach the output. In our example, a business owner may meet with his head of customer service, customer service managers, and his finance department and together find that its customer service costs are driven mostly by salaries and that their input into the organization would be the number of customer services calls per month. 3 Develop a measureable metric to benchmark. To continue with our example, we find that Cost per Customer Serviced can help tell us how much we are paying per customer and allows apples to apples comparisons if a business is growing. We would take our service costs/customers serviced per month to come up with how much each customer costs.

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Importance

Measures how much of the employees billable time is being collected. Measures what percentage of employee time is spent on revenue producing activities.

Calculation Sales Cost of Sales/ Sales Net Income + Interest + Taxes + Depreciation + Amortization Net Operating Income/ Debt Service (Principle + Interest) Total Billed/ Total Expected Billings Billable Hours/ Total Hours

4 Benchmark the metric against prior results and industry standards and set targets. For our customer service example, a good analysis would be to compare with a rolling 12 months as well as to what others in the industry are paying per customer. 5 Set & execute strategies. For example, in conjunction with our customer service team we may set a strategy that streamlines the customer service process so that the staff can take more calls per month if we find the costs are too high, or consider adding more staff to improve customer service if the costs are too low and other KPIs (customer satisfaction surveys) dictate as much. 6 Continue to monitor – even after target has been reached. KPI’s are an integral part of the next step in growing a business enterprise. A KPI provides a concrete objective measure to assist in setting targets and goals for your operation as a whole. A good KPI will be one that is measurable and is found to have a direct impact on your final output, whatever that may be. Many astute owners are often intrinsically aware of these KPIs, but have never formally documented or measured their results and can often be surprised when they do. The use of KPIs will only increase as more data is readily available and can be used to continue to grow your business. Edward McWilliams, CPA Manager Cerini & Associates, LLP - BottomLine 

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Calculating the Future of Accounting: C&A’s Summary of FASB’s 2016 Accounting Standards Updates

Each year, the Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to communicate changes to the FASB Codification, which if you’re not already aware by now, is the sole source of authoritative Generally Accepted Accounting Principles (GAAP). Keep in mind that these ASUs are not authoritative standards, but they do aid in explaining how and why the FASB has changed US GAAP, background information related to the change, and a timeline of when the changes will be effective. In 2016, there have been a number of updates released, varying from changes in revenue recognition to proper classification of complex accounts. Outlined below is a summary of some of the more significant changes that may affect your for-profit business. The purpose of these summaries is to provide some quick insight, which will hopefully enable you to identify the ASUs that impact your business. FASB ASU No. 2016-13: Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. For non-public organizations, 6   Cerini & Associates, LLP - BottomLine

the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. FASB ASU No. 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This update addresses issues such as collectability from noncash payments and contract modifications as they relate to the new revenue recognition standard. The amendment also allows the exclusion of sales tax from the reported amount for the transaction price. FASB ASU No. 2016-09: Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU is intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.

FASB ASU No. 2016-02: Leases (Topic 842)

FASB ASU No. 2016-08: Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. It helps clarify how an entity determines whether the nature of its promise is to provide that good or service to the customer (i.e., the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the entity is an agent). A number of clarification points are discussed in the ASU and are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. FASB ASU No. 2016-07: Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments both eliminate and add certain requirements, which are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. FASB ASU No. 2016-06: Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The updates apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The update simplifies the analysis of embedded derivatives for debt instruments that contain contingent put or call options. Applying a retrospective transition method, entities are expected to apply this rule to existing debt instruments as of their adoption period. FASB ASU No. 2016-04: Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The ASU requires issuers of prepaid stored-value products redeemable for goods or services at retailers or merchants to derecognize liabilities for brokerage. Brokerage signifies the value of prepaid stored-value products that is not directly redeemed by consumers for goods and services at the place of the purchase. For example, this applies towards gift cards, traveler’s checks, and prepaid telecommunication cards.

Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1

2

A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under the new update. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 (i.e., January 1, 2020, for a calendar year entity), and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. The FASB’s main objective with these ASUs, is to enhance the current regulations and make them more effective and easier. The ultimate goal is to improve the helpfulness of financial statement information to its users, while also keeping the costs of obtaining the information lower. The specific updates outlined above only begin to scratch the surface. We urge anyone reading, who thinks a specific ASU may impact their business, to read the complete ASU and all relevant guidance on the Financial Accounting Standards Board website (www.fasb.org). In addition, please don’t hesitate to contact the experts at Cerini & Associates should you require any additional guidance or clarification. Sean Wilkinson, CPA Supervisor

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Cerini & Associates, LLP 3340 Veterans Memorial Hwy. Bohemia, N.Y. 11716 www.ceriniandassociates.com

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