Doug Houser: From Rea & Associates, this is unsuitable, a management and financial services podcast for entrepreneurs, tenured business leaders and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser.
Doug: It's December now, which means, as far as your company's finances are concerned, we're on crunch time. Did you get everything done that you wanted to cover over the course of 2019?
On this week's show, we are joined by Brent Ardit, a principal at Rea, and we'll talk about the importance of year end planning and what you can do to get your financials in order as we look ahead to 2020, which is hard to believe. Welcome, Brent.
Brent Ardit: I was going to say the same thing, hard to believe we're talking about 2020 already.
Doug: End of the decade, my friend.
Brent: Okay.
Doug: And here we are.
Brent: I always hear when people talk about 1990, they think it's yesterday.
Doug: Right.
Brent: Now, that was 30 years ago.
Doug: I feel like that, you know, some days. But yeah, so we're approaching year end and it's always good, as we tell our clients, right, be prepared, plan ahead because lack of planning makes it all a disaster, right?
Brent: Absolutely. I think we've had a few conversations recently with some clients that, you know, that we've talked to and-
Doug: Right. So what, in your view, what can a company do as they approach year end to best plan for their CPAs to come out, whether it's, you know, compilation review, audit, doesn't matter, what should they be thinking about to be prepared?
Brent: Yeah, there's definitely a couple of different angles you can come in at. You know, it can be, yeah, with the audits, reviews, compilations, it could be from tax planning, but it's just taking a look and reviewing how the year has gone. You know, I always say that if you can look at your balance sheet and you can go down through your cash, your accounts receivable, your accounts payable, whatever it may be, and you can explain what the balance is, you have some supporting schedules for that, that's going to go a long way to preparing you for year end.
Brent: You know, because a CPA is going to come in and they're going to want to know, you know, especially if it's an audit-
Doug: Sure.
Brent: They're going to want to know what's in this balance, what makes up this balance. And same thing with the income statement. Understanding, looking at trends, analytics, why did this go up, why did this go down-
Doug: Yeah.
Brent: Why did it stay the same?
Doug: It's a great point because I think we see a lot of folks, they get in the weeds so to speak, or you know, in that whirlwind, as we say, they're worried about the day to day and then not focused kind of on the big picture, what's the financial statement look like as a whole? And then sort of thinking, "Huh, why is this a little different than maybe I thought," or those kinds of things. So having that support is important for that.
Brent: Yeah, and especially when you're talking an audit and someone's going to come in and ask you what this balance is and ask you for all these documents. If you're able to answer that quickly and have some support, it's going to make that process go a lot easier.
Doug: Right, less time for us out there-
Brent: Less time for us, absolutely.
Doug: And we can spend more time actually talking about the client's business, right? Not about the basic stuff that we're trying to clean up.
Brent: Yeah. As much as you can do on the front end, you know? Once you get into the next year, you know, you want to focus on that next year, you want to be able to focus on the future, and like you said, you know, you don't want to always be looking at the past, you want to provide that value-
Doug: Right.
Brent: And forward looking, you know, and future looking and preparing for what's coming up and what's going to impact your business.
Doug: Yeah.
Brent: So the more you can focus on that and the less on some of that historical stuff that you've already prepared for-
Doug: Sure.
Brent: The better.
Doug: And from a tax perspective too, I know you and I aren't tax folks per se, but we know enough to be dangerous, right?
Brent: Absolutely. Yeah.
Doug: But the important thing is have an idea as to where your year might finish and sit down with your CPA, right? Say, you know, "So what should we be doing?"
Brent Yeah. Yeah. Tax planning for sure. I mean obviously, you can't do much after, you know, December 31st.
Doug: Right.
Brent: You know, if you're telling your CPA on January 2nd that you... You know, tough to plan for that. But if you're getting out ahead of it, even if it is, you know, two or three weeks before you're in, there might be some things that you can do-
Doug: Sure.
Brent: As opposed to a couple of days after.
Doug: Right. I mean, I think about our clients, say, in the construction space with planning for capital equipment purchases or, you know, whatever the case might be. So it's a good time to sit down and have those conversations.
Brent: Yeah. And there's opportunity there if you can see where you're going to end up at year end. You know, some tax planning, there's those opportunities. Do we have the opportunity to purchase some equipment?
Doug: Yeah.
Brent: Or, you know, it could be retirement planning or bonuses, or whatever it may be-
Doug: Great point.
Brent: You know, if you can think about those things ahead of time, it'll go a long way.
Doug: Yeah. And it actually ends up saving you time and effort and makes things more efficient with us too. That's for sure.
Brent: For sure.
Doug: So what are some of the main pitfalls that you see, and failings that you've seen with clients that just maybe don't have their house in order? What does that process look like from sort of a worst case scenario perspective?
Brent: Probably the biggest thing is the reconciliations, you know, it starts with cash. If you haven't been doing regular bank reconciliations, that can be a problem.
Doug: Okay.
Brent: If you're not looking at accounts receivable, aging, you know, reconciling that detail, accounts payable, again, those major balance sheet items, it could be inventory-
Doug: Okay.
Brent: Have you done a year-end inventory count? You know, when you haven't done these reconciliations and then it comes time for the CPA to come in, and again, whether it's on, you know, for an audit, a review, for tax purposes, it just puts unwanted stress on everybody. You know, there's deadlines, obviously there's IRS deadlines-
Doug: Right.
Brent: But there can be bank deadlines-
Doug: Sure.
Brent: Or bonding-
Doug: Yeah.
Brent: Or you know, whatever it may be, and if you don't have these things done, it just puts a lot of stress on both parties really.
Doug: Yeah, yeah, for sure. And it's amazing that you say that about cash not being reconciled. I know I remember walking into a few engagements where maybe they hadn't reconciled cash in several years. You know, it was a brand new engagement, say, for our firm, and I mean, you just think about the risk that you're putting your business in in that sense, I mean, it's unbelievable.
Brent: Yeah. You wonder how someone runs a business without, you know, reconciling balance sheet items-
Doug: Right.
Brent: On a regular basis. I mean, that may work for a while, you know, maybe for a small business senior-
Doug: Sure.
Brent: Saying, "No, I have cash in the bank." Well, you know, that can probably work for a little bit, but as a business continues to grow, I think what we've seen is that eventually catches up with you.
Doug: Yeah, great point.
Brent: You know, in planning. So a lot of these things that we're talking about right now aren't necessarily things that you should wait until right here at year end-
Doug: Right.
Brent: But for sure, you know, if you are at this point and you're thinking back and you're like, "Man, I haven't done that," or, "I haven't done that," these are some key things you want to really start focusing on is some reconciliations and understanding what is making up these balances-
Doug: Yeah.
Brent: And being able to answer those questions.
Doug: Now, what about the income statement this year. We've got this new revenue recognition standard, which we're obviously talking to clients about. What should they be focused on on the income statement? Is it really just kind of the revenue side of things or expense details? All of the above?
Brent: I think it's all the above and that's a very good point. You know, if you are reporting in accordance of GAAP, or generally accepted accounting principles, you know, there is a new revenue recognition standard and that affects all industries. It doesn't matter if you're construction, manufacturing, retail, whatever it is, that standard is going to affect you in some way.
Doug: Yeah.
Brent: It could have a major impact, it could have a minimal impact, but you know, you want to get ahead of that.
Doug: Yeah.
Brent: goes into effect, you know, for reporting periods 1231, 2019 will be that first reporting period-
Doug: Yeah.
Brent: And you'll want to get ahead of that. So reaching out to your CPA, understanding, looking at, if you have contracts-
Doug: Yeah.
Brent: Things like that.
Doug: Yeah, it's a good point. It's just again, having those conversations to make sure you've addressed what issues are there so that you're adhering to the proper guidelines and all of that. You know, some of what we've seen, the impact with that rev rec has been, you know, not too bad, but in some cases people aren't prepared either, and then we end up having to spend way more time than probably we'd like or the client would like going through that stuff, which nobody likes, right?
Brent: Right.
Doug: Not fun.
Brent: No.
Doug: So if I think about some of the best practices from folks, you know, obviously being prepared, having those reconciliations done, what else should I be thinking about in terms of the dialogue with my accountant when they come out? So assume all my stuff's balanced and tied out and clean, so what do I want to focus on?
Brent: I would focus on, you know, are there any major transactions that occurred, in the air, especially, you know, if you have an audit or review, I mean, those are the types of things you want to focus on. If there's new disclosures surrounding that, if there's a potential impact as it relates to covenants, you want to focus on, you know, are there any major transactions that occurred?
Doug: Yeah.
Brent: You know, if there's anything in the future coming up, yeah, you want to reach out to your banker-
Doug: Right.
Brent: Maybe it's your attorney.
Doug: Yeah.
Brent: You know, get legal involved. You know, you want to do as much as you can.
Doug: And you bring up a good point, say, about the the covenants or the banker for example, because of the different reporting guidelines that are in place this year with rev rec and we've got leases upcoming, how that can impact the presentation of the financial statements that we provide, right?
Brent: Yeah.
Doug: It may certainly impact what the bank sees or the bonding company or whoever, so let's get together and have those conversations, right?
Brent: Absolutely. Get all parties so everyone's on the same page. You know, it's not a surprise at deadline time when drafts are going out-
Doug: Right.
Brent: Or that final is going, you know, that final report is going out and all of a sudden a banker sees it and, "What is this?"
Doug: Freaks out, right?
Brent: Freaks out, "What is this?"
Doug: Yeah.
Brent: You know, and that that could have impact on the future.
Doug: And you and I have been involved in a number of clients that have gone through transitions this year, either, you know, inside sales to other inside parties or an ESOP or outside sales. Talk about the impact of lack of, say, financial accounting standards has on going through that process.
Brent: That can absolutely come back to haunt you. As people are doing their due diligence and coming in and taking a look at your business, like you said, from a sale perspective, from potentially ESOP, you know, obviously that's one of the big, big things that people are going to be looking at is your financial reporting and how accurate it is. You know, is it reliable information?
Doug: Sure.
Brent: And if people are asking you questions and asking you for this and asking you for that and you're not able to provide it or, you know, haven't reconciled this in a year, two years, I think that looks poorly on a potential from a buyer perspective or whoever it may be.
Doug: Yeah.
Brent: You know, it reflects poorly on the business itself.
Doug: I think what we've seen, you and I, we've got one now that clients may be looking at acquiring another company, and the company that they might potentially acquire, the financial reporting is just, you know, it's lacking would be an understatement.
Brent: Yeah.
Doug: And what people fail to realize is they fail to get value for their company because of that. You know, they think they're being wise in not spending that money over the years, but it ends up costing them a heck of a lot more at the end of the day, right?
Brent: Yeah. You get what you pay for.
Doug: There you go. Right? That's the ultimate lesson. But yeah, it's frightening what we see with some of that stuff.
Brent: Oh, we could probably sit here for the next hour and talk about stories and what happens and the stress that ends up on everybody at deadline time if you're not prepared, trying to get, you know, the report out at the last minute. Of course, no one likes to have their fees increased so you want to be somewhat fee conscious, but you know, not being prepared is a very easy way to see those fees increase as well.
Doug: I think that's a great point. And just, you know, having those conversations ahead of time, you think, "Well gosh, I'm going to spend this extra time. Is that going to cost me?" No, it actually ends up saving you, right?
Brent: Right.
Doug: But people don't always think of it that way.
Brent: No, they don't.
Doug: Unfortunately. Well that's great. What else do you see coming ahead in '20, as we get into 2020, we get into our financial reporting busy season, as you say, right? Because we've got to get this stuff done for the banks and et cetera. What's ahead that folks should be aware of, if anything? Anything new?
Brent: You know, I think we've talked about it. I think it's, you know, especially when it comes to the revenue recognition standard, I think regardless of the impact, bigger or small, I think there's going to be some disclosure type items that need to be addressed.
Doug: Yeah.
Brent: I'm sure there's plenty of things on the tax side. I mean, we've mentioned-
Doug: Sure.
Brent: We know enough to be dangerous on the tax side here, you know, let's be honest. But you know, I think there's definitely some... Tax is always changing.
Doug: Yeah. Always some planning that you can do there.
Brent: Always some planning you can do there. But yeah, just, you know, revenue recognition, those new standards, luckily leases were pushed back a little bit-
Doug: Yeah, we have a little bit of time.
Brent: We have a little bit of time here. Yeah.
Doug: I know from a revenue recognition perspective, particularly with regard to contractors, some of the balance sheet disclosures will look a little bit different, grouped a little bit differently perhaps, so that can have an impact for third party readers too. Again, it's not that this changes the way somebody should run their business, but be aware of how it impacts those that you're answering to. I think that's-
Brent: Absolutely.
Doug: Yeah. The lesson is communication, right?
Brent: Yes.
Doug: Absolutely, at the end of the day. Well this is great stuff, so I appreciate that. But now that we're unfortunately at the end of golf season, you got any new equipment plans for the upcoming year? Or are you going to stand pat for now?
Brent: You know, it's funny you say that. I have a appointment this weekend to do a fitting for golf clubs.
Doug: Nice, nice.
Brent: So I'm using this, you know, kind of approaching the off season to potentially look at a new set of clubs.
Doug: Good. So you're planning on-
Brent: Yeah.
Doug: For the new season of golf as it were, same as you would do it professionally.
Brent: Yeah, absolutely.
Brent: Got to get ready for next year.
Doug: I love it. I love it. So irons or a new metal or what? What are you?
Brent: Probably irons.
Doug: Irons?
Brent: Yeah. It's been a few years since I've got a new set iron-
Doug: Nice, good for you.
Brent: So you need to get the edge. It's probably like anything, you know, if you're a musician, you want that new guitar or whatever it may be.
Doug: Yeah. You got to watch it. That's going to mean less strokes though for you.
Brent: Yeah. I played with you. I know I'm the one that gets all the strokes.
Doug: I don't know about that. But anyway, thanks for being on, Brent. It's been a great insight. If you want more business tips and insight, or to hear previous episodes of unsuitable, visit our podcast page at https://www.reacpa.com/podcast. Thanks for listening to this week's show. You can subscribe to unsuitable on iTunes or wherever you like to get your podcasts, including YouTube. And while you're there, leave us a review. I'm Doug Houser. Join us next week or another unsuitable interview from an industry professional.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.
