Build Better Financial Insight with a Well-Organized Chart of Accounts

The chart of accounts is one of your business’s most important bookkeeping tools. It provides the framework for classifying and tracking financial transactions. The challenge is finding the right level of detail. Categories that are too broad can obscure important information, while excessive detail can make bookkeeping cumbersome and inconsistent. A well-designed chart balances those competing concerns and gives your business a reliable foundation for financial reporting and decision-making.

Give financial data structure

A chart of accounts is a structured list of general ledger accounts that are used to record and organize financial transactions. An organized chart simplifies the preparation of tax returns and financial statements that comply with formal accounting standards, such as U.S. Generally Accepted Accounting Principles (GAAP). However, the chart alone doesn’t ensure compliance. Transactions must also be recognized, measured and presented correctly.

Additionally, a well-designed chart provides insight into profitability and asset management. It can help you identify financial and operational areas in need of improvement and make better-informed strategic decisions.

In turn, these insights can help you communicate with stakeholders, such as lenders and potential investors, about your business’s financial performance. This can be useful, for example, when applying for new loans, seeking additional capital contributions or selling your business.

Organize accounts logically

Essentially, the chart of accounts mirrors the financial statements; it includes major balance sheet and income statement accounts. Each account is assigned an account name and, if your business uses account numbering, a unique identification number.

There’s no universal numbering requirement under GAAP. One possible structure is:

• 1000–1999 for assets, such as cash on hand, cash in checking, accounts receivable, equipment, furniture, vehicles, buildings, land and inventory,

• 2000–2999 for liabilities, including accounts payable, accrued expenses and loans,

• 3000–3999 for equity, for example, retained earnings and capital accounts,

• 4000–4999 for revenue,

• 5000–5999 for job costs or cost of goods sold, and

• 6000–6999 for operating expenses, such as administrative payroll and benefits, rent, utilities, marketing and insurance.

Subcategories are generally created for key accounts within each main category. For example, current assets could start at 1100, fixed assets at 1200 and other assets at 1300. As your business grows or its reporting needs change, you might add more accounts within a range.

Keep the structure useful

There’s no one-size-fits-all format for the chart of accounts. The appropriate structure will depend on the number, nature and complexity of your business’s financial transactions. Many businesses start with industry-specific templates provided by their accounting software packages. Then, they customize those templates to fit the business’s needs.

When setting up your chart, consider these best practices:

• Leave space between account numbers (if you use numbering) to accommodate business growth.

• Use simple, easy-to-understand naming conventions.

• Add a description for each account to help accounting personnel enter transactions into the correct general ledger account.

• Select the correct account type (asset, liability, etc.) to facilitate financial statement and tax return preparation.

• Review the chart at least annually and make any necessary adjustments.

A simple chart of accounts may work initially, but your business may need more complexity as it evolves. For example, management might want to track results by department, project or region. Depending on your software, you may be able to use classes, locations or project-tracking features instead of creating additional general ledger accounts. Other systems may use account segments to support this reporting. A new business line might also require changes to an existing chart. More complex charts are common in certain industries, such as health care or construction.

Strengthen your reporting foundation

Like a foundation beneath a building, your chart of accounts supports everything built on top of it — from financial statements and tax returns to budgeting and business planning. Taking time to keep that structure organized can make it easier to track performance, identify trends and monitor costs. Whether you’re building your chart of accounts from the ground up or revamping an existing one, contact FMD to discuss a structure that supports your current reporting needs and provides room for future business growth.

Profitability Matters: Why Book Profits Don’t Always Match Taxable Income

Many owners assume the pretax profit reported on their financial statements should equal the business’s taxable income. In practice, those metrics often differ, sometimes significantly. Book-tax differences may result from differences in timing, tax law requirements and accounting treatment. Understanding those differences can help you evaluate financial performance, maintain accurate accounting records and make informed business decisions.

Pretax profit vs. taxable income

Under U.S. Generally Accepted Accounting Principles (GAAP), pretax profit includes all revenue and expenses (except income taxes) for the accounting period. Accrual-basis accounting generally recognizes revenue when earned and expenses when incurred, rather than when cash changes hands. Higher pretax profits generally indicate stronger financial performance, though accounting methods and estimates can affect comparisons.

In contrast, taxable income is calculated under applicable tax laws. Higher taxable income generally increases tax obligations, though credits and other provisions can affect the amount owed.

The tax rules and accounting standards may differ in how certain items are treated, including depreciation and other business deductions. This may lead to differences in timing and amounts between the two metrics.

Hypothetical example

Consider a hypothetical C corporation that uses the accrual method for tax purposes. In 2026, it earns $8 million of revenue and incurs $4 million of general operating expenses for both book and tax purposes. How do the company’s pretax profit and taxable income compare?

Pretax profit. Its GAAP income statement reports $1 million of straight-line depreciation, $500,000 of bad debt expense based on estimated credit losses and $700,000 of fines payable to the Environmental Protection Agency (EPA). So, its pretax profit is 1.8 million(8 million − $4 million − $1 million − $500,000 − $700,000).

Taxable income. The company’s Form 1120 claims $1.6 million of accelerated depreciation (including first-year write-offs for eligible assets) and $300,000 for specific bad debts that became worthless and were written off during 2026. However, the EPA fines were penalties for legal violations, rather than qualifying restitution, remediation or compliance payments, so they’re nondeductible for tax purposes. As a result, its taxable income is 2.1 millionfor2026(8 million − $4 million − $1.6 million − $300,000), assuming no other adjustments.

Timing differences, such as those related to depreciation and bad debt deductions, generally reverse over time. But permanent differences, including nondeductible EPA fines, don’t reverse. State tax rules may differ from federal rules, adding complexity.

Potential bookkeeping pitfalls

Some book-tax differences stem from internal bookkeeping practices. For example, businesses may estimate bad debt expense, record accrued liabilities or write down obsolete inventory for financial reporting purposes before those items become deductible for tax purposes. Because accounting rules sometimes require recognizing certain losses and expenses sooner than tax law permits, these items can create differences between pretax profit and taxable income. Inaccurate estimates may also distort reported profitability.

In addition, misclassified transactions, owners’ personal expenses recorded through the business and other bookkeeping errors can complicate year-end tax reporting. Reviewing book-tax differences often helps uncover these issues before they become larger financial reporting or compliance problems.

Inaccurate tax estimates

Book-tax differences can have real-world tax and cash-flow consequences. For C corporations, they may affect estimated tax payments. For pass-through businesses, they can affect owners’ individual tax-planning decisions and estimated tax obligations.

If the hypothetical corporation had based its estimated tax payments on its $1.8 million pretax profit instead of its $2.1 million taxable income, it would underpay its 2026 federal income tax. The $300,000 gap between pretax profit and taxable income could leave an unexpected balance due. An underpayment penalty also could apply, depending on the required installments and available exceptions. Coming up with funds when the balance is due could be challenging.

Be especially careful when certain timing differences reverse in subsequent tax years. This commonly happens when businesses claim first-year write-offs for bonus depreciation and Section 179 expensing. Continuing with the hypothetical example, let’s assume that the company doesn’t buy additional assets that qualify for accelerated depreciation deductions in 2027.

If management relies solely on its 2027 pretax profit to make estimated tax payments, it could owe a significant balance when it files its return, along with potential underpayment penalties. That’s because the company already claimed larger tax deductions upfront. As available depreciation deductions decline in future years, taxable income may rise even if operating profit remains relatively stable.

Why it matters

Book-tax differences are a normal part of doing business. However, significant or unexpected differences may signal accounting issues that warrant closer review. Understanding why pretax profit and taxable income may differ helps business owners improve financial reporting, strengthen cash-flow planning and avoid surprises at tax time. Contact FMD for help reconciling book-tax differences and preparing financial records that accurately reflect your business’s profitability.

Let’s Take a Closer Look at Accrued Expenses

At the end of the reporting period, most businesses have accumulated operating costs that won’t be paid until the next period. If your business prepares financial statements under U.S. Generally Accepted Accounting Principles (GAAP), certain unpaid costs may need to be reported as accrued expenses. Overlooking them can understate your business’s liabilities and overstate its profits. Accurate bookkeeping requires knowing which obligations to report on your financial statements and why recognizing an expense for accounting purposes doesn’t necessarily generate an immediate tax deduction.

Unpaid obligations

Businesses that issue GAAP financial statements use the accrual method of accounting. Accrual-basis accounting generally requires recognizing expenses when incurred, regardless of when you pay them. At the end of the accounting period, your business may have incurred expenses in the current period that it hasn’t yet paid or recorded in its financial statements. Unrecorded expenses incurred in the current period require adjusting entries.

For instance, if your business has borrowed money to finance operations or capital assets, it’s accumulating interest costs daily. An adjusting entry may be needed at the end of the accounting period to record the interest accumulated during that period. Interest payable generally appears on the balance sheet as a current liability if due within one year or the operating cycle, whichever is longer. The related cost generally appears on the income statement as interest expense, though interest incurred during the construction or production of qualifying assets may need to be capitalized.

Other common examples of expenses that may be owed but unpaid at the end of the period include taxes, utilities, professional fees, and employee wages, bonuses and benefits. By accruing expenses, a business matches revenue earned in the accounting period with the related expenses incurred in that period. Reporting many accrued expenses, such as accrued interest, is straightforward. However, reporting certain accrued expenses may be more complicated because it requires estimates.

Significant accruals

GAAP doesn’t require a separate footnote describing every accrued expense or every estimation method. Presentation and disclosure depend on materiality and the accounting guidance applicable to the underlying obligation. Significant accrued liabilities may warrant separate presentation on the balance sheet or additional detail in the footnotes.

For example, a business might provide the following disclosure for accrued wages and benefits:

As of December 31, 2026, the business has accrued $300,000 for wages and related benefits, representing employee compensation earned but unpaid as of the balance sheet date. The accrual includes salaries, bonuses and payroll taxes. These amounts are expected to be paid in the first quarter of the following fiscal year. Management regularly reviews and adjusts the accruals based on actual compensation and obligations.

Businesses must also disclose their use of estimates in preparing financial statements. Additional disclosure may be required when a significant estimate is subject to uncertainty and could change materially in the near term. Other guidance may require disclosures about particular obligations or material changes in estimates.

Book-tax differences

Some businesses apply different rules for recognizing income and expenses for tax purposes. Specifically, certain small businesses can choose to use cash-basis accounting for federal income tax purposes. For tax years beginning in 2026, the inflation-adjusted gross receipts threshold is $32 million in average annual gross receipts over the previous three tax years. Eligibility may be subject to additional rules and restrictions.

If your business chooses to use cash-basis accounting for tax purposes, some expenses recorded on your GAAP financial statements may not be deductible in the same tax year. Under the cash method, you generally report income when you actually or constructively receive it and deduct expenses when you pay them, rather than when you incur them (as under the accrual method). Using cash-basis accounting for tax purposes may defer taxable income, but it can also delay deductions for unpaid expenses. Exceptions apply, including rules requiring certain costs to be capitalized.

Special rules for accrued bonuses

Special tax rules apply to accrued employee bonuses. Cash‑basis employers generally must deduct bonuses in the year they’re actually paid, regardless of when they’re earned. However, accrual-basis employers can generally deduct accrued bonuses in the year employees earn them if the applicable requirements are satisfied, including:

• Bonus amounts are fixed obligations by the end of the tax year,

• Bonus amounts are reasonably determinable, and

• Bonuses are paid within 2½ months after the end of the tax year (generally March 15 for calendar-year businesses).

If the business delays bonus payment beyond this period, the deduction is generally deferred until the year the employee includes the payment in income, typically the payment year, under the deferred compensation rules.

Bonus plan terms also matter. For example, requiring employees to remain employed through the payment date may prevent a year-end deduction if forfeited bonuses revert to the employer. One possible workaround is to establish a bonus pool. If the other requirements are met, employers may deduct bonuses in the year they’re earned, as long as they reallocate any forfeited bonuses among the remaining employees in the pool. Under such a plan, the aggregate bonus amount is fixed at year end, even though amounts allocated to specific employees may not be determined until the payment date.

In addition, the favorable tax treatment for deducting accrued bonuses may be limited by the related-party rules. Under these rules, bonuses owed to cash-basis related parties generally aren’t deductible until the recipients include them in income, typically when paid. In general, this applies to shareholders who directly or indirectly own more than 50% of the value of a C corporation’s outstanding stock and to S corporation shareholders regardless of ownership percentage. These rules can be complicated, especially for partnerships and limited liability companies, so contact your tax advisor to discuss the appropriate treatment for your situation.

Errors and manipulation

Reporting accrued expenses can be challenging and requires meticulous recordkeeping, especially when a business follows different rules for recognizing expenses for book and tax purposes. Errors and omissions may happen when making estimates or matching expenses to the proper accounting period, resulting in under- or overstated liabilities. Some businesses may also misclassify accrued expenses, causing confusion in financial reporting.

In addition, accrued expenses can be vulnerable to fraud schemes. For instance, fake accruals for nonexistent expenses may be used to create a reserve that can be reversed to inflate future profits. Or management might hide bills or manipulate estimates to avoid recognizing accrued expenses in the current period, artificially inflating profits. External audits can help detect these schemes, but they provide reasonable, rather than absolute, assurance that financial statements are free of material misstatement due to fraud or error. Your accountant can also recommend antifraud controls to fortify your defenses.

Strengthen your review

A consistent closing process helps ensure your financial statements accurately reflect unpaid obligations. Giving accrued expenses the attention they need provides owners, lenders and investors with a clearer picture of profitability and financial health. Contact FMD for help reporting your business’s accrued expenses and related disclosures.

What are the Common Warning Signs of Financial Distress?

Owners, lenders, investors and other stakeholders often rely on a business’s annual financial statements to assess profitability, liquidity and overall financial health. However, the financials generally report what has already happened and may not fully reflect recent developments. Even when financial information is prepared regularly, stakeholders who rely solely on historical results may miss warning signs that emerge between reporting periods and could affect their financial interests.

That’s why it’s important to look beyond the numbers. Operational and behavioral changes can sometimes provide early clues that a business is under financial pressure. Here are some common red flags to watch for throughout the year — before the effects appear in the year-end financial statements.

Excessive employee turnover

Employees may recognize problems before they appear in financial statements. Some may seek other job opportunities when they’re aware of financial distress or feel pressure to meet unrealistic budget targets.

They may also jump ship if they think deteriorating performance could lead to pay cuts or layoffs. Likewise, concerns about declining bonuses or the value of stock incentives may motivate key employees to leave. Turnover is especially problematic when it involves top performers or hard-to-replace executives because it can ripple through the remaining staff and lower morale.

Financial reporting issues

Delays in the financial reporting process may signal unqualified accounting personnel, inadequate recordkeeping or even fraud. In some cases, a controller or CFO may be reluctant to report weak financial performance to owners who aren’t involved in the business’s day-to-day operations. Or management may delay reporting out of concern that lenders will call loans or refuse to waive covenant violations. Late financials can also reflect staffing shortages and difficulty resolving accounting issues. If the year-end close takes longer than usual, find out what’s causing the delay before relying on the results to make important business decisions.

Also watch for changes in accounting methods, unusual transactions or unexpected adjustments to the general ledger. In some situations, managers may use aggressive accounting practices to make financial performance appear stronger than it is. For example, a business may engage in related-party transactions at above- or below-market prices. Such transactions aren’t inherently improper, but you should carefully evaluate their terms and financial reporting implications. Management might also make aggressive accounting estimates to overstate asset values or earnings.

Reliance on nonoperating sources of cash

Financial distress often results in cash shortages. If operating activities don’t generate enough cash to cover working capital needs, management may borrow money or liquidate assets to make ends meet.

For instance, maxed-out credit lines and repeated loan applications may signal cash pressure. Each financing request should have a clear purpose and repayment plan. When cash is tight and loan requests are denied, business owners may turn to increasingly costly financing options. In some cases, they might take on debt with unfavorable terms or use their personal credit cards to fund the business’s working capital needs. As a business’s debt load increases, it’s critical to assess whether expected cash inflows from operations will support the incremental loan payments.

Healthy businesses routinely invest in new equipment and upgrades. However, those experiencing financial distress may sell fixed assets to meet short-term liquidity needs. This strategy can help bridge temporary cash shortages and allow a business to dispose of idle or outdated equipment. But it’s not viable over the long run because it could compromise the business’s ability to generate future income, especially if management liquidates valuable operating assets at fire-sale prices.

Stay alert

A single warning sign may have a reasonable explanation. Several appearing together, however, may suggest that a business is experiencing financial stress. Whether you’re an owner, lender, investor or other stakeholder with a financial interest in a business, paying attention to these developments can give you time to investigate further and act before problems become more serious. Contact FMD for assistance identifying potential warning signs and evaluating a business’s financial results.

Buying a Business? It Pays to Dig Deeper into the Financials

Whether you’re launching a new venture or expanding an existing one, it’s often easier to buy an established business than to build market share from scratch. Before signing a purchase agreement, however, you should review the seller’s financial records to understand what’s really driving the business’s profits and cash flow.

Comprehensive due diligence doesn’t just benefit buyers. Under recent U.S. Small Business Administration (SBA) guidance, certain SBA-financed business acquisitions may now require an independent quality of earnings (QoE) report as part of the underwriting process. The change underscores the importance of thorough financial due diligence. Here’s a closer look at what you should review to help identify risks, evaluate the sustainability of earnings and make a more informed decision.

Financial statements and tax returns

Start by asking the seller for financial statements and tax returns for the last three to five years. These records can help you evaluate trends in revenue, profitability and cash flow. Consistent growth and stable margins may indicate a healthy business. On the other hand, declining profits, volatile results or persistent cash flow challenges may warrant closer scrutiny.

Before you analyze performance, understand how the financial statements were prepared. Under U.S. Generally Accepted Accounting Principles (GAAP), the primary financial reports include:

• An income (or profit and loss) statement, which shows revenue and expenses for the accounting period,

• A balance sheet, which presents the book values of the business’s assets, liabilities and equity on the financial statement date, and

• A statement of cash flows, which summarizes cash inflows and outflows from operating, investing and financing activities during the accounting period.

GAAP statements follow accrual-basis accounting, meaning revenue and expenses are matched to the reporting periods in which they’re earned and incurred. Audited and reviewed financials may also include footnote disclosures that explain important information about the amounts reported in the financial statements.

Some businesses don’t prepare GAAP statements. Instead, they might use a special purpose framework or provide only internally prepared statements. These statements may exclude certain reports, line items and disclosures. Cash- or tax-basis statements may require accounting-method adjustments to analyze financial performance.

Also, compare financial statements with tax returns. Differences may be legitimate, but significant discrepancies should be explained. The objective is to determine whether the reported results accurately reflect the business’s economics.

Supporting records

Reports from the seller’s accounting software may help reveal issues that aren’t immediately obvious from the financial statements. During due diligence, consider requesting copies of:

• The current year’s budget,

• General ledger detail for selected accounts,

• Accounts receivable aging reports,

• Accounts payable aging reports, and

• Inventory summaries, if applicable.

For example, accounts receivable aging reports can show whether customers are paying on time or whether substantial amounts are overdue. Inventory reports may identify obsolete or slow-moving inventory.

You can also request bank reconciliations. Consistently reconciled accounts can indicate stronger bookkeeping practices and more reliable financial reporting. By contrast, incomplete or outdated reconciliations may signal that the records require additional verification.

Don’t overlook the importance of touring the business’s facilities. Observing operations firsthand may reveal inefficiencies, equipment concerns, excess inventory or other conditions that aren’t apparent from accounting records alone.

Normalizing adjustments

Many closely held businesses have expenses or financial arrangements that may not continue after a change in ownership. Examples may include:

• Above-market owner compensation,

• Personal expenses paid through the business,

• Family members on payroll,

• Above-market or below-market rent or related-party arrangements, and

• One-time gains or expenses.

During due diligence, these items are often adjusted to reflect what earnings would look like under typical operating conditions. This process is commonly referred to as “normalizing” the financial statements.

QoE reports

A common mistake buyers make is focusing on how much profit a business reports without considering the quality of those earnings. Effective October 1, 2026, certain SBA-financed acquisitions require an independent QoE report. This requirement generally applies to certain change-of-ownership loans when the purchase price is $3 million or greater, excluding applicable real estate. The new SBA requirement reflects growing recognition among lenders and investors that reviewing the acquisition target’s financial statements alone isn’t always enough.

A QoE report evaluates whether earnings and cash flow reflect the business’s ongoing operations and can support the acquisition debt. Such reports typically 1) analyze revenue, working capital, cash flow, and management’s earnings before interest, taxes, depreciation and amortization (EBITDA) figures and 2) verify various adjustments to the financial statements. In turn, the report may help reveal potential deal risks, such as:

• Customer or supplier concentration risks,

• Working capital shortfalls,

• Deferred equipment purchases and maintenance,

• Bad debts,

• Dependence on key personnel,

• Undisclosed liabilities and related-party transactions, and

• Pending litigation.

Even if you’re financing a deal yourself, an independent QoE report can help you interpret the business’s historical results in the context of today’s market conditions. If you commission your own report, you can customize it based on your needs and concerns.

For instance, you might want to break down gross profits by geographic region, salesperson or product line to understand what’s making money — and what’s not. Or you might ask for additional analysis of anomalies detected during your preliminary review of the financial statements and tax returns. A QoE report can also calculate relevant financial ratios and compare them with industry benchmarks for comparable businesses.

Professional support

If you’re thinking about buying a business, contact FMD for guidance through the due diligence process. We can help evaluate financial statements and tax returns, review supporting records, identify unusual transactions, assess financial and operational risks, and provide a QoE report if needed — before you sign on the dotted line.

Prepare Now for a More Efficient Audit

Audit preparation should begin long before fieldwork starts. Giving your accounting team and external auditor time to address significant transactions, reconcile accounts and assemble supporting documents can help streamline the audit process and avoid financial-reporting delays.

Communicate significant developments

Internal and external changes may bring opportunities and risks that could affect your auditor’s procedures. Identify significant developments and discuss them with your auditor during the planning stage rather than waiting for fieldwork.

Examples of noteworthy internal events or transactions include:

• Major asset acquisitions or divestitures,

• New or expanded product lines,

• Business combinations, discontinued operations or restructuring activities,

• Relocation or a new lease for commercial space,

• New or refinanced debt, covenant issues or changes in financing arrangements,

• Addition or retirement of owners and other key employees,

• Losses and business interruptions from natural disasters, fraud or cyberattacks,

• Acquisition or loss of a key customer or supplier, and

• A change in accounting software.

Your auditor will also want to hear about external changes, such as pending lawsuits and tax audits, new sources of competition, and new regulatory developments. Also communicate financial pressures, liquidity concerns and events occurring after year end that could affect the financial statements or related disclosures. When in doubt, tell your auditor.

Address accounting issues early

To the extent possible, all transactions for the year should be entered into your accounting system before fieldwork begins. But your accounting personnel might not know exactly how to report certain items. New contracts, leases, financing arrangements, acquisitions and unusual transactions may require research or significant judgment under U.S. Generally Accepted Accounting Principles (GAAP) or another applicable financial reporting framework.

If your staff is uncertain how to account for a particular transaction or when a new rule goes into effect, ask for help before closing the books. Your auditor may be able to explain the applicable guidance and discuss possible approaches, subject to independence requirements.

However, management must make accounting decisions, oversee any assistance provided and accept responsibility for the financial statements. Resolving questions early can reduce audit inquiries and the need for adjusting journal entries during fieldwork.

Apply lessons from your prior audit

Start by looking at last year’s adjusting journal entries, control deficiency communications and management letter comments. Confirm that you’ve incorporated recurring adjustments into your year-end closing procedures and implemented agreed-upon corrective actions. Also evaluate whether key controls are being performed consistently and whether supporting documentation, approvals, and other audit evidence are being retained and organized appropriately.

For example, if your controller previously forgot to record accrued payroll and vacation, double-check that you recorded the necessary accruals for the current year. Likewise, if your auditor recommended stronger internal controls over purchasing, evaluate whether your processes for ordering and receiving goods, approving invoices, modifying vendor information, and authorizing payments are appropriately separated or independently reviewed.

Don’t limit your review to items that resulted in an adjustment. Consider delays, documentation gaps and difficult questions from the previous audit. Addressing those trouble spots before fieldwork can prevent the same issues from resurfacing.

Organize records and responsibilities

Financial statement balances should be supported by schedules or other documentation that reconcile to the general ledger and trial balance. Be prepared to substantiate significant judgments and estimates, such as allowances for credit losses, inventory obsolescence reserves, warranty obligations, impairment analyses and measures of progress used to recognize revenue over time.

Ask your auditor for an updated prepared-by-client request list and clarify the expected format and due date for each item. You’ll likely create many requested schedules — such as accounts receivable aging reports and fixed asset listings — when you reconcile your general ledger. A secure electronic audit portal or well-organized audit file can help your team submit documents efficiently and track outstanding requests.

It also helps to designate an internal liaison to field the audit team’s inquiries. Often, this is the business’s CFO or controller, but it can be anyone knowledgeable about your business’s operations and accounting systems. Make sure other employees understand their roles, preserve requested records and reserve time to answer questions. Prompt, complete responses can help keep fieldwork on schedule.

Reduce disruptions and avoid surprises

A well-planned audit is typically more efficient, less disruptive and easier to manage than one that relies on last-minute preparation. By addressing accounting questions early, organizing documentation and resolving potential issues before fieldwork begins, your team can spend less time responding to audit requests and more time running the business. Contact FMD to help coordinate the planning process and prepare for a smoother audit.

Assessing Your Business’s Fraud Risks

Fraud risks change as your business and its external market conditions evolve. Controls that were previously effective may no longer be appropriate if, for example, you’ve added employees, revised your payment methods, switched vendors or opened new locations. Moreover, fraud perpetrators may use increasingly sophisticated schemes to gain access to your systems. A formal fraud-risk assessment can help you identify control gaps and fortify your defenses against asset misappropriation, financial misstatement and corruption schemes.

Review records and controls

Forensic accountants are often engaged to conduct a focused, objective review of fraud risks and the controls designed to address them. This assessment may include discussions with management and employees to understand how transactions are authorized, processed and recorded. Examples of documents that forensic accountants may review are:

• Bookkeeping records,

• Invoices,

• Bank statements,

• Payments,

• Journal entries, and

• Financial reports.

The assessment may also cover vendor and payroll files, electronic payment records and user-access logs. Management can assist by ensuring easy access to records and personnel. Unexplained delays, inconsistent explanations and missing or incomplete documents can be red flags that warrant further attention.

The engagement’s scope should reflect your business’s size, systems, industry and risks. Although a fraud-risk assessment can help you identify and address vulnerabilities, it won’t uncover every instance of fraud. So ongoing vigilance is essential.

Follow the transactions

Depending on the risks identified, forensic accountants may look for altered, forged or missing documents, management overrides, unusual transaction patterns, and other anomalies. For example, unusual or unsupported journal entries may warrant closer scrutiny, particularly if they’re inconsistent with normal business activity or posted by unexpected individuals. Unreconciled accounts and differences between the general ledger and subsidiary ledgers also warrant attention. An independent count of inventory or cash can help identify missing assets.

Payroll deserves particular attention. Missing or unaccounted-for workers could indicate “ghost” employees — nonexistent workers whose pay is diverted by a perpetrator. Management can help identify these schemes by reconciling payroll to human resources records and tax filings, confirming active workers with supervisors, reviewing duplicate bank accounts or addresses, and independently approving payroll changes.

Management should also watch for behavioral red flags. For instance, fraud perpetrators may avoid taking vacation or sick time for fear someone will uncover their activities, or they may become defensive. Such behavior isn’t necessarily proof of wrongdoing and should be evaluated alongside transactional evidence and other facts.

Protect the investigation

If a fraud-risk assessment uncovers suspicious activity, a separate investigation may be appropriate. Management should preserve relevant evidence and consult legal counsel and a qualified forensic specialist before confronting a suspected employee. A documented investigation plan can help maintain confidentiality, protect evidence, and address legal and employment considerations. Management also shouldn’t assume that one employee acted alone because fraud may involve collusion among employees or people outside the business.

Warning signs don’t always indicate fraud. Accounting irregularities may stem from genuine errors or an ill-designed process. Honest mistakes can be corrected and avoided in the future with better training, process improvements or more effective controls.

Make reporting safe and accessible

According to the Association of Certified Fraud Examiners’ Occupational Fraud 2026: A Report to the Nations, tips were the initial detection method in 43% of the cases studied, and more than half of those tips came from employees. The median fraud scheme lasted 12 months before detection, reinforcing the value of giving people practical ways to speak up.

If your business hasn’t established a process for employees, vendors, customers and others to report suspected misconduct, consider doing so. Your reporting process should provide accessible channels, route allegations away from anyone who may be implicated, prohibit retaliation consistent with applicable law and protect confidentiality to the extent reasonably possible.

Turn findings into stronger controls

A fraud-risk assessment should conclude with an action plan: Assign responsibilities, set deadlines for correcting deficiencies and follow up to confirm that revised controls are working. An external forensic accountant can provide an independent perspective, but management remains responsible for the business’s fraud controls and response procedures. Periodic reassessment can help those controls keep pace as the business and its fraud risks change. Contact FMD to discuss your business’s fraud risks and determine whether your existing controls adequately address them.

4 Tips to Help Seasonal Businesses Enhance Cash-flow Management

Most businesses experience cash-flow fluctuations, but the swings can be especially intense for seasonal businesses. Revenue may rise sharply during busy periods and fall in slower seasons, yet many expenses continue year-round — and some must be paid months before sales peak.

This timing mismatch can leave an otherwise profitable business short on cash. Here are four ways to make cash flow more predictable and reduce the risk of a shortfall.

1. Map your cash-flow cycle

Start by identifying when cash typically flows in and out of your business. For example, a lawn-and-garden distributor might purchase materials and build inventory in the fall, ship products in the spring and wait until early summer to collect customer payments. In the meantime, it must cover payroll, storage, utilities, transportation and other overhead costs.

Don’t confuse profit with available cash. A credit sale may appear as revenue on the income statement weeks before the customer pays. Conversely, purchasing inventory reduces cash but generally doesn’t produce an immediate expense, and repaying loan principal reduces cash without affecting your bottom line.

Because an income statement doesn’t show the timing of cash receipts and payments, use it in conjunction with a rolling cash-flow forecast. A 13-week forecast can provide a detailed short-term view and can be supplemented by a 12-month forecast covering the full seasonal cycle. Update the forecasts using current revenue, receivables, inventory, payroll and upcoming payments.

A forecast reflects the conditions management expects and the actions it plans to take. You might also prepare cash-flow projections based on hypothetical assumptions to explore “what-if” scenarios. For instance, what would happen if demand falls short, customers pay late, costs rise or bad weather shortens your selling season? Projections can help you decide in advance which expenses you could defer or reduce in a pinch.

2. Make data-driven spending decisions

A short selling season leaves little time to recover from excess spending. Use prior-year sales, current orders and other relevant data to develop realistic inventory and staffing plans. Track how quickly products are selling throughout the season. This gives you time to adjust future orders or promote slow-moving items before they lose value.

When planning seasonal staffing, consider the full cost — not just hourly wages. Recruiting, training, payroll taxes, workers’ compensation insurance and lower initial productivity may add to the cost of temporary workers.

Apply similar discipline to marketing. Establish a preseason budget and decide how you’ll measure results. Compare each campaign’s cost with the revenue and gross profit it helps generate, where measurable. This analysis can show which marketing activities are paying off and which should be adjusted or discontinued.

3. Monitor working capital closely

Small changes in working capital can substantially affect available cash. To enhance collections, be sure to:

• Invoice customers promptly,

• Provide clear payment terms, and

• Follow up consistently on overdue balances.

Depending on the business, deposits or advance payments on large orders may bring in cash before related bills are due. Early-payment discounts are another option, but weigh the cash-flow benefit against the effect on profit margins.

Also review vendor terms and volume discounts carefully. Buying more than you need ties up cash and may leave you with inventory that becomes obsolete or must be marked down. If your forecast indicates that you won’t have enough cash to pay an invoice on time, contact the supplier before it’s due to request an extension or payment plan. Delaying payment without a vendor’s approval could damage the relationship or trigger late fees.

Current accounting records are essential. Regularly review receivables and payables aging schedules, inventory reports, bank balances and upcoming obligations. Reconcile bank and credit card accounts promptly so you can investigate errors or unexpected charges.

4. Build reserves and arrange financing early

Ideally, cash retained from the peak season will cover slow-season expenses and help you prepare for the next cycle. Establish a reserve target that includes a cushion for unexpected costs or weaker-than-anticipated demand. Consider designating a separate account for those funds to discourage discretionary spending.

If your reserves aren’t enough to cover your next cycle, consider applying for a line of credit before cash becomes tight. Lenders may request current and historical financial statements, cash-flow projections, tax returns, debt information, inventory reports, and receivables and payables aging schedules. Accurate, timely records can strengthen your application.

Review interest rates, fees, collateral requirements, repayment terms and financial covenants carefully. A line of credit should cover temporary working-capital gaps, not ongoing operating losses.

Are you ready for your next busy season?

After the busy season, compare actual results with your budget and forecast. Review revenue, gross margins, labor costs, inventory levels, collections and marketing performance. Apply what you learn to your next cycle.

FMD can help you analyze your operating cycle, prepare rolling forecasts and maintain accounting records that provide a clearer view of your cash-flow needs. Contact us to get started.

Build Credibility with Audited Financial Statements

A financial statement audit can give lenders, investors and other stakeholders greater confidence in your business’s financial reporting. But not every private business needs an audit — and you must weigh the potential benefits against the cost and time involved.

Understand what an audit provides

Most businesses maintain an in-house accounting system to manage their financial records. The documents your staff prepares through this system are called “internally prepared financial statements.”

Depending on your business’s needs, internally prepared financial statements may follow U.S. Generally Accepted Accounting Principles (GAAP), a tax basis, a cash basis or another financial reporting framework. However, internal statements may not include all the adjustments, disclosures and other elements required under the applicable framework.

During an external audit, an independent CPA performs risk assessment procedures and obtains evidence about amounts and disclosures in your financial statements. The goal is to obtain reasonable assurance that the statements are free from material misstatement, whether caused by error or fraud. Management remains responsible for preparing the financial statements and maintaining appropriate internal controls.

If the auditor issues an “unmodified” opinion — sometimes called an “unqualified” opinion — the auditor has concluded that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

A qualified opinion means the statements are presented fairly except for a specific material matter. It may result from a material departure from the applicable reporting framework or the auditor’s inability to obtain sufficient appropriate evidence about a particular issue. Depending on the circumstances, material and pervasive issues could lead to an adverse opinion or a disclaimer of opinion.

Balance the benefits and costs

U.S. public companies generally must issue audited annual financial statements. External stakeholders often influence a private business’s decision to prepare audited financial statements. For instance, lenders and investors might ask for audited financial statements before providing financing. Similarly, audited financial statements may be a prerequisite for obtaining surety bonds or bidding on certain government contracts.

Even when an audit isn’t required, audited statements may strengthen the credibility of your financial reporting and help stakeholders evaluate your business. For example, audited financial statements can help you prepare for a business sale, merger or initial public offering.

From an internal perspective, an audit may also identify needed accounting adjustments, disclosure issues or weaknesses in internal controls that deserve management’s attention. Auditors use risk-based procedures, which may include inspecting records, confirming information with third parties, observing certain activities and testing selected transactions. However, an audit doesn’t examine every transaction or guarantee it will detect all errors or fraud.

Despite these potential benefits, your business shouldn’t pursue an audit without careful consideration. An outside audit requires a financial investment and substantial time and effort from you and your employees. You’ll need to gather and provide extensive documentation and respond to the auditor’s questions and requests for evidence.

Ready, set, audit

Whether an audit is required or voluntary, early preparation can make the process more efficient. Audit planning often begins months before fieldwork starts. If your business operates on a calendar year, now is a good time to review your accounting records, reconcile key accounts, gather supporting documentation and address accounting or internal control issues that could complicate the audit process. Contact FMD to discuss your upcoming audit and identify steps you can take to get your books and records audit-ready.

Understanding Deferred Taxes: Why Book Income and Taxable Income Don’t Always Match

Deferred taxes remain one of the more misunderstood areas of financial reporting. Deferred tax assets and liabilities generally reflect temporary differences between when items are recognized for book and tax purposes. Here’s a practical overview of how deferred taxes work and why they matter.

Who must report deferred taxes?

Not every business reports deferred taxes. The accounting rules for deferred taxes generally apply to businesses subject to entity-level income taxes that prepare financial statements under U.S. Generally Accepted Accounting Principles (GAAP). Many S corporations, partnerships and other pass-through entities don’t record federal income taxes at the entity level, though exceptions may apply. Small businesses that use the cash or tax basis of accounting don’t usually report deferred taxes either.

C corporations and other businesses subject to entity-level income taxes pay tax on “taxable income” as determined under applicable tax law. However, for GAAP purposes, total income tax expense generally includes 1) current tax expense or benefit, reflecting taxes payable or refundable for the current year, and 2)  deferred tax expense or benefit for changes in deferred tax assets and liabilities.

Where do deferred taxes come from?

Each year, taxable income and pretax book income may differ. A common reason for a temporary difference is depreciation expense. For federal income tax purposes, businesses may be able to use accelerated depreciation methods to reduce taxable income in the early years of an asset’s useful life. Some businesses also may elect to claim Section 179 deductions and bonus depreciation in the year an asset is placed in service.

For GAAP reporting purposes, businesses frequently use straight-line depreciation. Early in an asset’s useful life, this divergent treatment usually makes taxable income significantly lower than accounting pretax income. However, as the asset ages, the temporary difference in depreciation expense reverses itself.

Using different depreciation methods for book and tax purposes typically causes a business to report a deferred tax liability. In effect, the business pays less tax today because it claims larger depreciation deductions upfront. However, those deductions won't be available later, resulting in higher taxable income in future years.

Depreciation is just one type of accounting event that may give rise to deferred tax items. Other common examples include certain loss contingencies, charitable contribution carryforwards and accounting estimates (such as warranty costs and allowances for credit losses).

It’s important to distinguish temporary differences from permanent differences. Temporary differences reverse over time and create deferred taxes. Permanent differences, such as certain nondeductible expenses or tax-exempt income, may affect the business’s effective tax rate but don’t result in deferred tax assets or liabilities.

How are deferred taxes reported on the balance sheet?

When temporary differences exist between taxable income and accounting pretax income, your business generally must record deferred tax assets, deferred tax liabilities or both on its balance sheet. You must record deferred tax assets for expected future tax benefits from deductible temporary differences and from carryforwards related to capital losses, net operating losses or tax credits. Conversely, you must record deferred tax liabilities for the additional future amounts your business will owe.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply when the related temporary differences reverse, or carryforwards are used. Because deferred taxes reflect future tax consequences, changes in tax law or tax rates can affect their reported amounts, with the impact generally recognized in income from continuing operations in the period of enactment.

Under GAAP, deferred tax assets and liabilities are generally presented as noncurrent items on the balance sheet. They may be netted only when they relate to the same tax-paying component and tax jurisdiction.

Deferred taxes also aren’t discounted for the time value of money. Instead, they’re recorded based on the applicable tax rate and the expected future tax effects of temporary differences.

Deferred tax assets may be reduced by a valuation allowance that reflects the possibility they’ll expire before the business can use them. Management must evaluate all available positive and negative evidence when determining whether a valuation allowance is necessary. Deciding how much deferred tax valuation allowance to book requires significant judgment and is often one of the more challenging aspects of income tax accounting. Changes in the allowance generally flow through to the income statement.

Look beyond today’s tax bill

The rules surrounding deferred taxes can be complex, but understanding them is important for maintaining accurate financial statements. Because deferred tax balances may affect both the income statement and balance sheet, they may also impact ratios that lenders and other external stakeholders use to evaluate your business’ financial results. FMD can help you account for deferred taxes and explain what they mean for your business. Contact us to learn more.

Take Control of Working Capital

A profitable business can still run short of cash. Receivables may take time to collect, inventory can tie up funds and bills may come due before customers pay. Effective working capital management can help your business maintain liquidity and remain prepared for growth opportunities or unexpected challenges.

What are the components of working capital?

Working capital is calculated by subtracting current liabilities from current assets. The math is simple, but the result requires context. Start by identifying the specific components that drive the calculation.

Current assets generally include assets expected to be converted to cash, sold or consumed within one year (or the business’s normal operating cycle, if longer). Common examples are:

• Cash and cash equivalents,

• Accounts receivable,

• Inventory,

• Certain short-term investments, and

• Prepaid expenses.

Not every asset that could eventually be sold or converted to cash qualifies as current. Classification depends on the asset’s nature and when the business expects to realize or use it.

Current liabilities generally include obligations due within the same timeframe. Examples include:

• Accounts payable,

• Accrued expenses,

• Short-term loans, and

• The current portion of long-term debt.

An outstanding balance on a line of credit may also be classified as current, depending on the arrangement’s terms and the business’s ability to defer repayment.

How can you manage it more effectively?

Although many items affect working capital, the following three levers often provide the greatest opportunities for improvement:

1. Receivables. Strong collection practices are critical. Review accounts receivable aging reports regularly, address disputed or overdue invoices promptly, and establish credit limits and payment terms based on customer risk. Early payment discounts may accelerate collections, but weigh the cash flow benefit against the cost of the discount.

You also can improve the collection process by issuing invoices quickly, offering electronic payment options, automating payment reminders and requesting deposits or milestone payments when appropriate. A bank lockbox may speed processing for businesses that still receive a significant volume of paper checks. Monitor customer concentration and recurring late payments, because receivables contribute little to liquidity if they can’t be collected on time.

2. Inventory. Excess or obsolete inventory can consume cash and generate unnecessary storage, security, insurance and handling costs. But reducing inventory too aggressively can lead to stockouts, production delays and lost sales. The goal should be to maintain enough inventory to meet expected demand while limiting slow-moving and obsolete items.

Regularly review inventory turnover and demand forecasts. Modern inventory systems can help identify purchasing trends and automate reorder points. When appropriate, sharing forecasts and other data with key customers and suppliers may improve planning and reduce supply chain disruptions.

3. Payables. Businesses often try to preserve cash by delaying payments, but consistently paying late can damage vendor relationships and lead to less favorable terms. Use the full payment period available under your agreements without exceeding the due date. Also evaluate whether early payment discounts provide a worthwhile return.

Prepare short-term cash forecasts so upcoming obligations don’t come as a surprise. If existing terms create liquidity pressure, consider negotiating longer payment periods, installment arrangements or other terms with vendors before balances become past due.

Are your improvements sustainable?

To maximize the benefits of your improvement efforts, adjustments to these three levers must be sustainable over the long run. This requires management’s ongoing attention. Include working capital in strategic planning and review relevant measures at regular management meetings. Common metrics include:

• The current ratio, calculated as current assets divided by current liabilities,

• Days inventory outstanding (DIO), the average number of days inventory is held before being sold,

• Days sales outstanding (DSO), the average number of days it takes to collect payment from customers, and

• Days payables outstanding (DPO), the average number of days a business takes to pay its suppliers.

The cash conversion cycle (DIO + DSO − DPO) estimates how long cash is tied up in your operating cycle. Your accountant can help you calculate these metrics, determine what’s most relevant for your operations and evaluate your results over time or against industry benchmarks.

At smaller businesses, the owner may need to lead the effort. At midsize businesses, working capital management should involve finance, sales, purchasing, operations and other functions that influence customer terms, inventory levels and vendor payments. Assigning clear responsibility can help prevent one department’s decisions from creating cash flow problems elsewhere.

Reliable technology is also important. Rather than assuming every business needs a full enterprise resource planning (ERP) system, evaluate whether your existing accounting platform and integrated receivables, payables and inventory tools provide timely, accurate information. More complex businesses may benefit from an ERP system, but the appropriate solution should reflect your business’s size, operations and reporting needs.

In addition, technology — such as electronic invoicing, customer payment portals, automated reminders and integrated payment processing — may shorten collection times and reduce manual data entry. Appropriate user permissions, approval controls, data backups and cybersecurity protocols can help safeguard these processes.

Keep liquidity in view

It’s common for business owners to focus on growing the top and bottom lines of their income statements, but the balance sheet deserves attention, too. Regularly monitoring the components of working capital can help reveal operational issues, such as slow-paying customers, obsolete inventory and unfavorable payment terms, before they become larger cash-flow problems. Contact FMD for help evaluating your existing processes and identifying strategies to strengthen your working capital management.

A Closer Look at Shareholder Advances

Shareholders sometimes provide funds to their businesses outside of their initial investment or regular capital contributions. These transfers — commonly referred to as shareholder advances — raise an important accounting question: Under U.S. Generally Accepted Accounting Principles (GAAP), should the business report the advance as a liability or as equity?

The term “shareholder” technically refers to an owner of a corporation. However, the same basic accounting issue can arise when an owner of a partnership, limited liability company or other noncorporate entity advances funds to the business. For simplicity, this article uses the terms “shareholder” and “shareholder advance” broadly to include owners and owner advances regardless of the entity’s legal structure.

Look beyond the label

When evaluating a shareholder advance, it’s important to consider the substance of the arrangement rather than relying solely on how the transaction is labeled. To determine the appropriate classification under GAAP, the facts and circumstances of the arrangement should support whether the advance represents an obligation to repay the owner (a bona fide debt) or an equity contribution. Relevant considerations may include:

Intent to repay. Open-ended understandings between related parties about repayment may indicate that an advance is an equity contribution rather than a loan to the business. For example, a lack of repayment activity or evidence that repayment wasn’t expected may weigh against debt classification.

Terms of the advance. Debt classification may be more appropriate when the parties have signed a written promissory note that bears reasonable interest, has a fixed maturity date and establishes repayment terms. A history of repayments consistent with those terms may provide additional support for debt treatment. Subordination to bank debt or other creditors may also be relevant to the analysis, but that alone doesn’t warrant equity classification for an advance.

Ability to repay. Relevant factors include the business’s historical and future debt-service capacity, credit standing and ability to secure other forms of financing. The business’s ability to meet the stated repayment terms may also provide evidence about the substance of the arrangement. However, financial difficulty alone doesn’t necessarily mean an advance should be classified as equity.

How an advance is treated in tax filings and other records may provide additional evidence about the parties’ intentions. However, tax treatment doesn’t determine the appropriate classification for financial reporting purposes.

Deciding whether to classify advances as debt or equity matters for financial reporting purposes. It may affect your debt-to-equity ratio and other metrics that outside lenders and investors use to evaluate your business’s financial condition.

Be transparent

Detailed footnote disclosures can help stakeholders better understand the nature of shareholder advances. Accounting Standards Codification (ASC) Topic 850, Related Party Disclosures, generally requires disclosure of material related-party transactions. Depending on the circumstances, disclosures may include:

• The nature of the relationship,

• A description and dollar amount of the transactions, and

• Amounts due to or from related parties, including settlement terms when they aren’t otherwise apparent.

If your business engages in numerous related-party transactions, a tabular format may make the disclosures easier to understand.

Changes to an advance can introduce additional accounting complexity. Shareholders sometimes forgive loans or convert them to equity. The accounting for forgiveness, conversion or other restructuring depends on the specific facts and terms of the transaction, including the shareholder’s relationship to the business and the nature of the instruments involved. These transactions may require different accounting from the original advance and appropriate disclosure to help financial statement users understand their effects.

Document from the start

Shareholder advances can look straightforward when the cash changes hands, but their accounting treatment may not be so simple. Clear documentation of the parties’ intentions and the terms of the arrangement at the time funds are advanced can help support the appropriate treatment and avoid uncertainty later. Contact FMD for help documenting and classifying shareholder advances and preparing any required disclosures.

Making Smarter Capital Investment Decisions

Whether you’re buying equipment, automating processes, launching a new product line or expanding your facilities, capital investment decisions shouldn’t be based on intuition alone. Your management team may identify several promising growth opportunities. Which ones can your business realistically support today with available cash flow, financing and staffing — and which ones can wait?

A comprehensive financial analysis can help you compare alternatives and allocate resources where they’ll likely have the greatest long-term benefit.

Develop financial projections

Start by evaluating how a proposed investment is likely to affect your business’s financial results. Historical financial statements typically serve as a baseline for financial projections.

Use your most recent income statement to develop realistic assumptions about 1) how much additional revenue (or cost savings) the project is expected to generate, and 2) what incremental expenses it will incur. In some cases, qualifying property may be eligible for special tax savings — such as 100% bonus depreciation or Section 179 expensing — that should be factored into the decision.

A proposed investment may also affect your balance sheet and statement of cash flows. For example, a project may require additional working capital and fixed assets. Preparing comprehensive financial projections helps you determine how much cash the project will need each period and whether internal resources will be sufficient to finance it. Some projects will require the business to tap its line of credit or obtain additional loans or capital contributions.

Financial projections are only as reliable as their underlying assumptions. So consider how the projected results would change if implementation is delayed, costs exceed estimates or expected cash flows fall short. Comparing best-case, worst-case and most-likely scenarios can reveal which assumptions pose the greatest risk to the investment.

Evaluate competing opportunities

Once you’ve estimated the projected cash flows, it’s time to analyze the results and prioritize competing investment alternatives. For example, you might have $50,000 to invest in either a new machine or IT upgrades. Which option is better from a financial perspective?

Three common financial tools for evaluating such decisions are:

1. Payback period. This tells you how long it will take for a project to recoup its initial investment without considering the time value of money. For example, suppose a new machine that costs $48,000 is expected to generate $12,000 of incremental cash flow annually. Its payback period would be four years ($48,000 / $12,000).

2. Net present value (NPV). When calculating NPV, you discount each period’s projected cash flow to its present value. The sum of the present values for all the periods, including the cost of the initial investment, equals the project’s NPV. If NPV is greater than zero, the project is expected to create value and generally warrants further consideration. If not, the project may not be worthwhile. Typically, management uses the business’s cost of capital or a discount rate that reflects the project’s risk profile to discount projected cash flows.

3. Internal rate of return (IRR). This is the discount rate at which a project’s NPV equals zero. Management typically has a preset hurdle rate that a project must exceed to be considered. For example, if management sets its hurdle rate at 15%, any project with an IRR below 15% will be less likely to move forward.

When applying these financial tools, it’s also important to consider qualitative factors. For example, IT upgrades might strengthen cybersecurity, improve efficiency, enhance customer service and reduce business risk — benefits that may be difficult to quantify in financial projections.

Need help?

Strong investment decisions combine sound financial analysis with strategic objectives, operational considerations and risk management. Contact FMD to help you evaluate potential capital investment projects and identify which opportunities make the best use of your business’s resources.

Accounting Teams Need More Than Number Skills

In addition to mastering accounting and tax rules, today’s accounting professionals must work through financial decisions with customers, vendors, lenders, business partners and internal stakeholders. Topics may range from payment terms and budgets to technology investments and contract renewals.

Developing strong negotiation skills can help your accounting team resolve billing issues and achieve favorable pricing and contract terms. Over time, these skills can add real value by strengthening business relationships and improving your business’s overall financial performance. Here’s how to help your internal accounting team become confident, effective negotiators.

Start by earning trust

The first step in any negotiation is establishing rapport with the other party. Although difficult to measure, rapport is the trust-based connection that enables people to communicate openly and work toward common goals. Ways to establish and maintain it include:

• Asking open-ended questions and avoiding interruptions,

• Restating key points to demonstrate interest in what the other party said,

• Paying close attention to your tone of voice and word usage, and

• Maintaining eye contact, smiling and being mindful of body language, such as crossed arms, that may send subtle yet noticeable signals about your level of engagement.

If you want someone to trust you, that person must feel like they’re being heard and not judged or looked down upon. While building rapport, it can also help to communicate your commitment to fairness and transparency. Setting an ethical tone signals integrity and helps lay the foundation for a more productive exchange.

For example, rapport building remains critical when following up on overdue customer invoices. Automated payment reminders and online customer payment portals can often resolve routine issues. If additional outreach is needed, your accounting staff should begin with a calm, friendly phone call or video conversation that acknowledges the customer’s situation while reviewing the invoice amount and payment status. If the customer remains unresponsive after your normal collection timeline has passed, the employee should follow your company’s escalation policy for involving management, document all outreach and get approval before changing terms or pursuing additional collection steps.

If your business doesn’t already have a formal escalation policy, now is a good time to draft one. Your staff should operate within clear approval limits and know when to involve management and outside advisors.

Focus on shared objectives

When negotiating, it’s easy to view the exercise as a win-lose proposition, meaning one person’s gain comes at the other's expense. While some negotiations can produce just one winner, in many cases, it’s possible to collaborate and reach a mutually beneficial outcome. A win-win scenario is more likely when both parties openly discuss their priorities and constraints.

For instance, when discussing a long-term agreement with a supplier, primary considerations are price, payment terms and contract length. But vendor negotiations often extend beyond cost. Additional issues to consider include service expectations, delivery performance, technology integration, cybersecurity responsibilities and communication protocols. Sharing appropriate forecasting or inventory data can also help suppliers improve planning and minimize disruptions. Businesses that build collaborative relationships with key vendors may be better positioned to negotiate favorable pricing and receive priority service.

Invest in your team

Business owners play a critical role in developing employee skills. By modeling strong communication skills, emphasizing collaboration and practicing ethical negotiation techniques, you can show your accounting team firsthand how these skills translate into stronger business relationships and better financial outcomes.

Building “people” skills doesn’t happen overnight, but the payoffs from nurturing and mentoring your team may include lower costs, stronger cash flow and a more empowered team. Contact FMD for guidance on strengthening your accounting team's negotiation skills so they can handle key business discussions more effectively.

Turn Raw Data into Actionable Insights with Dashboard Reporting

Business owners have access to more financial and operational data than ever before. The challenge is identifying the most useful information and presenting it in such a way that enables better decision-making. Dashboard reports consolidate your key metrics into an easy-to-read format, helping management monitor performance, identify trends and respond more quickly to changing business conditions.

Focus on what matters most

Everything in a dashboard report can typically be found elsewhere in your financial reporting systems, albeit in a less user-friendly format. Rather than providing new information, a dashboard report captures the most critical data — based on the nature of your operations — and presents it clearly and succinctly.

A dashboard report may compare your results with budgets, prior periods or industry benchmarks so you can see whether you’re falling short or exceeding expectations. It can also provide an early warning system for potential problems, allowing you to pivot as needed to minimize losses and capitalize on emerging opportunities before they pass.

To maximize the effectiveness of dashboard reports, make them accessible to appropriate managers across your organization via your internal website or weekly email blasts. Widespread availability allows your management team to quickly identify trends that require immediate attention. Additionally, businesses that are struggling during a reorganization or debt restructuring sometimes share selected dashboard reports with their lenders or investors to demonstrate performance and confirm compliance with financial expectations.

Choose relevant metrics

When deciding which information to target, look at your business’s loan covenants — lenders usually have a good sense of which metrics are worth monitoring. Then conduct your own risk assessment. What’s relevant varies depending on your industry, general economic conditions and the nature of your business operations.

In addition to tracking cash balances and receipts, useful financial measures may include the following ratios:

• Gross margin [(revenue – cost of sales) /revenue],

• Current ratio (current assets / current liabilities), and

• Interest coverage ratio (earnings before interest and taxes / interest expense).

From here, consider adding a handful of business- or industry-specific metrics. For example, a warehouse might report daily shipments and inventory turnover. A hotel might track net operating income, average room rates and occupancy rates compared to the previous week or month. A law firm might report each partner’s realization rate. Retailers may focus on sales per square foot and average transaction value, while service businesses might track utilization rates and revenue per employee.

Avoid information overload, however. A limited number of well-defined metrics is generally more useful than a cluttered report that recreates the underlying financial statements. Review your dashboard metrics periodically as your business’s goals, risks and operating conditions change.

Complement rather than replace

While financial statements provide a comprehensive view of your business’s financial position and results, dashboard reports deliver timely insights that help management monitor day-to-day performance and respond quickly when conditions change. Contact FMD for help identifying key financial metrics and developing a dashboard report that’s tailored to your business.

Where to Look When You Need to Improve Profit Margins

Increasing revenue isn’t the only way to strengthen your business’s financial performance. Another option is to take a closer look at operating expenses and determine whether every dollar you spend delivers value. A systematic review of major expense categories can uncover opportunities to reduce waste and protect your bottom line without sacrificing long-term growth. Here are some tips to help you use financial data to cut selectively.

Review compensation and benefit costs

Evaluate your total employment costs. These include salaries, wages and employee benefits, such as health insurance and retirement plan contributions. Benefits account for more than 30% of total employee compensation, according to the U.S. Bureau of Labor Statistics.

As you seek to offer competitive pay and benefits, compare your total compensation for each position with what others in your industry pay for similar roles. Consider adjustments if your compensation differs significantly from these benchmarks. Sometimes you can offset salary reductions by adding cost-effective benefits and perks that your workers might value — such as flexible work arrangements and professional development opportunities — to help maintain morale and minimize turnover.

Evaluate vendor and subscription spending

Gather all your vendor contracts so your management team can review them together. These may include contracts with suppliers, insurers, professional services providers, cleaners, landscapers, technology firms and software subscription providers. Determine if you’re paying for overlapping services from multiple providers. If so, eliminate unnecessary vendors. Next, evaluate the services you’re purchasing from each provider and whether they’re necessary. For instance, you might be paying a vendor to perform a service that your staff could accomplish with technology you already have in place.

Finally, designate a preferred provider in each expense category and negotiate the best price with this vendor. Require employees to use preferred vendors unless there are extenuating circumstances that are approved by a manager. Also consider leases for equipment and property that could be renegotiated on more favorable terms. Before changing vendors or renegotiating contracts, it’s important to review cancellation penalties and renewal deadlines.

Measure marketing ROI

Work closely with your marketing team or agency to measure the effectiveness of your current campaigns. Some businesses spend thousands of dollars a month on advertising, digital marketing and other promotional efforts that deliver few, if any, results. Ask your marketing team to estimate the return on investment (ROI) of campaigns across channels, including search, social media, email and traditional advertising. Based on this analysis, reduce or eliminate spending on ineffective campaigns and consider diverting these funds to campaigns with stronger ROIs.

Also, consider putting your advertising account out to bid if you haven’t done so in the past year or two. Many agencies automatically increase their rates annually. Tell your current agency that you’re shopping around and ask them for their best price. If you decide to switch to a new agency, you might benefit from fresh ideas and new perspectives on increasing revenue.

Keep borrowing costs under control

If your business borrows money for equipment, real property or working capital needs, interest expense is probably a significant item on your income statement. Although commercial interest rates have eased from their recent highs, borrowing costs remain elevated for many businesses. If you have variable-rate loans, financing costs may still be adversely affecting your profitability.

Your business operations should generate returns that exceed the cost of your debt. If not, high interest costs could lead to financial distress. To avoid this pitfall, brainstorm ways to lower borrowing costs and improve cash flow.

For instance, you might be able to lower your interest rate by shopping around for fixed-rate loans or refinancing existing debt if more favorable terms are available. Shorter terms may reduce total interest costs but increase monthly payments. Alternatively, you may need to draw less from your line of credit by managing inventory and receivables more efficiently. Also consider setting aside some operating cash to pay down your outstanding loans, rather than taking dividends or paying bonuses.

Take a targeted approach

Reducing expenses doesn’t mean cutting costs across the board. The goal is to eliminate spending that isn’t contributing to your success while continuing to invest in the people, technology and resources your business needs to grow. Contact FMD for guidance on performing a comprehensive expense review. We can help you analyze margins and identify strategies to improve profitability without undermining your long-term business goals.

How a Financial Statement Audit Strengthens Your Fraud Defenses

Fraud is a major threat facing small and midsize businesses. While audits aren’t designed to uncover fraud, they can help business owners identify anomalies and deter would-be fraudsters. Recent findings from the Association of Certified Fraud Examiners (ACFE) underscore the important role audits play, together with other controls, in a broader fraud prevention strategy.

Recent ACFE study

External audits can be effective antifraud controls. The ACFE’s Occupational Fraud 2026: A Report to the Nations analyzed 2,402 occupational fraud cases across 143 countries. Consistent with previous studies, the latest version of the ACFE’s report estimates that organizations lose approximately 5% of their annual revenue to occupational fraud. The study also found that a typical fraud scheme lasts 12 months before it’s detected.

More than half of the cases in the 2026 study involved either a lack of internal controls or management overriding existing controls. However, respondents with strong antifraud controls — such as external financial statement audits, management review, proactive data monitoring and surprise audits — generally experienced lower fraud losses and detected fraud more quickly than organizations without those safeguards.

Limits on audit assurance

The purpose of an audit isn’t to detect fraud. Instead, it provides an express opinion about whether the financial statements are fairly presented, in all material respects, in conformity with U.S. Generally Accepted Accounting Principles (GAAP) or another comprehensive basis of accounting.

An audit provides a reasonable level of assurance that the business’s financial statements are free from material misstatement and conform with GAAP. However, external audits don’t provide guarantees against intentional financial statement fraud or inadvertent errors.

The role audits play in fraud detection

Auditors play a crucial role in supporting the integrity of financial reporting. Here’s how certain audit procedures may help reveal suspicious activity and identify weaknesses in your business’s controls.

Risk assessments. These assessments identify high-risk areas for misstatement or errors. They help direct the auditors’ attention to the accounts and transactions that warrant more rigorous audit procedures. Auditors analyze the business’s operations, financial reporting processes, internal controls and industry environment to pinpoint potential risks. Then they develop audit plans focusing on these areas.

Audit fieldwork. Auditors perform various procedures during fieldwork to help them detect discrepancies that may indicate fraudulent activity. For example, they may test certain financial transactions and account balances to verify their accuracy and completeness. They may also examine supporting documentation, such as invoices, contracts and bank statements, to ensure that transactions are legitimate and properly recorded. And they might confirm accounts receivable, review pending litigation and physically observe year-end inventory counts. Auditors customize their procedures to fit each business’s risk assessment.

Auditors are trained to recognize the warning signs of fraud, including unusual transactions, inconsistencies in financial records and deviations from standard procedures. When auditors identify red flags, they may ask questions and conduct additional audit procedures to help ensure the financial statements are fairly presented and conform to GAAP.

Financial reporting compliance. Businesses must comply with a wide range of laws and regulations, including those related to financial reporting, taxes and corporate governance. Auditors consider laws and regulations that could have a material effect on the financial statements and may identify issues that warrant management’s attention or further review.

A stronger defense

No organization is immune to fraud. But an external audit can help reduce your business’s risk by examining financial reporting procedures, evaluating internal controls and identifying potential warning signs before they become larger problems. If you have questions about your business’s fraud risks or you’d like to discuss our audit and forensic accounting services, contact FMD. We can help you build a stronger fraud prevention strategy and investigate any suspicious activity.

Balancing Financial Reporting Needs with Compliance Costs

Issuing financial statements that comply with U.S. Generally Accepted Accounting Principles (GAAP) requires significant time, expertise and resources. Although lenders and other stakeholders often prefer — or require — GAAP statements, some small business owners may find that tax-basis reporting is a practical alternative. If you use financial statements only for tax compliance and internal decision-making, this framework may better align with your needs. Let’s take a closer look.

Why are businesses exploring alternatives?

The Financial Accounting Standards Board has issued several major accounting rule changes over the last decade, including updated guidance on revenue recognition, leases and credit losses. For many private businesses, the most challenging update has been the guidance under Accounting Standards Codification Topic 842, Leases. The updated standard became effective for most calendar-year private businesses in 2022, but it continues to create compliance and reporting challenges today.

To alleviate the burden of complying with complex GAAP reporting requirements, some private businesses are now opting for a special reporting framework, the most common of which is tax-basis reporting. This framework is popular among small businesses because it aligns financial reporting with federal tax return preparation. But it’s not right for every business.

How does tax-basis accounting differ from GAAP?

GAAP requires businesses to follow accrual-basis accounting. Under this method, revenue is recognized when earned (regardless of when it’s received), and expenses are recognized when incurred (not necessarily when they’re paid). It matches revenue to the corresponding expenses in the proper period. So, it minimizes fluctuations in profit margins over time and facilitates comparisons with other businesses.

Under tax-basis accounting, financial statements are prepared using the accounting methods and principles applied for federal income tax reporting. As a result, book income and taxable income are generally aligned, reducing the need to maintain separate accounting records for financial reporting and tax purposes.

Historically, tax-basis reporting was used by businesses that had relatively straightforward operations and financial reporting needs. Often, these businesses transitioned to accrual-basis accounting as they grew and developed more sophisticated financial reporting requirements. In recent years, some private businesses have reconsidered whether the benefits of GAAP reporting outweigh the additional costs and complexity of ongoing compliance requirements.

However, there’s a risk in switching accounting methods. An unexpected change could upset investors and lenders, who generally prefer accrual-basis statements. GAAP is designed to prevent businesses from overstating profits and asset values. By contrast, tax rules are designed to maximize government revenue, so they generally prevent businesses from understating profits and asset values. As a result, the two frameworks can produce different results for the same business activities and may paint different pictures of your business’s financial performance.

What’s the right fit for your business?

Selecting the right financial reporting framework involves more than simply reducing compliance costs. The right choice depends on various factors, including your business size, growth plans, financing arrangements, ownership structure and stakeholder expectations. Contact FMD for help evaluating whether your current reporting method supports your business goals.

Accounting for Business Combinations

Mergers and acquisitions (M&A) provide growth opportunities. But these transactions also introduce accounting complexities. Here’s a closer look at the rules for reporting business combinations under U.S. Generally Accepted Accounting Principles (GAAP). Getting it right is essential to managing stakeholder expectations and providing a solid foundation for future financial reporting.

Breaking down the purchase price

Accounting Standards Codification Topic 805, Business Combinations, requires a buyer to allocate the purchase price to all acquired assets and liabilities based on their fair values. This process begins by estimating a cash-equivalent purchase price.

If a buyer pays 100% cash up front, the purchase price is already at a cash-equivalent value. But it’s less clear if a seller accepts noncash terms, such as an earnout contingent on the acquired entity’s future performance or stock in the newly formed entity.

The next step is to identify all tangible and intangible assets and liabilities acquired in the business combination. The seller’s presale balance sheet will usually report most tangible assets and liabilities, including inventory, equipment and payables. However, intangibles are reported only if the seller previously purchased them. Most intangibles are generated in-house, so they’re rarely included on the seller’s balance sheet.

Allocating value to acquired assets and liabilities

Acquired assets and liabilities are then added to the buyer’s balance sheet, based on their fair values on the acquisition date. Determining fair value can require significant judgment, particularly when valuing intangible assets. In some cases, buyers engage valuation specialists to assist with the process. The difference between the sum of these fair values and the purchase price is reported as goodwill.

Acquired identifiable intangible assets — such as customer lists, noncompete agreements and certain technology assets — are amortized over their estimated useful lives. As a result, purchase price allocation decisions can affect future earnings and other key financial metrics.

Goodwill and other indefinite-lived intangibles — such as brand names and in-process research and development — usually aren’t amortized under GAAP. Instead, companies generally must test goodwill for impairment annually. Impairment testing may also be necessary when certain triggering events occur. Examples of triggering events include the loss of a major customer or the enactment of unfavorable government regulations. If a business reports an impairment loss, it may indicate that the acquisition hasn’t delivered the expected economic benefits or that business conditions have changed since the transaction closed.

Rather than test for impairment, private companies may elect to amortize goodwill on a straight-line basis, generally over 10 years. However, companies that elect this alternative method must still test for impairment when certain triggering events occur.

In rare instances, a buyer negotiates a bargain purchase. Here, the fair value of the net assets exceeds the fair value of the consideration transferred (the purchase price). Rather than recognizing negative goodwill, the buyer reports a gain on the income statement.

Why post-deal accounting matters

The rules for reporting M&A transactions are complex and can sometimes have unexpected effects on a buyer’s financial statements. Accurate purchase price allocations are essential for reliable post-deal financial reporting and reducing future adjustments and restatements. Contact FMD for guidance on accounting for business combinations and subsequent testing for goodwill impairment.

Rethink Inventory Management

For many businesses, inventory is one of the largest and most expensive assets to maintain. Beyond the cost of purchasing goods, businesses incur ongoing expenses related to storage, labor, insurance, transportation, obsolescence, depreciation and shrinkage. Excess inventory can also tie up cash that you could otherwise use to fund growth initiatives or other operational priorities. Here are two supply chain approaches that may help reduce inventory carrying costs, improve cash flow and enable a more efficient response to changes in customer demand.

1. JIT inventory management

Under the just-in-time (JIT) approach, a business plans shipments of raw materials to arrive just before they’re required for production or fulfillment. This reduces the amount of inventory on hand — and the associated carrying costs. It also increases production responsiveness and flexibility. Elements of this approach include:

Small lot sizes. This allows the business to be more flexible and adapt more quickly to changes in market demand. It can also decrease inventory cycle time, lead times and pipeline inventory. Because lot sizes are smaller, businesses that use this approach can achieve more consistent workflows.

Tight set-up times. By reducing equipment set-up times and the associated costs, a business can afford to produce smaller lot sizes. In addition, the business can avoid lengthy or inefficient set-up processes, which may discourage frequent product changeovers and reduce operational agility.

Workforce flexibility. A flexible workforce can quickly shift responsibilities and resources during bottlenecks or unplanned spikes in demand.

Strong supplier relationships. Suppliers must provide frequent, on-time deliveries of high-quality materials. So, close ties with them are vital to this approach. Long-term relationships with suppliers promote loyalty and improved overall quality.

Regular maintenance schedules. For operations with a high degree of automation, preventive maintenance is critical. Unplanned downtime can be disruptive and costly.

Quality control. JIT systems are designed to control quality at the source, rather than later in the process. For that reason, production workers are responsible for their own work, and if a defective unit is discovered, it’s returned to the area where the defect occurred. This makes employees accountable and empowers them to produce higher-quality products.

JIT can reduce carrying costs and improve efficiency. However, it hinges on having a reliable supply chain. Delays, shortages and other disruptions can adversely affect sales and customer satisfaction when inventory levels are kept low.

2. Accurate response inventory management

While JIT focuses on minimizing inventory levels, the accurate response approach tries to match inventory levels to customer demand. This approach can be particularly useful for seasonal products and items with unpredictable demand because it helps reduce excess inventory and minimize stockouts. However, it requires timely sales and inventory data, demand forecasting capabilities, flexible production processes and shorter replenishment cycles.

The accurate response approach begins with an initial forecast of customer demand, which helps management determine how much inventory to produce or purchase. Then management monitors actual sales and uses that information to adjust inventory levels. That way, the business carries more high-demand products and limits its investment in slower-moving items.

Find the right fit

There’s no one-size-fits-all approach to inventory management. The most effective system depends on your business’s products, supply chain, customer expectations and operating model. Contact FMD to help assess your current inventory management processes and identify opportunities to improve cash flow and operational efficiency.