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.

Use Non-GAAP Measures without Losing Transparency

U.S. Generally Accepted Accounting Principles (GAAP) is widely perceived as the “gold standard” in financial reporting. Public companies are required to issue GAAP financial statements. A recent survey found that most private businesses also follow GAAP, though some use carve-outs for certain complex rules, such as the lease guidance.

However, you might want to supplement your GAAP financials with non-GAAP metrics. Doing so can help stakeholders better understand your operations, profitability and cash flow. Here’s how to ensure consistency and transparency when using these supplemental metrics.

Why non-GAAP measures matter

GAAP is a set of rules and procedures that accountants typically follow to record and summarize business transactions. These guidelines provide the foundation for consistent, fair and accurate financial reporting. Businesses that issue GAAP financial statements use the accrual method of accounting. Under this method, revenue is recognized when earned (regardless of when cash is received), and expenses are recognized when incurred (not necessarily when bills are paid). Lenders and investors often prefer GAAP financials because they make it easier to compare your financial results over time and with those of other businesses.

Over the years, the use of non-GAAP measures has grown. Beyond helping your management team understand your financial results, these supplemental measures can be useful when applying for financing and evaluating mergers and acquisitions. In fact, some investors and executives argue that certain unaudited figures provide a more meaningful proxy of financial performance than customary earnings figures reported under GAAP. Before relying on non-GAAP metrics, it’s important to understand what’s included and excluded to avoid making misinformed business decisions.

A closer look at EBITDA

One popular example of a non-GAAP metric is earnings before interest, taxes, depreciation and amortization (EBITDA). It was developed in the 1970s to help investors project a business’s long-term profitability and cash flow. The figure is considered one of the most valuable yardsticks investors use when a business is being bought or sold.

Because non-GAAP measures aren’t governed by a single set of accounting standards, some businesses may calculate EBITDA and related metrics differently, or enhance EBITDA figures by excluding certain costs, such as stock- or option-based compensation, that are plainly costs of doing business.

This trend has made it difficult for investors and lenders to make fair comparisons and understand the items left out. As a result, stakeholders should carefully review how these figures are derived, what adjustments have been made, why those adjustments are needed and how management uses non-GAAP metrics for internal purposes. Transparent, detailed disclosures are essential for reliable comparisons across organizations and industries.

Clarity and consistency

Non-GAAP measures can provide valuable insight into your business’s performance when used alongside traditional financial statements. But they should complement — not replace — GAAP reporting. Contact FMD for guidance on presenting EBITDA and other non-GAAP metrics consistently and transparently.

Managing Overhead Costs Today

Persistent inflation, elevated interest rates and volatile energy costs continue to squeeze profit margins for many small and midsize businesses. While implementing price increases may seem like the simplest response, that’s not always necessary — and, in today’s competitive markets, price increases can even cause some of your customers to search for lower-cost providers. Sustainable pricing decisions start with disciplined cost controls. One broad area to target for operational inefficiencies is overhead expenses.

Learn what counts as overhead

Overhead costs are a part of every business. These accounts frequently serve as catch-alls for any expense that can’t be directly tied to revenue-generating activities, including:

• Equipment maintenance and depreciation,

• Rent and building maintenance,

• Administrative and executive salaries,

• Insurance, and

• Utilities.

These are sometimes called indirect costs because they support your operations as a whole. Generally, these costs are fixed over the short run, meaning they won’t change appreciably as your revenue ebbs and flows. However, some overhead costs can rise with increased activity levels, energy usage or staffing demands.

For many small businesses, overhead grows gradually over time. And, because it isn’t directly tied to a single product, job or service, you may underestimate how much these costs affect your overall profitability.

Choose an allocation method that fits your business

The key to controlling overhead — and unlocking hidden profit potential — lies in allocating these costs to your products, services, projects or clients. Overhead allocations are typically associated with manufacturers. But a thoughtful approach, even if it’s informal, can help many businesses evaluate profitability. For instance, construction companies can assign equipment, supervision and office expenses to projects, restaurants can assign operating costs across menu items or locations, and professional service firms can assign administrative costs across client engagements.

The challenge is deciding how to allocate these costs using a relevant overhead rate. The rate is typically determined by dividing estimated overhead expenses by estimated totals in the allocation base (for example, direct labor hours) for a future time period. Then you multiply the rate by the actual number of direct labor hours for each product, project or service line to determine the amount of overhead to apply.

In some businesses, the rate is applied across all products. But if your operations are more complex, you may use multiple overhead rates to allocate costs more accurately. If one department is machine-intensive and another is labor-intensive, for example, multiple rates may be appropriate. In some situations, activity-based costing methods can improve accuracy by assigning overhead to activities that drive costs, such as machine setups, shipping volume or employee time supporting clients.

Cost allocations provide insight into which customers, services or business segments are the most profitable. This can help you identify underperforming products or services, evaluate expansion opportunities and make better-informed pricing decisions.

Review overhead regularly

There’s one problem with accounting for overhead costs: Variances from actual costs are almost certain. Fortunately, you can reduce the chance of overhead anomalies and improve the reliability of your financial reporting by:

• Conducting independent reviews of adjustments to overhead accounts,

• Studying significant overhead adjustments over different periods of time to spot anomalies, and

• Evaluating your existing overhead allocation methods and updating them when needed.

Allocating costs more accurately won’t guarantee that you make a profit. However, it can provide a stronger foundation for planning and budgeting.

You should also periodically revisit allocation assumptions as labor costs, supply chain expenses, technology investments and business operations evolve. Allocation methods that worked several years ago may no longer be relevant for your current operations.

Need guidance?

Accurate overhead allocation can provide valuable insight into profitability, pricing and operational efficiency. We can help you evaluate your current costing methods, strengthen internal controls and develop practical strategies to manage rising expenses. Contact FMD to learn more.

How to make Financial Reports Easier for Stakeholders to Understand

Financial statements are essential tools for evaluating performance, planning for growth and managing risk. Yet many business owners, board members, donors and investors don’t have formal accounting training. Presenting financial information in a clear, approachable way can help stakeholders better understand results and make informed decisions.

Know your readers

The people who rely on your organization’s financial statements probably come from different walks of life. Some may have financial backgrounds, but others might not. And it’s this latter group you need to keep in mind as you supply financial data.

This is especially true for nonprofits, such as charities, religious organizations, recreational clubs and social advocacy groups. Their stakeholders may include board members, volunteers, donors, grant makers, watchdog groups and other members of the community. But it also may apply to for-profit businesses that share financial data with their boards, employees and investors.

Don’t assume all your stakeholders understand accounting jargon; consider providing definitions of key financial reporting terms. For instance, a nonprofit might explain that “board-designated net assets” refers to assets set aside by the board for a particular purpose or period. Examples include safety reserves or a capital replacement fund, which aren’t subject to external restrictions imposed by donors or the law. While this definition might seem obvious to a nonprofit’s management team, stakeholders might not be familiar with it. You could also provide internal stakeholders with some basic financial training by bringing in outside speakers, such as accountants, investment advisors and bankers.

Turn numbers into visuals

In addition to providing numerical information from your income statement, balance sheet and statement of cash flows, consider presenting some information in a graphical format. Long lists of numbers can overwhelm financial statement users. Pictures may be easier for laypeople to digest than numbers and text alone.

For example, you might use a pie chart to show the composition of your business’s assets. Likewise, a line or bar graph might be an effective way to communicate revenue, expenses and profit trends over time. Additionally, dashboard-style reports can help highlight key performance indicators (KPIs), cash flow trends and operational metrics.

Focus on key ratios

Financial ratios show relationships between key items on your financial statements. While ratios don’t appear on the face of your financial statements, you can highlight them when communicating results to stakeholders. For instance, you might report the days in receivables ratio (accounts receivable divided by annual revenue multiplied by 365 days) for the current and prior reporting periods to demonstrate your efforts to improve collections. Or you might calculate gross profit margin (revenue minus cost of goods sold, divided by revenue) from the current and prior reporting periods to show how increases in materials, labor and operating costs have affected your business’s profitability.

Another useful tool is the current ratio (current assets divided by current liabilities). It’s a common measure of short-term liquidity. A ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted current assets to cash.

It may also be helpful to provide industry benchmarks to show how your performance compares with others in your industry. This information is often available from industry trade publications and websites.

Keep the message straightforward

Clear communication can strengthen trust in your organization’s financial reporting and help stakeholders feel more confident about the decisions they make. Contact FMD for help developing financial reports and presentations that improve understanding while supporting transparency and credibility.

When Outstanding Invoices Indicate Underlying Operational Issues

Late customer payments don’t just create temporary cash shortages. Over time, inconsistent collections can disrupt budgeting, increase borrowing needs and make it harder to plan for growth. In response to cash flow challenges, many businesses focus heavily on increasing revenue while overlooking how efficiently they convert receivables into cash. But even a strong top line can mask underlying collection problems. Evaluating your receivables process from a broader perspective may reveal opportunities to improve liquidity and reduce financial strain.

Look beyond the invoice

When payments arrive late, the problem isn’t always the customer’s unwillingness to pay. In many cases, breakdowns elsewhere contribute to collection delays.

For example, unclear proposals, inconsistent pricing, incomplete project documentation or poor communication between departments can lead to disputes after invoices are issued. Customers who are confused about deliverables or billing details may postpone payment while seeking clarification.

Your business can reduce these issues by creating more consistent internal workflows. Sales, operations and accounting teams should communicate clearly about pricing terms, timelines, discounts and customer expectations before work begins. Strong coordination upfront often prevents collection problems later.

Review your payment policies

Some businesses use outdated billing practices simply because they’ve always done things a certain way. But customer expectations and payment technologies have changed significantly in recent years.

Review whether your current processes create unnecessary friction. Questions to consider include:

• Are invoices easy to understand?

• Do customers have convenient payment options?

• Are payment deadlines realistic and clearly communicated?

• Is your collection approach consistent across all accounts?

Modernizing payment methods may help accelerate collections. Digital payment portals, automated reminders and recurring billing tools can simplify the process for both your staff and your customers.

Reviewing collection trends may also help you segment customers based on payment behavior. Long-standing customers with reliable histories may deserve greater flexibility, while higher-risk accounts may require deposits, shorter payment terms or more frequent follow-up.

Proactively monitor warning signs

An accounts receivable balance can develop gradually, making it easy to overlook warning signs until cash flow problems become severe. Regularly reviewing aging reports may help identify trends before they escalate. For example, increases in partial payments, repeated billing questions or customers requesting extended terms may indicate elevated collection risk.

Also pay attention to operational metrics tied to receivables performance, such as the average collection period, the percentage of overdue accounts and the frequency of disputed invoices. Additionally, to gauge customer concentration risk, evaluate how much of your revenue each customer generates. Tracking these indicators over time can help you make more informed financial decisions and identify weaknesses in your collection process.

Formalize your collection procedures

Many business owners hesitate to follow up promptly on overdue invoices because they worry about damaging customer relationships. However, avoiding difficult conversations often allows collection problems to worsen.

Establishing a professional, consistent collection process can improve results while preserving goodwill. Staff members responsible for collections should understand when to send reminders, when to escalate concerns and when outside assistance may be necessary.

Document all payment discussions carefully, especially when customers request revised terms or promise future payments. Thorough documentation may be important if legal action, write-offs or insurance claims are later required.

Strengthen your receivables strategy

Receivables management plays an important role in maintaining operational flexibility and financial stability. Businesses that actively monitor customer payment trends and refine their collection practices are often better positioned to manage uncertainty and support long-term growth. FMD can help you assess your current receivables procedures, strengthen internal controls and identify practical ways to improve cash flow management. Contact us for guidance.

Rethinking Payment Options for Your Business

Cash hasn’t disappeared — but it’s no longer the preferred payment method for many customers. As electronic and digital options continue to expand, more businesses are evaluating how much they rely on physical currency. Rather than eliminating cash entirely, many are exploring a “cash-light” approach. Here’s a look at current payment trends and the practical considerations for business owners.

Payment trends continue to shift

Consumer payment behavior has shifted in recent years, with noncash options steadily gaining ground. Card payments, including credit and debit, now dominate, alongside growing use of mobile wallets and peer-to-peer apps.

At the same time, cash hasn’t vanished. Many consumers keep cash on hand for budgeting, emergencies or small purchases. This dual reality — declining usage but persistent demand — is one reason many businesses are opting for a cash-light model instead of going fully cashless.

Customer preferences aren’t one-size-fits-all

Payment preferences often vary by age, income level and access to financial services. Younger consumers, including Millennials and Generation Z, tend to favor cards and mobile payment platforms such as Apple Pay, Google Pay and Venmo. These methods are fast, convenient and increasingly integrated into everyday transactions.

However, other groups still rely heavily on cash. Some older consumers prefer it for its simplicity and familiarity. In addition, unbanked and underbanked individuals, who may lack access to traditional financial services or smartphones, often depend on cash as their primary payment method.

For businesses, this creates a balancing act. Limiting cash too aggressively could alienate certain customers, while continuing to rely heavily on it may create operational inefficiencies. Evaluating your customer mix, average transaction size and industry norms can help determine how far you can shift away from cash without adversely affecting revenue or customer satisfaction.

The real cost of handling cash

While cash offers immediacy (funds are received instantly without processing delays), it also comes with hidden costs. Managing cash requires time, labor and internal controls, including:

• Maintaining sufficient bills and coins to make change,

• Counting and reconciling registers daily,

• Transporting and depositing funds at the bank, and

• Implementing safeguards such as cameras, safes and segregation of duties.

Cash also carries risk. Theft, employee fraud and counterfeit bills remain ongoing concerns. These risks can increase insurance costs and require additional oversight.

On the other hand, noncash payments may involve transaction fees. Credit card processors and payment platforms charge a percentage of each sale, which adds up over time. These costs can reduce margins and influence pricing strategies, so they should be weighed against the operational savings and reduced risk associated with handling less cash.

Legal and regulatory considerations

Before reducing or eliminating cash acceptance, it’s important to understand the legal landscape. While U.S. currency is considered legal tender for debts, no federal law requires private businesses to accept cash for everyday transactions.

However, to protect consumers who rely on it, several states and municipalities have enacted laws requiring businesses to accept cash. These requirements vary by jurisdiction and may include exceptions. For example, certain types of transactions — such as app-based services — may still be cashless. For businesses operating in multiple locations, these variations can create compliance complexity and heighten the risk of unintended violations.

Legislation in this area continues to develop. In recent years, policymakers have debated measures that would require businesses nationwide to accept cash and prohibit differential pricing based on payment method. Business owners should stay informed about applicable state and local rules before changing their policies.

Finding the right balance

As payment technology continues to evolve, businesses have more flexibility than ever in how they accept and manage transactions. Before making changes, however, it’s important to consult with your accounting and legal advisors to evaluate the financial and compliance implications for your specific situation. The right payment mix depends on your customer base, cost structure and risk profile. Contact FMD to discuss whether a cash-light approach makes sense for your business and how to implement it effectively.

Create a more Agile F&A Team with Cross-Training

The accounting profession continues to face a talent shortage. This trend — driven by retirements among experienced accountants and bookkeepers and a limited pipeline of new graduates with accounting degrees — is forcing many organizations to rethink how their finance and accounting (F&A) team operates. As businesses prioritize flexibility and continuity, cross-training is a practical, cost-effective way to strengthen your team.

Ample advantages

The most immediate benefit of cross-training is improved coverage. When an employee is out — whether due to illness, resignation, vacation or family leave — others can step in and keep essential processes running smoothly.

Cross-training also strengthens collaboration. When team members understand each other’s responsibilities, they gain a clearer view of how the department functions as a whole. This broader perspective often leads to better communication, fewer bottlenecks and errors, and improved overall efficiency. It can also support internal mobility, as employees are better prepared to step into new roles when opportunities arise.

Another important advantage is risk reduction. The accounting function remains particularly vulnerable to fraud schemes, such as payment tampering and billing irregularities. When multiple employees are familiar with key processes, it creates natural oversight and can facilitate the separation of duties. Combined with practices like mandatory vacations and management review procedures, cross-training can help strengthen internal controls.

Simple steps

Cross-training doesn’t have to be complicated. A basic starting point is to rotate responsibilities among team members on a temporary basis. The goal isn’t to create deep specialists in every function, but to ensure employees understand the core day-to-day tasks their colleagues perform.

Even short-term rotations — lasting a day, a week or during slower periods — can build valuable familiarity. Over time, this shared knowledge base can make a big difference when unexpected gaps arise.

It’s also wise to include leadership in the process. Encouraging CFOs, controllers and other senior staff to “reverse train” on routine functions helps ensure they can step in if needed and effectively guide others. This approach builds resilience at every level of the F&A department.

Turn cross-training into a strategic advantage

As talent challenges persist, cross-training can help your F&A department maintain continuity while building a more engaged and versatile team. By investing in your current staff, you not only prepare for unexpected disruptions but also support long-term growth and development. FMD can help you identify cross-training priorities and align your approach with strong internal controls and reporting needs — so your team gains flexibility without increasing risk. Contact us for guidance on developing a cross-training strategy tailored to your organization.