Want to Speed Up your Month-End Close? Here’s How

For many organizations, the end of the month brings added pressure to finalize financial records accurately and on time. This process often requires coordination across various departments, including finance and accounting (F&A), operations, sales and payroll. When handoffs aren’t well coordinated, the risk of financial reporting delays and errors increases. The good news is that a few practical adjustments can make your month-end close far more efficient and manageable.

Create a consistent workflow

Gathering accounting data involves many moving parts throughout the organization. To reduce stress, adopt a consistent approach that follows standard operating procedures and uses detailed checklists to track responsible parties, deadlines and progress.

This minimizes the use of ad-hoc processes. It also helps ensure consistency and accuracy each month. When assigning tasks, it’s important to clearly divide responsibilities between team members to improve efficiency and ensure proper segregation of duties.

Implement effective review procedures

Too often, F&A teams spend most of their time during the close process on the mechanics. But dedicating time to review procedures is critical to maintaining effective internal controls over financial reporting. Examples of review procedures include:

• Reconciling amounts in a ledger to source documents (such as invoices, contracts or bank records),

• Testing a random sample of transactions for accuracy, and

• Performing variance analysis by comparing monthly results to prior periods, budgeted amounts and/or external benchmarks.

Results should be accurate, complete and reasonable in light of the reviewer’s understanding of the business, the nature of underlying transactions and expected relationships among financial data.

Without adequate oversight, the probability of errors (or fraud) in the financial statements increases. Timely review procedures help identify and resolve issues early, reducing the need for more time-consuming corrections later.

Encourage ownership and adaptability

Employees who are actively involved in the month-end close are often best positioned to recognize trouble spots and bottlenecks. So, it’s important to adopt a continuous improvement mindset.

One practical approach is to hold brief post-close discussions to identify what worked well and what didn’t. From there, assign responsibility for implementing changes to individuals with clear accountability and the authority to drive change in your organization.

At the same time, many F&A departments rely heavily on certain specialized staff to complete critical tasks each month. When those individuals are unavailable, it can delay the entire timeline. Cross-training employees on key steps can help minimize frustration and delays. It may also help identify inefficiencies in the financial reporting process and improve overall team flexibility.

Leverage automation tools

Your F&A department may rely on manual processes to extract, manipulate and report data. However, these processes can be time-consuming, increase the risk of human error and make it more difficult to maintain consistent internal controls.

Fortunately, modern accounting software can now automate certain tasks, such as invoicing, accounts payable management and payroll processing. In some cases, you may need to upgrade your current accounting software to take full advantage of these efficiencies. But even modest improvements — such as automating recurring entries or bank feeds — can substantially reduce the time it takes to close your books.

Focus on efficiency

A smoother month-end close can improve the reliability and timeliness of your company’s financial reporting. By refining your procedures and making smart use of available tools, your F&A team can spend less time chasing numbers and more time interpreting them. If you’d like guidance on improving your month-end close process, FMD is here to help.

How AI is Transforming Small Business Bookkeeping

Many time-consuming accounting and bookkeeping processes — from transaction coding to financial analysis — can now be handled more quickly and consistently with the help of artificial intelligence (AI). Rather than replacing humans, AI-powered automation helps finance and accounting teams work more efficiently, reduce manual workloads, and focus on higher-value analysis and decision-making.

What AI automation can (and can’t) do

Over the past few years, AI capabilities have advanced rapidly. They’ve also become more affordable and accessible for businesses of all sizes. Tools that use machine learning and generative AI can now categorize transactions, draft reports, summarize financial data and flag unusual activity. This can lead to faster reporting, fewer errors and clearer financial insights.

However, AI still struggles with areas that require professional judgment, interpretation, and deep knowledge of tax rules, regulations and business strategy. That’s why the most effective accountants and bookkeepers treat AI as a support tool rather than a replacement for human expertise.

For example, AI-powered systems can often handle repetitive bookkeeping processes such as:

• Coding routine transactions,

• Assisting with or generating routine journal entries,

• Matching and reconciling bank transactions,

• Identifying anomalies or duplicate payments, and

• Assisting with forecasting models and budgeting inputs.

By automating these tasks, your team can spend less time on data entry and more time analyzing results, advising management and improving financial controls.

Where to start

For many businesses, the biggest challenge isn’t applying the technology — it’s knowing where to begin. Consider these practical tips to help ensure AI tools deliver real value:

Identify time-consuming manual work. Start by listing accounting and bookkeeping tasks that require significant manual effort. Examples include reconciliations, invoice processing, expense categorization and financial report preparation. Rank them based on time spent and complexity to identify the best candidates for automation.

Standardize workflows. Automation works best when processes follow consistent rules. Review how transactions are handled across your accounting system and create standardized procedures. The fewer exceptions and workarounds, the easier it will be to implement AI tools effectively.

Clean up and centralize financial data. AI systems rely on organized, consistent data. If information is stored across multiple spreadsheets, software platforms or formats, consider consolidating it within your accounting system. Clean data leads to better automation and more reliable insights.

Evaluate technology options carefully. AI features are now appearing in many accounting platforms, including bookkeeping software, accounts payable tools and financial analysis applications. Before adopting a solution, identify the specific capabilities you need — such as automated transaction categorization, anomaly detection or predictive forecasting.

Test results before relying on automation. Before fully implementing an AI-driven process, verify the system’s outputs. Review samples of automated journal entries, reconciliations or classifications to confirm accuracy. Ongoing monitoring helps ensure the technology continues to produce reliable results as your business evolves.

We can help

When implemented thoughtfully, AI can significantly improve the efficiency and accuracy of finance and accounting operations. However, adopting AI automation often requires changes to processes, internal controls and reporting procedures. It may also affect how your external accountant approaches audits, financial statement preparation or advisory services. Contact FMD to explore ways AI-enabled automation can streamline your bookkeeping, improve financial reporting and strengthen your business’s financial processes.

The Ins and Outs of Materiality

Materiality is a core concept that shapes the entire financial reporting process. In simple terms, materiality helps determine which financial information is significant enough to influence decisions — and which details likely won’t affect the overall picture. Understanding how experienced certified public accountants (CPAs) evaluate materiality can help you prepare reliable financial reports and avoid surprises when working with external advisors.

Materiality defined

Under U.S. accounting standards, financial information is “material” if omitting or misstating it could influence users’ decisions based on the financial statements. Auditing standards apply the same principle, focusing on whether misstatements — individually or in the aggregate — could reasonably influence users’ economic decisions.

Although wording varies slightly across reporting frameworks, the underlying principle remains consistent: Materiality is user-focused and requires professional judgment informed by both quantitative and qualitative factors. It’s not a mechanical percentage test.

How auditors set and apply materiality thresholds

An audit provides reasonable assurance that the financial statements are free from material misstatement. External auditors rely on their professional judgment to determine what’s material for each company, based on such factors as:

• Size,

• Industry,

• Internal controls, and

• Financial performance.

When planning an audit, the auditor establishes overall materiality for the financial statements as a whole, often using a benchmark such as a percentage of pretax income, revenue or total assets. The auditor also sets “performance materiality,” a lower threshold used to reduce the risk that undetected misstatements, in aggregate, exceed overall materiality. In some cases, auditors establish separate materiality thresholds for particular high-risk accounts or disclosures.

During fieldwork, materiality affects the nature, timing and extent of audit procedures. It influences sample sizes, risk assessments and which accounts receive more scrutiny. Auditors also evaluate significant year-over-year fluctuations and unexpected trends. For example, if shipping or direct labor costs increased by 30% in 2025, it may raise a red flag, especially if it didn’t correlate with an increase in revenue. Businesses should be ready to explain why costs increased and provide supporting documents (such as invoices or payroll records) for auditors to review.

Auditors may need to reassess materiality if circumstances change from year to year — or even during an engagement. Moreover, auditors must apply significant judgment when evaluating materiality. For instance, a relatively small misstatement may still be material if it masks a trend, affects compliance with loan covenants, triggers management bonuses or involves fraud.

Beyond audits

Materiality also plays a role in other types of accounting engagements. In a financial statement review, the CPA provides limited assurance that financial statements are free from material misstatement. The CPA performs inquiry and analytical procedures and reports whether anything came to his or her attention suggesting the financial statements may be materially misstated. Unlike an audit, a review doesn’t involve detailed testing of transactions or internal controls. However, materiality still plays an important role in designing review procedures and evaluating unusual fluctuations, significant estimates and financial statement disclosures.

In a financial statement compilation, the CPA provides no assurance. The accountant presents financial information in the proper format but doesn’t verify its accuracy. Professional standards require the CPA to consider whether the financial statements appear materially misstated or misleading. If information is incomplete, inconsistent or obviously incorrect, the CPA may need to request revisions — or, in some cases, withdraw from the engagement.

Why it matters

The concept of materiality also has strategic implications for business owners and their internal finance and accounting teams. Not every minor bookkeeping error requires immediate correction, and not every fluctuation deserves the same level of attention. Understanding materiality helps you focus attention where it matters most — on the accounts, estimates and risks that could meaningfully affect profitability, cash flow, debt covenant compliance and overall business value.

Rather than striving for perfection in every minor detail, management can use materiality as a decision-making filter. It supports smarter allocation of accounting resources, more effective internal controls and clearer financial reporting. A shared understanding of what’s truly material also strengthens discussions with lenders, investors and other stakeholders by keeping the focus on the issues that influence business outcomes.

Putting materiality to work for you

Materiality is more than an accounting concept — it’s a practical tool for better financial decision-making. Proactively evaluating significant changes in your financial statements and understanding what matters most to your stakeholders can strengthen your reporting. Contact FMD to learn more.

Turn your Income Statement into a Profit-boosting Playbook

When your financial statements arrive, it’s tempting to glance at the bottom line and move on. After all, you’ve got customers to serve and employees to manage. But your income statement is more than a report card. It can be a strategic tool to help you spot growth opportunities, tighten your execution and make smarter decisions that move your business forward.

Measure what matters

The income statement is a good starting point for analyzing your financials and identifying inefficiencies and anomalies. The following ratios are commonly used to gauge profitability:

Gross profit margin. This is gross profit (revenue minus cost of goods sold) divided by revenue. It’s a good ratio to compare with industry statistics because it’s typically calculated on a consistent basis, though the definition of cost of goods sold can vary between companies.

Net profit margin. This is calculated by dividing net income by revenue. If the margin is rising, the company is generally doing something right. Often, this ratio is computed on a pretax basis to accommodate differing tax rates.

Return on assets. This is net income divided by the company’s total assets. The return shows how efficiently management is using its assets.

Return on equity. This is calculated by dividing net income by shareholders’ equity. The resulting figure shows how well the shareholders’ investment is performing compared to competing investments. However, private companies should use this ratio with caution because their equity levels can fluctuate due to owner withdrawals or tax strategies.

You can use these profitability ratios to compare your company’s performance over time and against industry norms.

Dig deeper into the details

If your company’s profitability ratios have deteriorated compared to last year or industry norms, it’s important to find the cause. If the whole industry is suffering, the decline is likely part of a macroeconomic trend. If the industry is healthy but your company’s margins are falling, it’s time to identify internal factors and take corrective measures.

Depending on the source of the problem, you might need to cut costs, reevaluate staffing levels, automate certain business functions, eliminate unprofitable segments or product lines, raise prices or possibly conduct a forensic accounting investigation. For instance, a hypothetical manufacturer might discover that its gross margin fell due to rising labor costs from excessive overtime or because supplier prices rose faster than the company adjusted its pricing.

Build a winning game plan

In today’s volatile economy, it’s easy to blame shrinking profit margins on external pressures. But assumptions can be costly. Your income statement provides insight into your team’s performance, from your operational efficiency to pricing and spending. A careful review of your income statement — including revenue trends, cost drivers and operating expenses — often uncovers actionable opportunities for improvement. FMD can help you develop strategies to boost profitability and keep your business competing at the highest level.

Beware: Accounting Missteps can Trip up New Businesses

Launching a start-up comes with no shortage of big decisions and fast-moving priorities. In the rush to grow, financial fundamentals can sometimes take a back seat — often with costly consequences. Some common accounting missteps that new business owners should avoid include:

Overlooking day-to-day spending. Starting a new business is exciting, and it’s natural to focus on generating revenue and building business relationships. But it’s essential to keep detailed, timely records of expenses, including receipts and invoices. This will help you properly allocate costs, price products and services, assess and improve financial performance, and claim tax deductions.

Skipping regular account reviews. Reconciling accounts involves comparing your records to your bank and credit card statements to identify and correct any discrepancies. Account reconciliation helps ensure your business pays close attention to expenses and available cash. It can also help prevent and detect fraud by third parties and employees.

Blurring the line between personal and company finances. When you own a business, you need to keep personal and business matters separate for financial reporting, tax and legal purposes. Maintaining separate bank and credit card accounts and clearly distinguishing between personal and business activities will help avoid confusion. These practices also make it easier to track business expenses and support accurate budgeting and forecasting.

Getting worker status wrong. How much control do you exercise over the people who work for your business? Are your workers an integral part of your operations? Misclassifying employees as independent contractors can have serious legal and financial consequences. Make sure you understand the differences between employees and contractors and categorize them appropriately. If you don’t follow the rules, the IRS, the U.S. Department of Labor and a state tax agency might challenge the status of your workers. Some state rules may be stricter than the federal ones.

Being unprepared for tax obligations. Because many start-ups run at a loss, at least initially, some owners forget to set aside money for taxes. This can lead to cash shortages and other financial difficulties when tax time rolls around. Failure to make timely federal and state tax payments can result in penalties and interest charges. And don’t forget about payroll, sales and property tax obligations. Even if your business operates at a loss, these taxes may still be due.

Neglecting formal accounting systems and controls. Entrepreneurs must select and consistently apply an accounting method that best fits their business needs. Many fledgling businesses start off using cash- or tax-basis accounting, then graduate to accrual-basis reporting as they mature. But lenders, franchisors and investors sometimes require accrual-basis financial reporting from the get-go. Working with an experienced accountant can help you evaluate these requirements, select affordable, user-friendly bookkeeping software and establish consistent processes for recording business transactions.

It also pays to invest upfront in simple internal controls — such as locks on file cabinets, regular software updates, network backups and antivirus programs — to help prevent theft and fraud. Start-ups with valuable intellectual property, such as patents, secret recipes and proprietary software, should consider protecting these assets by implementing network security policies, filing appropriate legal protections, and requiring employees and contractors to sign noncompete agreements, where legally permitted. Additional internal control measures can be implemented as your business matures.

Fortunately, these common accounting missteps are preventable if you take proactive measures to avoid them. Building a strong financial foundation begins with seeking guidance from experienced bookkeeping and accounting professionals. In addition to helping you design and implement sound financial systems and controls, FMD offer interim CFO and bookkeeping services to support your business while you recruit and onboard the right talent for your finance and accounting department. Contact us to learn more.

Remote Auditing is Here to Stay: How it’s Changing the Audit Process

Once considered a temporary workaround, remote auditing is now a permanent part of how audits are planned and performed. Technological advances and evolving workforce expectations have pushed audit firms to rethink traditional, fully on-site approaches. The question isn’t whether remote auditing will continue (it will), but how firms and clients can use it effectively while maintaining audit quality.

How remote auditing gained momentum

The concept of remote auditing didn’t emerge overnight. Even before remote work became commonplace during the COVID-19 pandemic, accounting firms were gradually expanding the use of off-site audit procedures. Many firms invested in staff training and technology — such as cloud computing, secure remote access and videoconferencing tools — to work off-site. Moreover, advanced analytics software and continuous auditing tools enabled real-time testing, reducing reliance on certain traditional manual testing procedures.

These efforts were driven largely by a desire to reduce business disruptions and costs while improving flexibility for both auditors and clients. The pandemic served as a catalyst for the widespread adoption of remote auditing techniques. As firms became more comfortable with these tools, they found that some procedures could be completed just as effectively, if not more so, outside the traditional on-site model.

Why hybrid audits are the new standard

Even with well-established remote capabilities, certain audit areas still benefit significantly from being conducted in person. Auditing standards emphasize that auditors must obtain sufficient appropriate evidence, whether collected on-site or off-site. Your auditor’s risk assessment dictates how and where procedures are performed.

Today, most auditors use a hybrid approach. By combining off-site and in-person procedures, they can balance efficiency with effectiveness. Some examples include:

Internal control testing. Auditors must evaluate whether controls are properly designed and implemented, and if they’re operating effectively. Gaining a full understanding of a company’s control environment can be challenging through virtual meetings alone. In addition, auditors often need to reassess how transactions are processed when employees work remotely or in hybrid settings. Controls that were effective in prior periods may need to be updated or supplemented, and in-person observation can provide critical context.

Fraud-related inquiries. Auditing standards emphasize that inquiries of management and those charged with governance regarding fraud are most effective when conducted face-to-face. On-site discussions allow auditors to observe body language, assess tone and evaluate interpersonal dynamics — insights that are harder to capture through a screen.

Inventory observations. Auditors are required to obtain sufficient appropriate evidence that inventory exists and is in good condition. While technology, such as live video feeds, drones and security cameras, can support this process, these tools have limitations. Observing inventory counts in person, at least for a sample of locations, often remains necessary to verify accuracy and completeness.

Companies that are unwilling to allow in-person procedures in these areas may raise concerns about audit risk. And when auditors decide to use remote procedures, they must apply heightened professional skepticism and be well-trained in using technology effectively.

Remote auditing, together

The future of auditing is flexible, adaptable and often remote. However, maintaining audit quality requires using the right tools in the right situations. The optimal mix of remote and on-site procedures will vary based on a company’s size, industry, systems and risk profile. Contact FMD to discuss what makes sense for your organization. We’ll work closely with your internal finance and accounting team to design an audit approach that streamlines the process while upholding audit quality.

Preparing Your F&A Team for Leadership Changes

At the start of the new year, your finance and accounting (F&A) department is under a microscope. Budgets, forecasts and strategic plans are top of mind, and internal staff may be working with your CPA to finalize year-end financial statements. This heightened attention often raises an important question: What would happen if your CFO suddenly left?

For many organizations, leadership change in the F&A department would be highly disruptive. Proactively planning for a CFO’s departure — whether expected or unexpected — can help stabilize your team and reduce key-person risk. It also creates a valuable opportunity to reassess your organization’s financial reporting and strategic planning needs. Here are four practical steps to consider as you plan for 2026.

1. Update the job description

During the current CFO’s tenure, your organization’s needs may have changed. Take time to review the existing job description and assess whether it still reflects the skills and experience your organization requires today.

For example, if you’ve recently taken on debt and must comply with lending covenants, make sure those responsibilities are clearly defined in the job description. Also, if you’ve expanded substantially, you may have outgrown the current role’s scope or structure. For instance, you might need to replace a bookkeeper with a CPA who has the experience and skills to manage a larger F&A team.

2. Evaluate your department’s performance

The F&A department is critical to your success. It should provide accurate, relevant financial information on a timely basis. Objectively assess whether reporting delays, recurring errors or limited financial insight have been holding your business back.

If your organization’s goals demand a higher level of performance, this may signal a need for structural improvements — such as enhanced training, new team members, clearer accountability, and more formalized policies and procedures. Strong internal controls help reduce fraud risk and lessen reliance on any single individual.

3. Ensure your accounting technology is keeping pace

Leveraging modern accounting software can help your F&A team operate more efficiently, reduce manual data entry and minimize errors that often arise from spreadsheet-driven processes. Well-configured systems can also improve consistency in reporting, strengthen internal controls and create clearer audit trails.

In addition, automation can free up internal staff to focus on higher-level activities, such as financial analysis, forecasting and strategic decision-making. As part of your planning, assess whether your current system is up to date, industry-appropriate and properly configured to support your organization’s size, complexity and growth plans. If the system relies heavily on manual workarounds or undocumented processes, it may expose your organization to unnecessary risk during a leadership transition.

Also consider whether you’re maximizing the functionality of your current accounting software. Set up a meeting with a vendor rep to discuss what’s working and what’s not, and see how they respond. A worthy provider will address issues, provide training and offer ongoing customer support. If your vendor doesn’t provide adequate support, we can conduct a comprehensive assessment of the effectiveness of your accounting system and how you’re using it.

4. Plan for change

In-house personnel will need to manage new challenges as your organization grows and evolves. For example, if you’re dealing with a complex matter — such as a merger, restructuring or private equity transaction — your CFO should have sufficient knowledge to support the effort.

Thinking in terms of succession, scalability and adaptability can help ensure your finance function remains effective over time. Streamlined processes and documented procedures also make transitions smoother when change does occur.

Be proactive, not reactive

A CFO’s departure doesn’t have to derail your organization’s momentum. With a clear action plan in place, you can turn a potential disruption into a strategic reset. Taking these steps before a transition occurs can help ensure your F&A team remains stable, effective and aligned with your organization’s goals in 2026 and beyond. Contact FMD for more information.

How Auditors Evaluate Accounting Estimates

Financial statements aren’t built solely on fixed numbers and historical facts. Many reported amounts rely on accounting estimates — management’s best judgments about uncertain future outcomes. Estimates are inherently subjective and can significantly affect reported results. How do external auditors evaluate whether amounts reported on financial statements seem reasonable?

Understanding management’s assumptions and data

External auditors pay close attention to accounting estimates during audit fieldwork. They review the methods and models used to create estimates, along with supporting documentation, to ensure they’re appropriate for the specific accounting requirements. In addition, auditors examine the company’s internal controls over the estimation process to ensure they’re robust and designed to prevent errors or manipulation.

For instance, they may inquire about the underlying assumptions (or inputs) used to make estimates to determine whether the inputs seem complete, accurate and relevant. Estimates based on objective inputs, such as published interest rates or percentages observed in previous reporting periods, are generally less susceptible to bias than those based on speculative, unobservable inputs. This is especially true if management lacks experience making similar estimates.

Challenging estimates and assessing bias

When testing inputs, auditors assess the accuracy, reliability and relevance of the data used. Whenever possible, auditors try to recreate management’s estimate using the same assumptions (or their own). If an auditor’s independent estimate differs substantially from what’s reported on the financial statements, the auditor will ask management to explain the discrepancy. In some cases, an external specialist, such as an appraiser or engineer, may be called in to estimate complex items.

Auditors also may conduct a “sensitivity analysis” to see if management’s estimate is reasonable. A sensitivity analysis shows how changes in key assumptions affect an estimate, helping to evaluate the risk of material misstatement.

In addition, auditors watch for signs of management bias, such as overly optimistic or conservative assumptions that could distort the financial statements. They also consider the objectivity of those involved in the estimation process, ensuring there’s no undue influence or pressure that could affect the estimate’s outcome.

Auditors also may compare past estimates to what happened after the financial statement date. The outcome of an estimate is often different from management’s preliminary estimate. Possible explanations include errors, unforeseeable subsequent events and management bias. If management’s estimates are consistently similar to actual outcomes, it adds credibility to management’s prior estimates. But if significant differences are found, the auditor may be more skeptical of management’s current estimates, necessitating the use of additional audit procedures.

Why estimates matter

Accounting estimates are a key focus area for auditors because small changes in management’s assumptions can have material effects on a company’s financial statements. Through rigorous testing, professional skepticism and independent analysis, auditors can help promote accurate, reliable financial reporting.

As audit season gets underway for calendar-year businesses, now’s a good time to review significant accounting estimates and address gaps in documentation. Taking these proactive measures can help streamline the audit process and reduce the risk of unnecessary delays. Contact FMD with questions or for assistance preparing for your audit.

What to Look for on Your Balance Sheet — and How to Strengthen It

The balance sheet shows your company’s financial condition — its assets vs. liabilities — at a specific point in time. However, the balance sheet is more than a static report. It can also serve as a diagnostic tool for managers and other stakeholders to analyze historical performance and plan for future growth. Taking your balance sheet to the next level requires context, judgment and forward-looking analysis.

Look beyond what’s reported

Under U.S. Generally Accepted Accounting Principles (GAAP), not everything that creates value or risk for a business appears on the balance sheet. For example, internally generated intangible assets (such as brands, proprietary processes or customer relationships) are often critical to business operations. But they’re generally excluded on a GAAP-basis balance sheet unless acquired from third parties.

Likewise, accounting for potential obligations — such as pending litigation, governmental investigations and other contingent losses — depends on the circumstances. These “contingencies” may be reported on the balance sheet as an accrued liability, disclosed in the footnotes or omitted from the financial statements, depending on how they’re classified under GAAP. Accounting Standards Codification (ASC) Topic 450, Contingencies, requires companies to classify contingent losses as “probable” (likely to occur), “remote” (chances that a loss will occur are slight), or “reasonably possible” (falling somewhere between remote and probable). These determinations rely heavily on professional judgment.

Identify what matters most

Once you understand the limitations of reported numbers, the next step is determining which balance sheet items matter most to your business model. A “common-sized” balance sheet — where each line item is expressed as a percentage of total assets — can help highlight concentrations and priorities.

Items with the largest percentages often warrant the most attention, both from an operational and risk perspective. For example, inventory may dominate a retailer’s balance sheet, while accounts receivable may be more critical for professional services firms.

Use ratios to assess strength

Ratios compare line items on your company’s financial statements. They may be grouped into four categories: 1) profitability, 2) liquidity, 3) asset management and 4) leverage. While profitability ratios focus on the income statement, the others compare items on the balance sheet. Common examples include:

• The current ratio (current assets ÷ current liabilities), a short-term liquidity measure that helps assess whether your company has enough current assets to meet current obligations,

• The days-in-receivables ratio (accounts receivable ÷ annual sales × 365), which measures collection efficiency, and

• The debt-to-equity ratio (interest-bearing debt ÷ equity), which reflects the use of debt vs. equity to finance growth.

Tracking these ratios over time — and against industry benchmarks — can reveal emerging issues before they become problems.

Set goals and forecast the impact

After identifying key metrics, establish realistic targets based on your strategy and risk tolerance. For instance, you may aim to increase cash reserves, improve liquidity or reduce your debt-to-equity ratio.

Importantly, forecast how these changes will flow through the financial statements. Strengthening one area often constrains another — for example, building up cash reserves may limit debt reduction. Forecasting helps test whether goals are achievable and highlights trade-offs early in the process.

A clearer, stronger financial picture

Reinforcing your balance sheet isn’t just about increasing assets or reducing liabilities. It’s about understanding what’s missing, evaluating risk with informed judgment and proactively managing key drivers. With thoughtful analysis and planning, your balance sheet can become a powerful tool for resilience. Contact FMD to learn more.

How Auditors Evaluate Key Person Risks

From technical know-how to charisma and innovation, the skills and personal attributes of a company’s leaders are often critical to its success. But those same traits can become a source of risk if the business relies too heavily on its founder or another top manager.

If a so-called “key person” becomes incapacitated, retires or unexpectedly leaves, it can disrupt day-to-day operations, unsettle customers and lenders, and strain working capital. As you plan for the new year, take a moment to consider whether your business faces key person risks — and, if so, how to think like an auditor to proactively manage them.

No organization is immune

Financial statement auditors are required to perform a risk assessment as part of audit planning and execution. One potential source of risk is overreliance on one or two individuals for leadership, revenue generation or institutional knowledge.

Key person risks are usually associated with small businesses, but they can also impact large multinationals. Consider the stock price fluctuations that Apple experienced following the death of innovator Steve Jobs. Fortunately for Apple and its investors, the company had a deep management bench, a strong pipeline of technology and sufficient working capital to bridge the transition period. However, many small businesses lack those buffers and may take years to recover from the sudden loss of a key leader.

Factors to consider

Does your business rely heavily on one or two individuals, or is your management team sufficiently decentralized? Key people typically:

• Handle broad duties,

• Possess specialized training or industry knowledge,

• Have extensive experience that isn’t formally documented, or

• Make significant contributions to annual sales or customer relationships.

Auditors also consider whether an individual has signed personal guarantees for business debts, as well as the depth and qualifications of other management team members. Generally, companies that sell products tend to be better positioned to withstand the loss of a key person than service-based businesses, where relationships and expertise are harder to transfer. That said, a product-based company that relies heavily on technology may be at risk if a key person possesses specialized technical knowledge.

Customer and supplier relationships are also important factors. When those relationships are concentrated in a single individual, the departure of that person can create instability and lost business. Companies are better able to retain relationships when they’re shared across multiple team members.

Mitigating your exposure

An audit risk assessment can help identify where key person risk may exist and prompt discussions about business continuity and resilience. While auditors don’t design succession plans or internal controls, the process often highlights vulnerabilities that management may want to address through training programs and succession planning options. Contact FMD to help assess key person risks and brainstorm practical solutions to strengthen your company’s long-term stability.

How Activity-based Costing Can Improve Business Performance

Your income statement indicates whether your business is profitable — but it doesn’t always explain why. For many small businesses, traditional cost accounting can mask where time and money are really being spent. Activity-based costing offers a practical way to understand the true cost of the work you perform, helping you make better decisions about pricing, profitability and operational efficiency.

How does activity-based costing work?

With activity-based costing, you assign costs to specific activities based on the resources they consume. Think of activities as the building blocks of your operations — such as setting up equipment, processing invoices, completing service calls or performing quality checks. Implementing activity-based costing generally involves four steps:

1. Identify activities. Create a list of tasks your company performs to deliver a product or service. Define each activity in such a way that there’s no overlap and everyone understands what’s included.

2. Allocate resources. For each activity, identify the resources used, such as materials, equipment time, labor hours and subcontracted services.

3. Calculate the per-unit cost of each resource. Choose a standard, measurable unit for each resource and calculate the cost per unit. For example, if a box of 100 screw anchors costs $30, the per-unit cost is 30 cents per anchor. For labor, the unit is typically an hourly wage or fully burdened labor rate.

4. Determine resource consumption and allocate indirect costs. Estimate how many units of each resource each activity consumes, then multiply by the per-unit cost. Indirect costs — such as rent, equipment leases, administrative salaries and software subscriptions — are allocated using reasonable cost drivers, such as square footage, machine hours or transaction volume, to arrive at the total cost of each activity.

What insights can activity-based costing provide?

Activity-based costing can provide meaningful insights into what’s working — and what’s not. For example, if a job or service line is consistently less profitable than expected, whether from excessive labor time, inefficient processes or underutilized equipment, it can help pinpoint where costs are accumulating. This approach can help management identify inefficiencies early and take corrective action before margins erode.

You may also uncover spending patterns that lead to better purchasing decisions and improved cost control. From a strategic standpoint, activity-based costing provides a clearer picture of which products, services and customers contribute most to profitability — and which may need to be repriced, redesigned or discontinued.

Estimating and pricing can also improve with activity-based costing. By breaking work into well-defined activities, businesses can build more accurate estimates and adjust them more easily when scope changes. Activities essentially become flexible line items that can be added, removed or refined as projects evolve.

Is it right for your business?

Activity-based costing is designed to supplement, not replace, your traditional accounting system. It works best for businesses with multiple offerings, significant overhead or processes with varying complexity. While the methodology can seem intimidating at first, modern accounting and project management software can significantly reduce your data burden. Contact FMD to discuss whether activity-based costing is a good fit for your business and how it can be implemented in a practical, scalable way based on your operations, goals and resources.

Change Orders Require Careful Accounting

If your business does contract-based work, you know that change orders are a fact of life. This holds true regardless of whether you provide construction, engineering, information technology, manufacturing or other custom services.

Although change orders are inherently disruptive and stressful, they’re also often prime opportunities to increase project revenue and go the extra mile for customers. The key is to follow disciplined accounting practices so you capture the extra revenue without compromising your company’s financial position or the reliability of your financial statements.

Track the numbers

As you may have experienced, a customer’s needs or preferences can change after the contract is signed but before work is complete — or even before it begins. To keep projects on schedule, many contractors begin out-of-scope work before a change order is approved. But failing to properly track and account for the associated costs and revenue can distort your financial results.

For example, suppose you record costs attributable to a change order in total incurred job costs to date. But you don’t make a corresponding adjustment to the total contract price and total estimated contract costs. To a lender or surety, this may indicate excessive underbillings.

On the other hand, let’s say you increase the total contract price to account for out-of-scope work but are unable to obtain approval for the change order. In such an instance, there’s a distinct risk of profit fade — when a contractor’s expected profit on a project decreases over time as actual costs rise or anticipated revenue fails to materialize. This can shake the confidence of financial statement users such as lenders, sureties and investors.

Check the contract

Most business contracts include some form of change order language. Unfortunately, many contractors fail to follow the precise terms of those agreements when a customer requests or demands a change. The exact verbiage will vary, but change orders generally fall into three categories:

1. Approved. For this category, it’s typically appropriate to adjust incurred costs, total estimated costs and the total contract price. Depending on the contract’s change order provisions, this may increase your estimated gross profit.

2. Unpriced. If the parties agree on the scope of work but defer price negotiations, the accounting treatment depends on the probability that the contractor will recover its costs. If improbable, change order costs are treated as costs of contract performance in the period during which they’re incurred — and the contract price is not adjusted. As a result, estimated gross profit decreases.

If it’s probable that you’ll recover the costs through a contract price adjustment, you can either:

• Defer revenue recognition until you and the customer have agreed on the change in contract price, or

• Treat them as costs of contract performance in the period incurred and increase the contract price to the extent of the costs incurred (resulting in no immediate change to estimated gross profit).

To determine whether recovery is probable, assess the customer’s profile and financial history. Also, draw on your past experience in negotiating change orders and other factors. If you’ll likely raise the contract price by an amount that exceeds the costs incurred (increasing estimated gross profit), you may recognize more revenue only when it’s highly probable that a significant reversal of that revenue won’t occur.

3. Unapproved. Treat these as claims. Recognize additional contract revenue only if, under the applicable accounting rules, it’s probable the claim will generate such revenue, and you can reliably estimate the amount.

Ask for assistance

Change orders can support revenue growth and strengthen customer relationships — but only when managed and accounted for correctly. Without disciplined tracking and a clear understanding of the accounting rules, you risk misstated financials, profit fade, and strained relationships with customers and other stakeholders. FMD can help you evaluate and refine your business’s change order procedures and ensure your financial statements accurately reflect the economics of your projects.

Year-end Reminder: Don’t Overlook Your PTO Accruals

As 2025 winds down, it’s important to review your company’s accounting for unused paid time off (PTO). Many employers allow employees to carry forward unused vacation, sick leave or personal time. This policy may create liabilities under U.S. Generally Accepted Accounting Principles (GAAP) — and, if your staff tends to bank time off, your PTO accrual may be larger than expected. Here’s what to consider as you finalize your financials.

What PTO represents on the balance sheet

Compensated absences include paid time off that employees have earned but not yet taken. These absences may include:

• Paid vacation,

• Paid holidays,

• Paid sick leave, and

• Other forms of PTO earned by employment.

Under GAAP, when time off carries forward or must be paid out upon termination, your company generally must record a short-term liability on its balance sheet. It represents future compensation the company is obligated to provide. PTO accruals also typically create a related deferred tax asset because PTO isn’t deductible for tax purposes until it’s paid.

Quantifying PTO accruals

Start by reviewing your PTO policy and applicable state laws. Under GAAP, a liability must be recorded when:

• Employees have earned the time,

• The rights vest or accumulate,

• It’s probable employees will use or be paid for the time, and

• The amount can be reasonably estimated.

For hourly employees, the accrual is generally based on the employee’s hourly rate multiplied by unused hours and adjusted for employer taxes and benefits. For salaried employees, the calculation typically converts annual compensation into a daily or hourly rate and applies it to the unused balance.

Employers also may adjust for “breakage.” This is the portion of PTO that employees historically don’t use. Your estimate should be supported by past trends and updated periodically.

PTO accruals are a common area of auditor focus. To minimize surprises during audit fieldwork, establish a clear policy for recording PTO, apply a consistent method for calculating accruals and provide auditors with detailed supporting schedules for your estimates. Consider reviewing your methodology now to ensure it reflects current pay rates, updated policies and recent workforce trends.

Incorporate PTO into your year-end checklist

Growing PTO balances aren’t just an accounting matter. They may point to employee burnout, workload pressures or scheduling challenges. To help support your employees’ well-being and productivity, encourage them to use their earned time off, especially as year end approaches.

Contact FMD if you need assistance determining whether a PTO accrual is required and, if so, how to report it properly. We can also advise on best practices for managing PTO policies and monitoring the related financial impact.

Using the Audit Management Letter as a Strategic Tool

Year end is fast approaching. Calendar-year entities that issue audited financial statements may be gearing up for the start of audit fieldwork — closing their books, preparing schedules and coordinating with external auditors. But there’s one valuable audit deliverable that often gets overlooked: the management letter (sometimes called the “internal control letter” or “letter of recommendations”).

For many privately held companies, the management letter becomes an “I’ll get to it later” document. But in today’s volatile business climate, treating the management letter as a strategic resource can help finance and accounting teams strengthen controls, improve operations and reduce risk heading into the new year. Here’s how to get more value from this often-underutilized tool.

What to expect

Under Generally Accepted Auditing Standards, external auditors must communicate in writing any material weaknesses or significant deficiencies in internal controls identified during the audit. A material weakness means there’s a reasonable possibility a material misstatement won’t be prevented or detected in time. A significant deficiency is less severe but still important enough to warrant management’s attention.

Auditors may also identify other control gaps, process inefficiencies or improvement opportunities that don’t rise to the level of required communication — and these frequently appear in the management letter. The write-up for each item typically includes an observation (including a cause, if known), financial and qualitative impacts, and recommended corrective actions. For many companies, this is where the real value lies.

How audit insights can drive business improvements

A detailed management letter is essentially a consulting report drawn from weeks of independent observation. Auditors work with many businesses each year, giving them a unique perspective on what’s working (and what isn’t) across industries. These insights can spark new ideas or validate improvements already underway.

For example, a management letter might report a significant increase in the average accounts receivable collection period from the prior year. It may also provide cost-effective suggestions to expedite collections, such as implementing early-payment discounts or using electronic payment systems that support real-time invoicing. Finally, the letter might explain how improved collections could boost cash flow and reduce bad debt write-offs.

A collaborative tool, not a performance review

Some finance and accounting teams view management letter comments as criticism. They’re not. Management letters are designed to:

• Identify risks before they become bigger problems,

• Help your team adopt best practices,

• Strengthen the effectiveness of your control environment, and

• Improve audit efficiency over time.

Once your audit is complete, it’s important to follow up on your auditor’s recommendations. When the same issues repeat year after year, it may signal resource constraints, training gaps or outdated systems. Now may be a good time to pull out last year’s management letter and review your progress. Improvements made during the year may simplify audit procedures and reduce risk in future years.

Elevate your audit

An external audit is about more than compliance — it provides an opportunity to strengthen your business. The management letter is one of the most actionable and strategic outputs of the audit process. Contact FMD to learn more. We can help you prioritize management letter recommendations, identify root causes of deficiencies and implement practical, sustainable solutions.

Ready, Set, Count your Inventory

When businesses issue audited financial statements, year-end physical inventory counts may be required for retailers, manufacturers, contractors and others that carry significant inventory. Auditors don’t perform the counts themselves, but they observe them to evaluate the accuracy of management’s procedures, verify that recorded quantities exist and assess whether inventory is properly valued.

Even for businesses that aren’t subject to audit requirements, conducting a physical count is a smart end-of-year exercise. It provides an opportunity to confirm that the quantities in your accounting system reflect what’s actually on the shelves, uncover shrinkage or obsolescence, and pinpoint any weaknesses in your internal controls. Regular counts also support better purchasing decisions, more accurate financial reporting and improved cash flow management — making them a valuable exercise for companies of any size. Here are some best practices to help you prepare and maximize the benefits.

Streamlining the process

Planning is critical for an accurate and efficient inventory count. Start by selecting a date when active inventory movement is minimal. Weekends or holidays often work best. Communicate this date to all stakeholders to ensure proper cutoff procedures are in place. New inventory receipts or shipments can throw off counting procedures.

In the weeks before the counting starts, management generally should:

• Clean and organize stock areas,

• Order (or create) prenumbered inventory tags,

• Prepare templates to document the process, such as count sheets and discrepancy logs,

• Assign workers in two-person teams to specific count zones,

• Train counters, recorders and supervisors on their assigned roles,

• Preview inventory for potential roadblocks that can be fixed before counting begins,

• Write off any defective or obsolete inventory items, and

• Count and seal slow-moving items in labeled containers ahead of time.

If your company issues audited financial statements, one or more members of your external audit team will observe the procedures (including any statistical sampling methods), review written inventory processes, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

Handling discrepancies

Modern technology has made inventory counting far more efficient. Barcode scanners, mobile devices and radio frequency identification (RFID) tags reduce manual errors and speed up the process. Linking these tools to a perpetual inventory system keeps your records updated in real time, so what’s in your system more closely aligns with what’s on your shelves. However, even with automation, discrepancies can still happen.

When your books and counts don’t sync, quantify the magnitude of any inventory discrepancies and make the necessary adjustments to your records and financial statements. Evaluate whether your valuation and costing methods remain appropriate; if not, update them to ensure consistency and accuracy going forward.

Resist the temptation to simply write off the difference and move on. Instead, investigate the root causes, such as human counting errors, system data issues, mislocated items, theft, damage or obsolescence. Use the results to strengthen controls and processes. Possible improvements include revising purchasing and shipping procedures, upgrading inventory management software, installing surveillance in key areas, securing high-risk items, and educating staff on proper inventory handling and reporting procedures.

Also consider ongoing cycle counts that focus on high-value, high-turnover items to help detect issues sooner and reduce year-end surprises. For companies that issue audited financials, cycle counts complement — but don’t replace — year-end physical count requirements.

Formally documenting the inventory counting process, findings and outcomes helps management learn from past mistakes. And it provides an important trail for auditors to follow.

For more information

Physical inventory counts can enhance operational efficiency and financial reporting integrity. With the help of modern technology and advanced preparation, the process can be less disruptive and more valuable. When discrepancies arise, management needs to act decisively and systematically. Contact FMD for guidance on complying with the inventory accounting rules and optimizing inventory management.

Is your Accounting Software Working for Your Business — or Against it?

When buying new accounting software or upgrading your existing solution, it’s critical to evaluate your options carefully. The right platform can streamline operations and improve financial reporting accuracy. However, the wrong one can result in reporting delays, compliance risks, security breaches and strategic missteps. Here are some common pitfalls to avoid.

Relying on a generic solution

You might be tempted to choose a familiar, off-the-shelf software product. While this may seem like a practical solution, if the software isn’t tailored to your company and industry, you may be setting yourself up for inefficiencies and frustration later.

For example, construction firms often need job costing, progress billing and retainage tracking features. Not-for-profits need fund accounting and donor reporting features. Retailers may benefit from real-time inventory management and multi-channel sales integrations. Choosing a one-size-fits-all tool may result in a patchwork of manual fixes and workarounds that undermine efficiency and add risk.

Overspending or underspending

Accounting systems vary significantly in their features and costs. It’s easy to overspend on software with flashy dashboards and advanced add-ons — or to settle on a no-frills option that doesn’t meet the organization’s needs. Both extremes carry risk.

The ideal approach lies somewhere in the middle. Start by benchmarking your transaction volume, reporting complexity, staff skill levels and support infrastructure. Then build a prioritized feature “wish list” and set a realistic budget. Avoid paying for functions you’ll never use, but don’t underinvest in critical capabilities, such as automation, scalability or integration. Think strategically about where your business will be a year or two from now — not just today.

Clinging to legacy tools

Upgrading or moving to a new accounting platform is a major undertaking, so it’s easy to put these projects on the back burner. But waiting too long can lead to inefficiencies, data inaccuracies and missed opportunities. Modern platforms offer cloud-based access, AI-driven automation and mobile functionality — features that older systems can’t match. As more businesses shift to hybrid work and remote collaboration, staying current is essential for accuracy and speed.

If your financial closes take too long, if reports don’t reconcile easily or if you can’t view your numbers in real time, it may be time to modernize. Treat accounting software upgrades as part of ongoing business improvement — not an occasional “big project.”

Test your system periodically to ensure efficient data flows, accurate reconciliations and useful management reports. This exercise moves you from merely “keeping books” to driving financial insight.

Ignoring integration, mobility and security

In the past, accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. Your accounting system should integrate with the rest of your tech suite — including customer resource management (CRM), inventory and project management platforms — so data can be shared seamlessly and securely. If you’re manually entering data into multiple systems, you’re wasting valuable resources.

Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that allow users to access real-time data, approve transactions and record expenses from their smartphones or tablets.

Equally important is cybersecurity. With financial information increasingly stored online, prioritize systems with data encryption, secure cloud storage and multi-factor authentication. Protecting your data means protecting your business reputation.

Leaving your CPA out of the loop

Choosing the right accounting software isn’t just an IT project — it’s a strategic investment decision for your business. Our team has helped hundreds of companies select accounting technology tools that fit their needs. Let’s get started on defining your requirements, evaluating software features and rolling out a seamless implementation plan. Contact FMD to discuss your pain points, training needs and budget. We can help you find a solution that works for your business.

5 Ways to Streamline Your Billing Process

When your business is growing, billing can easily fade into the background. After all, once invoices go out and payments come in, it may seem like everything’s running smoothly. But small inefficiencies and overlooked errors can quietly chip away at cash flow.

Regularly reviewing and improving your billing systems can help you collect faster, reduce errors and strengthen customer relationships. Here are five tips to help make your billing process more efficient and effective.

1. Identify and fix issues promptly

Billing errors delay payments and erode customer trust. Invoices with incorrect amounts, missed discounts or incomplete details can lead to disputes and slow down collections. The following steps can help reduce billing issues:

• Review invoices for accuracy before sending them,

• Confirm that customer contact and account information is current, and

• Track billing errors and complaints to identify recurring issues.

It’s equally important to address service or product issues quickly. Late deliveries, incomplete work or miscommunication can give customers an excuse not to pay on time. Encourage your team to resolve any billing or service concerns promptly — and request payment for any undisputed balances while settling disputed items.

2. Invoice faster and more consistently

Delays in billing lead directly to delays in cash inflows. If you’re waiting until the end of the month to send invoices, you’re giving up valuable days of cash flow. Consider tightening your invoicing cycle by:

• Sending invoices as soon as work is completed or products are shipped,

• Establishing clear payment terms that reflect industry standards and shortening them if appropriate, and

• Leveraging technology to automate recurring invoices, reminders and follow-ups.

If you haven’t already, move to electronic invoicing and online payment options. Digital systems make it easier for customers to pay and for you to track payments in real time.

3. Use automation to your advantage

Modern accounting and billing software can do more than send invoices — it can alert you to overdue accounts and apply late fees. Your software can also generate cash flow reports to help you identify trends and trouble spots.

Make sure your billing system integrates smoothly with your accounting platform. Schedule periodic reviews to ensure your software is still meeting your organization’s needs and is compliant with current tax and reporting requirements. Also, confirm that your systems maintain proper data security, user permissions and backup procedures, especially when storing customers’ financial information.

4. Establish clear policies and communication

Strong billing practices start with clear communication. Provide customers with written documentation about your pricing, payment terms, late-fee policies and credit arrangements. Internally, train your finance and accounting team to consistently enforce these policies.

When billing disputes arise, handle them quickly and professionally. Maintaining goodwill while enforcing your terms is a balancing act — but it’s essential for predictable cash flow. Consistent enforcement also supports audit readiness and strengthens your internal controls.

5. Focus on what you can control

Economic shifts, customer demand and market disruptions are beyond your control. But your billing process isn’t. By proactively monitoring how invoices are issued, tracked and collected, you can protect your cash flow and reduce stress on your operations.

We can help you review your current billing systems, identify inefficiencies and implement stronger accounting practices that support steady cash flow. Contact FMD to schedule a review and discover practical ways to simplify and accelerate your billing process.

Business Owners: You Don’t Need a Crystal Ball to see the Future, just Your CPA

Financial statements report historical financial performance. But sometimes management or external stakeholders want to evaluate how a business will perform in the future. Forward-looking estimates are critical when evaluating strategic decisions, such as debt and equity financing, capital improvement projects, shareholder buyouts, mergers, and reorganization plans. While company insiders may see the business through rose-colored glasses, external accountants can prepare prospective financial reports that are grounded in realistic, market-based assumptions.

3 reporting options

There are three types of reports to choose from when predicting future performance:

1. Forecasts. These prospective statements present an entity’s expected financial position, results of operations and cash flows. They’re based on assumptions about expected conditions and courses of action.

2. Projections. These statements are based on assumptions about conditions expected to exist and the course of action expected to be taken, given one or more hypothetical assumptions. Financial projections may test investment proposals or demonstrate a best-case scenario.

3. Budgets. Operating budgets are prepared in-house for internal purposes. They allocate money — usually revenue and expenses — for particular purposes over specified periods.

Although the terms “forecast” and “projection” are sometimes used interchangeably, there are important distinctions under the attestation standards set forth by the American Institute of Certified Public Accountants (AICPA).

Leverage your financials

Historical financial statements are often used to generate forecasts, projections and budgets. But accurate predictions usually require more work than simply multiplying last year’s operating results by a projected growth rate — especially over the long term.

For example, a start-up business may be growing 30% annually, but that rate is likely unsustainable over time. Plus, the business’s facilities and fixed assets may lack sufficient capacity to handle growth expectations. If so, management may need to add assets or fixed expenses to take the company to the next level.

Similarly, it may not make sense to assume that annual depreciation expense will reasonably approximate the need for future capital expenditures. Consider a tax-basis entity that has taken advantage of the expanded Section 179 and bonus depreciation deductions, which permit immediate expensing in the year qualifying fixed assets are purchased and placed in service. Because depreciation is so boosted by these tax incentives, this assumption may overstate depreciation and capital expenditures going forward.

Various external factors, such as changes in competition, product obsolescence and economic conditions, can affect future operations. So can events within a company. For example, new or divested product lines, recent asset purchases, in-process research and development, and outstanding litigation could all materially affect future financial results.

We can help

When preparing prospective financial statements, the underlying assumptions must be realistic and well thought out. Contact FMD for objective insights based on industry and market trends, rather than simplistic formulas, gut instinct and wishful thinking.

What’s the Right Inventory Accounting Method for your Business?

Inventory is one of the most significant assets on a balance sheet for many businesses. If your business owns inventory, you have some flexibility in how it’s tracked and expensed under U.S. Generally Accepted Accounting Principles (GAAP). The method you use to report inventory can have a dramatic impact on your bottom line, tax obligations and financial ratios. Let’s review the rules and explore your options.

The basics

Inventory varies depending on a business’s operations. Retailers may have merchandise available for sale, while manufacturers and contractors may have materials, work in progress and finished goods.

Under Accounting Standards Codification Topic 330, you must generally record inventory when it’s received and the title (or the risks and rewards of ownership) transfers to your company. Then, it moves to cost of goods sold when the product ships and the title (or the risks and rewards of ownership) transfers to the customer.

4 key methods

While inventory is in your possession, you can apply different accounting methods that will affect its value on your company’s balance sheet. When inventory is sold, your reporting method also impacts the costs of goods sold reported on your income statement. Four common methods for reporting inventory under GAAP are:

1. First-in, first-out (FIFO). Under this method, the first items entered into inventory are the first ones presumed sold. In an inflationary environment, units purchased earlier are generally less expensive than items purchased later. As a result, applying the FIFO method will generally cause a company to report lower expenses for items sold, leaving higher-cost items on the balance sheet. In short, this method enhances pretax profits and balance sheet values, but it can have adverse tax consequences (because you report higher taxable income).

2. Last-in, first-out method (LIFO). Here, the last items entered are the first presumed sold. In an inflationary environment, units purchased later are generally more expensive than items purchased earlier. As a result, applying the LIFO method will generally cause a company to report higher expenses for items sold, leaving lower-cost items on the balance sheet. In short, this method may defer tax obligations, but its effects on pretax profits and balance sheet values may raise a red flag to lenders and investors.

Under the LIFO conformity rule, if you use this method for tax purposes, you must also use it for financial reporting. It’s also important to note that the tax benefits of using this method may diminish if the company reduces its inventory levels. When that happens, the company may start expensing older, less expensive cost layers.

3. Weighted-average cost. Some companies use this method to smooth cost fluctuations associated with LIFO and FIFO. It assigns a weighted-average cost to all units available for sale during a period, producing a consistent per-unit cost. It’s common not only for commodities but also for manufacturers, distributors and retailers that handle large volumes of similar or interchangeable products.

4. Specific identification. When a company’s inventory is one of a kind, such as artwork, luxury automobiles or custom homes, it may be appropriate to use the specific identification method. Here, each item is reported at historic cost, and that amount is generally carried on the books until the specific item is sold. However, a write-off may be required if an item’s market value falls below its carrying value. And once inventory has been written down, GAAP prohibits reversal of the adjustment.

Under GAAP, inventory is valued at the lower of 1) cost, or 2) net realizable value or market value, depending on the method you choose.

Choosing a method for your business

Each inventory reporting method has pros and cons. Factors to consider include the type of inventory you carry, cost volatility, industry accounting conventions, and the sophistication of your bookkeeping personnel and software.

Also evaluate how each method will affect your financial ratios. Lenders and investors often monitor performance based on profitability, liquidity and asset management ratios. For instance, if you’re comparing LIFO to FIFO, the latter will boost your pretax profits and make your balance sheet appear stronger — but you’ll lose out on the tax benefits, which could strain your cash flow. The weighted-average cost method might smooth out your profitability, but it might not be appropriate for the types of products you sell. The specific identification method may provide the most accurate insight into a company’s profitability, but it’s reserved primarily for easily identifiable inventory.

Whatever inventory accounting method you select must be applied consistently and disclosed in your financial statements. A change in method is treated as a change in accounting principle under GAAP, requiring justification, disclosure and, if material, retrospective application.

We can help

Choosing the optimal inventory accounting method affects more than bookkeeping — it influences tax obligations, cash flow and stakeholders’ perception of your business. Contact FMD for help evaluating your options strategically and ensuring your methods are clearly disclosed.

3 Tips to Streamline your Accounting Processes

Whether you operate a for-profit business or a not-for-profit organization, strong accounting practices are essential for maintaining financial health and making informed decisions. These include creating budgets, monitoring results, preparing accurate financial statements, and complying with tax and payroll requirements. Over time, even efficient systems can become outdated or inconsistent. Here are three simple ways to enhance your accounting function and keep operations running smoothly.

1. Review and reconcile

Management oversight is a critical component of internal controls over financial reporting. Start by ensuring that whoever oversees your finances — such as your CFO, controller or bookkeeper — regularly reviews monthly bank statements and financial reports for errors and unusual activity. Quick reviews can prevent minor discrepancies from turning into major issues later.

It’s also smart to establish clear policies for month-end cutoffs. Require all vendor invoices and expense reports to be submitted within a set period (for example, one week after month end). Delayed submissions and repeated adjustments can waste time and postpone financial reporting.

Don’t wait to reconcile balance sheet accounts until year end. Doing it monthly can save time and reduce stress. It’s much easier to fix mistakes when you catch them early. Be sure to reconcile accounts payable and accounts receivable subsidiary ledgers to your balance sheet to maintain accuracy and visibility.

2. Standardize workflows

Designing a standardized invoice coding sheet or digital approval process can improve accuracy and speed. Accounting staff often need key details, such as general ledger codes, cost centers and approval signatures, to process payments efficiently. A simple cover sheet, approval stamp or electronic workflow helps capture all this information in one place.

Include a section for the appropriate manager’s approval and multiple-choice boxes for expense allocation to departments, projects or programs. Always document payment details for reference and audit purposes.

Another tip: Batch your work. Instead of entering or paying each invoice as it comes in, set aside dedicated blocks to process multiple items at once. This saves time and reduces task-switching inefficiency.

3. Leverage accounting software

Many organizations underuse their accounting software because they haven’t explored its full capabilities. Consider bringing in a trainer or consultant to help your team unlock automation features, shortcuts and reporting tools that can save time and reduce errors.

Standardize the financial reports generated by your system so they meet your needs without manual modification. This improves data consistency and provides real-time insight, not just end-of-month visibility.

Also, automate recurring journal entries and payroll allocations when possible. Most accounting systems allow you to set up automatic postings for regular expenses, payroll distributions and accruals. Just remember to review estimates against actual figures periodically and make any necessary adjustments before closing your books.

Small improvements can make a big difference

Accounting practices are continuously changing due to advances in automation, cloud-based systems and AI-driven analytics. Review your workflows regularly to identify steps that could be automated or eliminated if they don’t add real value. Not sure where to start? Contact FMD to review your systems and brainstorm practical ideas to modernize your accounting function, enhance efficiency and improve financial oversight.