CFO Toolkit

Welcome to the CFO Toolkit

Here are some concepts and ideas that will help you to establish and grow a strong set of books.  Our method of accounting for business activity has wide reaching ramifications.  It is important to have as much knowledge as early as possible so that you can build the right system for your company.  No two companies are alike so, therefore, no two systems will be alike. This toolkit grew out of a webinar that I presented in February.  It was hosted by the Craft Beer Attorney.  A replay can be purchased.

Click on a title to expand or collapse a section.

One Book, Many Masters

Cash, Book, Tax, Cost, Insurance.... We tend to think that our accounting system will give us all the answers, and for the most part that is true.  However, your system will be called upon to answer many different types of questions-- some of which have conflicting answers.  The trick is knowing what to build in the system and what to build outside of the system. 

Sometimes it is hard to believe that one accounting system has to solve all of the data needs of the company.  Especially if the company is small, there aren't enough hands to keep separate books.  This is why most accounting professionals maintain one set of books with a series of spreadsheets to answer speciality questions.  I'm a big fan of making sure that your accounting system keeps reality as tight as possible.  That system should be open to some kind of database reporting tool that helps generate specialty analysis when needed.  In this section, I  talk about the different "sets" of books, but the reality is that I try to refer back to my main system as much as possible. Keep these rules in mind as you are designing a system.  The real art here is to know when to use what number for what purpose.  For example, most young breweries use tax depreciation as book depreciation.  At this point, only the tax preparer is tracking fixed assets.  A milestone of growth is to manage your own fixed assets

Cash - Good old cash forecasting

"Cash is King" is very true in just about any industry.  Even though we will need to keep accurate books, there will always be a need to understand the current bank balance and the effect of business decisions on the bank account.  Accounting systems are not the best place to understand your long-term cash needs (notice that I did not say Statement of Cash Flows, this is a true cash forecast).  Accounting systems are created to produce financial statements.  While that is critical, it does not give a really good reflection of cash in the long run.  Oftentimes cash decisions are split between the income statement and the balance sheet.  I have always maintained a separate cash forecast and reconciliation.  That way I can plan out for large income statement and balance sheet moves. 

To get you started, here is a sample cash forecast layout at the bottom of the page.  It is meant to loosely follow the logic of  a bank statement.  It is important to forecast one account at a time.  To keep yourself from going crazy, use checks mailed and bank debits for your outflows. DO NOT try to analyze float (unless that is material to your business).   This is meant to capture trends and to give you a good starting point for forecasting.  In this example, I lay out a main checking account and a savings account.  If you have a separate payroll account, then I would separate payroll into a separate sheet and replace that line with a payroll ZBA.  If you intend on using the worksheet, PLEASE read the comments.  It will help you frame the discussion and ease your customization time. 

Book - Standard GAAP Reporting

This is the most obvious master.  All accounting systems are built to organize information according to an accrual or cash basis.  Most companies start using the cash basis.  That means that you account for something when you receive or pay the cash for it.  Depending on the bank and credit card matching for your accounting system is by default a cash basis system.  Once you reach annual gross receipts of $1,000,000, most people convert to the accural basis.  What is the accrual basis?  That means that activity is tracked when it occured, NOT when you were compensated for it.  That means that a sale could be recognized in one month, but the cash could be received in another month.  It is important that once you make the move to accrual, everyone understands what that means to the organization.  Inventory will need to be tracked and reconciled.  You will need to pick an inventory costing method and reconciliation method.

  • Cash-basis Inventory
  • Periodic Accrual
  • Perpetual Accrual

.Each of those reconciliation methods will need to be monitored closely.  A lot of the trust in the system comes from good and accurate inventory.  Another main difference is in depreciation.  GAAP depreciation generally uses the straight-line method based upon standard useful lives.  Tax depreciation on the other hand is often accelerated.  A major milestone in the accounting system is when the company begins to recognize book instead of tax deprecation.

Tax - The world according to the IRS (and other taxing authorities)

Each taxing authority has their own way of defining revenue and cost depending on what they are trying to accomplish.  Sometimes book and tax methodologies agree, but not often.  It is much easier in the early stages to recognize activity using a tax-basis methodology.  That will change once the company grows and the readers of the finacials will want to see GAAP produced financials.  How do you keep track of the differences?  Typically the tax preparer has sophisticated software that can easily keep track of asset balances.  This is why you would want to move accountants in a slow period.  There is a bunch of information transfer that needs to happen.  It will happen much easier if everyone is no so frazzled. 

Cost - What does it really cost to do something?

That is one of the first questions that you will get and one of the last questions that you will try to answer.  There is an inherent conflict between the need to fully cost a process and to obtain the lowest tax bill.  That is because a fully costed product will move some costs from the income statement to the balance sheet.  That is,  if you include all of the direct and indirect costs in production as part of your inventory asset, then at the end of every reporting period there is a "layer of cost" that will be trapped in invenory and hence the balance sheet.  This is  particularly true in the case of barrel-aging.  Because a barrel can age for serveral years, several years of cost can be attributed to that work in process inventory.  The best answer that I've seen is to create a standard cost of direct and indirect costs and,  if you are not subject to UNICAP, then move those costs back to the income statement for tax purposes.  I would leave them there for book purposes.  It really helps the reader understand the cost of production. 

Insurance - How and what are we really insuring?

Insurance companies will regularly want to know what the company has in its possession.  It is easy to export an inventory or  fixed asset listing.  The trick is to understand  that the insurance company may value assets using a different formula than GAAP, tax or cash.  If that is the case, I would keep that value in a custom field in the accounting system. Then when you need to produce a report, you can report it with the correct basis. 

Sample 24 Month Cash Forecast

Who are Your Readers and What do they Expect?

All systems start the same way with a basic chart of accounts.  It is important to understand who the readers of your financials are and what they need from the system. A simple ownership structure will not appreciate the nuances of a complex structure.  On the other hand, a more sophisticalted ownership and investor will need to see more in-depth financials and reports to maintain trust in mangement. 

What are their expectations of the financial statements?  Readers of the financial statements often have different needs.  It is important to take each reader's needs into consideration when drafting financials and corresponding reports.

Ownership

Owners tend to have the most operational questions uppermost in mind.  Their reports are time sensitve.  This allows for the company to make course corrections as needed.

  • What do I have?
  • What did I make?
  • Is there enough cash to do what I want to do?
  • Do I make a profit?

Investors

Investors take a longer-term view of the company.  They want to see if the company is on track and is doing well.  They are ususally not involved in the day-to-day decision making, but they are very careful reviewers of the financial statements.

  • What is the status of my investment?
  • Will they honor their commitments?
  • Is the company doing what it promised?

Bankers

Bankers have a keen interest in the financials.  They want to make sure that the company has the ability to repay loans and to stay in business.  They also want to make sure that the company can produce according to a forecast.

  • Can it repay the loan and stay in business?
  • Is the company doing what it promised?

Accounting and Tax Concepts

Accounting systems are build upon a foundation of accounting and tax concepts.  It is important to understand the building blocks of both.  Often one choice has two different answers depending upon your subject matter.  The attachments in this section provide important details on different methods of accounting and UNICAP for taxes.

Will someone review your work one day?  One result of growth is typically a larger investment.  As the investment level grows, so does the level of accountability.  As the accountability grows, so does the need for an outside party to review the work of management.  This is why banks and some investors ask for a restatement of finanicials by an independent party (a CPA).  There are levels of assurance.  A compilation is a restatement of managment's financials.  Oftentimes you will see a consolidation of all related entites along with a summarized financial statement.  A review is the next level of statement.  It requires the CPA to do certain tests on key accounts in the financial statements.  Now the CPA is giving some level of assurance to the reader that the financials were prepared according to GAAP.  An audit is the highest level of assurance.  The CPA states that the financials are materially correct according to GAAP.  That is the hghest level of assurance that an outside party will give. 

If you (or your investors or bank) are planning on the presentation of these reports, it is important to plan early.  There are levels of infastructure that the CPA will need in order to issue these kinds of reports.  Working with a CPA for at least 6 months before the close of the first period will greatly lower your stress level.

Timeline of Accounting Milestones

Everyone's journey is different, but typically I see the following:

  • Simply Cash(auto-match the bank and credit card feed)
  • Periodic Accrual (correct things at the date of the financials)
  • Perpetual Accrual (there are levels of accrual)
  • Standard Costing
  • Variance Analysis
  • Benchmarking/KPIs (key-performace indicators)

Once your company gets to the benchmarking point, then the goal of every manager is to now manage by exception.  We know what should happen and the discussion changes to why something happened out of the ordinary.  That allows all managers (financial and operational) to take a wider view of the process and see the forest though the trees.  Spotting trends is critical to future success.

Tax Laws

Pass-Through Entity

Most companies are set up as a pass-through entity.  That means that taxes are paid at the investor level.  When making business decisions, it is important to take into account the tax effect on the investors.

Accounting Method

IRS dictates that companies must use the accrual method once annual  gross receipts are greater than $1,000,000.  I've attached an accounting methods handout which will gives more detail on the specifics.

UNICAP

Upon reaching certain thresholds, the IRS wants to see a more complete costing of inventory balances.  UNICAP was created to do just that.  I find that this is a great time to implement a fully costed model.  There is no worry about increased taxes, and everyone benefits from knowing the true cost of production.

Accounting Methods According to the IRS
UNICAP Rules
UNICAP Overview
SimplifiedUINICAP
Complying with UNICAP

Keeping Everything on a Schedule

For any system to be valuable, it must match the activity on the production floor.  I often tell my clients "The Physical World Must Match the Virtual World".  The best way for this to happen is for all tasks to be performed on a regular basis.  On this tab, we will discuss the need for a regular inventory counts and a monthly close checklst.

One of the most important things you can do for the company is match the physical world to the virtual world.  The only way that this can happen is if all computer tasks are done by the person doing the work.  Regular physical inventory is critical to keeping everything in balance.  Another important concept is the period close and the close checklist. It is important to set expectations when ownership and management can view accurate financials and for those financials to be completed as soon as possible.  It is impossible to judge the status of the company if the financials are months behind.  Therefore, it is critical that a close checklist be implemented as quickly as possible.  Don't be afraid of the growth of the list over time.  That is natural with the growth of the company.

 Monthly and Periodic Close Checklist

How to Choose the Right Computer System

One of the most important decisions that you will make is the choice of an accounting system.  It is the bedrock upon which the whole company rests.  It's kind of like Goldilocks, some people will find the smaller system just perfect while other will think that it is too simplistic.  More complex systems are right for the sophisticated company.  But jumping into a big system before you are ready will cause more headaches than it will solve. This section does some high-level comparison of each software and has sample chart of accounts.

There are many ways to create an effective and efficient system.  Usually there is a strong correlation between an effective system and the amount of work to maintain such a system. That is why systems often grow in complexity with the company.   That means that the more complete system will cost more and will take more to maintain.  The key here is to pick the right system at the right time for the company.  If you want a sportscar, just be sure that you can handle it in fourth gear.  If that is too much, then stick with a sedan until the sportscar makes more sense.  Don't be afraid of system conversions.  I will deliberately convert a company for a short time, just so they can get use to tools before purchasing an complex system. 

Systems usually match the company's need for structure

This mainly has to do with management's level of sophistication.  If you are used to a complex system, you'll feel uncomfortable with a less than complete system.  Therefore, match your need for data with a system that can provide that data.  One caution here, don't sign up for something that you can't manage.  You are not doing yourself or the system any favors by biting more off that you can chew.  The important thing here is to understand where you are, where you are going, and what system will best get you there.

This is not a report on every system in the marketplace.  I'm covering the main systems that cover the most basic needs up to the mid-market need.  You shoud be able to start and grow with any one of these systems.

Open a software systems comparison chart

What is the Next Step?

Every journey starts with the first step.  Sometimes the hardest thing to do is start.  Knowing the long-term vision will help you establish your own long-term vision.  Once you discover your end point, then mapping out the steps to get to the end point will give you the milestones for your journey. This section will give you a few tips to create change.

Since everyone is in a different place, it would be impossible to give precise advice here.  What I can say that there are a few concepts that you should keep in mind when you are mulling all of this information over.  Remember that every journey starts with a single step. The important thing here is to understand where you want to end up and not to over or under shoot the mark.  Here are some tips that I give my clients.

  • Balance between available resources and company needs
  • Everyone in the brewery is in the same boat.
  • Steer the ship towards the end game
  • Resolve to take one new step each quarter, each year
  • Make sure that you understand the end game
  • Grow large enough to need an audit?
  • Is acquisition the end game?
  • How many markets will you enter?  What is the timing?
  • Does your system track variance in all the key areas?
  • Understand that change is a constant
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