Accountants Aren't Just for Taxes

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Ask a builder for a definition of a good accountant, and tax savings probably will be a highlight of the response. But a good accountant can provide far more than a significant tax refund. An accountant's primary function is not to reduce tax liability through the use of smoke and mirrors but to help guide a business to increasing success. Does yours?

Ask Ken Bernhard (Sebern Homes, St. Charles, Ill.) why he switched accountants, and he'll start discussing how much he used to pay in taxes. But ask Nate Gordon, a senior tax partner at Berenson & Co., New York, about how he can add value for a client, and he'll discuss charitable contributions to donor-advised funds with corporate buybacks. Huh?

Some home builders view their accountant's sole role as tax preparer and ship financial information to the accountan's office every April. Others see their accountant as a trusted financial adviser, a person to be called for any issue involving money. And many builders probably aren't even certain what services their accountant offers, thus not taking advantage of an individual who could be an asset to their company.

Conversely, many accounting firms have expanded their practices from tax preparation and auditing to consulting, bookkeeping, asset management and more. An accountant's services should help a builder address the following issues:

Business entity: Especially critical for a startup, accountants can help an entrepreneur determine how the business should be structured. An accountant can review the pros and cons associated with sole proprietor-ships, partnerships, C corporations, S corporations and limited liability corporations. For established and/or growing companies, an accountant can determine whether a company should change its entity.

For builders with diversified operations, an accountant can help determine whether a business requires multiple entities. A builder might own a construction company as well as separate companies for trucks and construction equipment, offices and property, and subdivisions.

Bookkeeping: To ensure that information provided to the accountant for tax filings is accurate, the accountant should assist the builder in establishing a company record-keeping system. This system should include the method by which bills are paid, when income is recorded and how employee expenses are handled. One result of a bookkeeping system is the production of a general ledger that is the basis for an accountant to complete certain quarterly and annual reports.

An effective bookkeeping system provides the information necessary to operate a productive, profitable company. A builder should be able to self-generate regular reports that depict gross profit margins by type of job, thus clarifying which types are most profitable and should be pursued more aggressively. A good reporting system should assist a builder in setting prices, determining fixed and variable expenses, measuring individual employee profitability (if employees are assigned to oversee individual jobs) and monitoring cash flow.

Payroll and pension services: Another task for which an accountant should assist is locating and hiring a payroll service. Bruce Lumish, audit and accounting partner at Berenson & Co., says using an outside payroll service is usually cost-effective for any company, including those with just one or two employees.

A payroll service also should ensure that payroll tax filings are timely and accurate. The company accountant should monitor those filings as another safeguard.

Gordon and Lumish say a company accountant also should be able to recommend an appropriate qualified retirement plan.

Auditing: The American public has come to know this term thanks to the Enron scandal. Among the issues most debated: How independent is a company's auditor, and what is the auditor's legal obligation?

Most small builders probably do not have a formal audit of the company books. Certain banks, however, require third-party audits as a condition of loans. The builder might have to present an annual audit detailing how loans were used and the company's profitability.

Business valuation: Whether the issue is valuation for estate tax planning or for a sale, business owners typically have no sense of their company's worth. Without that, they might decide to sell the company based on an overly optimistic valuation. Conversely, an owner might not realize the company's unlocked value and fail to tap those economic resources for expansion.

An accountant trained and experienced in business valuation can render invaluable assistance to a builder. Armed with knowledge of the construction industry and comparably sized construction companies, an accountant can help an owner determine company value and how best to unlock it. In some instances, liquidating pieces of a company might prove more valuable than selling the whole business.

Financial planning: The link between an individual's company and personal finances is virtually unbreakable, and the same accounting firm typically prepares both a company's and the owner's tax returns. Gordon says an accountant doing both tasks can help defer recognition of income if, for example, the company is an entity such as an S corporation. But many accounting firms' services go far beyond that.

A number of accounting practices have developed into multidisciplinary entities. Along with the more traditional functions of taxes and audits, accounting firms have partnered with financial advisory firms or added personal finance professionals on staff. An entirely different discipline from giving random advice in response to client questions, financial planning includes asset management; insurance planning; estate, trust and gift planning; cash-flow projections; and retirement planning.

Loan preparation: A builder should be judicious in using credit and should incur debt only when it can lead to greater income or is necessary for the day-to-day workings of the company. Evaluating financing needs is just one more task for an accountant.

Preparing loan documents is a critical task for a company accountant. The accountant should be able to prepare cash-flow statements demonstrating how a loan can be repaid, company balance sheets and a cost/benefit analysis for the project requiring financing. An accountant with a network of professional contacts also can introduce clients to loan officers who might best understand a builder's unique needs and requirements.

Upgrading and updating: As a business grows, items relating to its financial aspects require change as well. A part-time bookkeeper, for example, might not be appropriate for a builder with larger or multiple projects. A company might require a "stronger financial person internally as business grows," Lumish says. A company's accountant can help in the search for that type of person, narrowing the options to the best candidates.

In addition to personnel, financial systems require upgrading as well. Whereas a simple program such as Quicken or QuickBooks might be sufficient for a small firm, a larger company with more complicated transactions might require a more comprehensive accounting package. Accounting pros should possess this sort of information so they can guide clients to software that can generate the most useful information in its most readable format.

As businesses grow, accounting methods might require change as well. As Gordon points out, builders eligible to use the completed contract method of accounting can defer income to future years, and builders who are eligible to use this method but are not doing so should rerun their numbers.

Stan Ehrlich can be reached at sfehrlich@rcn.com [2].