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Financial Management for Creative Entrepreneurs
LakeFX ChicagoMay 14, 2016Joshua Lance
Agenda
● What is Financial Management?● Financial Aspects of Legal Form
of Organization● Funding and Capital● Accounting Processes and
Systems● Building the Right Team● Open Q&A
About Your Presenter
Joshua Lance, CPA, CGMAManaging Director -- Joshua Lance CPA, LLC
Former Controller of N. Pritzker Capital Management & Audit Manager at Crowe Horwath
Provide Innovative Accounting Solutions to Tech-Centric Startups, Craft Breweries, and Creative Entrepreneurs
What is Financial Management?
What is Financial Management?
How you understand, adapt, plan, and organize the finances of your business.
Financial Management includes:
● Compliance (Legal & Tax)● Recordkeeping● Reporting and Analysis● Cash Management● Planning and Projection● Pricing● Employees/HR
What is Your Business
● Define what you are doing○ What are you selling? Goods or Services (or Both)?○ Do you have a market to sell to?
Financial Aspects of Legal Form of Organization and its Taxable Implications
Legal Form of Organization
What are your options?
● Sole Proprietor○ Pro: No Legal Filings Needed! Just Do Business!○ Cons: No Legal Filings Needed --- any activity generating income not under employment rel.○ Unlimited Legal Liability○ Tax Ramifications
■ Schedule C Filer■ Pass Through Taxation■ Income Tax and Self Employment Tax
Legal Form of Organization
What are your options?
● Partnership (General or LLP)○ General Partnerships run into same issues as Sole Proprietorships with even messier legal
issues!○ LLPs
■ Now we are limiting our legal liability!■ Pass through taxation■ Still have Self Employment Taxation
Legal Form of Organization
What are your options?
● C-Corporations○ Significant Legal Formation Documents
■ Articles of Incorporation, Bylaws, Founders Agreements, Stock Plans, etc.○ Limited Legal Liability○ Corporate Taxation
■ Watch for dividends! (Double Taxation)○ Why would a C-Corp be good for your business?
Legal Form of Organization
What are your options?
● S-Corporations○ Significant Legal Formation Documents
■ Articles of Incorporation, Bylaws, Founders Agreements, Stock Plans, etc.○ Strict Guidelines on ownership (100, 1 Form, USA)○ Limited Legal Liability○ Pass Through Taxation○ TAX ADVANTAGES!!!!!!!!!!!○ Why would a S-Corp be good for your business?
Legal Form of Organization
What are your options?
● Limited Liability Corporation○ Less Strict Legal Formation
■ Articles of Organization, Operating Agreement○ Flexible Ownership○ Choose Your Own Taxation!
■ S-Corp Election!■ Usually will be pass through taxation
○ Why would this be a good choice?
15.3%Did we mention S-Corp Tax benefits!!!!
Know Your Tax Deadlines!
Starting for the 2016 Tax Year
● Entities with pass through taxation (besides sole props)○ DUE MARCH 15
● Entities with corporation taxation○ DUE APRIL 15
● Individuals and Sole Props○ DUE APRIL 15
Now that you are legal...
Keep Your Personal and Business Finances Separate!!!!!!
● Don’t Pierce the Veil!● Better understand business cash flow
Funding and Capital
Funding and Capital OptionsWhere is your starting capital
coming from?
● Self Fund/Bootstrap● Friends and Family● Crowdfunding● Equity Crowdfunding● Bank and Alternative Lending● Equity Financing
Self Fund/Bootstrap
● You and your co-founders bring money to the entity to fund the company and your company gets its continuing funding from the operations of the business.
● Pros:○ You fund it, you own it outright○ No outside investors
● Cons:○ Limited capital resources○ If business takes time to startup, you may need other funding measures
Friends and Family
You get people you know well to provide funding.
WATCH OUT: Make sure you clearly define the terms of this form of funding
● Pros:○ Way to get funding at terms beneficial to you○ Determine the form of the funding
● Cons:○ May kill your friendships and impair family relationships○ Unintended tax consequences○ Unintended legal consequences
Crowdfunding
Kickstarter Variety of Crowdfunding aka Rewards Based Crowdfunding
Get people to give you money in return for a future good or service!
Potato Salad Kickstarter!
● Pros:○ Outside funding without need of repayment ○ Provides cash flow before a product needs to be made
● Cons:○ Instant business○ Taxation of Gross Proceeds of Kickstarter○ Timing Issues on Cash Flow○ Potential Sales Tax Ramifications
Crowdfunding
Equity Crowdfunding
New way to crowdfund, but instead of getting rewards, backers get stock.
● Pro’s:○ Potentially quicker and easier way to get diversified outside investment without needing to go
through VCs○ Utilize the new laws in the JOBS act to obtain funding over the internet○ Get funds from non accredited investors
● Con’s:○ Potential to be expensive to get funding both near term and long term○ Your ownership base will be unknown○ Investor Relations mechanism needed○ Depending on size of offering, you may need an audit or review
Bank and Alternative Lenders
Getting loans through banks or other lenders
● Pro’s: ○ Keep Control○ Way to leverage for growth
● Con’s○ Direct cash costs for lending○ Banks need assets to lend against○ Alternative lending can get expensive quickly
Equity Financing
● Methods○ Equity Crowdfunding
○ Outside Investors
○ Angel Investors
○ Venture Capital
● Types○ Common Stock
○ Preferred Stock
○ Convertible Financing
Accounting Processes and Systems
Why is Accounting Important?
Accounting gives you the data to understand how your business is performing and provides the information you need to make actionable decisions for your business.
Step One: Understand Your Processes
● Before you can implement an accounting system, you need to know the inputs are (sales, expenses, etc.) and what you want to get out of the system.
● Accounting is not just the means to an end of compliance.● Garbage Inputs or Garbage Processes (or lack thereof) mean garbage outputs.
Step 2: Implement the Accounting System
Implement a system that makes sense for your business.
Things to look for:
● Cloud Based● Unlimited users and have multiple users access at same time● It can handle your business and integrate with third party apps● Be able to understand it
Step 3: Actually use your accounting system
An accounting system that is not used can’t help your business
● Need to record transactions (invoices, bills, bank transactions, etc.)● Regularly keep the books up to date● Reconcile bank accounts● Review reporting● Get actionable data from the reporting
How Can I Use My Accounting System
Cash Flow Management
● See your current cash position and expected cash inflows and outflows○ Invoicing and Bills show where money will be coming and going in the future
● Build Cash Reserves● Analyze metrics
○ A/R Turnover○ A/R Aging & A/P Aging
● Understand Burn Rates● Figure out how to run as lean as possible
How Can I Use My Accounting System
Understand Profitability
● Ultimately the goal of a business is to be profitable● Need to know where and how you are making and spending money● Income Statement report is the primary tool to do this● Analyze Metrics to understand profitability
How Can I Use My Accounting System
Tax Planning
● Profitable businesses generate taxes that need to be paid● No surprises at year end● Track sales taxes for sales and use tax reporting
How Can I Use My Accounting System
Budgeting and Forecasting
● Create budgets based on what we are trying to accomplish financially for the year
● Compare budget to actuals to see how we are performing● Use our budgets to create forecasting for what if analysis, breakevens, and
projected burn rates
How Can I Use My Accounting System
Paying Yourself and Employees
● Understand your finances so you know what you can take as salary or draws from the business
● Figure out if you have the financial capability to hire● Determine if you can offer financial benefits for your employees
How Can I Use My Accounting System
Collecting Cash from Customers
● Send invoices to your customers from your accounting software● Make available electronic payment from your invoices● Chase and leverage the money you are owed
How Can I Use My Accounting System
Pricing Your Goods or Services
● Price is what a willing buyer will pay a willing seller in an equal exchange of value.
● Price needs to be backed up by your costs.● Price needs to be commensurate to your good or service that you are selling.
PSA: If you do not know how to setup an accounting system or understand how to account for your transactions, get outside help sooner rather than later.
Building the Right Team
Financial Management Aspects of Building Your Team● Inhouse or Outsource● Employee or Independent Contractor
In House or Outsourced
Need to determine the capacity and expertise of the role
Typically you outsource roles where you need less capacity but higher expertise
In house roles tend to be areas where capacity and full focus are needed
What gets outsourced?
● Accounting● Marketing/Social Media/PR● IT● Human Resources● Legal
Employee vs Independent Contractor
One of the areas that companies get into trouble most often
IRS can classify your independent contractor to employee status, which means big penalties, interest, and additional taxes owed.
Employee Costs:
● Payroll Taxes● Unemployment Taxes● Workers Compensation● Compliance Costs● Benefits (depending on size)
Q&A Time
Thanks!
Joshua Lance | [email protected] | @jlancecpa
Special Thanks to Xero and Gusto for providing the giveaways!
