Category: Tips

  • Are your numbers lying to you?

    Are your numbers lying to you?

    If you’re not paying yourself, you’re lying to yourself.

    Can’t afford to pay yourself a fair salary? It’s a huge red flag.

    I had a client with a thriving business, generating decent revenue. But they weren’t taking a salary. Zero. Profits looked good on paper.

    When you skip paying yourself a market salary, your “profit” isn’t profit. It’s a fantasy.

    Consider:
    ↳ Not paying yourself a market salary means the business’s profits are artificially inflated.
    ↳ Buyers and lenders might add back a realistic salary when valuing your business. Then what?

    Real business health means covering the cost of your time. So, I’d like to ask you to please pay yourself first. Like you’re an employee, not a charity case.

    If your business can’t afford to pay you what you deserve, it’s time to rethink the numbers.

    Not sure if you’re doing this? Ask yourself: What would I have to pay someone to replace me?

  • The IRS Doesn’t Care About Your Opinion on Cash vs. Accrual, Know the Rules

    The IRS Doesn’t Care About Your Opinion on Cash vs. Accrual, Know the Rules

    For most small businesses, choosing between cash and accrual accounting is a matter of preference, tax strategy, and simplicity.

    But if you run an RIA, it is not a choice. It is a requirement.

    The SEC requires that all Registered Investment Advisers maintain their financial books and records by Generally Accepted Accounting Principles (GAAP). Under GAAP, accrual accounting is a full stop.

    Many advisors get this wrong, thinking they can run their books on the cash basis because they don’t have inventory or because their tax CPA files their returns on a cash basis. However, for regulatory purposes, the SEC expects your internal books, the ones subject to audit or exam, to follow accrual accounting standards.

    Why Accrual?

    Accrual accounting matches income and expenses to the period when they are earned or incurred, not when cash moves in or out.

    Here is why this matters to the SEC:

    ✅ It gives a true, timely view of your firm’s financial health.

    ✅ It prevents the manipulation of income or expenses based on the timing of cash flows.

    ✅ It aligns with GAAP, which is the baseline for trustworthy, verifiable financial records during an SEC audit or exam.

    For example, if you invoice a client for Q2 services in July and they pay in August, under accrual accounting, you record that income in Q2, not when the money hits your account in August.

    Same with expenses. If you receive a vendor bill in December but don’t pay it until January, accrual accounting books that expense in December, when the liability occurred.

    But My CPA Does My Taxes on a Cash Basis, Is That Okay?

    Yes, for tax purposes only.

    Many RIAs with gross receipts under $27 million (the IRS threshold) can file their tax returns using the cash basis of accounting. But that has nothing to do with your internal books and records required by the SEC.

    For the IRS, cash basis may be fine. For the SEC, accrual is mandatory.

    This distinction trips up a lot of advisors who let their tax CPA handle their bookkeeping. Your tax filings and your internal financials are not the same thing. The books the SEC cares about, those required by the Books and Records Rule (Rule 204-2 under the Advisers Act), must be accrual.

    What the SEC Requires

    Under the Advisers Act, you are required to maintain:

    • General ledgers showing assets, liabilities, capital, income, and expenses, prepared by GAAP (accrual basis).
    • Journal entries for each transaction.
    • Supporting documentation for all disbursements and receipts of funds.
    • Trial balances and financial statements that fairly present your firm’s financial condition.

    These must be updated in a timely fashion and be ready for inspection during an SEC exam.

    Practical Steps for Advisors

    Here is what this means for your firm in the real world:

    1. Use the accrual basis for internal books. Your bookkeeping system, whether QuickBooks, Xero, or another platform, must be set to accrual accounting.
    2. Maintain separate tax accounting if needed. Your CPA can file taxes on a cash basis if you qualify, but that does not change your obligation to keep accrual-based books for SEC purposes.
    3. Work with a bookkeeper or controller who understands RIA-specific compliance. Many generalist bookkeepers miss this critical distinction. Make sure yours does not.
    4. Document everything. Have clear, GAAP-compliant records of all financial transactions. During an SEC exam, sloppy or incomplete records are a red flag.

    Bottom Line

    You don’t get to pick cash vs. accrual based on preference. The IRS allows a cash basis for tax returns in some cases. But the SEC requires accrual accounting for your firm’s books and records, without exception.

    Confusing the two can lead to sloppy records, audit headaches, and compliance risks that simply aren’t worth it.

    If you want your firm’s financials to stand up to regulatory scrutiny and make sharper, more strategic decisions, you need your books on an accrual basis, clean, timely, and accurate.

    No shortcuts. No debate.

    Need help getting your books SEC-compliant, without the hassle?

    Let’s make sure your firm’s financial foundation is rock-solid, audit-ready, and decision-focused.

  • Maximize Your Firm’s Profits with Expense Audits

    Most business owners don’t lose clients—they bleed profit slowly through poor expense tracking. 🩸

    →What I wish more firms knew:

    It’s not the big-ticket items killing your margins—it’s the dozens of small, recurring charges you stopped questioning. Software you no longer use. Subscriptions you forgot to cancel. Vendor creep.

    You wouldn’t tolerate this elsewhere in life. So why 🤷‍♀️ allow it in your own P&L?

    ✅ Run a monthly expense audit.
    ✅ Categorize every line item.
    ✅ Set thresholds for review (e.g., any increase over 10%).
    ✅ Use real-time reporting to catch trends before they balloon.

    Firms that track expenses proactively don’t just save money—they create room to reinvest in growth.

    Profit leaks are silent, but they’re not invisible if you know where to look.

  • Chart of Accounts: A Complete Setup Guide for Service-Based Businesses

    Chart of Accounts: A Complete Setup Guide for Service-Based Businesses

    Your chart of accounts is the backbone of your financial ecosystem. Yet it’s often overlooked until tax season hits and you’re scrambling to make sense of your numbers. Let me walk you through how to set up a chart of accounts that actually works for service-based businesses.

    What Is a Chart of Accounts (And Why It Matters)

    Simply put, your chart of accounts is a complete listing of every account in your accounting system. Think of it as the filing cabinet for your business transactions—each drawer (account) holds specific financial information.

    For service businesses, a properly structured chart of accounts helps you:

    • Track profitability by service line
    • Identify which clients or projects drain resources
    • Make data-driven decisions about pricing and capacity
    • Prepare for tax season without the usual panic

    Step 1: Start With the Five Core Categories

    Every chart of accounts consists of five fundamental categories:

    • Assets: What your business owns (cash, accounts receivable, equipment)
    • Liabilities: What your business owes (loans, accounts payable)
    • Equity: The owner’s stake in the business
    • Revenue: Income from your services
    • Expenses: Costs of running your business

    Step 2: Customize for Your Service Business

    Here’s where generic templates fall short. As a service business, your accounts should reflect how you actually operate:

    For Revenue Accounts: Create separate accounts for each service line. Instead of one “Service Revenue” account, break it down:

    • Consulting Revenue
    • Implementation Revenue
    • Retainer Revenue
    • Training Revenue

    This granularity reveals which services drive your profitability.

    For Expense Accounts: Group expenses by function rather than just type:

    • Client Servicing Expenses (directly tied to delivering services)
    • Business Development (marketing, sales)
    • Administrative (overhead costs)
    • Professional Development (training, certifications)

    Step 3: Number Your Accounts Logically

    Don’t skip this step! A logical numbering system makes your financial reports easier to navigate:

    • Assets: 1000-1999
    • Liabilities: 2000-2999
    • Equity: 3000-3999
    • Revenue: 4000-4999
    • Expenses: 5000-5999

    Leave gaps between accounts for future additions. For example:

    • 4100: Consulting Revenue
    • 4200: Implementation Revenue
    • 4300: Retainer Revenue

    Step 4: Keep It Lean (But Complete)

    I’ve seen charts of accounts with hundreds of line items that overwhelm business owners. Aim for the sweet spot:

    Too few accounts = hidden information
    Too many accounts = analysis paralysis

    For most service businesses, 30-50 total accounts provide sufficient detail without becoming unmanageable.

    Step 5: Align With Tax Reporting Requirements

    Structure expense categories to match your tax form requirements. For example, if you file Schedule C, create expense accounts that mirror those categories:

    • Advertising
    • Contract labor
    • Insurance
    • Professional development
    • Travel

    This alignment saves hours of reorganizing data at tax time.

    Step 6: Review and Refine Quarterly

    Your chart of accounts isn’t set in stone. Schedule quarterly reviews to:

    • Remove unused accounts
    • Add accounts for new service offerings
    • Consolidate accounts with minimal activity
    • Ensure account descriptions are clear and consistent

    Real-World Example

    A marketing agency transformed their financial clarity by restructuring their chart of accounts from generic categories to service-specific tracking. Within two quarters, they discovered their website development services were operating at a 15% loss while their SEO services delivered 40% margins. Without proper account structures, these insights would have remained hidden.

    Final Thoughts

    Your chart of accounts should tell the financial story of your business. When structured properly, it becomes more than a bookkeeping tool—it’s a strategic asset that highlights opportunities, reveals inefficiencies, and guides your business decisions.

    Remember: The extra hour you spend setting up your chart of accounts correctly will save you dozens of hours of financial confusion down the road.