Financial Boot Camp for Immigration Practitioners Kirby G. Joseph (DL), Conference Program Chair,...

Financial Boot Camp for Financial Boot Camp for Immigration PractitionersImmigration Practitioners

Kirby G. Joseph (DL), Conference Program Chair, Aurora, CO

Steven S. Manekin, CPA, Washington, D.C.Jenelle K. Conaway, CPA, MBA, Washington, D.C.

Solo & Small Practice: Business School For the Immigration Lawyer © 2011 American Immigration Lawyers Association

AgendaAgenda

•Understanding Financial JargonFinancial JargonFinancial StatementsInternal Controls

•How to Create a Budget and Financial Plan•How to Manage a Lawyer Trust Account Without Being Ashamed•Four Things to Know About Income Taxes•How to Give Yourself a Financial Health Checkup


Understanding Financial Understanding Financial JargonJargon


Financial JargonFinancial Jargon

•Types of EngagementsAudit – Full assuranceReview – Limited assuranceCompilation – No assurance

•Types of Audit Opinions Unqualified – Presented fairlyQualified – Presented fairly with exceptionsDisclaimer – No opinionAdverse – Not presented fairly



•Types of Financial Reporting

GAAP – Generally Accepted Accounting Principles

•Accrual Basis

OCBOA – Other Comprehensive Basis of Accounting

•Cash Basis•Income Tax Basis



•Types of Financial Statements

Balance SheetIncome StatementStatement of Shareholders’ EquityStatement of Cash FlowsNotes to the Financial Statements



•Types of Financial Reports

Trial BalanceGeneral Ledger

•Debits & CreditsSubsidiary Ledger (Account Detail)


Balance SheetBalance Sheet


•Statement of Financial Position•At a specific point in time•Presented in order of Liquidity•Includes Tangible or Intangible Assets

Tangible – Cash, property & equipmentIntangible – Goodwill, trademarks, patents

•Assets = Liabilities + Shareholders’ Equity



2010 2009CURRENT ASSETS:

Cash and Cash Equivalents 426,108$ 465,654$ Advances for Clients (Note 2) 15,700 - Other Current Assets - 7,200

Total Current Assets 441,808 472,854

PROPERTY AND EQUIPMENT - AT COST:Furniture, Fixtures and Equipment 48,669 55,925 Less: Accumulated Depreciation 34,628 38,428

Property and Equipment - Net 14,041 17,497

Total Assets 455,849$ 490,351$

ASSETS

ABC CORPORATIONBALANCE SHEETS

December 31, 2010 and 2009 •Assets – Things that a company owns that have value

•Liquidity – How quickly they can be converted to cash

•Current <1yr•Long-Term >1yr



CURRENT LIABILITIES:Current Maturities of Long-Term Debt (Note 5) 8,742$ 9,959$ Accounts Payable and Accrued Expenses 46,346 137,622 Due to Related Party (Note 4) 12,057 38,272 Income Taxes Payable 32,490 2,238

Total Current Liabilities 99,635 188,091

LONG-TERM DEBT (Note 5) 35,662 45,621

Total Liabilities 135,297 233,712

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDER'S EQUITY:Common Stock; $.01 Par Value; 100 Shares

Authorized, Issued and Outstanding 1 1 Retained Earnings 320,551 256,638

Total Stockholder's Equity 320,552 256,639

Total Liabilities and Stockholder's Equity 455,849$ 490,351$

LIABILITIES AND STOCKHOLDER'S EQUITY•Liabilities – Amounts a company owes to others

•Due Date – How soon the obligation is due

•Current <1yr•Long-Term >1yr

Income StatementIncome Statement


•Statement of Financial Performance•For a specific period of time•Revenue – Total earned•Expenses – Total spent•Interest Income (Expense) – Interest earned on money invested, or interest paid to borrow money•Income Tax Expense - An estimate of the amount of income tax that will be paid, or has been paid, on the reported earnings•Bottom Line = Net Income or Loss

Income StatementIncome Statement


Amount % Amount %

REVENUE 2,454,569$ 100.0 3,212,201$ 100.0

OPERATING EXPENSES 2,355,704 95.7 3,238,921 100.1

Income from Operations 98,865 4.3 (26,720) (0.1)

INTEREST INCOME 785 - 3,637 -

Income (Loss) before Income Taxes 99,650 4.3 (23,083) (0.1)

INCOME TAXES (Note 7) (35,737) (12,502)

Net Income (Loss) 63,913$ (35,585)$

2010 2009

ABC CORPORATIONSTATEMENTS OF OPERATIONS

For the Years Ended December 31, 2010 and 2009

Statement of Shareholders’ Statement of Shareholders’ EquityEquity


RETAINED EARNINGS - January 1, 2009 292,223$

Net Loss (35,585)

RETAINED EARNINGS - December 31, 2009 256,638$

Net Income 63,913

RETAINED EARNINGS - December 31, 2010 320,551$

ABC CORPORATIONSTATEMENTS OF STOCKHOLDER'S EQUITY


•Shareholders’ Equity – residual interest in the assets after deducting the liabilities•Amount owners invested in stock +/- earnings and losses since inception

Statement of Cash FlowsStatement of Cash Flows


•Statement of Cash Inflows & Outflows•For a specific period of time•Indicates whether a company generated cash•Operating Activities – reconciled net income to cash flows generated by general operations•Investing Activities – cash flows from the purchase/sales of long-term assets•Financing Activities – cash flows to/from investors (banks, shareholders, etc.)

StatemeStatement of nt of Cash Cash FlowsFlows

2010 2009OPERATING ACTIVITIES:

Net Income (Loss) 63,913$ (35,585)$ Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities:

Depreciation 8,359 7,881 Disposition of Fixed Assets (4,903) - Decrease (Increase) in Assets:

Advanced Client Costs (15,700) - Other Current Assets 7,200 (7,200)

(Decrease) Increase in Liabilities:Accounts Payable and Accrued Expenses (91,276) (8,572) Due to Related Party (26,215) 281,205 Income Taxes Payable 30,252 12,197

Net Cash Provided by (Used in) Operating Activities (28,370) 249,926

INVESTING ACTIVITIES:Purchases of Property and Equipment - (7,040)

FINANCING ACTIVITIES;Payments on Long-Term Debt (11,176) -

Net Increase (Decrease) in Cash and Cash Equivalents (39,546) 242,886

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 465,654 222,768

CASH AND CASH EQUIVALENTS - END OF YEAR 426,108$ 465,654$

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Taxes Paid 3,247$ 7,505$ Non-Cash Exchanged Goods and Services 406,400$ 384,460$

ABC CORPORATIONSTATEMENTS OF CASH FLOWS


Notes to Financial Notes to Financial StatementsStatements


•Include additional information to help the reader understand the financials

•Explain how a company arrived at the numbers on the statements•Describe any significant events, changes, or commitments

•Examples:•Significant Accounting Policies•Income Tax Status•Retirement Plan Obligations•Future Lease Payments

Internal ControlsInternal Controls


•Procedures to ensure the integrity of financial and accounting information•Detective – Designed to detect errors or irregularities after they have occurred•Corrective – Designed to correct errors or irregularities that have been detected•Preventative – Designed to keep errors or irregularities from occurring in the first place



•Cash Disbursements & Accounts Payable

•Restrict check signing, electronic payment authorization, to a few individuals•Require the review of supporting documentation prior to check signing•Require dual signatures on large checks•Ensure checking accounts and bank statements are reconciled timely•Review AP ledger for fictitious vendors



•Cash Receipts & Accounts Receivable•Limit access to cash receipts

•Consider using a lockbox•Have two individuals involved in opening mail and logging incoming checks

•Payroll & Employees•Review payroll records for fictitious employees•Know your employees and be observant



•Internal Controls are limited by:JudgmentBreakdownsManagement OverrideCollusion

•Controls significantly reduce the risk of fraud or errors, but DO NOT GUARANTEE that fraud or errors will not occur

How to Create a Budget and How to Create a Budget and

a Financial Plana Financial Plan


Budgeting & Financial Budgeting & Financial PlanningPlanning


•Make the “Road Map”Based on research and industry standards

•Understand capital requirements & cash flows

General operationsGrowthAsset acquisition



•First, consider CapitalizationHow to get money in to a business

How will you capitalize?•Personal check ● Bank financing

How much will you need?•Depends on type of business, billing and collection policies, etc.

Why capitalize?•2-3x monthly expenses



•Then, Budget IncomeHow much money do you expect to make?Educated guess

Hours x Rates•Market rates x anticipated hours billed

Flat Fee•Market rates – how many can be completed in a month?



•Finally, Budget Expenses

How much money do you expect to spend?

Fixed Costs•Rent ● Equipment lease payments•Payroll ● Insurance

Variable Costs•Supplies ● Utilities•Travel ● Marketing



•Prepare the budget on a Yearly and Monthly basis•Present your budget in the form of a financial statement•Monitor variances to stay on track•The budget is a “living document”

Revise and make changes as necessary



2011 Budget YTD Actual% of

Budget Variance June Budget June Actual% of

Budget VarianceREVENUES:

Fee Income 3,250,000$ 1,846,000$ 57% (1,404,000)$ 270,833$ 261,896$ 97% (8,938)$ Late Charge Income 12,000 5,184 43% (6,816) 1,000 330 33% (670) Other Income 75,000 50,850 68% (24,150) 6,250 6,563 105% 313

Total Revenues 3,337,000 1,902,034 (1,434,966) 278,083 268,788 (9,295)

EXPENSES:Personnel:

Salaries 539,292 334,361 62% (204,931) 44,941 39,323 88% (5,618) Payroll Taxes 111,833 69,336 62% (42,497) 9,319 8,154 88% (1,165) Insurance 67,954 33,977 50% (33,977) 5,663 5,663 100% -

719,079 437,675 (281,405) 59,923 53,141 (6,783) Office:

Office Supplies 29,151 13,701 47% (15,450) 2,429 1,589 65% (841) Postage 15,698 8,320 53% (7,378) 1,308 2,145 164% 837 Rent 60,779 30,390 50% (30,390) 5,065 5,065 100% - Repairs & Maint 8,888 4,266 48% (4,622) 741 2,592 350% 1,852 Utilities 35,624 20,234 57% (15,390) 2,969 2,930 99% (39)

150,140 76,911 (73,229) 12,512 14,321 1,810

2011 Monthly Budget2011 YTD Budget

ABC CORPORATION2011 BUDGET

How to Manage a Lawyer How to Manage a Lawyer Trust Account Without Trust Account Without

Being AshamedBeing Ashamed


• One of the most important items for lawyers to understand and keep track of!

• Could lose your license if not handled properly

• Must practice defensively, develop your systems

• Must set up your accounting system to reflect all account transactions

How to Manage a Lawyer Trust How to Manage a Lawyer Trust Account Without Being Account Without Being

AshamedAshamed


How to Manage a Lawyer Trust How to Manage a Lawyer Trust Account Without Being Account Without Being

AshamedAshamed


• You must set up the following accounts in your general ledger: Cash Trust Account Trust Liability Account

• The cash trust and trust liability accounts must balance to each other The only difference should be the original deposit

to start the cash account

How to Manage a Lawyer Trust How to Manage a Lawyer Trust Account without being Account without being

AshamedAshamed


• Must reconcile your trust cash account monthly

• Must maintain a detailed listing of the client’s money you are holding

• NEVER commingle funds—NEVER use this money, it is the clients money!

Four Things to Know about Four Things to Know about Income TaxesIncome Taxes




• The tax system is too complicated to pick just four things to know about taxes but let’s give it a try.

• Understand the tax attributes for each type of entity C-Corp

LLC/LLP General

Partnership

S-Corp Sole Proprietor Single Member

LLC



• Understand what constitutes income and expenses and when each can be recognized as such

• Understand what the IRS is looking for if they audit you Bank accounts – tying in deposits to income

reported Review escrow/trust accounts for potential

income at the end of the year



• Close review of meals and entertainment Make certain to document

• Look for personal expenses paid for by the business

• Review bonuses – salary or dividends• Advanced client costs• Cash payments, non-cash sources of income

– bartering, etc.



• Lastly, understanding the retirement plan options available to the tax payer. The contributions to those plans are tax deductible. Some of the options are as follows:

401(k) Plans Profit Sharing

Plans

SEP Plans IRAs

How to Give Yourself a How to Give Yourself a Financial Health CheckupFinancial Health Checkup


Financial Health CheckupFinancial Health Checkup


•Objective:To identify emerging trends and relationships and their underlying causes, in order to make better informed business decisions

•Tools:RatiosBenchmarkingRULES approach



•Ratios can provide insight into the strength and earnings capacity of the business

•Liquidity – Measures the company’s ability to pay off obligations in the short term

•Activity – Measures how effectively the company uses the assets employed

•Profitability – Measures the degree of success over a specified period of time

•Coverage – Measures the degree of protection for long-term creditors



Liquidity RatiosCurrent Ratio = Current Assets

Current LiabilitiesIndicates if a firm has enough short term assets to cover its short-term liabilities

2:1 (or 2) indicates that for every $1 of current liabilities, there are $2 of current assets to back it up

Want Current Ratio > 1



Activity RatiosAR Turnover = Net Sales

Average ARMeasures a firm’s effectiveness in extending credit and collecting debts

4:1 (or 4) indicates that the company’s accounts receivable turned over 4 times during the period

High ratio = Efficient extension of credit and collection of AR. Low ratio = Poor collection of AR.



Profitability RatiosProfit Margin = Net Income

Net SalesMeasures the percentage of profit from each dollar of sales (8% indicates that for every $1 in sales, 8 cents was profit)

Earnings per Share = Net Income# of Shares Outstanding

Measures how much money shareholders would receive per share if the company distributed all of its earnings



Coverage (Leverage) RatiosDebt to Equity = Total Liabilities

Total Shareholders’ Equity

Indicates the proportion at which the firm acquires debt compared to its owners’ investment in the company

3:1 (or 3) indicates that for every $1 of Shareholder Investment, there are $3 of Outside Debt (i.e., the company is taking on debt at three times the rate that its owners are investing in the company)



•Benchmarking provides a firm with a point of reference (similar firms in the industry or practice area) with which to compare its performance

The Survey of Law Firm Economics

•Consider the following statistics:Annual Billable HoursAverage Billing RatesPersonnel Ratios (Associates to Partners, etc.)Expenses per Partner



•The RULES Approach can help you understand the factors that affect law firm profitability

•Realization•Utilization•Leverage•Expense Control•Speed of Billing & Collections

•Monitor these elements and look for ways to improve profitability



•Realization =

Collection = Value of $ CollectedValue of $ Billed

Billing = Value of Time BilledValue of Time Worked

Overall = Value of $ Collected Value of Time Worked



•Utilization•Are you using your employees effectively?•Proper staffing

•Leverage•Using debt to increase potential return

•Are you properly leveraged?•A company increases its leverage because it can invest in business operations without increasing its equity



•Expense Control•Decreasing expenses (overhead) wherever possible•Decreasing expenses increases the bottom line, but is not the most efficient way to increase profitability

•Speed of Billing & Collections•AR Turnover•Improve Time, Billing and Collections

Questions & AnswersQuestions & Answers


Financial Boot Camp for Immigration Practitioners Kirby G. Joseph (DL), Conference Program Chair,...

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