Hartford Business Journal

22 HARTFORDBUSINESS.COM | FEBRUARY 10, 2025 FOCUS | ACCOUNTING EXPERT'S CORNER As businesses grow, so does the need for accurate financial reporting By Matthew Soroka A s a small business grows, its need for accurate financial reporting increases. In their early days, many busi- nesses simply look at their checking account to see how they're doing. But before long, that number paints an incomplete or inaccurate picture. For effective goal-setting, to make strategic decisions, and to communicate the financial reality of the business to potential investors and partners, companies need to formalize financial reporting. But it doesn't have to be overly complex. Here are the basics. Developing a monthly closing process The first step is standardizing how information is gathered and how data is organized within the company. You'll need an accounting software system that supports your current reporting needs, but also has the ability to grow with you as you continue to mature as a company. You will also need processes to enter transactions into that system. Once the system is in place, formalize your reporting and create templates and data sets in an organized fashion. You want to be able to easily compare data on a month-over- month basis. At that point, you will be able to implement a hard monthly close process. This process should include formal monthly reconciliations that are prepared by one person and then reviewed by another. A formal monthly reporting check- list ensures that every month, you're doing all the things necessary to organize and reconcile your data. Assuring efficiency and continuity The close process should be completed within the first week or so of the month following, not four or five weeks after each month ends. So, it's important to ensure that your finance team has what they need to do the monthly close quickly. Be sure to build into the process external reporting requirements that cover loans or investments. Busi- nesses that don't yet have this need should still keep it in mind as they formalize financial reporting so that they could easily enter into this type of relationship without reinventing the entire process. Finally, you have to start restricting who has access to certain levels of data within your organization. Internal controls have to strike a balance between limiting potential security risks, and also including redundancy so that a single individual can't bring things to a halt if they are out sick or leave their job. Generating key statements Having these processes in place should result in three key statements: a balance sheet, income statement and cash flow statement. Any accounting software system should be capable of generating and customizing all three. The key to making these state- ments useful is allocating accounts in a way that is properly reporting on a couple of key metrics. As an example, a smaller middle market company usually has four major expense categories: cost of goods sold; research and devel- opment; sales and marketing; and general administrative expenses. Having that basic four-line under- standing of the macro costs creates visibility into the business that's easy to understand. If you start getting into department-level expenses, you can assign subcategories to those four. But that can become cumbersome quickly, so there's no need to rush into that level of complexity. It takes some effort to get these processes into place, but when done well, accounts should automatically allocate within software and require minimal correction. Achieving this fairly basic level of financial reporting is a major milestone for any growing business, and the positive effects of it will be felt immediately. Matthew Soroka is a partner at accounting and advisory firm Fiondella, Milone & LaSaracina LLP (FML CPAs). EXPERT'S CORNER Here's how CT manufacturers can maximize tax savings By Brenden Healy T he manufacturing sector is vital to Connecticut's economy, creating job opportunities, driving innovation, and facilitating community growth. As the industry faces a rapidly evolving market, it is critical to leverage tax-saving opportunities to remain competitive. Tax incentives such as the federal and state research and develop- ment (R&D) credits, the Work Opportunity Tax Credit (WOTC), and energy-related credits can help manufacturers reduce costs and reinvest in their operations. Here's how these programs work. Federal R&D tax credit The federal R&D tax credit rewards companies for developing or improving products, processes or technologies. For manufacturers, this could involve: • Designing prototypes; • Experimenting with advanced materials; • Software development; • Automating production lines to improve efficiency. Eligible expenses may include: wages for employees directly involved in R&D; costs of supplies and prototypes; and contract research conducted by third parties. Depending on the circumstances, manufacturers could convert up to 20% of certain R&D expenditures into a more beneficial tax credit. Businesses can optimize claims and ensure compliance during audits by tracking project costs, employee time, and related expenses. Connecticut R&D credits For certain C corporation taxpayers, Connecticut amplifies the federal R&D incentives with its own tax credit programs: Incremental R&D expenditure credit: Allows companies to claim 20% of the amount by which their current-year R&D spending exceeds the average of the previous three years. This is particularly beneficial for manufacturers steadily increasing research investments. Non-incremental R&D expenditure credit: Offers up to a 6% credit for research-related expenses. Unused credits can be carried forward for up to 15 years. Unfor- tunately, no carryback of this credit is allowed. R&D tax credit buy back A qualified small business (i.e., a business' prior year gross income was less than $70 million) that cannot take the Connecticut R&D tax credit in a year, because it has no Connecticut tax liability, may be able to exchange the tax credit with the state for a refund equal to 65% of the value of the tax credit. A qualified small business that files a Form CT-1120 is permitted to exchange this tax credit if: the company's apportioned net income is $0 or less, regardless of the amount of its capital base tax; or the compa- ny's capital base tax is equal to $250. Work Opportunity Tax Credit The federal WOTC incentivizes employers to hire individuals from specific target groups facing employment barriers, such as U.S. veterans, long-term unemployment recipients, ex-felons, and Supple- mental Nutrition Assistance Program (SNAP) beneficiaries. Key benefits include: • Credits up to $9,600 per eligible employee, depending on their demographic category and time worked. • Opportunities to diversify the workforce while addressing staffing needs with proper training programs. Matthew Soroka Brenden Healy

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