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The owner of a small s-corp is using company resources for a personal project...

I'm working on developing KPI's to help gauge our performance, but this project is skewing our numbers.  What's the best way to remove the impact of the project?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Book the value of resources being used for personal reasons from their individual G/L accounts to an owner Draw or Officer Loan account.

Another way, if your accounting system permits is to code transactions that have a personal use to a specific project or department. Subtract or don't inlcude this department/project when calculating the KPI.

As an example, the bookkeeper is paid $10/hr and spends 5 hrs a week on paying the owner's personnel expenses. A KPI involves her payroll. So deduct $50/week from the payroll expense (using either method).

Now your remaining balances are un-skewed.

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  • Chris Shumate
    Title: Accounting Manager
    Company: Dominion Development Group, LLC
    LinkedIn Profile
    (Accounting Manager, Dominion Development Group, LLC) |

    Who wants to remove the project, the owner of the S-Corp, you, or some other party?

    Wayne's approach is correct and likely one of the best.

    I have "heard" that owners of S-Corps consider the company money their money because the K-1 ends up on their Schedule C anyways, thus impacting their taxes.

    Depending on how much, how often, and other factors the owner engages in such activities then the company's performance is hindered because of his/her pet projects.

    Perhaps you could do a KPI to show how much potential the company is losing due to the personal projects.

    Anonymous
    (CFO) |

    Are the KPI's for internal or external use?

    Producing them for potential investors and/or lenders requires full disclosure.

    Internal use? Not so much. Footnotes might be sufficient.

    Topic Expert
    Jaime Campbell
    Title: Chief Financial Officer
    Company: Tier One Services, LLC
    (Chief Financial Officer, Tier One Services, LLC) |

    100% agreed with Wayne. The owner of an S corp can certainly use company resources for personal projects, they just need to recorded appropriately...and the owner must already be taking a fair market salary.

    So if your KPIs draw from P&L numbers, for example, correctly classifying these expenditures as Wayne described will automatically take them out of the equation.

    Randy Moore
    Title: CFO
    Company: SJB Bagel Makers
    (CFO, SJB Bagel Makers) |

    I agree with Wayne with a couple of caveats.

    The first is if the S-Corp has multiple shareholders. If, for example, there are 20 shareholders and only 1 of them uses corporate assets for personal use, the other 19 certainly need to be aware of it as they may not be in agreement with it.

    Another would be if the personal use is essentially a de minimus fringe, such as using the postage meter to mail his personal utility bill. In these cases, who really cares? I suspect this isn't what the OP is referring to.

    Topic Expert
    Wayne Spivak
    Title: President & CFO
    Company: SBAConsulting.com
    LinkedIn Profile
    (President & CFO, SBAConsulting.com) |

    Randy very true, but you can always have 20 officer loans accounts or one account and 20 departments or projects.

    Methodology is the same. But your point about the other 19 being in the dark is spot on - been there, had that rather sticky conversation.

    Anonymous
    (Consulting CFO) |

    Great counsel offered by all! The S-Corp is a single shareholder; he's aware of the issues the special project has created within the KPI's and is willing to accept whatever treatment I suggest to give us a clearer picture of performance that can be measured quarter-to-quarter and year-over-year without the special project to weigh down our GM and CM's.

    I had planned to simply move the costs to a Draw account; however, I thought I'd take advantage of the Proformative resource before "just doing it the same old way".

    Thanks for all the thoughtful insights!

    L. Keith Jordan
    Title: Sole Proprietor
    Company: L. Keith Jordan, CPA
    LinkedIn Profile
    (Sole Proprietor, L. Keith Jordan, CPA) |

    I agree with both Wayne and Randy. There is one other issue that should be considered. The owner may actually be unaware of the magnitude of the diverted resources and how they impact the company's operations and revenues.

    By separating the diversions, you can graphically illustrate their impact. Armed with this information, the owner may then a) choose to ignore the impact; b) choose to discontinue the diversion; or c) work to achieve an optimized balance between diverted and dedicated resources.

    How to separately track and account for diverted resources depends on your accounting software:

    >Setting up a separate department can work, but that may inordinately increase the size of the chart of accounts -- making it cumbersome and confusing.

    >Using classes (as in QuickBooks) can work, but care should be taken to avoid upsetting any class structure already in place -- rendering class data less meaningful.

    >Using job cost is probably the best approach, as long as the accounting software allows job cost to function separate from the customer (QuickBooks job cost is customer centric and therefore would not be a good fit). Using this option, one or more separate jobs would be set up to track resource costs related to the owner's personal diversions.

    Not only would the job cost approach allow you to remove the effect of the diversions from KPIs, it would allow the owner to see the extent of the diversions and their effect on the company's bottom line.

    Topic Expert
    Wayne Spivak
    Title: President & CFO
    Company: SBAConsulting.com
    LinkedIn Profile
    (President & CFO, SBAConsulting.com) |

    Kieth,

    Not every small business uses QB. In most of the systems I've used, adding a project/department/some other dimensional attribute either by name or design does the trick.

    There are also other issues that we all know about that would favor a departmental approach rather than other approaches.

    L. Keith Jordan
    Title: Sole Proprietor
    Company: L. Keith Jordan, CPA
    LinkedIn Profile
    (Sole Proprietor, L. Keith Jordan, CPA) |

    Wayne:

    Perhaps I wasn't clear. I was not suggesting that every small business uses QB. In fact, I was suggesting that other accounting software might be better suited to the task at hand.

    In my opinion, the job cost approach (if available) may be less cumbersome than the departmental approach. This assumes the later approach creates the need for numerous additional general ledger accounts.

    Small and micro businesses often use accounting software and processing procedures that allow clerical transaction entry without prior review for coding and correctness. For various reasons, the staff performing this function may be challenged by accounting concepts and the chart of accounts.

    Having once worked in such a situation, I explored both the departmental approach and the job cost approach and found the owners understood the job cost approach better and preferred it over the departmental approach. I also found that the job cost approach was less confusing to those charged with clerical transaction entry.

    Based on the OP's subject line and description, it is possible the company is using QB. If so, QB Classes might work (but see the caveat in my previous post).

    On the other hand, it is possible they are using accounting software that provides for job-centric job costing. If so, this may be the preferred approach.

    Of course, your mileage may vary. Hopefully, our collective responses will allow the OP to find the best path to his or her solution.

    Topic Expert
    Wayne Spivak
    Title: President & CFO
    Company: SBAConsulting.com
    LinkedIn Profile
    (President & CFO, SBAConsulting.com) |

    Much clearer, thank you.

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