In 2017, considerably more than one million taxpayers had their tax returns audited by the Internal Revenue Service (IRS), but this counted for less than 1% of all files.
If you received a dreadful IRS audit notice, keep calm, and realize that the investigation is a professional process that may be handled by simply delivering the proper papers.
Understanding what to expect will help you fix issues quickly, handle numerical disparities, communicate with IRS agents appropriately, and complete the process with only a tiny amount of stress.
Why the IRS May Contact You
Taxpayers should always be mindful that an audit does not imply that unlawful conduct is suspected. Tax filings are complex documents that contain financial information that you must examine for accuracy.
The auditing procedure is referred to as an evaluation, and it does not infer that you have got it wrong on purpose. The IRS contacts individuals for several reasons.
According to the IRS, taxpayers are chosen through some “spontaneous classification and computer screening” procedure based on analyzing the economy. The Internal Revenue Service analyzes tax returns to “norms” for similar returns.
If you have operations with other taxpayers, such as business contacts or shareholders, and they have been questioned, you may be evaluated.
Other indicators, such as revenue reported or odd deductions, are used to select some returns.
Other reasons you may be audited:
Third-party reports on income on 1099s or W-2s that contradict each other
Deductions for home offices
Losses on rental properties
Use of a vehicle for business purposes
Deductions for hobbies (also known as hobby losses)
Bank accounts or foreign currency transactions
Three Types of Audits
There are three sorts of audits, each with a different level of seriousness. According to news sources, most audits are minor, and more than three-quarters of audits are done via mail.
Correspondence (Mail) Audit – Correspondence is frequently used to tackle routine problems such as improper math or missing paperwork.
Office Examination Audit – An office investigation is planned in a local IRS department to determine if you have reported all your earnings and that your deductions are valid.
Field Audit – The most thorough of the three is a field audit. An IRS agent will come to your home, business, or accountant’s office to look over your records and files to ensure that the information on your tax return is valid.
Preparing for an Audit
The IRS will notify you by mail or phone if you are being audited, not via email. The particular facts you will evaluate, and any other papers you may need to bring will be included in the notification.
An audit notice gives you 30 days to reply. Do not put off responding to a letter since the time you wait to respond will add to the amount you owe the IRS in interest.
Before an audit, prepare your papers, figure out the problem, and decide whether you want representation.
Home mortgage statements are among the documents you may be required to present
Tax returns from the past
Receipts
Statements of Brokerage
Records of retirement accounts and receipt of payments
You should check your files with a tax professional to understand the discrepancy. If you file your taxes at home using an online filing service or through a tax compilation firm, the firm may charge a fee for audit defense.
During the Appointment: Know Your Rights
You can attend the appointment alone or have a representative attend in your place or beside you. A certified public accountant (CPA), attorney, IRS Enrolled Agent, or paid preparer of your return can represent you; however, it may be costly.
It would help if you were nice and compliant throughout the audit, which will occur in person at an IRS office or at your home. Show just the IRS agent documents that they have requested.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
You must first have a clear view of your cash flow before you can begin conserving money each month. You must account for all your cash inflows and outflows, including future debt repayments, monthly expenditures, and how much you save each month. Let’s break this down into a few steps.
Learn to manage your budget and understand your finances
To save money rapidly, the most important thing you can do is learn how to manage your budget. You have control over your finances if you have control over your budget. If you want to meet your short- and long-term savings goals, you must first become financially independent.
Over 30 days, keep track of your finances. It contains all your earnings and outgoings.
Calculate how much you’re saving or overspending each month by comparing your monthly income to your monthly expenses.
Sort your spending into two categories: fixed and variable.
Your fixed costs include things like rent and utilities, which are tough to change. Groceries, entertainment, and subscriptions are all examples of variable costs.
Pay off your debts
You must first pay off your bills before you can begin saving. Because interest accrues over time, the longer you wait to pay off a loan, the higher your interest. Before focusing on your other savings goals, pay off your bills first.
Consider using the 50/30/20 rule for this. US Senator Elizabeth Warren developed the 50/30/20 rule while she was a bankruptcy specialist at Harvard. It is a straightforward technique to manage your budget and, as a result, pay off your debts. It works like this:
Use half of your salary to cover your fixed expenses, such as rent and utilities. Use 30% of your income to satisfy your appetites, including variable costs such as dining out and memberships.
Open a dedicated savings account
You must divide the money you utilize for your daily necessities from the money you aim to save to save money quickly. To do so, you’ll need to open a separate savings account. As a result, you reduce the danger of having to tap into your savings account to cover your everyday costs. It will motivate you to stick to your daily budget while safeguarding your savings.
Schedule your savings
If you have a consistent monthly income, consider automating your savings: you may set up an automated monthly transfer from your checking account to your savings account. As a result, the risk of using these assets to cover daily needs is reduced.
Schedule your bill payments
You can also set up a payment plan for your invoices. Companies frequently charge late fees if you don’t pay your bills on time, so paying your bills ahead of time will help you avoid any additional penalties.
Set your card spending limit
Do you want a simple strategy to save money quickly? Set a limit on how much you can spend on your credit or debit cards. It will keep you from overspending and urge you to plan time for your everyday purchases. It is a service that many banks provide. For example, via your N26 app, you may set daily spending limits and choose whether to authorize ATM withdrawals in seconds.
Use the envelope management system
Another option is to adopt Dave Ramsey’s envelope management technique to help you save money quickly. This approach entails taking your monthly income in cash (in its total) from the bank at the start of each month and splitting it into several envelopes based on your management goals.
However, we must admit that it is unlikely to be the most practical in 2021! It’s nearly impossible not to stay within your budget when you pay for everything in cash! As a result, you’ll have envelopes for fixed and variable costs (e.g., rent and utilities) (e.g., purchases of clothes, dining out, shopping).
Save on your rent
Rent savings is one of the quickest methods to save money each month. One of the simplest ways to achieve this if you live alone is to share a room. It will immediately decrease your rent in half, and if you opt to live with two roommates, you’ll only have to spend around a third of what you’re paying now.
If you spend $1,300 per month for a three-bedroom apartment and locate a roommate, you will save $650.
You can move into a smaller room if you already live in a shared apartment. Rents are usually calculated based on the size of the room being rented.
As a result, you can save a lot of money each month. It would also inspire you to resell your furniture, allowing you to make some money.
Of course, there are several ways to save money on rent based on your living situation, needs, and residence.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
You need to know where you are before you can pave the route. As a result, let’s begin with reviewing actual revenue and expenses. The longer the period needed to cover – say, a year – the more the budget fluctuated from month to month.
All sources of income, including one-time ones, should be considered: salary, bonuses, freelancing, money from renting an apartment, revenue from the sale of old stuff, and interest on deposits.
It is critical to consider everything, including “little” costs such as transportation, taxis, couriers, gifts to coworkers, a child’s kindergarten, or any subscriptions. Expenses should be treated similarly.
It’s also crucial to investigate whether there are any simple ways to cut mandatory spending, such as getting discount cards at your preferred businesses or paying using cards that offer enhanced cashback in various areas.
The most straightforward financial aim is to stay within your budget. It will contain the amount you save each month and your income and spending. All of this will enable you to construct a monthly budget.
Working on basic financial security
It is possible to control your budget in the present by understanding the structure of household financial flows. The remainder of the funds can be set aside for future use. But, again, awareness is required, as are clear financial objectives.
The SMART technique has already been discussed in further depth. We’ll repeat it: “I want to save $100,000 for a vacation in ten months” is an excellent financial objective. And while “I want to get rich” is an understandable aspiration, it is not a monetary aim. An economic goal should be explicit, quantifiable, attainable, meaningful, and time-bound.
Short-term, medium-term, and long-term goals are commonly split. First, it is preferable to begin by attaining short-term objectives to provide the confidence and motivation necessary to adopt a long-term strategy.
Anything you can accomplish in a few months is considered a short-term aim. The most crucial is inflating an airbag and closing modest loans and credit cards. Experts argue about the priority order: on the one hand, interest on loans devalues any savings. Thus, they must be paid off first. However, if the family does not have a stable fund, any unforeseen event, such as illness or job loss, may push it into debt. Everyone must choose which aim is essential to them, yet both are critical.
Set medium-term goals
It would be best if you continued to increase your financial security in the medium term. But now that the loans are paid off and the “rainy day” fund provides protection in the face of adversity, one can think back on dreams.
For the next 1 to 5 years, medium-term goals are evaluated. Renovations to a home, a down payment on a mortgage, studying abroad, or purchasing a new car are all examples.
At this point, it’s a good idea to incorporate stock market investment into your financial plan. The current approach to investing proposes that you should first determine the portfolio’s composition by the investor’s personal life and financial goals rather than by the most significant return. It’s one thing to wait a year or two after achieving your objective, whether buying a home or retiring. Another is the planning horizon of 30 years. The essential premise is that the longer it takes to attain a goal, the more risk the investor can take.
Planning for retirement
The construction of pension savings is the essential long-term financial goal and completing the complete financial planning process.
Consultants recommend putting 10% to 15% of your income into a long-term pension portfolio. In three steps, you can more precisely calculate the required amount for a personal pension fund:
Estimate your expected monthly expenses. The current budget will be a good guideline, but it is worth including additional costs, such as medical care.
Subtract the income by then – the state pension itself, perhaps rent, part-time jobs, etc.
The remaining amount will need to be accumulated by the expected retirement date. American sources say about the 4% rule: there should be enough pension savings to live on 4% for a year. This figure is based on data on the yield of low-risk securities in the US stock market from 1926 to 1976.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
As crucial as account reconciliation is in accounting, it is not given much attention in accounting classes. Many accountants can have a successful career without performing a single account reconciliation. While you can manually perform account reconciliations, you can save valuable time and energy by using accounting software tools to reconcile accounts. Using accounting software for your financial transactions will automatically record your transactions, making it easier to perform account reconciliations.
What Is Account Reconciliation?
It is the process of reconciling the receipts and expenditures of money, for example, on a bank statement or at the cash desk, with invoices from customers and suppliers. As a result of reconciliation, it is clear which invoices are paid and which are not. Suppose your company does not regularly conduct such reconciliation, or it takes too long. You will gradually sink into chaos because you will not know which supplier invoices you paid and which did not and which invoices you paid. Buyers. Account reconciliation is a crucial process. If it is performed regularly and quickly, this indicates that, most likely, your money is under control and the accounting is correct.
Less Work, More Results
Reconciliation should not be difficult; it should not take a lot of time. Anyone engaged in business should not waste time filling out plates and entering data. But most often, it is in the tablets that they keep accounts and note whether they are paid or not. It is time-consuming and inconvenient. There are programs to make this job more manageable. They help do this work; they select the appropriate payments for accounts that allow you to perform account reconciliation in a semi-automatic mode. It is easy to understand how tedious and tiring every time you get a bank statement, look in the tables for accounts and mark them as paid – you can hang yourself from such work. It is entirely different when the system collects all payments and receipts on one sheet and selects accounts for them (by dates, amounts, counterparties, and other details).
What If the Sums Don’t Add Up?
The world would be perfect if everything always converged if customers always got their account numbers right. But it’s like world peace – everyone wants it, but it doesn’t come. You should not panic if you cannot fully match payments to invoices. It can happen for several reasons, each of which has its solution. You only need to select the right one. There are five main reasons why an invoice and payment may not match:
You could give a discount for early payment. Or they gave it to you.
Bank charges may be deducted from the payment, or the exchange rate may have changed.
Or will you just pay the balance later, and the invoice should remain partially paid?
Managers may have forgotten to enter the invoice into the system.
Finally (and unfortunately), you understand that the invoice will not be paid in full, and you will have to write off the balance of the payment at a loss.
Of course, there may be more reasons for partial payment of bills than the five that we wrote above – these are the most common. Please take the time to write your list of possible causes for invoice and payment discrepancies specific to your business. Then determine the necessary actions for each of them – this will speed up the reconciliation work, make it easier and allow you to have constantly up-to-date data about customer debts and planned expenses of money.
A Few More Things to Know About Account Reconciliation
Account reconciliation is an essential skill that every accountant and business owner should have. Simply knowing how to reconcile an account correctly can be crucial to your financial health as it ensures that your financial records are always accurate. Regular reconciliation of reports allows you to control the most liquid asset – money better. The proper process will avoid abuse and fraud – separate those who issue invoices, conduct bank statements, and reconcile accounts – when they are different people, everything will be under control without your direct participation. Use an information system that allows for partial matching, keeps invoices partially paid, splits payments, adds required additional fields, and is easy to use.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
The security issue in the operation of banking products is always very acute. Practice shows that many bank customers do not know the elementary rules for handling details, codes, and other data. It becomes essential in the case of repayment of debt on loan. If the client has deposited an amount greater than the amount of his debt on the credit card, then the spare part is accounted for on a separate account and cannot be used to make transactions at the expense of the client. It will only go to the future repayment of the loan after its occurrence.
Moreover, the loan is repaid on a specific date specified in the contract and not immediately after the event. There is a particular set of rules that help, if followed, to secure the finances contained on the card:
Do not share your PIN information with anyone under any circumstances. It is strictly confidential information available only to the client. Remember that even bank employees are not allowed to request a PIN code.
You should keep the code used to carry out specific operations separately from the card.
You should not temporarily give your plastic to another person. Only the person specified in the service agreement has the right to use the card.
Upon receipt of the payment instrument, sign on the reverse side in the field provided.
Remember or keep the contacts of the issuing bank with you. They are also listed on the back of the card at the top.
Upon receipt of a request to provide card details, the client has the right to ignore this. It is even recommended to report the fact to the bank.
Cashless Payment
Due to the popularity of non-cash payment for various goods and services, it is worth considering the rules for conducting the operation:
Do not use the card for purchases in stores of dubious origin.
Always be present at all card transactions – this will reduce the risk of unauthorized access to confidential data.
Keep receipts – including when the operation was not completed successfully (make sure that the receipt does not contain an operation and you made no payment).
As you can see, there are some conditions, but they are pretty necessary.
Online Payments
Online transactions are a separate topic because there is an acute security issue and many nuances. The rules for online payments are as follows:
You cannot use a PIN when ordering goods and services by phone, fax, or Internet.
Card data that are strictly confidential cannot be entered into any forms – the same applies to the account.
For operations on the Internet, if necessary, to purchase something, it is better to use a separate card that was issued for this.
Check the correctness of the entered data – for example, address, contacts, etc.
Perform remote operations on your device (in extreme cases, turn on incognito mode so that the entered data is not saved).
Details
Card details are highly confidential information to which only the owner should have access. Leakage of this information is fraught not only with the loss of access to the account but also with the debiting of all funds. And in the case of a credit card – also the formation of debts to the bank. Getting at least some information into the wrong hands requires blocking the card. The bank can do this independently if it detects a leak and at the client’s request.
A credit card is a different wallet. You can spend money from it at your discretion and return it without interest using the grace period. The validity period is usually limited to three to five years at the plastic itself, but then the card is reissued. It is just a key to a credit account, which can be unlimited or limited, for example, by age. A vivid example of this is youth credit cards, which are not reissued after the client reaches a certain age; terms are discussed in the contract. If you only have the card number, it will not be possible to withdraw funds from it. However, an attacker can pretend to be an employee of a banking organization to find out other, more critical information.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
Even if they are all related to the purchase of products, they are not all recorded in the same account. The goods purchase account should be well-documented because it is crucial in your revenue statement. You are the one who decides on your profit margin.
An overview of the accounting rules to be aware of and use to complete a perfect entry and achieve top accounting!
Which account should I use for posting goods?
Account 607 is the goods purchase account.
It is a part of class 6 in the chart of accounts, which is the category of purchases. It varies from the 601 stored purchases-raw materials, which are dedicated to activities in which a transformation occurs before the final product is offered to the user.
Account 607 is linked to account 6073, which represents a change in the stock of products. The latter makes only two accounting entries per year: the closing stock at the end of the financial year and the initial stock at the start of the financial year.
Of course, if you create an intermediate situation throughout the accounting year, you must report the ending stock on the date the case is made.
What should be recorded in the purchase of goods account?
Only commodity purchases should go into the commodities buy account. Put another way, your purchase invoice must be analyzed so that the accounting records accurately reflect reality.
What is the accounting consideration for the purchase of goods?
You will pass a consideration to balance your accounting record in the purchasing diary. It is the account for 401 Suppliers. It is strongly encouraged to divide the 401 accounts into 401001, 401002, etc., to have a supplier account dedicated to each of your suppliers. Alphanumeric subdivision is possible in some accounting applications.
As a result, you’ll have supplier accounts with account numbers beginning with 401SUPpliED.
Even if you pay your bill fully, the payment for items must proceed through a vendor account. This account solely contains the invoice’s total value, including VAT. It will then be settled by the cash account you used to make the payment (530000 cash or 512000 banks).
Why is entering merchandise purchases important?
The purchase of goods, like all other class 6 accounts, is one of the income statement’s parts.
This accounting document will provide you with precise and essential information about the health of your firm for year N at the end of the financial year in cost accounting. Improper account usage (e.g., an erroneous allocation) might result in inaccurate accounting data.
The cost of products is deducted from your net sales for the year, or your turnover, to determine your commercial margin. This commercial margin provides numerous important indicators and allows you to choose if you have successfully bargained with your suppliers or if your margin is adequate. It will enable you to make essential changes for the coming year.
In the same way, the 401-supplier account will increase your balance sheet debts.
It will then be time to check your suppliers’ payment terms and modify your customers’ receipts for the new fiscal year. You’ll gather crucial data for controlling your cash flow once more here.
As you can see, keeping track of item purchases is a serious undertaking. The company’s good management conducts an analysis. It has a significant impact on the income statement and the tax return, which provides a wealth of accounting data. Therefore it’s critical to keep track of all of your purchase invoices.
How do we adapt the recording of several different products?
If you sell various products in the same store, you’ll want to know which ones work, which ones cost money, and which ones don’t bring in any revenue but should be kept as a loss leader.
As a result, a “bulk” posting on a single 607 account will not give you the in-depth insight you require.
The PCG (General Chart of Accounts) allows you to create subdivisions to track each product you’re interested in. As a result, in accounting, you have the authority to construct a 607001, 607002, and so on.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
What are the different types of accounting in rental management?
The accounts of a real estate agency that works via rental management mandates can be kept in two distinct ways:
Cash accounting
Commitment accounting
Cash accounting allows you to keep track of your real estate agency’s expenses and revenues. As a result, it’s a question of genuine money outflows and inflows, such as collecting fees while collecting rent or purchasing office supplies.
On the other hand, Accrual accounting adds non-monetary transactions to the equation. Rent calls will display prominently among the entries, even though the renter has not yet paid them, leaving the latter with a debt to the real estate firm.
What is extra-accounting accounting?
Rents sought but not yet paid are not included in a cash accounting. However, such information is required to determine where the payments are made. This monitoring allows you to pinpoint payment delays, send out reminders, and act in the event of non-payment. Extra-accounting accounting is used in this situation. You may improve the management of your real estate agency by having a complete list of rental calls sent, their date, and their status.
It’s worth noting that accrual accounting incorporates non-accounting accounting, allowing these controls to be implemented.
How do you recover unpaid rent?
It is essential to collect outstanding rent based on commitment accounting or non-accounting documentation. The real estate agent has three years from the first day of late payment to reclaim the money owed.
The first step is to try to reach an amicable agreement. You’ll need to make contact to do so, which will lead to a written reimbursement arrangement with due dates and amounts.
The second step is to give the tenant a formal notice to pay the rent. It is done by a formal letter either mailed with an acknowledgment of receipt or delivered by hand with a signature.
Then comes activating the taken guarantees, such as a natural person’s or an organization’s security. The procedure should not take too long: specific organizations have rapid activation times, such as the Visalia guarantee, which takes only 15 days.
Finally, legal ways of collecting rents are required without outcomes or promises. It is what you should get: A command to pay: after the intervention of a bailiff, the tenant has a maximum of 2 months to pay. Beyond this period, the lease is terminated, and you can sue the tenant.
Empty slots
You must report receipts at the same time as total income. If the owner chooses the actual regime, he must also reveal his expenses so that you can calculate his net income.
It’s essential to remember that accounting must follow the cash accounting principle. Expenses and revenue are acknowledged explicitly at the time of payment. It means that work completed in late 2021 but paid for in early 2022 can only be deducted in 2022. Similarly, if a tenant paid his December 2020 rent in January 2021, you must include the rent in the revenue for 2021.
Furnished accommodation
The category changes for dwellings rented through a non-professional furnished rental firm (LMNP), as it is no longer a subject of property income but instead of industrial and commercial profits (BIC).
The owner can deduct all his expenses and even depreciate his property for tax purposes in this situation (which has the advantage of reducing or even reducing the taxable profit to zero). We are, on the other hand, a commitment accounting. The period to which the product or expense pertains, not the payment date, is essential. As a result, even if a December rent is paid late, it must be accounted for in the same month.
Finally, LMNP rental requires the development of a tax package that must be sent to the tax authorities no later than the beginning of May each year. Due to these responsibilities, an accountant is strongly recommended to accompany you.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
This variable is responsible for assessing the impact of public spending by the State on the country’s economy. It shows us how an increase or decrease in public spending or taxes affects the country’s total income. Next, we will see its interpretation, how to calculate it, and the abundant criticisms that economists have made about this variable.
How to interpret the tax multiplier
When trying to understand this term, whose calculation we will see a little later, it is essential to know that the fiscal multiplier can be interpreted in three ways, always depending on its value: equal to 1, less than 1, and greater than 1:
Equal to 1. Suppose the fiscal multiplier is calculated, and the result is exactly 1. In that case, GDP increases by the same amount as public spending (if public spending increases by 1 million, GDP also increases by 1 million dollars).
Less than 1. If the calculation is less than one unit, we will know that if public spending increases by one unit, the country’s GDP will increase by less than one unit.
Greater than 1. Suppose the calculation of the fiscal multiplier is greater than unity. In that case, increasing public spending by one unit will increase the country’s GDP by a value greater than unity.
Evidently, in all the above cases, if what occurs is a reduction in public spending, the effect is reversed (GDP will decrease following the rules we have just seen).
Calculation of the tax multiplier
When trying to calculate the fiscal multiplier, a simple formula is used. It has its positive points (it serves as a good estimator that is simple and quick to calculate), but that does not measure the full impact of the fiscal policies carried out by a government. Something that has provoked much criticism and distrust in the economic sector. The formula to calculate the tax multiplier is as follows:
Mult. tax = 1 / 1 – c (1 – t)
c (or MPC) = Marginal propensity to consume. It is a financial ratio, valued between 0 and 1, which indicates the part that citizens or companies dedicated to consumption when their income increases by 1 unit. If the value of this ratio is 1, it means that 100% of that amount is being used for the beneficiary’s consumption in an increase in income.
t = Tax rate. The current percentage of taxes established by the government (that is, if you must pay 25% of the tax, we put 0.25 in the formula).
Example: Tax Multiplier Calculation
Putting into practice the calculation of the fiscal multiplier is very simple if you have the two values necessary to use the formula. Putting a case in which the current tax rate is 25%, and the marginal propensity to consume has a value of 0.66, the calculation of the fiscal multiplier of the country in question would be the following:
Tax multiplier = 1 / 1 – 0.66 (1 – 0.25) = 1.98
With this result, we can interpret that, for each unit that public spending increases, GDP will increase by 1.98 units. If the government increases public spending by 250 million euros, GDP will increase by $495 million (1.98 x 250).
Criticism of the utility of the fiscal multiplier
Although the calculation of the fiscal multiplier can become an excellent reason to apply specific fiscal policies to the economy of a country, there are indeed many doubts and criticisms when using it since, on many occasions, you can do erroneous or inaccurate calculations that seriously harm the economy of an entire nation.
We must bear in mind that, when calculating the PMC, aggregate values are used, which can complicate things and lead to the appearance of errors when obtaining the fiscal multiplier. In addition, the experience with this variable is not positive, something that we have seen after the economic crisis of 2008, where the IMF erroneously estimated the fiscal multiplier used to take the recovery measures, causing a serious paralysis in the economies, being the Greek case the most notorious and worrying.
Although many criticize the lack of reliability that governments or large economic entities have when applying the fiscal multiplier, this indicator offers an exciting representation of the variation in public spending on a country’s economic activities.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
Entrepreneurs are almost always passionate about what they do, developing products, innovating, making customers happy, marketing, sales, et cetera. They often find finance difficult, and they think they can get little benefit from it. The average entrepreneur has no idea how much valuable information is contained in the figures, Hogema writes. Numbers hold the only truth about their business. And knowing and understanding this truth gives them the tools to earn more, sleep better, and work less complicated.
Using this information, the profit advisor helps the entrepreneur determine where he stands, where he wants to go, and which buttons he can turn to get there. The profit advisor helps entrepreneurs manage their money, plan profits, and make financially sound choices to build financially healthy and profitable companies.
The transformation from traditional administrator/accountant to profit advisor involves three steps:
Step 1: You help your customer do his bookkeeping 30 minutes a week
Bookkeepers are usually not happy with their bookkeeping. It costs them too much time, money, and energy. As a result, many entrepreneurs bury their heads in the sand for months and ignore accounting as best they can. The solution is as simple as it is complex. The customer needs accounting habits, processes, and systems. If bookkeeping is a daily habit, it requires hardly any time and energy, and then it is always up to date.
Your purpose is to help your client set up the routines and habits that will allow them to complete their accounting in 1 minute per day and 30 minutes per week. Three primary conditions to do this are:
You must do the bookkeeping entirely online.
Optimal use should be made of technological developments.
The processes must be established, set up, and implemented consistently.
When you get this done, the foundation is in place. The bookkeeping is now always in order, without too much time, money, and energy. Now you are going to help the entrepreneur make a profit. Antoine de Saint-Exupéry said it beautifully: ‘A goal without a plan is just a wish. In other words: achieving a good result first requires that there is a solid plan.
Step 2. You guide your customer in making a profit plan
Once the foundation is in place (accounting), the most enjoyable and most valuable work for the customer begins: you will help him make a profit: no taxable profit, but real money, which is leftover. One of the best tools for this is the profit plan: a translation of the company’s goals into turnover, costs, and profit. A kind of budget but profit plan has much greater appeal to entrepreneurs. A profit plan shows whether the entrepreneur is making a profit: whether he is making money from what he does.
Reserve a part of the day to make the profit plan with your customer. It would be best if you had that time. Also, see if you can make this a memorable moment. Don’t sit in a boring office but invite your customer to a beautiful location in nature, with good coffee and tasty lunch. Give your customer an actual VIP treatment. You take him, yourself, and his plans seriously. There is a good chance that working in an inspiring environment will also positively affect your results. Finally, your customer will see you more as a profit advisor than an accountant.
Step 3. You teach your customer how to manage his finances with the help of Profit First
An essential foundation has been laid with the accounting and the profit plan. However, this is not enough for the entrepreneur to make the right (financial) choices and steer for profit. The solution is not to provide more information in financial reports. Entrepreneurs don’t look at it, and when they do, they don’t base their decisions on it. Although? With Profit First.
Profit First is a super simple and accessible method with which the entrepreneur manages his cash flow based on his bank accounts. The method is based on households’ pot system: each financial target has its pot.
Entrepreneurs who work with Profit First have five business bank accounts: one receipt account where all the money comes in and four accounts for the most critical business goals: costs, profit, tax, and salary. It is a controversial method because it does something that makes no sense from an accounting or tax point of view. It often feels nonsensical to financial experts, but it works exceptionally well.
Step 4. The old formula — revenue – costs = profit — is mathematically correct
But it doesn’t work in practice. You encourage the entrepreneur to sell more, but no matter how much income he generates, he always finds a way to spend that money. In addition, the formula allows the entrepreneur to focus on turnover and costs and not on profit. The Profit First formula is turnover – profit = costs. Mathematically nothing changes, but emotionally it does. You must pay the expenses from what is left at the bottom of the line. If the company cannot live on that, something is wrong in the revenue model, or you must do the strategy and work. Taking the profit first is not just a theoretical reversal of the formula with Profit First: it is now something entrepreneurs do literally. Often, they can’t wait to redistribute the money. It is very motivating to transfer money to the profit account and watch this amount grow!
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
Master the 3 Cs of Lending: Cash Flow, Character, Collateral
The 3 Cs of lending—Cash Flow, Character, and Collateral—are the three fundamental factors lenders evaluate to determine your creditworthiness and loan approval. Cash flow demonstrates your ability to repay through ongoing revenue, character reflects your track record and reliability with past obligations, and collateral provides security that protects the lender’s investment.
Did you know that 41% of small businesses were denied financing in 2024 because of excessive existing debt, compared to just 22% in 2021? As the founder of Complete Controller, I’ve spent over 20 years helping businesses across all sectors navigate the complexities of financial management and secure the funding they need to grow. Through thousands of client relationships, I’ve witnessed firsthand how mastering these three critical lending factors can transform rejection letters into approved loans with favorable terms. This article breaks down each C with real-world examples, provides actionable strategies to strengthen your lending profile, and reveals insider tips that can dramatically improve your approval odds.
What are the 3 Cs of lending and why do they matter?
The 3 Cs of lending are Cash Flow, Character, and Collateral—the primary factors lenders use to assess creditworthiness
Cash Flow measures your ability to generate enough revenue to cover loan payments
Character evaluates your credit history and reputation for meeting financial obligations
Collateral represents assets you pledge as security for the loan
Together, these factors determine approval likelihood, loan amounts, and interest rates
Cash Flow: Your Financial Engine
Cash flow stands as the most quantifiable metric in lending decisions. Lenders scrutinize your revenue streams to verify you can comfortably service new debt while maintaining operations.
Your Debt Service Coverage Ratio (DSCR) serves as the critical benchmark. This calculation divides your net operating income by total debt obligations. Most lenders require a minimum DSCR of 1.25x, meaning your income exceeds debt payments by 25%. Different property types demand varying ratios:
Multifamily and industrial properties: 1.25x
Self-storage facilities: 1.40x
Assisted living properties: 1.50x
High-risk ventures: 2.00x-3.50x
Modern lenders go beyond basic financial statements. They analyze bank transaction patterns, seasonal revenue fluctuations, and real-time cash flow data through integrated accounting systems. This comprehensive approach reveals management habits and payment priorities that traditional reports might miss.
Strengthening your cash flow position
Start by implementing cloud-based bookkeeping systems that provide real-time visibility into your financial position. Project cash flows 12-24 months forward, factoring in seasonal variations and growth plans. Focus on accelerating receivables collection while negotiating extended payment terms with suppliers.
A local coffee shop owner improved cash flow by 30% within six months through better inventory management and streamlined operations. This improvement, combined with detailed financial projections, secured the expansion financing previously denied.
Character: Building Lender Trust
Character assessment combines your credit score with your overall reputation and business track record. While cash flow shows capacity, character demonstrates willingness to honor obligations even during challenging times.
Credit scores above 700 open doors at traditional banks, while scores between 650-700 may qualify for SBA programs with compensating factors. Scores below 650 limit conventional options but don’t eliminate all possibilities. Alternative lenders consider broader criteria including:
Payment history on utilities and rent
Business banking relationship duration
Industry experience and expertise
Transparency about past financial challenges
Small banks approve 54% of loan applications compared to lower rates at large institutions. Their relationship-based approach values local knowledge and personal connections alongside numerical metrics.
Enhancing your character profile
Maintain consistent payment patterns across all obligations. Address credit report errors immediately—even small corrections can boost scores significantly. Build relationships with community banks before needing financing. Share your business story openly, including how you’ve overcome past challenges.
A tech startup founder with imperfect credit secured funding by providing comprehensive documentation of past difficulties and concrete steps taken to rebuild. The lender valued transparency and proactive financial management over perfect history.
Collateral: Your Safety Net
Collateral provides lenders security if cash flow falters. Different assets carry varying advance rates based on liquidity and market stability.
Real estate typically allows the highest advance rates due to stable valuations and established markets. Equipment financing uses the purchased assets as inherent collateral but requires larger haircuts for depreciation. Accounts receivable and inventory serve as working capital collateral but command lower advance rates due to collection risks.
Maximizing collateral value
Document all assets thoroughly with current appraisals and clear title verification. Maintain equipment properly to preserve resale value. Diversify collateral types to provide flexibility in loan structuring.
Consider this manufacturing company that needed new machinery but lacked sufficient cash flow. By pledging existing equipment as collateral, they secured favorable loan terms. The lender’s confidence in the collateral’s value and liquidity minimized perceived risk.
Strategic collateral management
Keep detailed asset registers with serial numbers, purchase dates, and maintenance records. Update valuations annually to reflect market conditions. Clear any liens before seeking new financing.
Beyond the Basics: Advanced Strategies
Success with the 3 Cs requires integrated thinking. Strong character can partially offset weaker cash flow. Valuable collateral might compensate for shorter credit history. Understanding these relationships helps you present the strongest possible lending package.
Monitor your business metrics continuously, not just when seeking financing. Build banking relationships during strong periods when you don’t need loans. This positions you favorably when growth opportunities arise.
Final Thoughts
Mastering the 3 Cs of lending transforms financing from an obstacle into a strategic tool for growth. By strengthening your cash flow documentation, building impeccable character credentials, and maintaining valuable collateral, you position your business for approval with favorable terms.
The lending landscape continues evolving with new data sources and evaluation methods, but these three fundamentals remain constant. Focus on continuous improvement across all three dimensions rather than perfection in just one.
Ready to optimize your financial profile for lending success? The experts at Complete Controller can help you implement systems that strengthen all three Cs while positioning your business for sustainable growth. Contact us today to discover how professional financial management transforms lending outcomes.
Frequently Asked Questions About 3 Cs of lending
What minimum credit score do I need for a business loan?
Traditional banks prefer scores above 700, while SBA programs may accept 650 with strong compensating factors. Alternative lenders work with scores as low as 550 but charge higher rates.
How much collateral coverage do lenders typically require?
Requirements vary by asset type—real estate might allow 80% advance rates while inventory typically caps at 50%. Lenders want collateral value to exceed loan amounts by 20-50%.
Can strong cash flow overcome poor credit history?
Yes, exceptional cash flow with DSCR above 1.5x can compensate for credit challenges, especially with alternative lenders who emphasize current performance over historical issues.
How far back do lenders review financial history?
Most lenders examine 2-3 years of tax returns and financial statements, though some may request up to 5 years for larger loans or complex businesses.
What happens if my collateral value drops during the loan term?
Lenders may require additional collateral, partial repayment, or renegotiated terms if values decline significantly. Regular monitoring helps identify issues before they become critical.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
Jennifer BrazerFounder/CEO
Jennifer is the author of From Cubicle to Cloud and Founder/CEO of Complete Controller, a pioneering financial services firm that helps entrepreneurs break free of traditional constraints and scale their businesses to new heights.
Brittany McMillen is a seasoned Marketing Manager with a sharp eye for strategy and storytelling. With a background in digital marketing, brand development, and customer engagement, she brings a results-driven mindset to every project. Brittany specializes in crafting compelling content and optimizing user experiences that convert. When she’s not reviewing content, she’s exploring the latest marketing trends or championing small business success.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
