Category: Accounting

How to Use Your Tax Windfall

~ C.O.R.E. Beliefs ~ Leave a comment

One of the most important things to be thinking about, even as a small business, is how to use the cash from paying less taxes.  Oh sorry, this assumes you are a C Corporation.  S Corporations are probably out of luck on the tax savings side – but that will be tomorrow’s blog.

First, keep in mind that from a banking perspective, your company won’t change.  That is because bank’s typically measure you according to EBITDA – or Earnings Before Interest, Taxes, Depreciation and Amortization.  If you have bank covenants with any time of earnings ratio it is based on this, not net profit after tax.

This being said, you should have additional cash flow.  Assuming you are profitable.

An example might help.  Lets say your business has EBITDA of $1,000,000.  From this:

  • Interest on your bank loan is $100,000
  • Depreciation and amortization is $100,000
  • Earnings before taxes is $800,000

Under old law, your tax would have been about $240,000.

Under the new tax law your tax will be $168,000, or a savings of about $72,000.

Honestly, the one thing you may want to avoid is increasing an expense by paying out a bonus, increasing wages, etc.  Paying out that $72K will reduce your EBITDA which could cause a covenant violation.

You also probably can’t issue a dividend to the shareholders because there is another covenant prohibiting such a move.  The bank wants its money first – which is only fair.

So what should you do?  Keeping idle cash around seems foolish, especially if you have a line of credit or term debt.

Ah yes, the debt.

Small businesses should seriously consider using the free cash flow from the reduced income tax rates to pay down debt. I would recommend freeing up the Line of Credit first and then start paying down the term debt.

The sooner you get that debt down the sooner you can start paying dividends – which as my blog yesterday pointed out, might be a better choice than taking payment as wages.  You will need to work with your accounting professional to ensure that this is the most effective way of getting money out to you but it may work out best that way.

Make sure you are on top of your loan covenants before you make big decisions on how to spend the tax savings which start this year.  And, everything else being equal, paying down bank debt will improve your ratios – anything else you do might impair them.

Have a great day.  If you are looking for an accounting and tax advisor who can help you navigate these times, feel free to contact me for a free consultation.

Evaluating Risk in Your Business

~ C.O.R.E. Beliefs ~ Leave a comment

I received another interesting Google alert which reminds me how small business owners often take their business for granted.  This one was about how the bookkeeper managed to write almost 100 checks to himself over 3 years to the tune of almost $250,000.

Let me start by saying that the bookkeeper was wrong.  No ifs, ands, or buts about it.  But to be honest, the business owner provided the means and the opportunity.  That doesn’t excuse the behavior but the owner would have been $250,000 wealthier if he hadn’t failed in his responsibilities to set up his company to deter such poor behavior.

First, a small business owner should never, ever give the bookkeeper check signing authority.  There is no such thing as a good reason for this.  One of the most important rules to protect your cash is make sure that the person with direct oversight of the accounting system can not sign a check.

Yes, I know there are many good reasons to have a second signer and I think there probably should be at least one other.  But have it be your shop manager or construction foreman, not the bookkeeper!  Hell, have your cousin Bob be a signer so that when you are out of town he can come by the office and sign checks.

But you have to make sure that the second signer knows the rules.  The most important rule is that no check is signed unless all the paperwork is with it.  That means a purchase order (yes use those too), a vendor invoice, a receiving ticket (what? You don’t have anything to prove items were delivered?) all packages together so they can review it prior to signing.  Everything must match or they must not sign.  And the bookkeeper cannot pressure them for any reason.  As a matter of fact, they should call you immediately if they feel something is off.

I understand it is possible that someone could create lots of documents to support stealing but the reality is that it would take some advanced planning to pull it off.  Plus, once it was discovered (and it will be) it is pretty obvious they had real intention to steal from you and that it wasn’t merely a crime of opportunity (oh look a $1,000 bill lying on the ground, finders keepers).  But ultimately having someone who is not part of the accounting control system look things over might actually help you find new ways to do the work.

We are big fans of using automated workflows and online document management.  These can make the process of approvals easier, faster and far more reliable.  Properly constructed, your system wouldn’t even allow a check to be written until the work flow is complete.  You could have several different people review their parts and then you can be comfortable in knowing that whoever signs the check (or pushes the enter key for an ACH transaction) is doing so with proper authorization.

Here are a few other commonsense rules for vendor payment management:

  • Make sure that all vendors have filed a W9 and submitted their insurance documents
  • Create a receiving document to prove what was delivered and that it matched to the PO
  • Create PO’s for goods being purchased
  • Have a contract with professional service providers for every major project they do – no open-ended hourly billing
  • Have one of your employees call random vendors to verify their information to make sure they really exist and do business with you
  • Review your accounts receivable aging reports and personally follow up with customers who haven’t paid in 60 days.

These steps won’t stop a determined fraudster but they do substantially reduce opportunity.  And without opportunity, most fraud disappears.

If you are looking for an accounting firm who understands business and how to protect it, check out our website for more information and to contact us.  We look forward to the opportunity to be of service to you.

Have a great day and Happy New Year.

Using accounting to deceive

~ C.O.R.E. Beliefs ~ 1 Comment

I have received a few google alerts recently about companies that are being accused of using their accounting and financial statements to deceive readers.   It is sadly a far too common occurrence.  For readers of financial statements – like those who are owners in a homeowners or condominium association – knowing what to look for can help you determine if the information could be incorrect and maybe even fictitious.

First up on the balance sheet is cash.  While it is difficult to determine if the amount of cash is bogus there are things to look for, especially in associations.  If the financial statements show lots of cash but you are receiving messages from the board saying that they are worried about having to increase assessments – ask how that can possibly be.   There could be a logical explanation but every once in a while something is just flat our wrong.

Accounts receivable is one of the places where potential problems may really lurk.  Accounts receivable are sales that have not been collected – i.e. an IOU from the buyer.  For most businesses, one month’s sales in receivable would be expected, but watch out.  I once worked on an engagement for a hotel chain where the accounts receivable kept increasing and was approaching almost 10 days of revenue.  The a/r was used to hide the theft of cash sales and the controller didn’t catch it.  Ask yourself, if you owned a business like that, would you let someone promise to pay you later?

Inventory is another big area where accounting irregularities can show up.  Ask yourself, does the inventory seem excessive?  An easy way to tell is to divide the cost of goods sold by 12 and then compare that number to the amount reported as inventory.  Is it close to or less than 1:1?  That would mean that inventory is turning every 30 days.  If it is over 1.5:1, or more than 45 days, be careful.  Inventory goes obsolete quickly these days so lots of inventory may mean lots of write-offs coming soon.

Fixed assets, or property, plant and equipment can be gimmicked as well.  WorldCom tried to pull off this method of lying to their investors.  This is one of those areas that is harder to tell if something is wrong but the best thing to do is look at how fast the investment in fixed assets grow.  If sales have grown on average 3% over the last 5 years and fixed assets grew 12% this year, it may be worth questioning.  It is definitely worth looking at when fixed assets grows consistently at 12% year over year and sales isn’t going anywhere.  That is a sign of trouble.  We performed a review this past year where we required management to write down their asset value because we felt that the fixed assets were overstated.

Keep in mind that most entities that want to fool you will want you to focus on their profits – which means that revenues exceed expenses.  The easiest way to do that is to move expenses to the balance sheet; the receivables, the inventory, the fixed assets.  Look at expense trends and if you see an expense, like cost of goods sold, drop as a percentage, and then check if inventory went down that same percentage.  If it went up, it could be a sign something is wrong.

The vast majority of financial statement issuers are above board and honest.  To help keep them that way, remember to read the statement critically and be willing to ask questions, especially if you have a financial interest in the issuer.

Have a great day.

It’s Official

~ C.O.R.E. Beliefs ~ Leave a comment

In today’s newsletter from Currie & McLain, they told their clients that they are officially becoming part of Integrated Tax Services (ITS) effective January 1, 2018.  It has been a pleasure to work with the team at Currie & McLain and I know that ITS will be able to offer the same excellent tax service clients came to appreciate from Currie & McLain.

Doug and I purchased the HOA and condo client base of Currie & McLain in September so that there was a firm ready to handle the audit and review services for homeowner associations and condo properties.  C.O.R.E. Services does not do taxes, we refer that out to ITS and other firms who demonstrate superior client service.  But we do offer the review services that are often required of businesses with bank loans and financial statement loan covenants.

So what does this mean for clients?

ITS will be able to do all your tax work and I would strongly encourage you to continue your relationship.  With the integration of the preparation teams, there will actually be more qualified staff to work with clients.

For businesses who need attest work on their financial statements, C.O.R.E. would like the opportunity to work with you.  Because we only focus on audits and review engagements we dedicate our resources to completing these engagements timely and effectively.  We encourage you to have ITS prepare your business tax return while we do the procedures to be able to issue an opinion or conclusion on your financial statements.

C.O.R.E. emphasizes audits and reviews of common property associations – HOA’s, condominium associations and co-operatives.  Doug and I have many years of experience in both the technical aspect of audits and reviews as well as many years of focus on these types of associations.

If you are on a condo or HOA board and are looking for a quote for an audit or review and are interested in working with a firm that dedicates itself to performing the right procedures to ensure that your management’s accounting is accurate, feel free to reach out to C.O.R.E. Services.  If you would a referral for your taxes, either personal or business, we would be happy to give you the right referral based on your needs.

Have a great weekend.  And congratulations to Leslie, Linda and Doug for taking such excellent care of their clients.