Anderson ZurMuehlen Blog

3 Midyear Tax Planning Strategies for Individuals

 

In the quest to reduce your tax bill, year end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here are three strategies that can be more effective if you begin executing them midyear:

1. Consider your bracket

The top income tax rate is 39.6% for taxpayers with taxable income over $418,400 (singles), $444,550 (heads of households) and $470,700 (married filing jointly; half that amount for married filing separately). If you expect this year’s income to be near the threshold , consider strategies for reducing your taxable income and staying out of the top bracket. For example, you could take steps to defer income and accelerate deductible expenses. (This strategy can save tax even if you’re not at risk for the 39.6% bracket or you can’t avoid the bracket.)

You could also shift income to family members in lower tax brackets by giving them income-producing assets. This strategy won’t work, however, if the recipient is subject to the “kiddie tax.” Generally, this tax applies the parents’ marginal rate to unearned income (including investment income) received by a dependent child under the age of 19 (24 for full-time students) in excess of a specified threshold ($2,100 for 2017).

2. Look at investment income

This year, the capital gains rate for taxpayers in the top bracket is 20%. If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

Depending on what happens with health care and tax reform legislation, you also may need to plan for the 3.8% net investment income tax (NIIT). Under the Affordable Care Act, this tax can affect taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT applies to net investment income for the year or the excess of MAGI over the threshold, whichever is less. So, if the NIIT remains in effect (check back with us for the latest information), you may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

3. Plan for medical expenses

The threshold for deducting medical expenses is 10% of AGI. You can deduct only expenses that exceed that floor. (The threshold could be affected by health care legislation. Again, check back with us for the latest information.)

Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (17 cents per mile driven in 2017). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor.

These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult us now. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.

© 2017

Read more from Anderson ZurMuehlen Blog

Private Companies: Consider these Financial Reporting Shortcuts

For years, private companies and their stakeholders have complained that the Financial Accounting Standards Board (FASB) catered too much to large, public companies and ignored the needs of smaller, privately held organizations that have less complex financial reporting issues. In other words, they’ve said that U.S. Generally Accepted Accounting Principles (GAAP) are too complicated for them. The FASB answered these complaints by issuing some Accounting Standards Updates (ASUs) that apply exclusively to private companies.

“Little GAAP”

Currently there are four ASUs that apply only to private companies:
1. ASU No. 2014-02Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. Under this alternative, private companies may elect to amortize goodwill on their balance sheets over a period not to exceed 10 years, rather than test it annually for impairment.

2. ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach. This alternative allows nonfinancial institution private companies to elect an easier form of hedge accounting when they use simple interest rate swaps to secure fixed-rate loans.

3. ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. This alternative exempts private companies from recognizing certain hard-to-value intangible assets — such as noncompetes and certain customer-related intangibles — when they buy or merge with another company. It doesn’t eliminate the requirement to recognize and separately value other intangible assets acquired in business combinations, such as trade names and patents.

4. ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This option simplifies the consolidation reporting requirements of lessors in certain private company leasing transactions. It’s important to note that the FASB is currently considering expanding this alternative: In June 2017, the FASB issued a proposal that would allow private companies that use variable interest entities (VIEs) to skip the consolidation guidance. Comments on the proposal are due on September 5.

No effective dates or preferability assessments

After the FASB issued these alternatives, it updated the guidance to remove the effective dates. It also has exempted private companies from having to make a preferability assessment before adopting one of these accounting alternatives. Under the previous rules, a private company that wanted to adopt an accounting alternative after its effective date had to first assess whether the alternative was preferable to its accounting policy at that time.

Forgoing an initial preferability assessment allows private companies to adopt a private company accounting alternative when they experience a change in circumstances or management’s strategic plan. It also allows private companies that were unaware of an accounting alternative to adopt the alternative without having to bear the cost of justifying preferability.

Right for you?

Simplified reporting sounds like a smart idea, but regulators, lenders and other stakeholders may require a private company to continue to apply traditional accounting models, especially if the company is large enough to consider going public or may merge with a public company. We can help private companies weigh the pros and cons of electing these alternatives.

© 2017

Read more from Anderson ZurMuehlen Blog

3 Midyear Tax Planning Strategies for Business

Tax reform has been a major topic of discussion in Washington, but it’s still unclear exactly what such legislation will include and whether it will be signed into law this year. However, the last major tax legislation that was signed into law — back in December of 2015 — still has a significant impact on tax planning for businesses. Let’s look at three midyear tax strategies inspired by the Protecting Americans from Tax Hikes (PATH) Act:

1. Buy equipment. The PATH Act preserved both the generous limits for the Section 179 expensing election and the availability of bonus depreciation. These breaks generally apply to qualified fixed assets, including equipment or machinery, placed in service during the year. For 2017, the maximum Sec. 179 deduction is $510,000, subject to a $2,030,000 phaseout threshold. Without the PATH Act, the 2017 limits would have been $25,000 and $200,000, respectively. Higher limits are now permanent and subject to inflation indexing.

Additionally, for 2017, your business may be able to claim 50% bonus depreciation for qualified costs in excess of what you expense under Sec. 179. Bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it’s set to expire on December 31, 2019.

2. Ramp up research. After years of uncertainty, the PATH Act made the research credit permanent. For qualified research expenses, the credit is generally equal to 20% of expenses over a base amount that’s essentially determined using a historical average of research expenses as a percentage of revenues. There’s also an alternative computation for companies that haven’t increased their research expenses substantially over their historical base amounts.

In addition, a small business with $50 million or less in gross receipts may claim the credit against its alternative minimum tax (AMT) liability. And, a start-up company with less than $5 million in gross receipts may claim the credit against up to $250,000 in employer Federal Insurance Contributions Act (FICA) taxes.

3. Hire workers from “target groups.” Your business may claim the Work Opportunity credit for hiring a worker from one of several “target groups,” such as food stamp recipients and certain veterans. The PATH Act extended the credit through 2019. It also added a new target group: long-term unemployment recipients.

Generally, the maximum Work Opportunity credit is $2,400 per worker. But it’s higher for workers from certain target groups, such as disabled veterans.

One last thing to keep in mind is that, in terms of tax breaks, “permanent” only means that there’s no scheduled expiration date. Congress could still pass legislation that changes or eliminates “permanent” breaks. But it’s unlikely any of the breaks discussed here would be eliminated or reduced for 2017. To keep up to date on tax law changes and get a jump start on your 2017 tax planning, contact us.

© 2017

Read more from Anderson ZurMuehlen Blog

Look Beyond EBITDA

 

Earnings before interest, taxes, depreciation and amortization (EBITDA) is commonly used to assess financial health and evaluate investment decisions. But sometimes this metric overstates a company’s true performance, ability to service debt, and value. That’s why internal and external stakeholders should exercise caution when reviewing EBITDA.

History of EBITDA

The market’s preoccupation with EBITDA started during the leveraged buyout craze of the 1980s. The metric was especially popular among public companies in capital-intensive industries, such as steel, wireless communications and cable television. Many EBITDA proponents claim it provides a clearer view of long-term financial performance, because EBITDA generally excludes nonrecurring events and one-time capital expenditures.

Today, EBITDA is the third most quoted performance metric — behind earnings per share and operating cash flow — in the “management discussion and analysis” section of public companies’ annual financial statements. The corporate obsession with EBITDA has also infiltrated smaller, private entities that tend to use oversimplified EBITDA pricing multiples in mergers and acquisitions. And it’s provided technology and telecommunication companies with a convenient way to dress up lackluster performance.

Inconsistent definitions

EBITDA isn’t recognized under U.S. Generally Accepted Accounting Principles (GAAP) or by the Securities and Exchange Commission (SEC) as a measure of profitability or cash flow. Without formal guidance, companies have been free to define EBITDA any way they choose — which can make it difficult to assess company performance.

For example, some analysts when calculating EBITDA subtract nonrecurring and extraordinary business charges, such as goodwill impairment, restructuring expenses, and the cost of long-term incentive compensation and stock option plans. Others, however, subtract none or only some of those charges. Therefore, comparing EBITDA between companies can be like comparing apples and oranges.

Moreover, the metric fails to consider changes in working capital requirements, income taxes, principal repayments and capital expenditures. When used in mergers and acquisitions, EBITDA pricing multiples generally fail to address the company’s asset management efficiency, the condition and use of its fixed assets, or the existence of nonoperating assets and unrecorded liabilities. In fact, many high profile accounting scandals and bankruptcies have been linked to the misuse of EBITDA, including those involving WorldCom, Cablevision, Vivendi, Enron and Sunbeam.

Balancing act

Despite these shortcomings, EBITDA isn’t all bad. It can provide insight when used in conjunction with more traditional metrics, such as cash flow, net income and return on investment. For help performing comprehensive due diligence that looks beyond EBITDA, contact us.

©2017

Read more from Anderson ZurMuehlen Blog

5 Recent Supreme Court Decisions that Could Affect Your Business

At the end of June, the U.S. Supreme Court adjourned for its summer recess. Here are five recent cases from its 2016 term that may be of interest to business owners and managers.

1. Advocate Health Care Network v. Stapleton (S. Ct. No. 16-74, June 5, 2017)

Under the Employee Retirement Income Security Act of 1974 (ERISA), employees are generally protected from unexpected losses in their retirement plans through various safeguards. However, church plans are specifically exempted from ERISA requirements, in order to avoid any entanglement of government and religion.

In this case, a group of employees work for a health care network that operates hospitals and in-patient and out-patient treatment centers in Illinois. The employees are covered under the network’s retirement plan. The network was formed through a merger of two religiously affiliated hospital systems. Although neither system was owned or financially operated by a church, the network remains affiliated with a church.

The employees sued the network. They argued that the retirement plan is subject to ERISA and failing to meet the ERISA requirements is a violation of federal law. The network countered that its plan falls under the exception for church plans. The Seventh Circuit Court affirmed a lower court’s ruling that a church-affiliated organization isn’t a church plan within the meaning of the law.

In a June ruling, the U.S. Supreme Court unanimously agreed that the ERISA exemption for church plans applies to plans maintained by a church-affiliated organization, even if that organization didn’t originally establish the plan.

2. TC Heartland LLC v. Kraft Food Brands Group LLC (S. Ct. No. 16-341, May 22, 2017)

A company organized under Indiana law and headquartered in Indiana sold liquid water-enhancing products that it shipped to Delaware in accordance with two of its contracts. But a major retailer, organized in Delaware with its primary place of business in Illinois, claimed that these products infringed on its patents for similar products.

The company selling the water-enhancing products argued that Delaware lacked jurisdiction over the lawsuit because the retailer isn’t registered to do business in the state, has no business there and doesn’t solicit any business there. A district court ruled that the subsection of the general venue statute allowing a defendant to reside in multiple jurisdictions for purposes of establishing jurisdiction applies to the patent venue statute.

This precedent conflicts with a previous Supreme Court case, Fourco Glass Co. v. Transmirra Products Corp. (353 U.S. 222, 1957). Fourco Glass holds that corporate jurisdiction is limited to the state of incorporation. The Fifth Circuit decided that the Congressional amendments to the general venue statute post-dated Fourco Glass and, therefore, superseded it.

However, in May, the Supreme Court unanimously ruled that the subsection of the general venue statute doesn’t apply to the patent venue statute. Thus, the Fourco Glass case still prevails. In his opinion, Justice Thomas stated that the patent venue statute hasn’t been amended, and it wasn’t meant to dovetail with other venue statutes.

3. Star Athletica, LLC v. Varsity Brands, Inc. (S. Ct. No. 15-866, March 22, 2017)

In the Star Athletica case, the plaintiff is a company that designs and manufactures clothing and accessories used in various athletic activities, including cheerleading. The design concepts for the clothing incorporate several elements — such as colors, shapes and lines — but they don’t consider the functionality of the final clothing. The plaintiff received copyright registration for two-dimensional artwork of designs that were similar to the ones that the defendant company began using.

In its lawsuit, the plaintiff alleged, among other claims, that the defendant had violated the Copyright Act of 1976. The defendant counter-claimed, asserting that the plaintiff had made fraudulent representations to the Copyright Office because the designs at issue couldn’t be copyrighted.

Significantly, the defendant argued that the plaintiff didn’t have valid copyrights because the designs were for “useful articles,” which can’t be copyrighted. Moreover, because the designs can’t be separated from the uniforms, the designs are impossible to copyright. In response, the plaintiff claimed that the designs were separable and non-functional.

The Sixth Circuit ruled that the Copyright Act allows companies to copyright graphic features of a design, even if the design isn’t separable from a “useful article.” Then the matter was brought before the U.S. Supreme Court.

In a 6-2 vote, the Court decided that copyright protection is allowed if a feature incorporated into the design of a useful article:

  • Can be perceived as a two- or three-dimensional work of art separate from the useful article, and
  • Would qualify as a protectable pictorial, graphic or sculptural work — either on its own or fixed in some other tangible medium of expression — if it were imagined separately from the useful article into which it’s incorporated.

Based on this interpretation, the plaintiff prevailed.

4. Czyzewski v. Jevic Holding Corp. (S. Ct. 15-649, March 22, 2017)

In 2008, a trucking company that was headquartered in New Jersey filed for bankruptcy under Chapter 11 of the U. S. Bankruptcy Code. At that point, it owed about $53 million to its first-priority secured creditors and about $20 million to its tax and general unsecured creditors.

Two lawsuits were initiated in U.S. Bankruptcy Court against the trucking company:

  • The truck drivers alleged that the trucking company violated federal and state Worker Adjustment and Retraining Notification (WARN) laws. Those rules require companies to provide workers with at least 60 days notice before layoffs.
  • A fraudulent conveyance action was made on behalf of the unsecured creditors. In 2012, the parties to the fraudulent conveyance action negotiated a settlement that dismissed many of the claims. But the settlement left out the drivers. The drivers objected to the settlement because it distributed property to creditors of lower priority under the Bankruptcy Code.

The Third Circuit affirmed the district court’s decision that the Bankruptcy Court had the discretion to approve a settlement scheme outside the Chapter 11 proceedings, even if it didn’t comply with distribution priority scheme under the Bankruptcy Code.

In a 6-2 decision, the U.S. Supreme Court sided with the truck drivers. The Court held that bankruptcy courts may not approve structured dismissals that don’t follow the priority order established in the Bankruptcy Code. While courts have flexibility, settlements must be viewed in light of the claims of affected creditors.

5. Kokesh v. Securities and Exchange Commission (S. Ct. No. 16-529, June 5, 2017)

The Securities and Exchange Commission (SEC) sued a New Mexico-based investment advisor for misappropriating funds from four business development companies. The district court found in favor of the SEC and ordered the advisor to pay $34.9 million for “the ill-gotten gains” connected to the violations. But the advisor argued this “disgorgement” remedy is barred by a five-year statute of limitations.

What is disgorgement? Funds received through illegal or unethical business transactions are disgorged, or paid back, with interest to those affected by the action. Companies that violate SEC regulations are typically required to pay both civil money penalties and disgorgement. In general, civil money penalties are considered punitive, while disgorgement is about paying back profits made from those actions that violated the SEC’s regulations.

The Tenth Circuit held that the usual five-year statute of limitations didn’t apply to this case because the ordered payment was remedial rather than punitive in nature. Therefore, a disgorgement payment may be allowed.

However, the Supreme Court has unanimously reversed the Tenth Circuit ruling. The Court decided that SEC disgorgement functions as a penalty, so it is subject to the five-year statute of limitations. This case is being widely viewed by commentators as a further erosion of the enforcement powers of the SEC.

©2017

Read more from Anderson ZurMuehlen Blog

Less Than 6 Months Until the New Contract Revenue Guidance Goes Live

The sweeping new revenue recognition standard goes into effect soon. But many companies are behind on implementing it. Whether your company is public or private, you can’t afford to delay the implementation process any longer.

5 steps

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, requires companies following U.S. Generally Accepted Accounting Principles (GAAP) to use a principles-based approach for recognizing revenues from long-term contracts. Under the new guidance, companies must follow five steps when deciding how and when to recognize revenues:

1. Identify a contract with a customer.

2. Separate the contract’s commitments.

3. Determine the transaction price.

4. Allocate a price to each promise.

5. Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract.

In some cases, the new guidance will result in earlier revenue recognition than in current practice. This is because the new standard will require companies to estimate the effects of sales incentives, discounts and warranties.

Changes coming

The new standard goes into effect for public companies next year. Private companies have a one-year reprieve.

The breadth of change that will be experienced from the new standard depends on the industry. Companies that currently follow specific industry-based guidance, such as software, real estate, asset management and wireless carrier companies, will feel the biggest changes. Nearly all companies will be affected by the expanded disclosure requirements.

Some companies that have already started the implementation process have found that it’s more challenging than they initially expected, especially if the company issues comparative statements. Reporting comparative results in accordance with the new standard requires a two-year head start to ensure all of the relevant data is accurately collected.

Reasons for procrastination

Why are so many companies dragging their feet? Reasons may include:

  • Lack of funding or staff,
  • Challenges interpreting the standard’s technical requirements, and
  • Difficulty collecting data.

Many companies remain uncertain how to prepare their accounting systems and recordkeeping to accommodate the changes, even though the FASB has issued several amendments to help clarify the guidance. In addition, the AICPA’s FinREC has published industry-specific interpretive guidance to address specific implementation issues related to the revenue recognition standard.

Got contracts?

We’ve already helped other companies start the implementation process — and we’re ready to help get you up to speed, too. Contact us for questions on how the new revenue recognition standard will impact your financial statements and accounting systems.

© 2017

 

©2017

Read more from Anderson ZurMuehlen Blog

Why Financial Restatements Happen … and How to Prevent Them

 

When companies reissue prior financial statements, it raises a red flag to investors and lenders. But not all restatements are bad news. Some result from an honest mistake or misinterpretation of an accounting standard, rather than from incompetence or fraud. Here’s a closer look at restatements and how external auditors can help a company’s management get it right.

Avoid knee-jerk responses

The Financial Accounting Standards Board (FASB) defines a restatement as “a revision of a previously issued financial statement to correct an error.” Accountants decide whether to restate a prior period based on whether the error is material to the company’s financial results. Unfortunately, there aren’t any bright-line percentages to determine materiality.

When you hear the word “restatement,” don’t automatically think of the frauds that occurred at Xerox, Enron or WorldCom. Some unscrupulous executives do use questionable accounting practices to meet quarterly earnings projections, maintain stock prices and achieve executive compensation incentives. But many restatements result from unintentional errors.

Spot error-prone accounts

Accounting rules can be complex. Recognition errors are one of the most common causes of financial restatements. They sometimes happen when companies implement a change to the accounting rules (such as the updated guidance on leases or revenue recognition) or engage in a complex transaction (such as reporting compensation expense from backdated stock options, hedge accounting, the use of special purpose or variable interest entities, and consolidating with related parties).

Income statement and balance sheet misclassifications also cause a large number of restatements. For instance, a borrower may need to shift cash flows between investing, financing and operating on the statement of cash flows.

Equity transaction errors, such as improper accounting for business combinations and convertible securities, can also be problematic. Other leading causes of restatements are valuation errors related to common stock issuances, preferred stock errors, and the complex rules related to acquisitions, investments and tax accounting.

Want more accurate results?

Restatements also happen when a company upgrades to a higher level of assurance (say, when transitioning from reviewed statements to audited statements). That’s because audits are more likely than compilation or review procedures to catch reporting errors from prior periods. An external auditor is required to “plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”

But after the initial transition period, audits typically catch errors before financial statements are published, minimizing the need for restatements. Auditors are trained experts on U.S. Generally Accepted Accounting Principles (GAAP) — and they must take continuing professional education courses to stay atop the latest changes to the rules.

In addition to auditing financial statements, we can help implement cost-effective internal control procedures to prevent errors and accurately report error-prone accounts and transactions. Contact us for help correcting a previous error, remedying the source of an error or upgrading to a higher level of assurance.

©2017

Read more from Anderson ZurMuehlen Blog

Put Your Income Statement to Good Use

By midyear, most businesses that follow U.S. Generally Accepted Accounting Principles (GAAP) have issued their year-end financial statements. But how many have actually used them to improve their business operations in the future? Producing financial statements is more than a matter of compliance — owners and managers can use them to analyze performance and find ways to remedy inefficiencies and anomalies. How? Let’s start by looking at the income statement.

Benchmarking performance

Ratio analysis facilitates comparisons over time and against industry norms. Here are four ratios you can compute from income statement data:

1. Gross profit. This is profit after cost of goods sold divided by sales. This critical ratio indicates whether the company can operate profitably. It’s a good ratio to compare to industry statistics because it tends to be calculated on a consistent basis.

2. Net profit margin. This is calculated by dividing net income by sales and is the ultimate scorecard for management. If the margin is rising, the company must be doing something right. Often, this ratio is computed on a pretax basis to accommodate for differences in tax rates between pass-through entities and C corporations.

3. Return on assets. This is calculated by dividing net income by the company’s total assets. The return shows how efficiently management is using its assets.

4. Return on equity. This is calculated by dividing net profits by shareholders’ equity. The resulting figure tells how well the shareholders’ investment is performing compared to competing investment vehicles.

For all four profitability ratios, look at two key elements: changes between accounting periods and differences from industry averages.

Plugging profit drains

What if your company’s profitability ratios have deteriorated compared to last year or industry norms? Rather than overreacting to a decline, it’s important to find the cause. If the whole industry is suffering, the decline is likely part of a macroeconomic trend.

If the industry is healthy, yet a company’s margins are falling, management may need to take corrective measures, such as:

  • Reining in costs,
  • Investing in technology, and/or
  • Looking for signs of fraud.

For example, if an employee is colluding with a supplier in a kickback scam, direct materials costs may skyrocket, causing the company’s gross profit to fall.

Playing detective

For clues into what’s happening, study the main components of the income statement: gross sales, cost of sales, and selling and administrative costs. Determine if line items have fallen due to company-specific or industrywide trends by comparing them to public companies in the same industry. Also, monitor trade publications, trade associations and the Internet for information. Contact us to discuss possible causes and brainstorm ways to fix any problems.

©2017

Read more from Anderson ZurMuehlen Blog

Seasonal business? Optimize your operating cycle

Every business has some degree of ups and downs during the year. But cash flow fluctuation OKs are much more intense for seasonal businesses. So, if your company defines itself as such, it’s important to optimize your operating cycle to anticipate and minimize shortfalls.

A high-growth example

To illustrate: Consider a manufacturer and distributor of lawn-and-garden products such as topsoil, potting soil and ground cover. Its customers are lawn-and-garden retailers, hardware stores and mass merchants.

The company’s operating cycle starts when customers place orders in the fall — nine months ahead of its peak selling season. So the business begins amassing product in the fall, but curtails operations in the winter. In late February, product accumulation continues, with most shipments going out in April.

At this point, a lot of cash has flowed out of the company to pay operating expenses, such as utilities, salaries, raw materials costs and shipping expenses. But cash doesn’t start flowing into the company until customers pay their bills around June. Then, the company counts inventory, pays remaining expenses and starts preparing for the next year. Its strategic selling window — which will determine whether the business succeeds or fails — lasts a mere eight weeks.

The power of projections

Sound familiar? Ideally, a seasonal business such as this should stockpile cash received at the end of its operating cycle, and then use those cash reserves to finance the next operating cycle. But cash reserves may not be enough — especially for high-growth companies.

So, like many seasonal businesses, you might want to apply for a line of credit to avert potential shortfalls. To increase the chances of loan approval, compile a comprehensive loan package, including historical financial statements and tax returns, as well as marketing materials and supplier affidavits (if available).

More important, draft a formal business plan that includes financial projections for next year. Some companies even project financial results for three to five years into the future. Seasonal business owners can’t rely on gut instinct. You need to develop budgets, systems, processes and procedures ahead of the peak season to effectively manage your operating cycle.

Distinctive challenges

Seasonal businesses face many distinctive challenges. Please contact our firm for assistance overcoming these obstacles and strengthening your bottom line.

Contact us for more information.

©2017

Read more from Anderson ZurMuehlen Blog

How to Shape Up Your Working Capital

Working capital — current assets minus current liabilities — is a common measure of liquidity. High liquidity generally equates with low risk, but excessive amounts of cash tied up in working capital may detract from growth opportunities and other spending options, such as expanding to new markets, buying equipment and paying down debt. Here are some recent working capital trends and tips for keeping your working capital in shape.

Survey says

Working capital management among U.S. companies has been relatively flat over the last four years, excluding the performance of oil and gas companies, according to the 2016 U.S. Working Capital Survey published by consulting firm REL and CFO magazine. The overall results were skewed somewhat because oil and gas companies increased their inventory reserves to take advantage of low oil prices, thereby driving up working capital balances for that industry.

The study estimates that, if all of the 1,000 companies surveyed managed working capital as efficiently as do the companies in the top quartile of their respective industries, more than $1 trillion of cash would be freed up from receivables, inventory and payables.

Rather than improve working capital efficiency, however, many companies have chosen to raise cash with low interest rate debt. Companies in the survey currently carry roughly $4.86 trillion in debt, more than double the level in 2008. As the Federal Reserve Bank increases rates, companies will likely look for ways to manage working capital better.

Efficiency initiatives

How can your company decrease the amount of cash that’s tied up in working capital? Best practices vary from industry to industry. Here are three effective exercises for improving working capital:

Expedite collections. Possible solutions for converting receivables into cash include: tighter credit policies, early bird discounts, collection-based sales compensation and in-house collection personnel. Companies also can evaluate administrative processes — including invoice preparation, dispute resolution and deposits — to eliminate inefficiencies in the collection cycle.

Trim inventory. This account carries many hidden costs, including storage, obsolescence, insurance and security. Consider using computerized inventory systems to help predict demand, enable data-sharing up and down the supply chain, and more quickly reveal variability from theft.

Postpone payables. By deferring vendor payments, your company can increase cash on hand. But be careful: Delaying payments for too long can compromise a firm’s credit standing or result in forgone early bird discounts.

From analysis to action

No magic formula exists for reducing working capital, but continuous improvement is essential. We can help train you on how to evaluate working capital accounts, identify strengths and weaknesses, and find ways to minimize working capital without compromising supply chain relationships.

 

Contact us for more information.

©2017

Read more from Anderson ZurMuehlen Blog