A government program you may not have heard of – ERC, or Employee Retention Credit – is a way to get a refund of your employment taxes already paid into IRS – no strings attached. This is a refund that you’ll get directly from the IRS without resistance, if you’ve met either of the two-part criteria for qualifying. Since your bank is not involved, and the qualification is not strictly numeric (so your CPA may have already decided you don’t qualify), you may not know this program even exists, but it does, and it’s good to go through the end of this year, with 3 years after that to make a claim. How much can you get? Up to $7,000 per employee per quarter. What must you use the money for? Whatever you want. What hoops do you have to jump through to get it? Only one or two. Short list but tricky.
The trick to qualifying for the refund is to be a small business – less than 500 employees – and have your revenues impacted during 4Q2020 and/or any of the four quarters of 2021, as long as that revenue impact was 20% or more OR – and this is key – was a disruption caused by anything that resulted from some action of a government agency. That’s the tricky part, because sometimes your supply chain was impacted by a required shutdown at one of your suppliers, or one of their suppliers, or one of their suppliers’ suppliers. Think of the car makers who can’t get computer chips to finish their dashboard assemblies. Anyway, you can see that it would require some research to ferret out the qualifying criteria. Not a slam dunk, for sure. But the result can be a gift from Uncle Sam of payroll taxes that have not already have been covered by a forgiven PPP loan.
Okay, so how do you figure all that out while still running your business? Well, it turns out there are a few consulting firms – not including ours – that are prepared to do that digging and help you get your refund (or tell you that you didn’t qualify), often at NO COST to you. Their fees can be totally contingent on your getting a refund.
So, if you already have a tax advisory firm that is strong in tax credit guidance, get them on the phone. If you don’t, ask me. I know a guy…two actually.
We are Your CFO for Rent.
So, you’ve built a successful business over the years, but you’ve added those years to your age as well. Now it’s time, you decide, to sell the business and retire to your south pacific island – or perhaps just your back-yard garden. You’ve managed your customer relationships well, revenues and profits have held up or grown, even during the pandemic. You’ve produced financial reports each month, and you’ve found an investment banker that you want to work with. You’re ready now. What could go wrong?
Well, let’s suppose your accounting over the years was a bit less than accurate in some subjective areas, like inventory valuation. You kept your book values conservative, i.e., smaller profits reported. You know there’s value there that isn’t reflected on your balance sheet, so that’s a good selling point, right? Maybe not.
One of the impacts of your “conservative” reporting was that you paid less income taxes. Without commenting on whether or not that was a goal of your reporting practices, there is a potential tax liability that is likely going to surface during any due diligence review by potential buyers. How much is that potential liability, plus penalties and interest? You don’t know, your prospective buyer doesn’t know, but they do know it’s a red flag. What else might there be? Other unrecorded assets? Unrecorded liabilities? What are they really buying? Suddenly your buyer cools off, doesn’t respond promptly to emails. And then they’re gone.
What happened? Didn’t they realize there’s hidden value here? Yes, but. It’s the “hidden” part that they are likely worried about. Hidden value offset by hidden costs? Since the best comprehensive statement of the value of your business is your financial records, and if those can’t be relied upon to a reasonable degree, how do they really get a handle on what they’re buying? Given the number of businesses that are coming to market as the current wave of baby boomer retirements builds, there are a lot of options for them to pursue that don’t involve a black box.
This is not to say you must have audited financial statements to affect a sale of the business. Most small and mid-sized businesses, even those with bank loans on their books, operate – and sell – without audits by CPAs. But that also means there is a greater need for reasonably accurate accounting that doesn’t have material misstatements over the years. And if it has in the past, one of the key tasks before you go to market the company is to develop a pattern of recent reporting that corrects those misstatements and properly reflects profits by period. That means fix the books and keep them fixed for a long enough period that you can stand behind your financial reports, knowing there is no hidden liability for taxes or other unrecorded risks. If you’re not sure how to do that, but it’s getting to be time to sell, give us a call.
We are your CFO for Rent.
If you own, operate or advise a privately owned company that leases equipment such as copiers, computers, factory machinery, vehicles, etc., the not-so-fun time is about to begin. The twice delayed start of the new accounting standards for leased assets – officially ASC 842 – is required to kick in on January 1, 2022, just 6 months away. Public companies have been dealing with this new standard since 2019, and now it’s your turn. So I decided to write a few posts over the next couple months about equipment leasing under the new reporting rules, to help get you started. Most of this material is taken from my online course on lease accounting, available at www.illumeo.com.
First, as a privately owned or family owned company, why do you even care about new accounting rules that are more challenging than the old rules? Well, if your financial reports are only for the management team and the owners, maybe you don’t. But if you have any reason to get your books audited by a CPA firm, e.g. for a bank loan or exit planning, your books will be required to be in accordance with GAAP – Generally Accepted Accounting Principles – and lease accounting under the new rules is an essential part of that. Of course, if that’s not your company, feel free to stop reading.
Wrinkle #1: The new rules apply to all future asset leases, but they also apply to assets already in use in your business. Those previously leased assets will probably have to be restated as if the rules had been in place when they were first acquired. That retroactive arithmetic will likely keep someone busy for quite a few hours recalculating the historical cost pattern under ASC 842.
Wrinkle #2: When you acquire equipment under an operating lease – where your intention is to use the asset for a period of time and then return it – you have typically just paid the monthly rental, expensed it, and nothing ever appeared on your balance sheet. Not anymore. Now those assets, if leased under a term longer than 12 months, must be capitalized on the books. So long-term rentals of equipment are gone.
Wrinkle #3: Do you record that asset at the sum of your committed lease payments? Nope. How about the sum of your lease payments less some imputed interest charge? Nope. The asset gets booked at the present value of all those lease payments, plus any initial direct costs, prepaid rent, and any guaranteed residual value payments. And that amount is then amortized on a straight line over the lease term. The liability gets similarly amortized, after recognizing the interest component at an appropriate rate.
So why did this happen anyway? Simply, because the world outside your company wants to compare your cost of doing business with comparable companies that buy their assets instead of leasing them. That comparison is distorted when assets are reported differently on balance sheets and income statements.
Stay tuned for more.
We are Your CFO for Rent ®
Dave Berkus, a seasoned angel investor, entrepreneur, author and board member, posted a solid article for young companies whose management team may think of their CFO as their internal accountant instead of a partner of the CEO in developing and refining strategy for the company. Read his thoughts at https://berkonomics.com/?p=4638.
We are Your CFO for Rent.
Will your employees steal from you? Did your former employees steal from you? How will you know? Certainly you’ll know if a desk or computer or truck goes missing. And if the company bank account comes up short, you’ll know that pretty quickly too. But some of your company’s most valuable assets aren’t so visible. Or they can be duplicated without the asset actually disappearing, even though their value may have sharply dropped without your even knowing it.
I’m talking about your intellectual property, or IP. Virtually every company has some, although some IP is much more valuable than others. The problem is that by the time you find out it’s been taken, the damage may already be done. Your golden goose may be laying eggs in someone else’s nest. For example:
- Your customer list may already have been shared with competitors.
- Your secret manufacturing process may be enhancing someone else’s gross profit margins.
- Your extensive software development project may have been replicated by a competitor within weeks, despite your taking months or years to develop it.
- Your trademarks and copyrights may have been cloned, and you’ll know that for the first time when the knockoffs appear.
The Commission on the Theft of American Intellectual Property estimates that annual losses due to IP theft in the US range up to $600 billion. Every year. And you can’t just send an army over to recover your property. Your only recourse upon discovery is often a lengthy court battle to prove something that’s not easy to prove. And if the thief is a foreign entity and not just a former employee – or worse in collaboration with that former employee – your task can be truly daunting.
OK, that’s the problem. How do you try to prevent it? Here are some questions to ask yourself:
- What are the ways in which our IP could potentially be compromised?
- Could the damage be minimized through legal means?
- Would a compromise cause real financial loss?
- How could the loss be measured?
- Are there ways in which the company could mitigate the loss?
Most of us are not smart enough, or tech savvy enough, to answer those questions without some professional help. But you can begin. For example, has your company attempted to make a list of its IP, so you know what exists that needs protecting? Do you have internal security policies in place that every employee knows about? Do you carefully vet potential new hires? Have you considered IP insurance as a source of compensation if it does happen?
While risk management is every CFO’s concern, my firm is not the place to help you develop effective IP protection strategies, but we know folks who are, and we’re happy to make a referral. Whether you’ve had a loss and your lawyers want technical help to prove it, or you are concerned that you have unprotected IP and you don’t know where to start, ask us. We know people.
We are Your CFO for Rent.
Congratulations! You’ve been asked to join a private company Board, either because you know the owners and they know you, or you have expertise they need and they want you. Either way, the opportunity is both an honor and an obligation – and a chance to fail. So how do you create the best chance for 2 out of 3, avoiding the failure part? Here are some solid pointers gleaned from a recent article published by the Private Directors Association.
- Perform a deep information dive prior to your official start to better understand the situation you’re about to enter. Understand the family dynamics, learn backgrounds of other Board members, interview the CEO about their view of key issues short and long term.
- Allocate ample time at the start to quickly build your depth of knowledge. Review strategic plans and budgets, prior Board minutes, any M&A activity past or under consideration, etc.
- Over time, interact with other members, C-Suite, and business unit heads. Get a thorough understanding of the company’s financials, succession planning (or absence thereof), litigation – past, present and possible.
- Visit, in-person or virtually, a representative sample of company sites and facilities.
- Be a keen observer of Board process dynamics such as interactions and information flows. How is information presented and how is it received, questioned, and resolved?
- Be an active contributor with a spirit of collaboration, contribution, and encouragement. Listen carefully, ask thoughtful questions, don’t be overbearing, and don’t get caught up in groupthink.
- Maintain continuity and forward momentum. You’re new, so review updates and progress reports, particularly on key issues, opportunities, and risks.
- Focus on demonstrating:
- Energy – Board positions are demanding. Maintain a high level of vigor.
- Communication – Engage in respectful conversation, listen attentively, be clear and succinct in your comments and questions.
- Courage – Be comfortable offering an independent point of view. That’s why you’re here.
- Absorption and synthesis – Lots of information to absorb; dedicate the time necessary to get educated.
- Emotional intelligence – Recognize emotional cues and use emotional information to guide your thinking and behavior. Mentally step into the shoes of others before asserting yourself.
- Detachment – Maintain a healthy level of detachment separate from any social engagement with the CEO or executive team. It’s about what’s best for the company.
- Humility – Checking egos at the door and self-effacement provide the strongest foundation for collaboration.
- Sense of humor – Embrace humor in yourself and others. It helps dissipate and release tensions, facilitating a stronger team dynamic.
You have a lot to contribute, otherwise you wouldn’t be there. Doing the homework and hitting the ground running in a private company Board role will accelerate your contribution to the success of the business. And after all, isn’t that the only reason to be there?
We are Your CFO for Rent.
Most business owners think of Working Capital as the amount of cash they have in the bank. But virtually all financial analysts, advisors and lenders define it as the difference between Current Assets and Current Liabilities. One sounds simple and easy to understand, the other a bit esoteric. Why do they make it so complicated? The answer: because it really matters.
Cash in the bank is real and always dependable – today. But what about tomorrow? Many business owners don’t get regular forecasts of future cash balances or future cash flows, which often results in a surprise when the customers don’t pay on time or an unexpected expense suddenly arrives at the door. If cash is tight that surprise can be alarming or worse.
So let’s look a little deeper. Current Assets are those things a company owns that are either cash or will become cash in the next 12 months, typically mostly composed of accounts receivable and inventories. Those are the assets that will convert into cash for the purpose of paying the Current Liabilities, those that are due for payment in the next 12 months. A quick look at a company’s balance sheet will usually show that current assets are more than current liabilities – a good thing since that’s where the resources to pay the bills will come from. But wait a minute. What if the assets are only slightly larger than the liabilities? And what if the receivables contain some slow paying customers, pretty common these days, especially if your customers were impacted by COVID? And what if the inventories include some stock that is slow moving – meaning we hope it’s not dead yet? Now those assets are going to turn into cash more slowly, and some of them might not make the turn at all. Oops! It’s not likely you can call your creditors and tell them you’ve got to write down some of your assets so you’ll have to write down some of your liabilities too, to keep things in balance. Wouldn’t that make it easier?
So what’s the takeaway from this little financial management tidbit? Here are a few:
- The spread between current assets and current liabilities, if it’s consistently too narrow, may mean your margins are too thin, and that’s a whole different set of problems.
- Strive to have $2 of current assets for every $1 of current liabilities, just to provide a robust cushion against the issues noted above.
- If you manage your current assets carefully, your current liabilities will almost manage themselves. That means collect your receivables and pay attention to your inventory.
If you manage your Working Capital effectively, tomorrow’s cash will be positive, and that’s a good thing.
We are Your CFO for Rent.
Back in the 80s, after a couple years of military service this young man started out as a CPA, grew to become a CFO for mid-sized private and public companies, and then decided to go out on his own as a financial management consultant. As for the timing, not great. The young public company he had helped build got sold to a venture capital firm that had their own ideas about what the management team should look like. Exit the entire management team. While this was totally unplanned, he felt very strongly the need in the marketplace for what is now called a Fractional CFO. On day 1 he hung out his shingle – with no clients, no prospects, no network, and minimal savings. Paying the home mortgage was still a requirement, as other debt began to pile up while trying to get the business off the ground.
Eventually the debt became overwhelming and way past due. Credit cards were tapped out, stock granted by the young public company was pledged for a loan that was defaulted. Not much was left but the original idea of a consultancy. Out of options, this young man filed for bankruptcy and relinquished every valuable asset except his home (and the mortgage).
Faced with an opportunity to consider his next move – mom would say “get a real job” – he chose to follow his heart and continue building his consulting business. The days went by. Then, seeds planted earlier began to sprout. A client signed on, and then another. Networking connections began to remember the name and the mission. More referrals followed by more engagements leading to more positive feedback into the business community. Within a few years the need for more consulting capacity became evident, leading to adding a second consultant to the growing firm, and then another.
Today that firm – known as Your CFO for Rent® – is a successful, well regarded boutique firm with 6 seasoned CFOs as consultants. We are as strong today as any other time in our 35-year history. I am grateful to everyone who helped me along the way, and there were a lot of you, believe me.
What’s the point of the story? If you can look in the mirror and honestly tell yourself:
- you are strong in your belief about the path you’ve chosen,
- you are persistent in getting up after every time you get knocked down, and
- you are not afraid to ask for help when you don’t know what to do,
then your success is virtually assured. Of course, it wouldn’t hurt to have some savings or friends & family money to help you get started. It’s harder the other way, I can say with some assurance. Been there, done that.
We are Your CFO for Rent.
Nick Neimann, a business friend of mine (we occupy adjacent seats on a family owned business advisory board) wrote a book a few years ago to help family business owners think about their exit in a more effective way. His book, “Fourth Quarter First,” tries to get business owners to look down the road further than they typically do, in order to get the best possible result when that time finally arrives. The concept isn’t new, but the thoroughness of his approach will give many owner/operators of well-run businesses some food for thought. I particularly like his chapter 6, which carries the bold title: 12 reasons for incredible “Fourth Quarter” results. I like it mostly because of the solid list that follows, so I’m going to reproduce it here, with credit to Nick:
- Sustainable Business Growth – a no-brainer if there ever was one – no one buys history.
- Capable Leadership and Successors – read my post from last week for my thoughts on this one.
- Co-owner Issues and Disputes Avoided Up Front – Resolve issues early via buy-sell agreements and the like.
- Well Designed Company Structure and Key Asset Protection – This speaks to intellectual property protection and other legal tools that protect its most valuable assets.
- Clear and Consistent Owner Objectives – it sounds like having a plan, but it’s also ensuring that personal and company plans are consistent with one another, short term and long-term.
- Cash Flow Impact on Company Price is Determined – You should know that the price of your company will ultimately be determined by its predictable future cash flow, emphasis on predictable.
- Management of Personal Wealth – Ensure you have managed your personal wealth so that your personal needs will not impact your flexibility in making the best deal for the company.
- Business Owner Estate Plan – There are estate planning differences to take into account when you have a business and a family, and you’ve considered that in your estate plan.
- Keeping the Business Always Ready for Sale – This is about “fourth quarter” timing, and its impact on current earnings.
- Pre-Exit Tax Tools – You’ve taken steps to legally minimize the tax bite regardless of when you sell.
- Capable Inside Buyer Exists – You have groomed an insider – partner, key employee, family member – to be ready to step in when it’s time.
- Understanding the M&A Market – Another no-brainer; understand the marketplace in which you will be dealing, or have the right advisor(s) around you to support that need.
Clearly I could write an article on each of those points. Nick wrote 290 pages on them and did a great job of it. You might want to read the original to fill in the details we didn’t have room for here.
We are Your CFO for Rent®
Call it leverage. Call it borrowing. Call it debt. All ways of saying that you got a loan to help your business grow (or, in 2020, to survive). This is not the free debt you get from delaying paying your bills, this is: go to the bank, ask for money, agree to pay interest on that money and to pay it back at some point. Virtually every business needs leverage at one time or another to take advantage of opportunities or to acquire the assets your business needs to operate effectively. To a point.
Some years ago we were engaged by a new client in Texas to guide the growth of their CFO as the company grew. One of the firsts things we noticed was the borrowed money, mostly to buy real estate, at interest rates that had not been renegotiated in several years, despite the (then) historically low rates that were available. We saved that company several hundred thousand dollars over the term of those loans by getting them to recompete those loans and lower the interest rates. And the winning lender was – their existing lender, who didn’t want to lose the business.
This year I took that strategy to my personal real estate loan portfolio and have gotten rates lowered on two properties – two more in process – by simply asking the lender to consider it before I looked elsewhere for a refinance. None of the lenders refused, because they wanted to keep the business, knowing that other lenders would gladly refinance those loans.
Recently we were engaged by a small but growing company who had survival loans on their books at double digit rates from a financing source that thrives on advertising ease and speed and generous terms, as long as you’re willing to pay whatever rates they ask. Inadequate financial reporting helped to keep the real impact of that lending from shocking borrowers into a refinance.
So what’s the point? Obviously it’s about holding onto today’s (again) historically low rates by looking at your own lending to see where a refinance, or a simple request, can get you a lower cost for the balance of the life of your loan. Even a single percent reduction can produce thousands of dollars in savings over the remaining term, but the bank is not going to call you and ask if you want to pay them less. The action has to come from you. So get borrowed money when you need it. But get it at a reasonable price as that is defined over time. And today, reasonable is LOW. Check out my blog from a couple weeks ago on yield curve to better understand how this can change, and then get busy.
We are Your CFO for Rent.