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Boosting Your Working Capital: Small Steps for Big Gains

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The COVID-19 pandemic has had a drastic impact on the economy as the gross domestic product dropped nearly 33%. For small and medium-sized businesses, it created unprecedented cash flow challenges, as many struggled to maintain a steady stream of revenue.

But now, as the pandemic continues to ease, businesses should revisit their working capital plan to bolster their cash flow for the future.

Key drivers of healthy cash flow

By understanding all the ways you can increase your organization’s working capital and improve cash flow, you can best set your business up for long-term success. The following techniques can help:

  1. Carefully manage debt. Another side effect of the pandemic? High corporate debt. You can enhance your working capital by meeting your debt obligations in a timely manner, avoiding additional interest, fees and penalties. Find out if your organization qualifies for a more favorable interest rate to settle debt faster.
  2. Receive sufficient financing. Don’t let the fear of healthy debt keep you from making smart financing Short-term business loans can help supply enough liquidity to finance current operations without excessive risk. Take the time to determine your working capital needs, as well as your forecasted needs, before selecting any financing.
  3. Issue invoices on time. Limiting the time between your operating cycle (when you begin spending money on a project) and your capital cycle (when you finally collect money for a project) can help you earn a profit quicker and improve liquidity.
  4. Make sure you’re not overspending. Examine your budget, breaking down each component to see where you’re spending and what you’re spending. Are there areas of overspending or spending unnecessarily? Are business trips essential? By curbing the extras, you can improve your working capital.
  5. Take control of your inventory. Did you know that well-managed inventory is arguably the most powerful way to drive working capital increases? Avoid stockpiling product, improve turnover cycles and reduce slow-moving inventory.
  6. Grow your sales revenue. While this one may seem obvious, think about how you can generate more sales to earn higher profits. For example, examine your profit margin to determine if your prices are up to date. And explore new marketing channels to reach more customers.

 

The lifeblood of your business

Working capital is essential to your business — especially small and medium-sized businesses that often can’t raise funds as easily as large corporations. Reach out to the CPAs at Magone & Company to learn how we can help you maintain a healthy cash flow.

Financial Check-up: Is Your Organization Fiscally Fit?

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Comprehensive financial statements can help tell the story of your organization’s financial health. Together, a balance sheet, income statement and statement of cash flows can be powerful diagnostic tools to help evaluate its financial well-being. Moreover, by carefully analyzing them, you may be able to uncover potential money-management problems or even fraudulent activity.

Assets vs. liabilities — The balance sheet

A balance sheet provides a snapshot of a company’s financial health at a moment in time. One side shows the assets owned by a company, such as cash, accounts receivable and inventory. The other side contains liabilities or claims on the assets, including accrued expenses, accounts payable and equipment loans.

Current assets (such as receivables) mature within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as payables) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which assets exceed liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your company’s liabilities exceeds the value of its assets, net worth will be negative.

A focus on profits — The income statement

The income statement reports revenue, expenses and profits earned (or losses incurred) over a given period. A commonly used term when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Another important term — “net income” — describes income remaining after all expenses (including taxes) have been paid.

Sales, general and administrative expenses (SG&A) are also indicated on income statements, reflecting business functions, such as marketing, that support a company’s production of products or services. The ratio of SG&A costs to revenue tends to be relatively fixed — no matter how well your business is doing. If these costs constitute a rising percentage of revenue, business may be slowing down.

The income statement can reveal other potential problems. It may show a decline in gross profits, as expenses rise quicker than revenue. Common causes include hiring more employees than needed or doing an excessive proportion of low- or no-margin business. In today’s business environment, many companies are reporting lower gross margins due to rising labor and materials costs — unless they’ve managed to pass along these cost increases to customers through higher prices.

Cash is king — The statement of cash flows

The statement of cash flows shows all the cash coming in and out of a company. Your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt. Ideally, a company will derive enough cash from operations to cover its expenses. If not, it may need to borrow money or sell stock to survive.

The statement of cash flows shows changes in balance sheet items from one accounting period to the next. It’s organized into cash flows from three primary sources:

  1. Operations
  2. Investing activities
  3. Financing activities

To complicate matters, non-cash investing and financing transactions are reported at the bottom of the statement of cash flows. These transactions don’t involve direct cash exchanges. For example, a machine that’s purchased directly with loan proceeds would be reported here.

Although this report may seem similar to an income statement, its focus is solely on cash. A product sale might appear on the income statement, even though the customer won’t pay for it for another month. But the money from the sale won’t appear as a cash inflow until it’s collected.

To remain in business, your company must continually generate cash to pay creditors, vendors and employees, watching your statement of cash flows closely.

 Ensuring tip-top financial shape

Financial statements can be valuable for many purposes — whether you’re evaluating the financial results of your own business or one that you’re considering acquiring, lending to or investing in. An experienced professional can help you assess your company’s financial health, including potential risks and areas of improvement.

Budget for Success: Your Essential Tool for Business Planning, Financing and More

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Is your business in growth mode?

Over the years, we’ve heard from too many business owners that their budget is in their head. And that may work for some in the beginning — as long as you’re not looking to grow.

As your business expands, there’s a spend against revenue. If you grow by $500,000 or a million, for example, you may need to hire more employees — so you’re going to spend more dollars. A monthly budget will help you figure out how much you can spend to still achieve your revenue goals.

And what business can’t benefit from that?

Beyond crunching the numbers

At Magone & Company, we recommend that most business owners have two to three different budgets:

  • Internal planned budget
  • Overachievement budget
  • And a budget that considers negative outcomes

Your planned budget is the one you’ll present to banks and investors when looking for financing opportunities. The other types are used when analyzing trends for the year.

As you’re forecasting trends, involve your sales team to speak with customers to gather input. What will your customers buy? How much will they spend? You can also refer to previous forecasts and estimate sales based on past purchase orders. For example, if you had purchase orders for $2 million in sales, but your overall sales for the year were $2.75 million, you can budget 35% of sales will be unplanned by your customer base.

All hands on deck

Budgeting involves more than your sales department — from your inventory team to HR to marketing and more:

  • Is there enough warehouse space?
  • Do you have a team of employees to carry out the projection?
  • Did customers indicate they’ll buy the same quantities?
  • Are customers looking for a price reduction?

Once the budget is complete, you’ll need a consistent close process to produce the actual results and analyze variances, so you can make changes to your headcount, pricing or other factors. Remember, as a business owner, you want to have the ability to change strategy and still achieve results.

Take control of your business growth

In celebration of our 30th year in business, we’re rolling out a series of educational videos to help busy executives, families and business owners meet their accounting and tax needs and achieve their financial goals.

Check out the latest on our YouTube channel, or call us at (973) 301-2300 for help setting up a business budget.

 

Executive Pay and Fringe Benefits: Is Your Compensation Plan Triggering an Audit?

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Executive compensation has evolved dramatically in recent years, in terms of creativity, complexity and dollar value. For example, stock options, deferred compensation, fringe benefits and other “non-cash” alternative forms of payment are becoming increasingly popular at business types of all sizes, making up a larger portion of executives’ overall compensation packages.

But creativity isn’t fooling Uncle Sam. The IRS is well aware that executives often receive extraordinary (and potentially taxable) fringe benefits that are not provided to other employees.  And executive perks that are not properly reported can land both you and your company in hot water.

Under the IRS’s watchful eye

If your organization does get audited, here’s what you might expect as the IRS examines your executive compensation and fringe benefits:

  • Assessment of corporate executives and officers to identify the highly compensated employees and determine who is responsible for approving and processing their payments.
  • Review of meeting minutes concerning executive compensation. In this case, auditors are looking for decisions and instructions about the treatment of fringe benefits.
  • Inspection of employment contracts and severance agreements to identify salaries and benefits.
  • Examination of loan agreements between the corporation and executives and officers. 
  • Evaluation of monthly expense reports submitted by executives.
  • A search of accounts payable records for the names, titles and Social Security numbers of executives to establish if payments made to them were included on their Forms W-2 or 1099.
  • Examination of any documents filed with the Securities and Exchange Commission, such as Form 10-K, to identify compensation issues.
  • Scrutinizing of payroll codes or other accounting codes which might be used for executive expenses to detect payments which may be taxable.
  • Analysis of certain items on tax returns to see if fringe benefits have been claimed.

Getting ahead of an audit

When it comes to executive compensation, getting the details right and staying in compliance can be a daunting task. Reach out to the CPAs at Magone & Company to ensure your company’s executive compensation plans are in line with IRS regulations.

The Right Time to Build a Banking Relationship? Right Now

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If you think about it, running a business is largely about building relationships. And establishing a solid banking relationship is one of the most critical moves you can make as a business owner.

When is the appropriate time to begin forming this relationship? According to CPA Nick Magone, Managing Partner of Magone & Company, “Immediately — before you need the money.”

Get the ball rolling on the relationship

Banks typically offer three levels of financing:

  • Branch level – up to $250K
  • Small business lending – $1-5 million
  • Middle marketing lending – Over $5 million

To get started, reach out to your branch manager, and they’ll introduce you to the correct contact for your future lending needs.

Become the ideal borrowing candidate

What are banks looking for? First and foremost, if your business isn’t profitable, or isn’t able to show a track record of profitability, the bank will not loan you money. Remember, the bank is not your business partner.

Banks also need to have a clearcut understanding of your business and what it brings to the table for them. For example, how many of their services will you use? Will you need their treasury or cash management services in the future? In other words, they are looking for a profitable relationship. Bankers are more than accommodating to get to know you, especially if there is business to be had.

The first meeting

While in-person meetings are preferable, a video meeting can be just as effective for introducing yourself and your business. A typical presentation may include:

  • An overview of your business and management team, including who you are and the number of years in business overall.
  • The market your business serves, including the top 10 suppliers and customers.
  • Your high-level budget for the year, e.g. cost of goods sold, wages, administrative costs, etc.
  • The performance of the budget, as well as the trend for expected revenue and profitability throughout the year.
  • Future plans for growth, acquisition or inventory that may require financing.

The takeaways

Says Magone, “The three main points to keep in mind: Get to know your banker before you need the money; invite your banker to a meeting before you need the money; and, profitability and performance are key to having your loan approved.”

30 years of experience and expertise

In celebration of our 30th year in business, we’re rolling out a series of educational videos to help busy executives, families and business owners meet their accounting and tax needs and achieve their financial goals. Check out the latest on our YouTube channel.

Getting Ahead of 2023 IRS Cryptocurrency Reporting Requirements

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Know those 1099-B forms that show up at tax time from your broker? Well, if you’re dabbling in cryptocurrency, you’ll soon be seeing more of them.

Starting in 2023, U.S. legislation now extends the same transaction reporting rules to cryptocurrency exchanges, custodians or platforms (e.g., Coinbase, Gemini or Binance), as well as digital assets, such as cryptocurrency (e.g., Bitcoin, Ether or Dogecoin). The same legislation also puts into effect cash reporting rules for payments of $10,000 or more to cryptocurrency. That means businesses accepting payments of $10,000+ in cryptocurrency will have to report those earnings to the IRS (using Form 8300).

How is this different than in the past?
The legislation, enacted in 2021, expanded the definition of “brokers” who must furnish Forms 1099-B to include businesses that are responsible for regularly providing any service accomplishing transfers of digital assets (also known as virtual currencies) on behalf of another person (for example, cryptocurrency exchanges). Thus, any platform on which you can buy and sell cryptocurrency will have to report digital asset transactions to you and the IRS at the end of each year.

The cryptocurrency exchanges/platforms will have to gather information from customers, so that they can properly issue Forms 1099-B. But it’s not yet known whether an exchange/platform will have to file Form 1099-B itself (modified to include digital assets) or some other new IRS form.

Digital assets defined
For these reporting requirements, a “digital asset” is any digital representation of value recorded on a cryptographically-secured distributed ledger or any similar technology. The definition could also potentially include some non-fungible tokens (NFTs) that use blockchain technology for one-of-a-kind assets like digital artwork.

Separate from the broker reporting rules, a business that receives $10,000 or more in cash must report the transaction to the IRS on Form 8300. For this cash reporting requirement, businesses will treat digital assets like cash.

What to expect moving forward
If you use a cryptocurrency exchange or platform, and it has not already collected a Form W-9 from you (seeking your taxpayer identification number), expect it to do so.

Cryptocurrency exchanges and platforms, in addition to collecting information from their customers, will begin tracking the holding period, and the buy and sell prices of the digital assets in your accounts. Be aware that transactions subject to the new reporting rules will include not only the selling of cryptocurrencies for fiat currencies (government-issued currency, such as the U.S. dollar), but also exchanges of cryptocurrencies for other cryptocurrencies. 

It’s also good to keep in mind that the cryptocurrency exchanges or platforms may not have all the information they need to meet their reporting requirements under the new rules. So be patient, because it may be a challenging first year to get the information you need.