Category Archives: Business

FASB: Close-up on Restricted Cash

The FASB wants to fix inconsistent reporting

DanReilly-07 HighResThe Financial Accounting Standards Board (FASB) has amended U.S. Generally Accepted Accounting Principles (GAAP) to clarify the guidance on reporting restricted cash balances on cash flow statements. Until now, Accounting Standards Codification Topic 230, Statement of Cash Flows, didn’t specify how to classify or present changes in restricted cash. Over the years, the lack of specific instructions has led not-for-profit entities and other businesses to report transfers between cash and restricted cash as operating, investing or financing activities — or a combination of all three.

The new guidance essentially says that none of the above classifications are correct.

FASB members hope the amendments will cut down on some of the inconsistent reporting practices that have been in place because of the lack of clear guidance.

FASB Prescriptive guidance
Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, still doesn’t define restricted cash or restricted cash equivalents. But the updated guidance requires that transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents be excluded from the entity’s operating, investing and financing activities. In other words, the details of those transfers shouldn’t be reported as cash flow activities in the statement of cash flows at all.

Instead, restricted cash and restricted cash equivalents balances and activities are treated the same as other cash and cash equivalents balances and activities on the statement of cash flows.  If the cash flow statement includes a reconciliation of the total cash balances for the beginning and end of the period, the FASB wants the amounts for restricted cash and restricted cash equivalents to be included with cash and cash equivalents. When, during a reporting period, the totals change for cash, cash equivalents, restricted cash and restricted cash equivalents, the updated guidance requires that these changes be explained.

Moreover, a not-for-profit entity or other business must provide narrative and/or tabular disclosures about the nature of restrictions on its cash and cash equivalents.

Effective dates
The updated FASB guidance goes into effect for public companies in fiscal years that start after December 15, 2017. Not-for-profit entities and private companies have an extra year before they have to apply the changes. Early adoption is permitted. Please contact Dan Hout-Reilly, CPA, CVA, Ciuni & Panichi, Inc. Audit and Accounting Service Department Manager, at 216.831.7171 or dhout-reilly@cp-advisors.com if you have additional questions about reported restricted cash or any other items on your organization’s statement of cash flows.

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Private Companies and Financial Reporting

Taxes and Cost Segregation

 

Private Companies and Financial Reporting

Private companies:  Consider these financial reporting shortcuts

private publicFor 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 approving the establishment of the Private Company Council (PCC), a new body to improve the process of setting accounting standards for private companies.  The PCC advises the FASB on appropriate accounting treatment for private companies.  Under PCC’s advice the FASB has issued 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. 2014-02, Intangibles — 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, replacing the requirement to test for impairment annually with a requirement to test when a triggering event occurs that indicates the asset may be impaired.
  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 provides entities with a practical expedient to qualify for cash flow hedge accounting treatment when they use vanilla interest rate swaps to convert variable-rate borrowings into fixed-rate borrowings.
  3. ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This allows a lessee to elect an alternative not to apply VIE guidance to a lessor entity under certain circumstances.  It’s important to note that the FASB is currently considering expanding this alternative: In June 2017, the FASB issued a proposal that would expand the accounting alternative to include all private company common control arrangements if both are not public business entities.
  4. 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 non-competes and certain customer-related intangibles — acquired in a business combination, separately from goodwill.  If elected, the guidance established with ASU 2014-02 must be adopted to amortize goodwill.

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. To learn more, contact George Pickard, CPA, MSA, Ciuni & Panichi, Inc. Senior Manager at gpickard@cp-advisors.com or 216-831-7171.

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Credit Cards and Fraud

Business Operations and Income Statements

 

Timeliness Counts in Financial Reporting

laterDon’t delay in closing books

Do you procrastinate when it comes to closing your books and delivering year-end financial statements? Lenders and investors may think the worst if an organization’s financial statements aren’t submitted in a timely manner. Here are three assumptions your stakeholders could make when your financial statements are late.

You are hiding negative results
No one wants to be the bearer of bad news. Deferred financial reporting can lead investors and lenders to presume that your organization’s performance has fallen below historical levels or what was forecast at the beginning of the year.

Your management team is not up to the task at hand
A delay in statements may lead to questions regarding your controller’s experience, the depth of your accounting department, or your overall ability to deal with a changing accounting landscape.  Fair or not, your stakeholders may assume any or all of the above concerns and that you and your team cannot pull together the requisite data to finish the financials.

Delayed statements may also signal that management doesn’t consider financial reporting a priority. This lackadaisical mindset implies that no one is monitoring financial performance throughout the year.

You are more likely to be a victim of occupational fraud
If financial statements aren’t timely or prioritized by the organization’s owners, unscrupulous employees may see it as an opportunity to steal from the organization. Fraud is more difficult to hide if you insist on timely financial statements and take the time to review them.  Assume your stakeholders are savvy and understand the control provided by strong reporting – and the potential for fraud when that reporting is absent or delayed.

Get back on track
Late financial statements cost more than time; they can impair relations with lenders and investors.  And specifically for not-for-profit organizations, they can negatively impact the opinions of donors and board members. Regardless of your reasons for holding out, timely financial statements are a must for fostering goodwill with outside stakeholders.

We can help you stay focused, work through complex reporting issues and communicate weaker-than-expected financial results in a positive, professional manner. Contact Herzl Ginsburg, Ciuni & Panichi, Inc. Audit and Accounting Services Department Manager, at hginsburg@cp-advisors.com or 216-831-7171 to learn more.

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Digital Marketing for Your Business

Business Operations and Income Statements

 

Digital Marketing for Your Business

Four digital marketing tips for every business

Photo woman working with new startup project in modern loft.You’d be hard pressed to find a company not looking to generate more leads, boost sales and improve its profit margins. The first step is creating awareness of your services and more importantly your expertise. Fortunately, today’s digital technologies make it easier to accomplish both tasks.

Here are four digital marketing tips for every business to consider:

  1. Add quality and current content to your website. Helpful blog posts, articles and even whitepapers can establish your business as a knowledge leader in your Few things disappoint and disinterest customers like an outdated or unchanging website. Give your visitors a reason to return.

    Review your website and add fresh content regularly to ensure it doesn’t look too old. Photos and videos are especially interesting to visitors. Beware, however, that posting amateurish-looking videos could do more harm than good. If you don’t have professional video production capabilities, you may need to hire a professional.  Finally if you haven’t updated your overall website design in a few years, it’s time.

  2. Leverage social media. If you’re not using social media tools already, focus on a couple of popular social media outlets, most definitely LinkedIn and perhaps Facebook and Twitter. Actively post content on them, including photos. Check the analytics regularly. LinkedIn, Facebook, and Twitter offer pretty detailed tracking so the you can see what content generated likes, clicks and re-tweets giving you insight to what appeals to your audience.
  3. Interact frequently. This applies to all of your online channels, including your website, social media platforms, email and online review sites. For example, be sure to respond promptly to any queries you receive on your site or via email, and be quick to reply to questions and comments posted on your social media pages.
  4. Keep your message concise and consistent with your brand. Remind your audience of what your business can do for them at every opportunity. The point is to help your customers and potential customers become aware of your services and/or products so they will think of you when they need them.

When it comes to marketing, you don’t want to swing and miss. Ciuni & Panichi, Inc. offers a full range of marketing advisory services to help you promote your business. To learn more, contact Jenna Snyder, at jsnyder@cp-advisors.com or 216-831-7171.

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2017 Q3 Tax Calendar

Make Collections a Priority

 

Taxes and Cost Segregation

Could a cost segregation study save your company taxes?

cost segregationIf your business has acquired, constructed or substantially improved a building recently, consider a cost segregation study. One of these studies can enable you to identify building costs that are properly allocable to tangible personal property rather than real property. And this may allow you to accelerate depreciation deductions, reducing taxes and boosting cash flow.

Overlooked opportunities
IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Often, businesses will depreciate structural components (such as walls, windows, HVAC systems, elevators, plumbing and wiring) along with the building.

Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, companies allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be part of a building may in fact be personal property.

Examples include:

  • Removable wall and floor coverings,
  • Detachable partitions,
  • Awnings and canopies,
  • Window treatments,
  • Signage, and
  • Decorative lighting.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. Examples include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations, and dedicated cooling systems for server rooms.

A study in action
Let’s say you acquired a nonresidential commercial building for $5 million on January 1. If the entire purchase price is allocated to 39-year real property, you’re entitled to claim $123,050 (2.461 percent of $5 million) in depreciation deductions the first year.

A cost segregation study may reveal that you can allocate $1 million in costs to five-year property eligible for accelerated depreciation. Reallocating the purchase price increases your first-year depreciation deductions to $298,440 ($4 million × 2.461 percent, plus $1 million × 20 percent).

Impact of tax law changes
Bear in mind that tax law changes may occur this year that could significantly affect current depreciation and expensing rules. This in turn could alter the outcome and importance of a cost segregation study. Contact our firm for the latest details before you begin.

On the other hand, any forthcoming tax law changes likely won’t affect your ability to claim deductions you may have missed in previous tax years.

Worthy effort
As you might suspect, a cost segregation study will entail some effort in analyzing your building’s structural components and making your case to the IRS. But you’ll likely find it a worthy effort.

A look-back study may also deliver benefits
If your business invested in depreciable buildings or improvements in previous years, it may not be too late to take advantage of a cost segregation study. A “look-back” cost segregation study allows you to claim missed deductions in qualifying previous tax years.

To claim these tax benefits, we can help you file Form 3115, “Application for Change in Accounting Method,” with the IRS and claim a one-time “catch-up” deduction on your current year’s return. There will be no need to amend previous years’ returns.

The best advice we can offer is, “don’t go it alone.” Contact Tony Constantine, CPA, Ciuni & Panichi, Inc. Tax Partner, at tconstantine@cp-advisors.com or 216-831-7171. He can help you make sure you are not missing any of the tax benefits available to you.

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2017 Q3 Calendar

Make Collections a Priority

2017 Q3 Tax Calendar

Key tax deadlines for businesses and other employers

tax-formHere are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us at 216-831-7171 or info@cp-advisors.com to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.)
  • File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

  • If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    - File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    - Make contributions for 2016 to certain employer-sponsored retirement plans.

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Taxes and Operating Across State Lines

Preparing for an IRS Audit

Business Operations and Income Statements

Put your income statement to good use

JerardLocktish-(High)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 industry-wide trends by comparing them to public companies in the same industry. Also, monitor trade publications, trade associations and the Internet for information.

The best advice we can offer is: “don’t go it alone.” Ciuni & Panichi, Inc. offers a wide range of management advisory services to help you keep your company operating in the black. Contact Jerad Locktish, CPA, Manager, at jlocktish@cp-advisors.com or 216-831-7171.

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Preparing for an IRS Audit

Taxes and Operating Across State Lines

Preparing for an IRS Tax Audit

Business owners: When it comes to IRS audits, be prepared

IRS Audit2If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.

Catching the IRS’s eye
Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:

  • Significant inconsistencies between previous years’ filings and your most current filing,
  • Gross profit margin or expenses markedly different from those of other businesses in  your industry, and
  • Miscalculated or unusually high deductions.

An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.

How to respond
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the field audit requires meeting with one or more IRS auditors.

More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS selects you for an audit, we can help you to:

  • Understand what the IRS is disputing (it’s not always crystal clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most expedient and effective manner.

Our best advice is: Don’t go it alone. Contact Jim Komos, CPA, Ciuni & Panichi, Inc. Tax Partner, at jkomos@cp-advisors.com or 216-831-7171.

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Taxes and Operating Across State Lines

Make Collections a Priority

Taxes and Operating Across State Lines

Presents Tax Risks and Rewards

state lineIt’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.

But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings.

Do you have “nexus”?
Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:

  • Employing workers in the state,
  • Owning (or, in some cases even leasing) property there,
  • Marketing your products or services in the state,
  • Maintaining a substantial amount of inventory there, and
  • Using a local telephone number.

Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.

Strategic moves
If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.

Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.

The complexity of state tax laws offers both risk and opportunity. Contact Ciuni & Panichi, Inc. for help ensuring your business comes out on the winning end of a move across state lines.

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Could stronger governance benefit your business?

How to shape up your working capital.
© 2017

Governance and Your Business

Could stronger governance benefit your business?

FAEEvery company has at least one owner. And, in many cases, there exists leadership down through the organizational chart. But not every business has strong governance.

In a nutshell, governance is the set of rules, practices and processes by which a company is directed and controlled. Strengthening it can help ensure productivity, reduce legal risks and, when the time comes, ease ownership transitions.

Looking at business structure
Good governance starts with the initial organization (or reorganization) of a business.

Corporations, for example, are required by law to have a board of directors and officers and to observe certain other formalities. So this entity type is a good place to explore the concept.

Other business structures, such as partnerships and limited liability companies (LLCs), have greater flexibility in designing their management and ownership structures. But these entities will benefit greatly from strong governance with well-designed partnership or LLC operating agreements and a centralized management structure. They might, for instance, establish management committees that exercise powers similar to those of a corporate board.

Specifying the issues
The corporate model is an excellent framework to use to help establish strong governance in your company, regardless of its size or ownership structure. An important factor is to have clear and documented business articles and bylaws defining the roles and responsibilities of leadership and, if you have them, board members. For example: the organizational documents might:

  • Define and limit the authority of each executive,
  • Establish a board of directors or internal executive committee
  • Require board approval (or specific leadership approval) for certain actions,
  • Authorize the board to hire, evaluate, promote and fire executives based on merit,
  • Authorize the board to determine the compensation of top executives and to approve the terms of employment agreements, and
  • Create nonvoting classes of stock to provide equity to the owner’s family members who aren’t active in the business, but without conferring management control.

As you look over this list, consider whether and how any of these items might pertain to your company. There are, of course, other aspects to governance, such as establishing an ethics code and setting up protocols for information technology.

Knowing yourself
Strong governance is all about knowing your company and identifying the best ways to oversee its smooth and professional operation. For help, please contact Ciuni & Panichi, Inc.’s Frank Eich, CPA, MBA, senior manager, at feich@cp-advisors.com or 216-831-7171.

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Customer Collections

Make collections a priority

collectionsA new customer you’ve been cultivating for some time finally places a custom order. The production team works diligently to meet the customer’s expectation as well as the order’s two-week deadline. The final product ships on time and the team members are congratulating each other on a job well done. But what’s missing?

Everyone was so preoccupied with completing the sale and producing the product that no one bothered to check the customer’s credit or collect a down payment. What’s more, a billing clerk had to chase down the sales rep and plant manager to get all the necessary information to accurately complete the invoice — which was mailed a month after delivery. Now, everyone’s attention has returned to making the next sale or batch of product, leaving no one to follow up on payment.

If this sounds familiar, you’re not alone. Scenarios like this play out in factories from coast to coast, costing them all big bucks in the long run.

Manufacturers need to take a hard look at their billing practices. Here are some collection process procedures to consider implementing:

Make collections everyone’s job. Every employee has a role in making sure the company gets paid. Salespeople must obtain accurate billing information from customers (phone numbers, email addresses and names of payables personnel), as well as request approval to perform credit checks. They also need to negotiate contract terms — such as early-bird discounts, late payment penalties and down payments on custom orders — that will help get money in the door faster. The owner or CFO should approve all new customers and terms before the accounting department sets them up in the system.

In addition, factory workers need to code jobs properly and notify the billing department when orders ship. In return office personnel must promptly submit invoices and follow up on unpaid accounts.

Make sure your workers understand their roles in realizing revenue. And give them adequate training and tools to get the job done efficiently.

Streamline the billing process. You can’t collect what you don’t bill. Set up formal procedures that trigger an invoice as soon as the delivery truck pulls away from your dock. Electronic billing systems allow companies to send invoices via email or text. Most e-billing systems also enable online payment and purchase orders, as well as automatic re-orders, if applicable.

Assign dedicated collection personnel. Dedicated representatives should be assigned to handle each customer’s billing issues. This encourages office staff members to develop a rapport with customers. They should monitor all new accounts closely at first and become more flexible as the relationship develops.

Manage overdue accounts. Someone, possibly your controller or finance officer, should be in charge of monitoring when payments are made. Each week, he or she should report to the owners about the percentage of receivables in the 0–30 days category, 31–60 days category, and beyond. Doing so allows you to detect and reverse negative patterns before they have a business impact.

Develop a timeline for acting on overdue accounts. For instance, after 45 days, you might call or send a reminder text to customers who haven’t responded after the first bill. By pursuing these accounts before too much time has passed, you send the message that the company intends to get paid but is willing to work with the customer to resolve payment-related questions or problems.

Provide performance incentives. Too often, incentives are based on revenues, not profits or cash flow. Consider structuring your incentive program based (at least partially) on collections. For example, offer a bonus to workers if the company has 50 percent or more of accounts receivable in the 0–30 days category or keeps bad debt write-offs below 5 percent.

Consider factoring. It takes time to rein in collections. If your company needs immediate access to cash, factoring can be a short-term solution. Here, your receivables are sold to a third-party collection agency, usually for 60 to 85 cents on the dollar. This may seem expensive, but it can provide instant cash and free up employees for implementing long-term collection improvements.

When all collection attempts fail
After repeated unsuccessful attempts at collection, you may eventually realize that a customer isn’t going to pay. When it’s time for a write-off, the Internal Revenue Code (IRC) offers a tax deduction for business bad debts that may soften the blow.

Under IRC Section 166, a business bad debt is a loss from the worthlessness of a debt that was created or acquired in your trade or business, or was closely related to your trade or business when it became partly or totally worthless. Most bad debts involve credit sales to customers for goods or services. But they can also include:

  • Bona fide loans to customers or suppliers that are made for business reasons and have become uncollectible,
  • Business-related guarantees of debts that have become worthless, and
  • Debts attributable to an insolvent partner.

To qualify for the deduction, you must show that you’ve taken reasonable steps to collect the debt and there’s little likelihood it will be paid. You also must have previously included uncollectible credit sales in your accrual-basis gross income.

The best advice we can offer is, “don’t go it alone.” For sound business advice and high quality accounting services, contact John Troyer, CPA, Ciuni & Panichi, Inc. Partner, at jtroyer@cp-advisors.com or 216-831-7171.

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How to shape up your working capital

Concentration risks can hurt your supply chain

How to shape up your working capital

Working capital — current assets minus current liabilities

Everyday leader.It’s 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.

Our best advice is: Don’t go it alone. Contact George Pickard, CPA, MSA, Ciuni & Panichi, Inc. senior manager, at gpickard@cp-advisors.com or 216-831-7171 for more information about how we can help you achieve your business goals.

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