Tax time!

taxtime It is tax time, so many small business owners are looking at summary financial information about their business for the first time in twelve months.

Some business owners are shocked as they look at their high tax bill, saying, “There is no way I made that much! It certainly doesn’t show in my checking account!”

Others are shocked saying, “I can’t believe I worked as hard as I did and made less than most hourly employees.”

Many business owners avoid a frequent review of financial statements because:

  • The financial statements generated by their financial software are inaccurate, difficult to read, and even harder to interpret.
  • When they have questions about what is in the financial statements, they don’t have anyone to help them understand.

We help business owners create financial statements that are easy and quick to read and help create understanding of what the numbers mean. With properly prepared and formatted financial statements reviewed monthly, a business owner is in a position to make frequent minor business adjustments on a monthly basis, rather than dealing with the shock of what the numbers say once per year.

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The $500,000 decision

See ClearlyHave you ever been at the optometrist’s office being fitted for glasses, and as he switches from one lens to another, had the “O” on the chart magically change to a “C” or “Q”?  It is amazing how looking through the appropriate lens changes what you see.

The Situation
A company I was working with had been struggling with cash flow and was faced with the choice between leasing one of two retail locations.  The company was already established in Location A.  It was more expensive and clearly a superior location.  Location B was much less expensive, but would not draw the same level of customer traffic.  The difference in cost between these two locations over a 5 year lease term was considerable-nearly a half a million dollars!

The Default Lens: Cost Management
Because cash flow had been difficult, the default lens was naturally drawn toward minimizing expenses.  There were some expenses to be expected in moving locations, and there was bound to be a dip in sales due to the change and less desirable location, but at first glance, Location B at about 1/3 of the price of Location A, looked desirable.

Another View:  Opportunity Cost
As the company weighed the options, I presented an alternative view.  By applying contribution margin analysis, we were able to determine the additional sales Location A would need to generate in order to be economically equivalent to Location B.  Despite the lease being nearly 3 times more than Location B, it only needed 20% higher sales to make up the difference in the lease expense, which seemed well within reach due to the higher customer traffic at Location A.

Summary
Sometimes the lens we look through by default makes our vision a little blurry.   Often a trained professional can provide another lens to look through and help us to see clearly, enabling us to make the best decisions for the business.

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A Penny Saved is $75,000 Earned

Penny SavedOne of the reasons our company is named Business Cents, is to emphasize the payoff that can come from managing even the little details.   We have all heard the saying, “A penny saved is a penny earned.”  In this case, a few pennies saved resulted in overall savings of $75,000 over a 5 year period.

The Situation
The company I was working with used a phone-based timekeeping system, where remote employees could use a touch-tone phone to clock in and out.  This system was critical to the processing of payroll and was very heavily used.  Because employees were usually performing their work at client locations, they used toll-free numbers, which carried higher than normal long distance rates.

The Savings
Upon investigation, we were able to negotiate lower line rates, reduce the number of lines required, and negotiate a 3 cent per minute reduction in long distance charges.  All totaled, these few cents here and few dollars there added up to a $15,000 savings per year, or $75,000 over a 5 year period.

Summary
Sometimes the expense savings that are available are overlooked because of habits, or just due to the day-to-day demands that take our time and attention.  Often, a fresh set of trained, experienced eyes is all it takes to identify thousands of dollars in savings.

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Will you give me $9,000?

Give Me Money Don’t you wish that bringing in money was as easy as simply asking for it? Here is a situation where the proper question at the proper time resulted in it being that easy.

The Situation
A company had a line of credit with a local bank.  They had a long banking relationship with this bank and their line of credit was renewed on an annual basis.  This renewal resulted in an annual loan processing fee of $3,000, which wasn’t unreasonable for the size of the loan.

The Question
I was asked to be involved in the annual line of credit renewal.  I was aware of another local bank that was aggressively trying to obtain new loan accounts.  In order to make a switch enticing, they offered a line of credit on similar terms, without any loan origination fee.

This company didn’t want to give up the long banking relationship over a few thousand dollars, but I asked their long-time bank if they would match the competing bank’s offer of no origination fee.  They did so gladly and didn’t charge an origination fee for the next 3 years.

Summary
Sometimes expense reduction can be as simple as asking the right question.  Having the right financial management professional involved in your financial processes can help ensure you ask the right questions at the right time.

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$73,008 per hour

Free MoneyWouldn’t we all like our time to be worth $50,000+ per hour?  Let me share one example of where one hour of effective financial management was worth more than that to a company.

The Seemingly Harmless Scenario

This company needed $50,000 of communications equipment and for cash flow purposes decided to use a lease to finance the equipment.  The owner had used financing leases many times in the past and was comfortable with this type of financing.  The monthly payment came to $1,521 per month, equating to an implicit interest rate of 6%, which seemed reasonable.  He signed the lease, authorized accounts payable to make this payment as a monthly recurring payment, and went on to other more pressing matters.

Fast Forward 3 ½ Years

During a normal financial review I came across this monthly lease payment and looked into the details.  Upon review, it was apparent that payments on this “financing” lease should have ended.  Upon investigation I discovered that this “financing” lease was an operating lease, with some barbs.  Not only did the company not own the equipment at the end of 36 months, as was originally assumed, but unless the leasing company was notified in writing at the end of the lease period, the lease automatically renewed for a 12 month period.  At the end of each subsequent 12 month period, it would again automatically renew for an additional 12 months.

The Cost

The cost of this “little” oversight at the lease origination resulted in one full year’s extra lease payments totaling $18,252.  Because this payment had been authorized as an automatic recurring payment, the likelihood is that the details would not have been reviewed until the equipment needed to be replaced in another 3-4 years, which would have resulted in additional excess charges of $54,756 (3 years), totaling a cost of $73,008 for a “little” oversight on a lease agreement.

Summary

This is a perfect example of how the value of financial management consulting can’t be easily seen from the outset.  In this situation, reviewing the company leases wasn’t part of our original goals, but the process of the review brought the situation to light.  If in the beginning we would have focused on the cost of the consulting, we could have easily missed the value that it could bring.

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Is there a better way?

We all have habits-some that keep us on course, and some that prevent us from reaching our potential.  From time to time it is good for all of us to look at what we do and ask, “Is there a better way?”

Most businesses do pretty well with their accounting but also have a few areas that are lacking.  Should you consider another way to approach your business accounting that could yield improved results?

I’d like to spend a little time with you exploring that question.  A little bit of focused consulting could magnify the benefit of the investment you put into your business accounting.  Here are a few areas where some limited consulting may yield a great benefit:

  • Part-time CFO—Large businesses pay large amounts for CFO expertise-your business could benefit from similar expertise, but not on a full-time basis.
  • Cash flow vs. Profit—Are you tired of paying taxes on your “profit” while cash doesn’t seem to increase?
  • Fraud prevention—How much could one of your employees embezzle without you knowing?
  • Candidate selection—Accounting is not your area of focus, and it would be helpful to have an accounting expert evaluate candidates’ technical accounting skills.
  • Paying someone full-time for what could be done with part-time work—Do you pay an accountant for full time work that could be done for less with part-time bookkeepers and a contracted accountant?
  • Business system setup -Are your accounting systems efficient?  Are there processes or reporting that could be automated?
  • Business system security and redundancy -Are your business systems secure?   Do you have a plan to recover from system failure?  What would happen if your office burned down tomorrow?

I hope to have the chance to explore how I could partner with you to make your business more successful.  Please call me (208-557-8725) to schedule a preliminary no-cost session to discuss your business needs together.

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Coming Soon….

Coming Soon….

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