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The definitive, whole-picture, year-end checklist

Marty Koenig //December 22, 2011//

The definitive, whole-picture, year-end checklist

Marty Koenig //December 22, 2011//

There are so many year-end business checklists going around. I’ve read them all, and it irks me that they all miss something huge.

Most of them seem to be written by a CPA firm, which is great if you only want a tax-related checklist. The advice in those checklists don’t take into consideration what strategy you have chosen. For example, they blatantly say “collect delinquencies.” Seems like a good thing no matter what, right? Bring in the cash – how can that hurt? You’ll see.

Or I’ve read “pay down credit cards and lines of credit before the end of the year.” But what if you want to grow fast? What if you have a management financial strategy that considers a capital strategy where you want to increase your working capital in 2012 so you can afford the huge growth you anticipate? What if it’s best to NOT pay down the principal and keep the cash in the company so your liquidity looks better to a banker.

I’m taking it up a level and giving you the whole picture. This will help you decide if your year-end focus is on tax or management financials. Those two approaches are very different. The outcomes of your actions are generally better if you’re willing to take a strategic financial approach over the coming weeks.

Tax focus:
With a tax focus your goal is to minimize your company’s income tax payment. Or if you’re a pass-through entity like an S-Corp or LLC, the focus is on minimizing the personal tax you’ll have to pay because the company made a lot of money in 2011.

With a tax focus, the overarching end-of-year strategy is to pay out as much as you can, and gain maximum tax leverage in 2011 to reduce your net taxable income. This approach is very different than some of management-focused finance would have you do: become more bankable. Tax focused strategies are accomplished in a number of ways:

1. Prepay some rent, a vendor or service provider to increase your expense outflow, improving your 2011 deductible expenses.
2. Pay bonuses, because payroll expenses are usually deductible.
3. Purchase and pay for that new equipment/machinery or software in 2011. You can deduct 100 percent of these new capital expenses this year (with generous limitations) which causes them to go into your tax return as a deductible expense from your income statement/P&L. Without this tax benefit, the cash outlay has to go on your balance sheet and gets depreciated the way the IRS says you should – over a number of years. Take advantage of extra bonus depreciations that are likely to go lower in 2012. Most of these require the equipment to be placed in service this year.
4. Hire qualifying workers for the Work Opportunity Tax Credit in 2011. That probably goes away in 2012.
5. Defer income until next year. If you’ve got a customer that’s focused on a tax strategy, they’ll want to pay you in 2011. If the customer has a management finance or bankability strategy, they’ll want to hold off on paying you till after the fiscal year ends. You can’t really ask them about that, but now you know why.
6. Write off obsolete inventory by giving it away or scrapping it. You have to track it correctly.

Business Management Financial Focus:
With a management focus, the goal is to show a big net income and EBITDA or net operating income. You might ask, “Why on earth would I want to do that, won’t I just pay too much in taxes?”

Here’s why: If your company is growing, you need working capital to fuel that growth. That doesn’t mean getting another loan from your friends and family, or using your home equity line of credit. It means becoming bankable where a bank will loan you money because you have the ability to service debt. When you show that your company can service debt, it means your positive cash flows every year for the last three years support additional principal and interest payments. Banks don’t care as much about your grand plans for the future. They want to confirm what happened in the past will support their need for certainty in the future.

If your company is bankable you’re doing many of the right things to grow a good business. If you want your company to become bankable, that shows that your head is in the right place to build a sustainable, growing, successful business. One that will provide employment for a lot of people and their families. One that will provide you, the business owner, with a nice income now, and a greater one in the future, especially if you plan to exit with a big check. When you become bankable or more bankable, you are setting it up so you can spend more time with your friends and family.

1. Pay out as little as possible this month so your net income and EBITDA / Operating Income is boosted.
2. Collect as much cash from your customers this year – an all hands phone call campaign will often yield surprising results to collect on outstanding receivables.

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3. Was there any work done in 2011 that can be considered research /development? R&D tax credits change after 2011.
4. Review your ratios to determine how bankable you are or are not. That’s what the banks will look at, so you’ll want to get ahead of them. If you’re numbers and ratios are good or great, increase your line of credit, or apply for one. Don’t waste their time and yours by going in unprepared. They’ll place at the back of the very long bus.
5. Review the differences between your business tax return and your books. If you want to become more bankable, be sure you can explain the differences.
6. Prepare to have your outside accountant provide compiled or reviewed financial statements for the year. Just relying on your QuickBooks reports will cause your banker to focus on your tax returns – which is likely to show a worse picture than your management financial records. If your CPA is tax-myopic that’s OK for this – they should know your business pretty well and be able to attest that your books are reasonable – from a non-tax perspective. It’s just that they are so often focused on the craft of tax, it’s often hard for them to look at a business from a completely different point of reference – management business finance. This type of CPA work is not tax-related work and will cost extra, but it’s a good thing to do at least once a year if you want to become more bankable. If you’re a bigger company or have more complex requirements, an accounting audit may be needed or beneficial.

Regardless of your overall strategy:

1. If you are self-employed, setup a self employed retirement plan, even if you’re not investing in it this year. Certain plans, if set up in 2011, will give you setup credits. You can set it up now and still contribute in 2012 to get the benefits.

2. Review your unpaid bills report in detail. Clean those up to make sure all of them have truly not been paid. Fix the ones that were actually paid. Decide whether you want to pay some the longer term payables this year or next. Some vendors may have already written off your payable. If you have some larger payables, stay in constant communications with them and try and pay a little bit every month if that’s all you can afford.

3. Review your accounts receivables in detail. If your policy is such that after 90 days, you don’t expect to get paid, try to collect again and either send it to collections or prepare to classify it as a write-off.

4. Validate the credits you hold in your books for customers. I have found what you believe the credit amount on your books is, can be very different than what the customer or vendor believes it should be. Call the top 20 percent of those who have a credit balance with your company and reconcile with them. You don’t want to overstate or understate assets on your balance sheet.

5. Pull your company’s D&B report and get your Paydex score. If you don’t have an account there, sign up for the $69/month version which include three vendor updates each quarter. That alone is all you need to improve your rating. Don’t fall for one of their services, it’s usually not much value. It’s relatively easy to increase your score, so plan to work on that now and next quarter.

6. Clean up misclassified or “other” accounts. Those won’t transfer easily to your taxes, costing you more CPA time.

7. Verify your sales and use taxes are correct. This area is a real pain and is often wrong. Its more painful when you have to go through a sales tax audit and pay out big bucks in penalties and past mistakes.

8. Your tax return and management financials are often very different. If they are exactly the same that means you and your accountant are attempting to manage your business through tax glasses. Limiting your financial management that way is not the cause of your CPA, that’s just how they are trained. A strategic -focused CFO will bridge the gap and help you run your business leveraging knowledge in both areas.

9. Download your year-end bank and credit card statements, store them electronically and print them out.

10. Read all of your bank covenants – do you know where those are? Make sure you’re not in technical default on your loans or lines. Many lines, for example, require you to pay them off every year and let it “rest” for a month. If you don’t, they can call the line and you owe it all and they can pursue legal action – not good if you want to be bankable. Many covenants will require your company to maintain certain financial ratios and report them. Have you considered what happens if you go out of compliance on those?

These are general strategies, and there are lots more of them to consider. There’s not much time left in 2011. Don’t get surprised with a larger bill from the IRS or your CPA. Don’t be surprised when you get turned down for a bank loan or line of credit.

You can leverage both strategies if it makes sense for your situation. Talk to your CPA about the tax focus, but talk to a business management financial expert to help you decide which focus is best for your company’s situation.

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