It’s Time to Talk Tax, Well Before Tax Day

As a business owner, when was the last time you talked to your tax accountant? Hopefully the answer is very recently, and if not, it needs to be a priority. Tax planning is one of the more critical, but too often unutilized tools in a company’s financial arsenal. For many business owners, recovery from the pandemic has been better than expected, but uncertainty due to potential legislation and continuing supply chain issues and an extremely tight labor market is still very real. Having a good proactive tax advisor is critical for a business, and dialogue should be frequent, providing business updates to them, and answering key questions they have.

Here's why it matters:
1. First and foremost, every business is unique, and tax implications for one can be very different from another. A solid tax accountant takes a customized approach, helping create the most favorable tax outcomes short term and long term for your business.
2. Critical decisions may need to be made before year end. Particularly for businesses with substantial profit and cash, an investment in assets before year end could result in tax savings. Depending on the type of retirement plans in place, contribution amounts may need to be made before year end as well.
3. Many tax provisions are expiring at the end of 2021, including the Employee Retention Credit that was part of the CARES Act. The 2021 tax year will also usher in changes to the treatment of net operating losses, business interest expense, and business meals. Understand how each of these items and others may affect your business and what you need to do before year end to be sure and take advantage.
4. For businesses who performed ahead of expectations and generated substantial profits, that likely means a much larger tax bill as well. Is ample cash available to pay the liability? Understanding the potential implications may affect investment plans in the new year.

What you need to do:
1. Ensure you have a solid tax accountant that understands your business – you don’t have to be the tax expert yourself. But if they aren’t asking you questions throughout the year, you may want to seek one who will. There are countless horror stories of businesses that made hefty tax mistakes because key context was not discussed.
2. Have good financial records. Your tax accountant can only work with the information provided to them. Before year end, the ability to provide year-to-date financial info plus an estimate of the remainder of the year will be crucial in allowing for effective planning conversations.
3. Don’t let the headlines cause panic. Much has been made of proposed tax legislation. Until it becomes law, it will not affect your business. Act on factual information with the guidance of your tax accountant.
4. Have at least a rough picture on what the new year might look like financially. That could make a huge difference in deciding the timing or whether to go forward at all with certain decisions. If substantial growth is expected next year, it may be beneficial to defer some expenses accordingly.
5. Start having the conversation – today.

A knowledgeable tax accountant is one of the strategic partners every business needs.  Ensure you have one, talk to them regularly and look forward to the new year with confidence.  It saves money, improves peace of mind and lowers risk. 

The Supply Chain Dilemma and What to Do Next

Disruption in the supply chain is nothing new, and you don’t have to look hard to find new data on a daily basis. Overseas manufacturers are still unsettled from the pandemic, ports are full and there are not enough truckers to move the necessary loads of goods. This disruption has affected small businesses particularly hard as they don’t often have the resources to hoard inventory well in advance. And unfortunately, recent trends are suggesting that the supply chain may not return to normal levels until well into next year. Like many disruptions we have seen over time, this also creates an opportunity and here are some ways to lay the foundation to do so.

1. Diversify – This is a great opportunity to diversify sources of supply, both suppliers and the geography of suppliers. Having multiple sources of the same product could dampen the blow of availability and potential for pricing shocks. Geographically, companies are for example successfully moving to suppliers in Mexico and Latin America where they once depended solely on China. Even if a new supplier cannot be spun up right away, this practice will help in the short run while also serving a beneficial long-term purpose. Just don’t forget to carefully assess quality control.

2. Down the chain – What is the downstream impact on your suppliers? Do you understand their supply chain? How much “raw” inventory do they carry and how are they managing the disruption? Could one of their suppliers tip the apple cart? Have these conversations if you are not doing so already.

3. Plan for It – It is a great idea to reforecast throughout the year, and we are not too far off from annual planning season for most businesses. Be conservative and budget for higher costs. What does this picture look like? It may well be a reality for the foreseeable future, but regardless it is a very valuable planning exercise. What impacts would alter decision making?

4. Pricing – How much price control do you have with your customers? Many companies have raised prices already, just following the inflationary wave. Perhaps this is limited by larger competitors or by the market however, or it will only apply to a subset of products. Understand the levers you can pull and where the ceilings are so options can be thoroughly evaluated.

5. Alternatives – This has also been a window of time where companies are re-examining what they make and how it is sold. Does product mix need to shift due to supply issues? Is this the right time to consider a product redesign or tweak, or one step further to create more in house? Disruptions create great opportunities to pause and explore alternative solutions that might not have been needed or even possible in more normal cycles.

6. Pull Back – Does it make sense to operate at lower sales levels for a period of time? Labor is tight, maybe that extra shift does not make as much sense. Could marketing spends be pared back? A good profit level may still be attainable. This is not a one-size fits all solution, but for some companies, a shrunken but stable version may be the best way to ride out the disruption and be positioned for success in the future. The key here again is to understand the what if’s and make decisions accordingly.

The supply chain disruption is real and likely not subsiding any time soon. There are steps that businesses can take. This is a time for nimble decision making, exploring creative options and looking ahead. The competition could already be doing so. Disruption can be your friend or your enemy. The choice is yours.

Is your business sale ready today? You should be and here’s why.

Even if you are not looking to sell your business near term, the mindset, preparation and readiness are essential to the long-term success and value of a business. We have worked with dozens of companies preparing for a sale transaction, and many more trying to build long term value. The similarities between the two strategies are closer than one might think.

Here are a few key factors to consider.

1. First, what are the core elements a buyer will look at? Buyers will look at 3 or more years of financial statements, almost always by month. They will look at budgets and forecasts. They will review the quality of accounts receivable, inventory, equipment, and other assets. They will want to understand how the company generates cash, the stability of where sales and product supply come from and the strengths and weaknesses of the management team. And of course, they will look at where the growth prospects of the company will come from. In summary, what story does all this information say about the quality of the business overall? Can you produce this information? The answer may suggest opportunities within the business.

2. As a business owner, these pieces are essential regardless of any potential sale. What story is the business telling you? As an owner, look at your business through the lens of a buyer. Do your monthly trends make sense? Do they tell the real story? Is the business as profitable as it should be? If not, why? Are your forecasts consistently missing the mark? Does your business lack a handle on its inventory or fixed assets? Forget a sale, these are fundamental components that could be limiting the profitability and value of the business. If you were a buyer, would you buy your business? If the answer is no that suggests deeper issues for the business today. What has to be true for your answer to change to yes?

3. Buyers think long term. Business owners need to as well. No question, short term profits matter. Sales for the next month matter. But a regular examination of the impact of actions and decisions today on the business long term is often overlooked.

4. Many business owners are thinking about selling their business at some point down the road. To be clear, we would certainly not suggest having a full due diligence package ready at any point in time, as the sale process can be extensive with a litany of information being requested and reviewed. But focusing on the core aspects, with good processes and information quality, fulfilling information requests does not have to be a herculean task. And from experience, it can take businesses 2 to 3 times as long and cost 2 to 3 times as much when being reactive and trying to scramble as a potential sale comes into play. A little preparation goes a long way in addition to being a business best practice.

5. Sales happen when you are not planning on them. The market for acquisitions remains strong and is projected to stay that way for years to come. We have seen many instances of unsolicited offers to purchase companies. You never know when that opportunity might present itself, and given a big enough check, just about any business owner would consider a sale. On a more personal note, even if not actively looking for it, have you thought about what that minimum number would have to be to consider a sale?

6. There are many other external uses that could be applicable tomorrow. Whether seeking growth capital from a lender, raising capital from investors, or reaching the scale where reviewed or audited financial statements are sought, the core elements in a presentable format are going to be required in any of these instances.

Look and act the part. Get above the business and look down on it. What needs to change? For the majority of entrepreneurs, their business is their nest egg. Understand its value, examine its value and protect its value. While a sale may not materialize today, the value of a business and anything that can preserve and improve it should be a routine area of focus. Get ready. Stay ready.

What does your lender really think of you? You should know, and here’s how to find out.

Many businesses have made a full recovery in 2021, while others are at least seeing light at the end of the tunnel. The economy is returning to some semblance of normal. Not to be overlooked in the midst of this good news, is the importance of lenders in the continued path forward. What does your lender think of your business right now? How are they viewing you?

Whether simply seeking a renewal, or rather additional financing for growth, an understanding of your lender’s view on your business is critical. Even with longstanding business relationships, the tumult of the past year and a half has impacted lenders, and how they view their clients, in multiple ways.

Here are 5 steps a business can take to successfully manage its lender relationships going forward.

1. Start the conversation early – Do you know how your lender views your business at this point in time? Regardless of how soon a financing event will arise, there is no time to waste in answering these questions. Gain as much insight as possible as soon as possible. Discuss where the business is and where it is headed. Discuss what the business might need going forward. And most importantly what does the bank want to see by way of information on the business?

2. Know how 2020 is evaluated - A key piece of information to understand is how the lender views this past year’s pandemic. Most businesses felt significant economic pain, for at least some period of time. How is the lender taking this setback into account? Some lenders are looking at businesses leading up to the pandemic, and then ignoring parts of Q1 and Q2 for example. Some are studying month over month financials very carefully starting pre-pandemic to present. Others are including some or all of the PPP proceeds in evaluating the historical financial performance. Even if there is no new financing need, does this disruption affect covenants? And for the lucky few that saw record years in 2020, the question of sustainability arises. For example a company that sells cleaning products may have seen a massive uptick that the bank may question whether it is sustainable. Being armed with this information will guide next steps.

3. Prepare good monthly trends – Regardless of how things are being evaluated, they are being evaluated in more granularity. This makes accurate month to month trend information essential to keep track of. Can you produce this information? Ensure that you have the ability to demonstrate a picture that supports company performance. In turn, this should excite a lender to continue and grow a relationship. Take a step back and view your monthly history. Does it support sustained growth? Are there a couple blips along the way that require explanation? The information you provide will tell a story that may require additional context, but if the information is poor, you may lose out before even getting started.

4. Forecast, forecast, forecast – All lenders we are seeing want a forecast into the future. They are not expecting 100% accuracy, but a picture of management’s best idea on where the business is headed is valuable to them. This might be just for the balance of 2021, possibly 12 months from now, or even through 2022. Ask the question and be prepared to show what the future might look like. And just like historical trends, be prepared with the key assumptions and context that a lender might ask about.

5. Limit risk – Banks are not in business to take big risks, so creating a picture for the bank that mitigates risk is the final cog for a business. How does your liquidity look? What about the collateral the business has? How do you show this to the bank? How can you demonstrate an ability to confidently repay any existing debt, but also support additional capital? For many businesses, using the steps above to demonstrate sharp management through and out of the pandemic can be a great source of confidence.

Capital is out there for the right opportunities, but lenders are not obligated to lend you money. Sell potential lenders on the promise of you and your business. Create a holistic business case for what you are seeking. Get out there and grow boldly.

Contact Us

(602) 675-7452 Phoenix
(520) 415-0188 Tucson

or growboldly@fintrepidsolutions.com

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TUCSON OFFICE

319 W. Simpson Street, Tucson, AZ 85701