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The Right CPA for You and Your Business

It is critical for businesses to have the right strategic partners around it for lasting success. A key part of the network every business needs is an effective, trusted CPA to manage tax and other compliance aspects. The world of tax is very complex, and evolves far more often than people realize. Couple that with an evolving business, and the alignment of a business with its tax professional is essential. We have business owners tell us quite often things like, “I’m not totally happy with my outside CPA”, “I’m not sure how to leverage them” or “I’m not sure how to make the relationship work better”. It is a vital ally to have, so how do you get it right? Be educated, be engaged and be selective.

What to expect – An essential part of the relationship with a tax professional is that they are proactive. If you are not doing any proactive tax planning before the year ends, or getting tons of questions about the past year right before filing day, you likely have the wrong team. Conversations should be frequent throughout the year, both forward looking and past. At times you should have your own agenda, at times they should have theirs. They should be asking questions about where the business is and where it is going and bringing ideas to the forefront. You may suddenly be eligible for tax deferrals or credits that were not relevant in the past. And on the flip side, you need to do your best to keep them informed of big changes in the business. They need that context. You should get to know them, and they should get to know you. There should be no big surprises in either direction. And in the long run, it will save you time and money, so do not worry about paying for that extra couple hours of meetings, with the right fit, the ROI is many times over. This iterative conversational component is a mutual commitment and what you should insist on and nothing less.

Match up expertise – There are tons of tax professionals that have wide bases of experience. There is nothing wrong with that. You do want someone who is comfortable and competent with business you are in, its size and the geographies in which you operate and the tax considerations accordingly, of not just today, but tomorrow. The needs evolve over time. We have often seen the classic case where what got you to point A is not what will get you to point B. Tax is no exception. Ask questions of your current CPA and who their clients are today. Do the same if interviewing new ones. A client of ours materially grew a B2C arm, only to find out their tax firm was not skilled in sales tax. That is a problem. We recently had a horror story with a technology company that has developed patents and made huge investments over the years that had not only not taken advantage of, but not even aware of tax benefits around research and development. Given that CEO’s business, I have no idea how that was never a topic of conversation. Don’t assume they can handle it all. Ask, and ask tough questions. Make sure the capabilities are there. This is not a one-size fits all.

Match up fit – This is a key partner. Do they align culturally with you? Do you communicate well with each other? Do you feel they understand you and vice versa? This is often overlooked, but no less important. Can you be vulnerable with them? Much of the time, the same CPA will handle both personal and business tax matters, and even if that is not the case, there is still crossover. Can you share worries and excites you and not hold back? They also need to fit with your team of strategic partners. They need to communicate with your financial planner, your legal advisors, lenders and other external stakeholders. If they don’t “fit”, their effectiveness will be limited. You cannot afford that.

Finding the right CPA has certainly become harder, with firms merging and longtime CPAs retiring. With the right expectations and commitments, the right CPA for your business is within your reach, and could be the one you already have, with just a simple reset conversation needed. Some of this may seem like such common sense. I can speak from experience with the tax mistakes we saw in the past tax year, that many businesses do not follow this approach, and leave themselves exposed to unexpected costs, anxiety and frustration. That does not have to be you. Be diligent and make sure you have a tax CPA in your corner that is there for you today and tomorrow.

Five Reminders to Start the Year

The new year brings a reset of the clock, a fresh start and the ability to naturally reset on many fronts. With all the moving parts and limited resources, small businesses can also feel behind the eight ball already once the calendar turns. We have already seen examples of businesses getting caught. You may have a number of these nailed already, but have you touched on them all? Here are five reminders to avoid common pitfalls and help get the year off to the right start.

Tax payment considerations – Have you reviewed your estimated year end results with your CPA? Tax outlays and their impact on cash can be significant. Do you need to adjust your January estimated payments accordingly? What are the implications for March/April? Do you need to accumulate more cash or is your tax liability lower than expected? Many businesses who have seen results decline are finding estimated payments can be trimmed materially. Do you know the answer for your business?

Cash considerations – Have you looked closely at your forecasted cash flow? Just as with taxes, there can be big outlays at the start of the year and other one-time payments/renewals, etc. It an also be a time when customers are a little slower with paying invoices due to the holidays and getting caught up. Are you unknowingly setting yourself up for a cash crunch? How do you know?

Reporting requirements – What reporting requirements do you have in your business? Almost all lenders require annual financial statements. Do you know your deadline and what covenants you have in place? They may be different at year end. Insurance carriers, strategic partners and key customers and vendors may also require info on the prior year. If you are audited or reviewed, what deadlines has the CPA firm set? And of course, you want to get financials off to your tax CPA to get out ahead of annual tax deadlines. Does your team have a list of all these deadlines and what is required. Are you on track to meet them?

Sensible budget – Your budget may not be done, and that is okay. We see so often that the budget process is stressful for business owners, and even something that keeps getting avoided. Many also rush through it to meet an arbitrary deadline. What we firmly believe is most critical is that the budget makes sense, is a guide and learning tool for the business and is still meaningful 90 days into the year. What is still open? What information needs to be obtained and how can you get it? It is not too late to finish the budget. Get it done right, not necessarily lightning fast. Address the remaining open questions, and finish it with confidence.

Reaffirm policy changes – The start of the year often includes changes in policies within your company and those you work with. You may have instituted pricing changes and/or changes in terms with customers. Are those changes being reflected and enforced? Might follow up be needed or at least vigilance in case they are not being observed? For example, we saw a professional services firm make pricing changes 1/1, but many of their customers were making recurring payments and did not update amounts for 60 days. Did any businesses you buy from change their policies? Too often these fall through the cracks on both sides. Especially for those that are material to your business, stay on top of this to encourage good behavior from your customers out of the gate, and make sure you don’t get a surprise from a vendor or partner you rely on.

The new year is an exciting time. By not losing sight of some of the little things, you can prevent problems down the road that will trip many businesses up. The pressure is not all on you – ask questions of your team. Make sure you are a 5 out of 5, and you can then execute more confidently. Go boldly into the new year.


How is Your Bank Lending?

We are in a period right now that I would describe as renewal shock. Companies have renewed loans already, some are in process and many more will do so in the coming months. We have seen first hand a number of changes, in the renewal process, terms and even in some cases polite nudges out the door from existing bank relationships. Rates are clearly higher, but just as important, underwriting standards have tightened, meaning deals are just harder to come by than they were a year ago, potentially even at your current bank partner. Very few banks are “not lending”, so the more important question is “how” are they lending and what does that mean for your business.

I won’t bore you with a long economics lesson, but the economy overall has slowed and due to multiple factors, there is less money in the banking system to be lent to borrowers than there was 6 to 12 months ago. That means we are in a state of increased scarcity. The days of low cost, easy to obtain financing are in the past. Unfortunately, in some cases, that may mean your deal that was bankable last year is not bankable today. We are involved firsthand with clients in that boat that either have to settle for a different structure or potentially find non-bank financing.

How do they see you? Underwriting has tightened across the board. Many banks have gotten picky on industry and company profile, either because of a higher perceived risk level, a high concentration or a combination thereof. Do you know how your bank views your industry? You want to. A majority of the banks we see will be more aggressive for existing customers than new ones, which can be to your benefit. You need to know where you stand in their eyes. Odds are it will not be exactly the same as it was 6, 12 or 18 months ago.

How has the process changed? Be prepared for a lot more questions about your business, its financial performance, its customers and its future. We see business owners at times getting offended by the level of questions that can be asked. “They never asked that before” is a common complaint. You are in the majority if you are hearing that. Don’t be alarmed, use it as an opportunity to make a strong case why they should still love you. We have also seen deals take longer to get done. Allot more time accordingly.

How might the deal look? Rates are clearly higher overall, as core interest rates have risen, but the spread over the whatever index the bank is using is also higher than it was a year ago. Fees are much more common, including higher origination fees. Unused line fees on lines of credit are commonplace as well, so you could pay more to just have capacity. And meaningful deposits at the lending bank are a norm, even to the point that we are seeing significant covenants tied to cash balances on hand. Be prepared for terms you may not have seen in a while, if ever.

Based on all this, a few points of caution and steps to take.

• Understand the whole deal – there is much more to evaluate beyond rate. Evaluate the entire structure. Understand the all-in costs. And understand the requirements and covenants. You will likely have new covenants and more of them, so you want to understand how it affects your business.
• Ask to see deal points in writing as early as possible. The lending industry, like many others has struggled to source talent. We have seen too many instances where the relationship banker does not understand what the bank can actually get done and deliver on. They likely will not put anything in writing that has not been vetted to some level. You cannot afford to be on the receiving end of a prolonged no.
• Get out ahead of a renewal, as you might, like many, need to start looking for a new home. The good news is there are still plenty of deals that will get done. And companies are moving to new banks that are lending – you just have to stand out above companies competing for the same dollars.

The banking sector and its impact on small businesses has created a new constraint. Accept the facts, do your homework, and be proactive – that is your best chance to get the options you want. The ultimate solution may not be perfect, but an imperfect deal could still allow you to put dollars to work and drive long term value in your business. Don’t let the renewal shock and its hurdles cloud that big picture. Keep growing boldly.

The Business Case – Are You Leveraging It?

The typical entrepreneur is presented with a constant stream of potential opportunities, initiatives and investments in their business. We see the struggle almost daily with how to evaluate options. Too often it is based on guesses, gut and momentum. While this can lead to positive outcomes, there is a way to mitigate risk and make more confident decisions using an underutilized tool in the entrepreneurs’ arsenal - the business case. Here are some tips to make it work for you.

It's a mindset – Form matters less than the mindset and the process. Collect all the relevant information. What are the assumptions? Who are the stakeholders? What are the risks? Let’s use the example of the purchase of additional equipment to add more capacity to a manufacturing line. There are easy variables like the cost of the equipment, but what about the impact on labor? What is the ramp-up time? How much of a deposit if any is required. Does it require a re-configuration of space? Deep questions from all sides are needed to properly frame the evaluation process to determine “does this make sense”.

Take the emotion out of it – Once the best available information is collected, the critical question is to ask “what has to be true” for this to pencil? By evaluating the key elements using the power of logic, it allows the team to unemotionally and safely evaluate a business case on its merits. It is easy to get emotionally charged for or against an idea – that is human nature. The added benefit here is not stifling the champion(s) of the idea as logic is hard to argue with versus other people’s opinion. Using our prior example, If the business has to hire 5 more specialized technicians to operate the new equipment, but the company can barely maintain its current bench of technicians, logic would dictate that as a very material risk.

Memorialize it – Get the business case on paper (or more likely virtually). This has multiple benefits. It codifies the whole process and forces a level of clarity in presentation. It also allows decision makers to step back and evaluate again on all its merits with a fresh set of eyes. Most importantly, once a go forward decision is made, it is a powerful flag in the ground to go back and measure actual results against expectations. The learning value here is tremendous and many times wasted. It can also guide improvements in future business case uses.

Dial it up or down - The size of the impact and investment will dictate the level of rigor required. The ultimate form may be a simple Excel analysis, perhaps a one pager in the vein of an executive summary or something more like a deck. If the aforementioned equipment expansion represents a 5% increase in capacity or capital investment versus a 35% change, the rigor needed should change accordingly. Again, it is the mindset and process that are the most critical. Get enough down so that you could step back from the business for a month, review the business case and have enough information to define the opportunity, understand the assumptions and what has to be true in them to unemotionally evaluate it.

Small businesses have limited resources. The business case can create value, mitigate risk and provide a sleep at night factor. It can be a means to evaluate options on their own merit or in comparison with others when resources dictate that some but not all options can be pursued at the same time. Especially in the early days of the organization when the founder is touching everything daily, gut can work. But over time, a repeatable, trusted process is required. Use the business case, make it work for your business, and make more confident decisions.

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