Woman using a magnifying glass to look at financial statements

View Financial Statements Through The Right Lens

Many business owners generate financial statements, at least in part, because lenders and other stakeholders demand it. You’re likely also aware of how insightful properly prepared financial statements can be — especially when they follow Generally Accepted Accounting Principles.

But how can you best extract these useful insights? One way is to view your financial statements through a wide variety of “lenses” provided by key performance indicators (KPIs). These are calculations or formulas into which you can plug numbers from your financial statements and get results that enable you to make better business decisions.

Learn about liquidity

If you’ve been in business for any amount of time, you know how important it is to be “liquid.” Companies must have sufficient current assets to meet their current obligations. Cash is obviously the most liquid asset, followed by marketable securities, receivables and inventory.

Working capital — the difference between current assets and current liabilities — is a quick and relatively simple KPI for measuring liquidity. Other KPIs that assess liquidity include working capital as a percentage of total assets and the current ratio (current assets divided by current liabilities).

A more rigorous benchmark is the acid (or quick) test, which excludes inventory and prepaid assets from the equation.

Accentuate asset awareness

Businesses are more than just cash; your assets matter too. Turnover ratios, a form of KPI, show how efficiently companies manage their assets. Total asset turnover (sales divided by total assets) estimates how many dollars in revenue a company generates for every dollar invested in assets. In general, the more dollars earned, the more efficiently assets are used.

Turnover ratios also can be measured for each specific category of assets. For example, you can calculate receivables turnover ratios in terms of days. The collection period equals average receivables divided by annual sales multiplied by 365 days. A collection period of 45 days indicates that the company takes an average of one and one-half months to collect invoices.

Promote profitability

Liquidity and asset management are critical, but the bottom line is the bottom line. When it comes to measuring profitability, public companies tend to focus on earnings per share. But private businesses typically look at profit margin (net income divided by revenue) and gross margin (gross profits divided by revenue).

For meaningful comparisons, you’ll need to adjust for nonrecurring items, discretionary spending and related-party transactions. When comparing your business to other companies with different tax strategies, capital structures or depreciation methods, it may be useful to compare earnings before interest, taxes, depreciation and amortization (EBITDA).

Focus in

As your business grows, your financial statements may contain so much information that it’s hard to know what to focus on. Well-chosen and accurately calculated KPIs can reveal important trends and developments.

Contact the experts at David Mills CPA, LLC with any questions you might have about generating sound financial statements and getting the most out of them. Our team can give you the business advice you need.

Graphic detailing SWOT (Strength, Weakness, Opportunities & Threats)

Does Your Business Need a SWOT Analysis?

Using a strengths, weaknesses, opportunities and threats (SWOT) analysis to frame an important business decision is a long-standing recommended practice. But don’t overlook other, broader uses that could serve your company well.

Performance factors

A SWOT analysis starts by spotlighting internal strengths and weaknesses that affect business performance. Strengths are competitive advantages or core competencies that generate value (and revenue), such as a strong sales force or exceptional quality.

Conversely, weaknesses are factors that limit a company’s performance. These are often revealed in a comparison with competitors. Examples might include a negative brand image because of a recent controversy or an inferior reputation for customer service.

Generally, the strengths and weaknesses of a business relate directly to customers’ needs and expectations. Each identified characteristic affects cash flow — and, therefore, business success — if customers perceive it as either a strength or weakness. A characteristic doesn’t really affect the company if customers don’t care about it.

External conditions

The next SWOT step is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit business performance.

When differentiating strengths from opportunities, or weaknesses from threats, the question is whether the issue would exist without the business. If the answer is yes, the issue is external to the company and, therefore, an opportunity or a threat. Examples include changes in demographics or government regulations.

Various applications

As mentioned, business owners can use SWOT to do more than just make an important decision. Other applications include:

Valuation. A SWOT analysis is a logical way to frame a discussion of business operations in a written valuation report. The analysis can serve as a powerful appendix to the report or a courtroom exhibit, providing tangible support for seemingly ambiguous, subjective assessments regarding risk and return.

In a valuation context, strengths and opportunities generate returns, which translate into increased cash flow projections. Strengths and opportunities can lower risk via higher pricing multiples or reduced cost of capital. Threats and weaknesses have the opposite effect.

Strategic planning. Businesses can repurpose the SWOT analysis section of a valuation report to spearhead strategic planning. They can build value by identifying ways to capitalize on opportunities with strengths or brainstorming ways to convert weaknesses into strengths or threats into opportunities. You can also conduct a SWOT analysis outside of a valuation context to accomplish these objectives.

Legal defense. Should you find yourself embroiled in a legal dispute, an attorney may want to frame trial or deposition questions in terms of a SWOT analysis. Attorneys sometimes use this approach to demonstrate that an expert witness truly understands the business — or, conversely, that the opposing expert doesn’t understand the subject company.

Tried and true

A SWOT analysis remains a useful way to break down and organize the many complexities surrounding a business. At David Mills, CPA, LLC, we can help you with the tax, accounting, and financial aspects of this approach. Contact us today.

cartoon of hands working on taxes with calculator and spreadsheet

Tax Season 2021: What To Know About 2020 Changes

 We’ve reached 2021, but it has already been an eventful January. Tax season is in full swing, so we want to share a few things:

Stimulus Payments

As you know, there is another round of stimulus payments. Many have already received them. The 2020 stimulus payments will be reconciled on the tax return. These payments are not income.

We will need to know the amount of 2020 stimulus payment you received. At this time, the IRS website only tells us if you received a payment, not how much the payment was. You may not have received the correct amount due to you. For example, if you had a child in 2020, you qualify for an additional $500. If you want to check on your stimulus payment go to this IRS website.

Other Changes for 2020

If you do not itemize deductions, you may qualify for a $600 charitable contribution deduction. This must be a cash donation, not a donation of goods typically given to Goodwill, etc.

Medical expense deduction starts at 7.5% of income, not 10% previously allowed. Keep in mind most people do not qualify for this deduction due to income levels or insurance payments.

Educator expenses now include protective equipment expenses. The maximum credit remains at $250.

Private mortgage insurance premiums can be deductible again for the 2020 tax season.

The standard mileage rate is .56 per mile in 2021.

Did you take a distribution from your qualified retirement plan or IRA? If so, and it was for COVID-19 reasons you will not incur the 10% early withdrawal penalty. Also, you have options on how much to report on your tax return. For example, if you withdrew $60,000 from your IRA you can report the entire amount in 2020 or spread this out over three years.

If you repay the loan within three years amended returns can be filed to refund the tax paid on the distribution. Contact us for the COVID-19 rules on this distribution.

wooden blocks spelling ppp and 2021

Need Another PPP Loan? Here Are The New Rules

Congress recently passed, and President Trump signed, a new law providing additional relief for businesses and individuals during the COVID-19 pandemic.

One item of interest for small business owners in the Consolidated Appropriations Act (CAA) is the opportunity to take out a second loan under the Paycheck Protection Program (PPP).

The Basics

The CAA permits certain smaller businesses who received a PPP loan to take out a “PPP Second Draw Loan” of up to $2 million. To qualify, you must:

  • Employ no more than 300 employees per physical location,
  • Have used or will use the full amount of your first PPP loan, and
  • Demonstrate at least a 25% reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after Jan. 1, 2021, are eligible to use gross receipts from the fourth quarter of 2020.

Eligible entities include for-profit businesses (including those owned by sole proprietors), certain nonprofit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, independent contractors and small agricultural co-operatives.

Additional Points

Loan terms. Borrowers may receive a PPP Second Draw Loan of up to 2.5 times the average monthly payroll costs in the year preceding the loan or the calendar year.

However, borrowers in the hospitality or food services industries may receive PPP Second Draw Loans of up to 3.5 times average monthly payroll costs. Only a single PPP Second Draw Loan is permitted to an eligible entity.

Gross receipts and simplified certification of revenue test. PPP Second Draw Loans of no more than $150,000 may submit a certification, on or before the date the loan forgiveness application is submitted, attesting that the eligible entity meets the applicable revenue loss requirement.

Nonprofits and veterans’ organizations may use gross receipts to calculate their revenue loss standard.

Loan forgiveness. Like the first PPP loan, a PPP Second Draw Loan may be forgiven for payroll costs of up to 60% (with some exceptions) and nonpayroll costs such as rent, mortgage interest and utilities of 40%. Forgiveness of the loans isn’t included in income as cancellation of indebtedness income.

Application of exemption based on employee availability. The CAA extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for a borrower reducing the number of employees retained and reducing employees’ salaries in excess of 25%.

Deductibility of expenses paid by PPP loans. The CARES Act didn’t address whether expenses paid with the proceeds of PPP loans could be deducted. The IRS eventually took the position that these expenses were nondeductible. The CAA, however, provides that expenses paid both from the proceeds of loans under the original PPP and PPP Second Draw Loans are deductible.

Further questions

Contact David Mills, CPA, LLC with any questions you might have about PPP loans, including applying for a Second Draw Loan or availing yourself of forgiveness.

$100 bill pulled apart as a puzzle piece

How Does the Consolidated Appropriations Act Affect You?

The Consolidated Appropriations Act 2021 is expected to be signed by President Trump today. There are key provisions for both individuals and businesses.

This is a 5,600-page document so it will take some time to provide all the details but the following is what has been released so far:

For Individuals: The full credit is $600 per individual, $1,200 per couple, and $600 for children. Children 17 and older are not eligible for the credit. There are income limits as in the first round of payments.

Payments are expected to start early next week. If you have not received the first payment or it was incorrect, you will be able to receive this on your 2020 tax return filing.

If you do not receive the second payment or it is an incorrect amount, you can claim this on your 2020 tax filing. For example, if a family has a child born in 2020 the additional $600 will not be included in the next round of payments. This amount will be claimed as a credit when filing the 2020 tax return.

Unemployment assistance is extended by 16 weeks. Supplemental federal unemployment benefits will continue to April 2021 instead of ending in December. The current CDC eviction moratorium will be extended until January 31, 2021.

For Businesses: Business expenses paid for with PPP proceeds are tax-deductible and the funds are not income. This will be the same rule for the second round of PPP funds.

There will be a second round of PPP funding (PPP2) to both first-time borrowers and those who have received a previous loan.

Previous PPP recipients may apply if:

  • You have 300 or fewer employees
  • Have used or will use the full amount of their first PPP loan
  • Can show a 25% gross revenue decline in 2020 quarter compared to the same quarter in 2019

PPP2 first time borrowers include:

  • Businesses with 500 or less employees
  • Sole proprietors, independent contractors, and eligible self-employed individuals
  • Not for profits, including churches

Borrowers that returned all or part of a previous PPP loan can reapply for the maximum amount available to them.  As with the first round of PPP, you will apply through your bank for funds.

More details will follow as they’re available. If you have any questions, contact us at David Mills, CPA, LLC.

sales force team members standing on blue lines grid

Rightsizing Your Sales Force

With a difficult year almost over, and another one on the horizon, now may be a good time to assess the size of your sales force. Maybe the economic changes triggered by the COVID-19 pandemic led you to downsize earlier in the year. Or perhaps you’ve added to your sales team to seize opportunities. In either case, every business owner should know whether his or her sales team is the right size.

Various KPIs

To determine your optimal sales staffing level, there are several steps you can take. A good place to start is with various key performance indicators (KPIs) that enable you to quantify performance in dollars and cents.

The KPIs you choose to calculate and evaluate need to be specific to your industry and appropriate to the size of your company and the state of the market in which you operate. If you’re comparing your sales numbers to those of other businesses, make sure it’s an apples-to-apples comparison.

In addition, you’ll need to pick KPIs that are appropriate to whether you’re assessing the performance of a sales manager or that of a sales representative. For a sales manager, you could look at average annual sales volume to determine whether his or her team is contributing adequately to your target revenue goals. Ideal KPIs for sales reps are generally more granular; examples include sales by rep and lead-to-sale percentage.

More than math

Rightsizing your sales staff, however, isn’t only a mathematical equation. To customize your approach, think about the specific needs of your company.

Consider, for example, how you handle staffing when sales employees take vacations or call in sick. If you frequently find yourself coming up short on revenue projections because of a lack of boots on the ground, you may want to expand your sales staff to cover territories and serve customers more consistently.

Then again, financial problems that arise from carrying too many sales employees can creep up on you. Be careful not to hire at a rate faster than your sales and gross profits are increasing. If you’re looking to make aggressive moves in your market, be sure you’ve done the due diligence to ensure that the hiring and training costs will likely pay off.

Last, but not least, think about your customers. Are they largely satisfied? If so, the size of your sales force might be just fine. However, salespeople saying that they’re overworked or customers complaining about a lack of responsiveness could mean your staff is too small. Conversely, if you have market segments that just aren’t yielding revenue or salespeople who are continually underperforming, it might be time to downsize.

Reasonable objectives

By regularly monitoring the headcount of your sales staff with an eye on fulfilling reasonable revenue goals, you’ll stand a better chance of maximizing profitability during good times and maintaining it during more challenging periods. Contact David Mills, CPA, LLC, for help choosing the right KPIs and cost-effectively managing your business.

IT Tech staff member at computer looking out window at city landscape

Should You Add A Technology Executive To Your Staff?

The COVID-19 pandemic and resulting economic impact have hurt many companies, especially small businesses. However, for others, the jarring challenges this year have created opportunities and accelerated changes that were probably going to occur all along.

One particular area of speedy transformation is technology. It’s never been more important for businesses to wield their internal IT effectively, enable customers and vendors to easily interact with those systems, and make the most of artificial intelligence and “big data” to spot trends.

Accomplishing all this is a tall order for even the most energetic business owner or CEO. That’s why many companies end up creating one or more tech-specific executive positions. Assuming you don’t already employ such an individual, should you consider adding an IT exec? Perhaps so.

3 common positions

There are three widely used position titles for technology executives:

1. Chief Information Officer (CIO). This person is typically responsible for managing a company’s internal IT infrastructure and operations. In fact, an easy way to remember the purpose of this position is to replace the word “Information” with “Internal.” A CIO’s job is to oversee the purchase, implementation and proper use of technological systems and products that will maximize the efficiency and productivity of the business.

2. Chief Technology Officer (CTO). In contrast to a CIO, a CTO focuses on external processes — specifically, with customers and vendors. This person usually oversees the development and eventual production of technological products or services that will meet customer needs and increase revenue. The position demands the ability to live on the cutting edge by doing constant research into tech trends while also being highly collaborative with employees and vendors.

3. Chief Digital Officer (CDO). For some companies, the CIO and/or CTO are so busy with their respective job duties that they’re unable to look very far ahead. This is where a CDO typically comes into play. His or her primary objective is to spot new markets, channels or even business models that the company can target, explore and perhaps eventually profit from. So, while a CIO looks internally and a CTO looks externally, a CDO’s gaze is set on a more distant horizon.

Costs vs. benefits

As mentioned, these are three of the most common IT executive positions. Their specific objectives and job duties may vary depending on the business in question. And they are by no means the only examples of such positions. There are many variations, including Chief Marketing Technologist and Chief Information Security Officer.

So, getting back to our original question: is this a good time to add one or more of these execs to your staff? The answer very much depends on the financial strength and projected direction of your company. These positions will call for major expenditures in hiring, payroll and benefits. Our firm can help you weigh the costs vs. benefits.

For more business advice, contact the small business experts at David Mills, CPA, LLC.

Glass hour glass with red sand sitting on a newspaper to mark the end of the year

2020 Is Ending | Now’s The Time To Review Your Personal Tax Return

We’ve almost made it through 2020! It’s time to take a look at a few things for your personal tax return.

New charitable contribution option If you do not itemize deductions, you can claim up to $300 of cash or check contributions to a charity on the front page of your tax return. Non-cash donations such as clothing, furniture and other personal property, do not qualify for this deduction. These non-cash donations are still reported on Schedule A (Itemized Deductions).

Did you receive a stimulus payment in 2020? The 2020 tax return asks for any stimulus payment received. If you received too little or none at all this may be the way to receive your payment.

Did you take a distribution from your qualified retirement plan or IRA? If so, and it was for COVID-19 reasons, you will not incur the 10% early withdrawal penalty. Also, you have options on how much to report on your tax return. For example, if you withdrew $60,000 from your IRA, you can report the entire amount in 2020 or spread this out over three years. If you repay the loan within three years, amended returns can be filed to refund the tax paid on the distribution. Contact us for the COVID rules on this distribution.

Look at Roth IRA conversions this year. Did you have less income in 2020? Do you have a traditional IRA? Will your income increase in 2021 and possibly further? What do you think tax rates will be going forward? These are all considerations when looking at Roth IRA conversions. This year may be a good opportunity to pay a one-time lower tax on your conversion. Generally, Roth IRA withdrawals are non-taxable. There are many considerations so call us to discuss your individual situation.

Is your income too high to qualify for a Roth IRA? You can still contribute to a traditional IRA and then convert to a Roth IRA. If you have multiple existing traditional IRA’s the rules are a bit different. Call us and we can discuss the details.

New rules for 529 accounts You can use 529 accounts to pay for apprenticeship program expenses such as fees, books, supplies and equipment required for the program. Also, up to $10,000 (in total, not yearly) can be paid on qualified student loans. This can be for the designated beneficiary or their sibling.

How you can lower capital gains tax With record stock market values check with your financial adviser on estimated capital gains, interest, and dividends on your accounts. Several companies have announced extra year end dividends in anticipation of higher tax rates next year. If you have stock that’s declined in value it may be a good time to sell to offset other gains you may have.

We hope you and your family have a safe and happy holiday season. If you have any questions, please contact us at David Mills, CPA, LLC.

man looking at a laptop screen while video chatting with an older family member

Family Business Owners Must Weave Together Succession & Estate Planning

It’s been estimated that there are roughly 5 million family-owned businesses in the United States. Annually, these companies make substantial contributions to both employment figures and the gross domestic product. If you own a family business, one important issue to address is how to best weave together your succession plan with your estate plan.

Rise to the challenge

Transferring ownership of a family business is often difficult because of the distinction between ownership and management succession. From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing any estate taxes. However, you may not be ready to hand over control of your business or you may feel that your children aren’t yet ready to run the company.

There are various ways to address this quandary. You could set up a family limited partnership, transfer nonvoting stock to heirs or establish an employee stock ownership plan.

Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the business. Providing such heirs with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth with them while allowing those who work in the business to take over management.

Consider an installment sale

An additional challenge to family businesses is that older and younger generations may have conflicting financial needs. Fortunately, strategies are available to generate cash flow for the owner while minimizing the burden on the next generation.

For example, consider an installment sale. These transactions provide liquidity for the owner while improving the chances that the younger generation’s purchase can be funded by cash flows from the business. Plus, so long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes.

Explore trust types

Or, you might want to create a trust. By transferring business interests to a grantor retained annuity trust (GRAT), for instance, the owner obtains a variety of gift and estate tax benefits (provided he or she survives the trust term) while enjoying a fixed income stream for a period of years. At the end of the term, the business is transferred to the owner’s children or other beneficiaries. GRATs are typically designed to be gift-tax-free.

There are other options as well, such as an installment sale to an intentionally defective grantor trust (IDGT). Essentially a properly structured IDGT allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once the installment payments are complete, the business passes to the owner’s beneficiaries free of gift taxes.

Protect your legacy

Family-owned businesses play an important role in the U.S. economy. We can help you integrate your succession plan with your estate plan to protect both the company itself and your financial legacy. For more information, contact David Mills, CPA, LLC today.

Tax documents, calculator, pen and post-it tab markers

CARES Act Gives Some Businesses Chance to File Amended Tax Returns

The Coronavirus Aid, Relief and Economic Security (CARES) Act made changes to excess business losses. This includes some changes that are retroactive and there may be opportunities for some businesses to file amended tax returns.

If you hold an interest in a business, or may do so in the future, here is more information about the changes.

Deferral of the excess business loss limits The Tax Cuts and Jobs Act (TCJA) provided that net tax losses from active businesses in excess of an inflation-adjusted $500,000 for joint filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to be treated as net operating loss (NOL) carryforwards in the following tax year.

The covered taxpayers are individuals, estates and trusts that own businesses directly or as partners in a partnership or shareholders in an S corporation. The $500,000 and $250,000 limits, which are adjusted for inflation for tax years beginning after calendar year 2018, were scheduled under the TCJA to apply to tax years beginning in calendar years 2018 through 2025.

But the CARES Act has retroactively postponed the limits so that they now apply to tax years beginning in calendar years 2021 through 2025. The postponement means that you may be able to amend: Any filed 2018 tax returns that reflected a disallowed excess business loss (to allow the loss in 2018) and Any filed 2019 tax returns that reflect a disallowed 2019 loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to tax years that begin in 2020. Thus, such a 2020 year can be a window to start a business with large up-front-deductible items (for example capital items that can be 100% deducted under bonus depreciation or other provisions) and be able to offset the resulting net losses from the business against investment income or income from employment (see below).

Changes to the excess business loss limits The CARES Act made several retroactive corrections to the excess business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross income or gain attributable to employment aren’t taken into account in calculating an excess business loss.

This means that excess business losses can’t shelter either net taxable investment income or net taxable employment income. Be aware of that if you’re planning a start-up that will begin to generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken into account in determining any NOL carryover but isn’t automatically carried forward to the next year.

And a generally beneficial change states that excess business losses don’t include any deduction under the tax code provisions involving the NOL deduction or the qualified business income deduction that effectively reduces income taxes on many businesses.

Because capital losses of non-corporations can’t offset ordinary income under the NOL rules: Capital loss deductions aren’t taken into account in computing the excess business loss and the amount of capital gain taken into account in computing the loss can’t exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Contact David Mills, CPA, LLC with any questions you have about this or other tax matters.