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Vol9

Planning for the Future

Are Fixed Costs Really Fixed?

BYOD

Data Mining your Tax Return

2 Cerini & Associates, LLP. - Bottom Line

Contributors

3340 Veterans Memorial Hwy, Bohemia, N.Y. 11716

631-582-1600 www.ceriniandassociates.com

EditorTimothy J. McHale, CPACerini & Associates, LLPPartner

Associate EditorsKen Cerini, CPA, CFPCerini & Associates, LLPManaging Partner

Lula LukasiewiczCerini & Associates, LLPMarketing Coordinator

Edward McWilliams, CPACerini & Associates, LLPSenior Accountant

WritersJacob Lutz, MBACerini & Associates, LLPStaff Accountant

Frank GiacconeCerini & Associates, LLPStaff Accountant

Edward McWilliams, CPACerini & Associates, LLPSenior Accountant

Carissa Scanlon, CPACerini & Associates, LLPManager

Page Layout & DesignApril St. AngeloCerini & Associates, LLP Graphic Designer

From the Editor - Timothy J. McHale

Connected to your business... connected to your goals...

connected to your success

If you believe what you read, the economy is turning around. Now if only the economy could read and acquiesce. I don’t know about you, but we’re just not seeing it. Yeah, there are some positive signs, but for the most part businesses are still struggling, looking for ways to improve operations, generate appropriate cash flows, and obtain necessary financing. Everybody is scrambling to determine the impact that changing government mandates, such as Obamacare, will have on their operations. Unfortunately, we find that many accountants are little more than historians, when most business owners really need a business advisor.

In this edition of the Bottom Line, we have included several articles focused on helping you to move your business forward … How to data mine your tax return for information; planning for the future; cost containment; and bring your own device, the pros and cons. We want you to be armed with the tools to think differently; to not just react but to proactively set a course for your business to succeed. Hopefully this issue of the Bottom Line will spark something that will start that process.

We pride ourselves on being different, focused on helping you reach your financial goals. After all, we’re business owners too. We are here to help you take your business to the next level … we are connected to your business, your future, your success!

Thanks,

Timothy J. McHale, CPAPartner

Cerini & Associates, LLP. - Bottom Line 3

Connected to your business... connected to your goals...

connected to your success

We talk to business executives all the time about planning for the future and one thing is evident: too many of them are mired in the here and now (crisis management), doing very little towards effectuating change that will drive their business forward. While it is important to listen and learn from the past and deal with the day-to-day issues that arise in every business, it is critical for executives to strategically focus on where they are looking to take their organization and implement strategies that will get them there. Below are some tips for looking at your past, dealing with your present and planning for the future.

The Past: It has been said that those that do not learn from the past are destined to relive it. This holds true for businesses too. We are firm believers that you need to perform analysis of your past financial information so that you can implement changes that will drive better results. Look at the following data to help judge your business performance:

• Budget to actual comparisons;• Referral patterns to your products and services;• Lost revenue and opportunities;• Staffing levels;• Industry benchmarks (Margins, cost of goods sold, overheads, ancillary

revenue streams, costs(rent, labor, etc) as a %age of sales.

There is so much information available to you through the internet, that it is fairly easy to gather the information necessary to do a deep dive on your past performance to find profitability leakage that you can stop. In order for this to be effective, however, you must ensure that you have strong, timely, and relevant internal financial information. Analysis of your past can help guide your actions in the present.

The Present: What is the key financial information that drives your business results? You need to determine the 4 to 6 key business measures that are important predictors for your business and measure them and track them on a daily basis similar to a patient in the hospital. When you’re in the hospital, the nurses are constantly taking your temperature, checking your blood pressure, and monitoring your vitals. You need to do the same for your business. By regularly monitoring your businesses vital statistics (dashboards) you will be able to determine early on if there are issues you need to be cognizant of and be in a better position to take action when the opportunity arises. Such dashboards should include information from your past (above) and your future (below).

Now is also when you want to start implementing change within your organization, which needs to take place at all levels. Utilize the information you learned from the past to create course corrections that will get you to the future you envision for your organization. If you develop a roadmap as to where you are looking to go, and install a good tracking system to monitor progress, you can more effectively run your day-to-day operations rather than have them run you. And, if you are on cruise control, it leaves you more time to focus on the future.

The Future: Successful executives know that the key to their success is strategic thinking and planning. Many businesses go through a “strategic planning process,” but then take the results of this process and relegate them to a file draw or book shelf, while they once again get sucked into the day-to-day crisis management that runs their business and their life. It is the rare few that understand that if you have a plan and work that plan, results will come. This is not an easy process … change never is. Who really likes starting a new exercise regimen (there’s always tomorrow to get into shape)? As we all know, though, tomorrow never comes as the complacency of the couch and TV remote call out to us. It’s time you take control of your business. Start strategic thinking using some of the following ideas:

• Consider developing an advisory committee made up of your key stakeholders (important customers, clients, donors, vendors) who can provide insight into your strengths and weaknesses.

• Set aside time with key staff members and other advisors (you know, like your accountant), and develop real, definable goals that you would like to achieve for your business.

• Determine who will be responsible for these goals and what steps will need to be implemented to achieve these goals.

• Create dashboards that will help you to monitor the key indicators that drive your business, so that regular course corrections can be made.

• Develop methods to continuously review your strategies for effectiveness. It takes time for new strategies to take hold.

• Don’t be impatient and pull the plug too quickly, but also don’t throw good money after bad if a strategy was truly ineffective. Develop appropriate financial and operational reporting so that you can see the results you are having.

In an effective business, your past and present need to come together to help shape your future. Are you on the right path?

PLANNING for the

FUTURE

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Each year, all businesses are required to file a tax return with the IRS, whether it be an 1120, an 1120S, or a 1065. Accounting firms will gather up the businesses’ information, prepare the returns, file them with the IRS, and send each client a copy of the return for their records. All too often, the client’s copy of the tax return is given just a quick glance and stuffed into a drawer where it will sit until it meets its ultimate fate in the belly of a shredder. What most business owners do not realize is that their business’ tax return is not just an expensive stack of paper; it has the potential to be a powerful analytical tool that can be used to gauge the success of the business. Tax returns are required to disclose a great deal of important information ranging from quantitative information,

such as revenues and expenses, to qualitative information, such as the business’ industry, key information about certain shareholders, partners, or officers, and details about the business’ assets and liabilities. All you need to do to make the most of this information is to think like an accountant and let the numbers on the return tell you a story about your business.

The best place to start analyzing a tax return is on the very first page. Regardless of the type of return, the first page is essentially an income statement and it shows your business’ revenues, cost of goods sold, gross profit, expenses, and net taxable income. There are several basic

Get The Most Out of Your Business Tax Return

DATA MINING YOUR TAX RETURN

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current liabilities include all lines from accounts payable through other current liabilities. Generally, you will want the current ratio to be above one, which means that your business’ current assets are greater than current liabilities. This demonstrates that your business is in a liquid enough financial position to meet its short term debt obligations. If your business’ current ratio is below one, then you should consider ways to bolster your current assets and increase the liquidity of your business. Unforeseen expenses come up all the time and if your business is having liquidity issues, these expenses could be very damaging. Your current ratio will also provide insight into the bankability of your company. The higher the current ratio, the more attractive you are to a bank.

Return on assets is another fairly common ratio and it is used to measure how effectively your business is making use of its assets in terms of generating revenues. To calculate return on assets, take the ordinary income from page one of the tax return and divide it by your total assets on Schedule L. The resulting number shows the amount of income generated from each dollar of assets on the books of the business. Unlike the current ratio where the benchmark number is one, there is no universal benchmark for return on assets. Return on assets numbers are industry specific and the way to determine whether your business’ return on assets is solid or needs improvement is to compare it to the industry average which can be researched online.

For a business that relies primarily on selling inventory such as a retail or wholesale business, calculating the inventory turnover ratio can be very useful. The inventory turnover ratio tells you approximately how many times during the year your business was able to completely sell out its inventory. To calculate inventory turnover, you first need to determine the average carrying value of inventory during the year. To do so, take the ending inventory value of the prior year, add it to the ending inventory value of the current year, and divide by two. Then, take the cost of goods sold number from the first page of the return and divide it by the average inventory number that you just calculated. The resulting number is the number of times that your business was able to sell out or “turnover” its inventory during the year. In general, a high inventory turnover is good because it indicates that the business is experiencing good sales and also that inventory is not sitting very long before it is sold. A low inventory turnover can either be the result of poor sales or the holding of excess or obsolete inventory. There is a big downside to slow moving inventory; potential obsolescence, excess warehousing costs, tied up cash flows, etc. To get an idea as to whether your inventory turnover is good or needs improvement, you can compare it to the industry average.

These ratios and calculations are only the tip of the iceberg. There are many other ratios, some industry specific, some not, that can tell you even more about your business. So when you receive your business’ tax return copy this year, don’t just toss it into the drawer. Get the most out of your tax return and use it as a tool to learn some important things about your business that you may not otherwise have known. If you need help, we’re here for you.

ratios that can be calculated using these numbers. The first is the gross profit percentage and it can be calculated by taking the gross profit amount and dividing it by the gross revenues and receipts. The gross profit percentage is important because it shows what percentage of total receipts is left over after subtracting out your business’ direct costs such as direct labor and inventory expenses. A higher gross profit percentage means that your business will have more cash available to pay for general and administrative expenses, distributions, and for new assets acquisitions that will be utilized in future years. In general, the gross profit ratio of your business should remain fairly steady each year (or even better, increase). If it does not, then it may be a good idea to investigate what is causing the downward fluctuations.

Net income percentage is another important ratio that you can easily calculate. To calculate the net income percentage, take the ordinary business income at the bottom of the page and divide it by the gross revenues and receipts. This ratio shows you the percentage of your total receipts that your business has left over after it pays both direct costs as well as general and administrative expenses. Unlike the gross profit percentage, the net income percentage has the potential to fluctuate significantly from year to year, so do not be too alarmed if you notice a large change from one year to another. Take a look at the expenses and how they changed from the prior year and you should be able to determine what is causing the change in net income. The key here is looking at annual trends. If your net income percentage significantly changes from year to year, it is important to understand the factors that are driving this change.

In addition to being useful for calculating the net income percentage, the ordinary business income number on the first page of the tax return can also be useful for getting a general idea as to your business’ cash flow from operations. Since several expenses on the first page are not cash expenses, such as depreciation, depletion, and amortization, you should add back these expenses to the ordinary business income or loss to arrive at the net cash your business received, if the number is positive, or expended, if the number is negative. It is, however, important to keep in mind that this is only an approximation of your business’ cash flow from operations and the number does not take into account cash from asset purchases or sales, cash from loans paid back or received, swings in receivables and payables (if you are an accrual based taxpayer), or cash that was put in or taken out of the business. The process to calculate actual cash flow is a bit more complicated, but can usually be done fairly accurately with the assistance of an accountant.

After the first page, the next page that you can analyze is the page that contains the Schedule L. For businesses filing an 1120 or 1065, the Schedule L can be found on the fifth page and for businesses filing an 1120S, the Schedule L can be found on the fourth page. Basically, the Schedule L is a balance sheet and it displays all of the assets, liabilities, and equities of your business. Many analytical ratios can be calculated using the numbers on the Schedule L, but for our purposes, we will be focusing on three: the current ratio, return on assets, and the inventory turnover ratio. Each of these ratios can be calculated relatively simply, but can be important in measuring your business’ financial success.

The first of these three ratios, the current ratio, is calculated by taking total current assets and dividing them by total current liabilities. Current assets include cash, marketable securities, accounts receivable, inventories, and other highly liquid assets. On the tax return, current assets include all lines from cash through other current assets. Current liabilities include all liabilities that will come due within one year of the ending date for which the tax return is filed. On the tax return,

DATA MINING YOUR TAX RETURN

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While most business owners are aware they can improve on their variable costs, many do not even think of evaluating ways to reduce their fixed costs. This is one of the best ways to improve your bottom line.

For example, if your profit is 10% of revenue you will need ten dollars of sales to increase profit by one dollar. By reducing your fixed costs by one dollar you will achieve that same one dollar of profit.

So how do you go about decreasing your fixed costs? The easiest step, which is often overlooked, is to sit down and evaluate where your money is going. Gather all of your businesses fixed costs and review them one by one. Often times these costs are paid automatically, and many owners do not even realize just how much they are paying. By simply taking a moment to look at these costs, and challenge them, you may instantly realize there are less expensive alternatives.

Other fixed costs may not be as obvious and may require you to dig a little deeper. The following are some examples to help you improve your bottom line. If your business has older vehicles and/or equipment that are not currently needed, it may be prudent to sell them. This will decrease your monthly costs and generate some cash, which may be put to better use elsewhere. If you still need the vehicle or equipment, now may be a great time to replace them with newer and more energy efficient models. This will save you a substantial amount of money in fuel, maintenance costs, and insurance. Also, with interest rates as low as they are, now is a great time to finance a newer vehicle or equipment, or for that matter refinance any other debt you may have.

If you are not maximizing your current space, downsize your facility. This will decrease your rent and utilities costs. If you own the building, look to rent out the unused space to generate rental income. If you plan to be in the same

building for awhile, try extending your lease contract from say 2 to 5 years. For doing so, your landlord may be willing to decrease your monthly rent. In any event, with vacancy levels where they are, consider opening lines of communication with your landlord to see if they would be willing to work with you on your monthly rent. Decreasing inventory, or keeping less inventory on hand, allows for your business to use a smaller warehouse or sublet your warehouse to another business.

The price of real-estate has decreased in many areas and interest rates are still low, so now may be a great time to look for a new location. Newer buildings are also far more energy efficient. When your business is closed, turn off your hot water heater and in the summer raise the thermostat to decrease air-conditioning costs. Check out energy efficient light bulbs. Switching from Halogen to LED bulbs can save your business potentially thousands of dollars a year. While initially more expensive, over time they will save your business in electricity costs. Going green can provide savings. Switching to Solar Power may be initially expensive, but the long-term savings can be significant. There are also companies that install the panels free of charge. You simply pay them for the energy used. Our firm has decided to go ahead and install solar panels and based on our analytics we will break even in 6 years. Not only will we save money after that, but as an added benefit we will be contributing to a cleaner and greener environment. Your customers will surely appreciate your eco-consciousness.

Switching telephone technologies and moving to VoIP (voice over Internet protocol) from your traditional phone service can be a great way to save money without losing any of your current features. If your business makes a significant amount of international phone calls VoIP will provide savings. The calls are made over the internet so you need to have broadband access. The only cost is speakers, sound card, microphone and your monthly internet bill regardless of who you call and how long you spend on the phone. Also, compare the rates of cellular providers in order to determine if changing plans can save you money.

Review your current advertising costs, you may find more effective ways of using this cash or marketing your business. For example using mobile, email, or social media may be far more effective and cheaper than traditional marketing for your business.

If your bank is charging you a monthly maintenance fee or minimum balance fee you may be able to find better deals elsewhere or increase the balance in your account to avoid fees. If you are not using all of the features of your current bank account look for other options with only the features you need. Similar situations exist with respect to credit cards fees. There are companies out there that can reduce your credit card fees by looking at the transaction that your customers charge. This should be explored.

Look for ways to reduce your insurance premiums. If you have not filed a claim in a while, your insurance company may be willing to reduce your premium. If you have theft coverage or fire insurance, installing security cameras and a sprinkler system may decrease your premium, while at the same time provide protection for your business.

Salary expense is often the largest cost for businesses and thus should be closely reviewed to determine if this expense can be reduced. Here are a few ways to reduce salary expense: consolidating positions and eliminating those which are not essential; look at outsourcing certain positions, such as sales, marketing and labor; consider using interns or newer staff out of school and train them. They are often more tech savvy and can streamline the work they perform for you. They also demand lower pay than more senior employees. By evaluating your fixed costs and implementing changes where possible, your business will be leaner, stronger, and more profitable.

Contact Cerini & Associates, LLP and see how we can help you improve your bottom line.

Are Fixed CostsREALLY Fixed?

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The rise of bring your own device (BYOD) programs is considered the most radical shift in the economics of client computing for business since PCs invaded the workplace. Bring your own device (BYOD) is an alternative strategy that allows employees, business partners, and other users to use their own selected and purchased devices to access secure company data and execute enterprise applications. For most organizations, the program is currently limited to smartphones and tablets, but the strategy may also be used for PCs and may include subsidies for equipment or service fees. It is currently estimated that 62% of U.S companies allow BYOD, and 94% of these companies have a BYOD policy in place.

BYOD benefits both employee and employer. Workers realize an improved user experience, since they are much more proficient with their own devices. Such a program limits the number of devices an employee must carry and can be structured to provide subsidies for mixed use devices, which is a nontaxable fringe benefit. The ownership of devices is also thought to increase overall employee engagement and satisfaction, which can be especially important with the increase of the mobile workforce and flexible employment arrangements.

Employers may also achieve a competitive advantage, as BYOD gives employees the ability to conduct business from anywhere at any time. Employees are more likely to look at the devices during non-peak work times and will generally put in more hours than an employee without a mobile device. It also allows the employer to save on hardware costs and the costs related to the obsolescence of technology. Employees will often have devices that are more technologically advanced than what is currently being offered by their employer. However, BYOD also comes with challenges for both the employee and the employer. From an employee perspective, the increased access that is seen as a benefit can also be a double edged sword as now employers and business partners will expect increased access to you at all times. This can be seen as further eroding the work/life balance equation that has become a hot topic for employment in recent years. Further, some BYOD users have learned of overreaching IT security the hard way, when their devices were remotely wiped clean with little to no warning by companies looking to secure their data after employment ended. As a result these former employees lost all of their personal data along with their business data. Although it has been estimated that only about 21% of companies perform these remote wipes when an employee quits or is terminated, it is often a complete surprise to the former employee, as most employees click the “I agree” button to the pro forma user agreement, which pops up when they connect to the internet, without taking the time to actually read it.

For the employer, there are several challenges that BYOD presents that have still not been fully resolved from a best practices and legal perspective. These are mostly related to privacy and security issues that arise due to loss of control over the device’s configurations and security settings. BYOD devices might not have the same security software and patches installed leading to network and data vulnerability. Businesses can also have issues with user authentication, access control, and monitoring.

Apart from the inherent technology risks, there are still unknown legal risks that are still being sorted out from an employer perspective. As mentioned above, many users experience a complete remote wipe of their device after employment, which can include valuable personal data. While there have been no cases related to this when agreements have been signed by employees, the full legal standing of this is still up in the air. Furthermore, if the devices have data relating to a legal proceeding on them (such as a lawsuit against the company for malfeasance), the device could be subject to legal discovery, requiring the employee to turn over the device for scrutiny of both public and private data. Finally, the increased worker access and productivity mentioned before can lead to contractual compensation issues being triggered.

In response to the unique challenges presented by BYOD, a company should analyze the benefits versus the risks. Once a company has decided to implement a BYOD program, they should meet with their IT staff and legal counsel in order to set up a secure IT control environment and employment policies. The IT environment should include a specification of what types of devices are acceptable, what the policies are for corporate data vs. personal data, passwords and security on the device, and the control and ownership of the corporate data.

Many of these IT environmental challenges can be handled by utilizing mobile device management software. There are numerous mobile device management programs available that create a secure container for work files on a user’s personal device. One such example is Moka Five for iOS, which is available and free in the app store. Programs like these allow IT staff to remove only work-related material from a device. This is viewed as the best practice.

Ultimately, a successful BYOD program properly balances the challenges to achieve empowered mobile users, improved IT insight, and a reduction of costs. Any business that currently allows BYOD, or is considering implementing a BYOD program, should put in place a set of formal policies and procedures as soon as possible.

BYOD

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3340 Veterans Memorial Hwy., Bohemia, N.Y. 11716 • (631)582-1600 • www.ceriniandassociates.com

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Timothy J. McHale, CPAPartner

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