Monthly Archives: March 2018

Short Sale of Rental Property

Category : Blog , sccm





A court rules that a short sale of rental property and forgiven debt was one transaction. The U.S. Tax Court ruled that the short sale of a married couple’s principal residence that had been converted into rental property, followed by the mortgagee’s forgiveness of their debt on the residence, was part of one sale or exchange. The taxpayer argued they were two separate transactions. As a result, the amount realized in that single transaction included the discharged nonrecourse debt. (Simonsen, 150 TC 8)


Feeling lucky? How to find a pot of gold in your financials

Category : Blog , sccm

Every business experiences occasional cash shortages. When this happens, owners often assume they should go out and sell more. But this strategy can sometimes compound money troubles over the short run. Why? The answer lies in a concept known as the “cash gap.” Understanding this concept can help your business generate extra cash to meet working capital needs. Here’s how.

Focus on the balance sheet

The cash gap is a function of the timing difference between 1) when companies order materials and pay suppliers, and 2) when they receive payment from their customers. This difference can lead to cash shortages if the company doesn’t have extra savings, doesn’t qualify for additional bank financing or doesn’t want to draw on a line of credit. It’s also important to keep in mind that cash gaps funded by bank financing incur interest costs.

Boosting sales generally isn’t the solution, because, when cash is tight, selling more will often widen the cash gap. That’s because the company will need to front the incremental cost of sales while new orders are fulfilled, invoices are sent and customers remit payment. This concept explains why start-ups and high growth companies tend to experience cash shortages.

Finding hidden treasures

If the company finances its cash gap, shaving a day or two off the gap could save thousands of dollars in interest expense over the course of a year. Minimizing the cash gap requires you to focus on its underlying variables:

Inventory. There are numerous ways to minimize your investment in inventory. For instance, you might search the warehouse for slow-moving items and then either return stale items for credit, trade them with another supplier or competitor, or sell the items for scrap.

You can also revise your company’s purchasing policies. For example, some materials and parts suppliers may agree to discounted bill-and-ship or consignment arrangements in exchange for exclusive or long-term contracts.

Receivables. The faster a company can get money in the door, the smaller its cash gap will be. Your business can encourage faster payments from customers by sending out past-due reminder letters and following up with phone calls. Also evaluate invoicing procedures to minimize the days in receivables. Poor communication among billing, sales and production staff can cause invoicing delays.

Payables. Think of trade payables as a form of interest-free financing. But, beware, there are limits to how far a company can extend its payables. Slow-paying businesses may forgo early-bird discounts or receive less favorable treatment from suppliers, such as slower delivery, higher rates or cash-on-delivery terms. Delayed payments can also harm a company’s credit rating, as well as its reputation among its pool of eligible suppliers.

Put it to work for you

The cash gap can be a helpful management tool, because it pinpoints hidden treasures in your balance sheet. Put simply, companies with shorter cash gaps tend to experience fewer cash shortages and rely less on bank financing. Contact us for help measuring your cash gap and using it to manage working capital more efficiently.

© 2018


Unlock hidden cash from your balance sheet

Category : Blog , sccm

Need cash in a hurry? Here’s how business owners can look to their financial statements to improve cash flow.

Receivables

Many businesses turn first to their receivables when trying to drum up extra cash. For example, you could take a carrot-and-stick approach to your accounts receivable — offering early bird discounts to new or trustworthy customers while tightening credit policies or employing in-house collections staff to “talk money in the door.”

But be careful: Using too much stick could result in a loss of customers, which would obviously do more harm than good. So don’t rely on amped up collections alone for help. Also consider refining your collection process through measures such as electronic invoicing, requesting upfront payments from customers with questionable credit and using a bank lockbox to speed up cash deposits.

Inventory

The next place to find extra cash is inventory. Keep this account to a minimum to reduce storage, pilferage and security costs. This also helps you keep a closer, more analytical eye on what’s in stock.

Have you upgraded your inventory tracking and ordering systems recently? Newer ones can enable you to forecast demand and keep overstocking to a minimum. In appropriate cases, you can even share data with customers and suppliers to make supply and demand estimates more accurate.

Payables

With payables, the approach is generally the opposite of how to get cash from receivables. That is, you want to delay the payment process to keep yourself in the best possible cash position.

But there’s a possible downside to this strategy: Establishing a reputation as a slow payer can lead to unfavorable payment terms and a compromised credit standing. If this sounds familiar, see whether you need to rebuild your vendors’ trust. The goal is to, indeed, take advantage of deferred payments as a form of interest-free financing while still making those payments within an acceptable period.

Is your balance sheet lean?

Smooth day-to-day operations require a steady influx of cash. By cutting the “fat” from your working capital accounts, you can generate and deploy liquid cash to maintain your company’s competitive edge and keep it in good standing with stakeholders. For more ideas on how to manage balance sheet items more efficiently, contact us.

© 2018


How to classify shareholder advances

Category : Blog , sccm

Owners of closely held businesses sometimes need to advance their companies money to bridge a temporary downturn or provide extra cash flow for an expansion, a major expense or other purposes. Should you categorize those advances as bona fide debt, additional paid-in capital or something in between? Under U.S. Generally Accepted Accounting Principles (GAAP), the answer depends on the facts and circumstances of the transaction.

Debt vs. equity

The proper classification of shareholder advances is especially important when a company has more than one shareholder or unsecured bank loans. It’s also relevant for tax purposes, because advances that are classified as debt typically require imputed interest charges. However, the tax rules may not always sync with GAAP.

To further complicate matters, shareholders sometimes forgive loans or convert them to equity. Reporting these types of transactions can become complex when the fair value of the equity differs from the carrying value of the debt.

Relevant factors

When deciding how to classify shareholder advances, it’s important to consider the economic substance of the transaction over its form. Some factors to consider when classifying these transactions include:

Intent to repay. Open-ended understandings between related parties about repayment imply that an advance is a form of equity. For example, an advance may be classified as a capital contribution if it was extended to save the business from imminent failure and no attempts at repayment have ever been made.

Loan terms. An advance is more likely to be treated as bona fide debt if the parties have signed a written promissory note that bears reasonable interest, has a fixed maturity date and a history of periodic loan repayments, and includes some form of collateral. If an advance is subordinate to bank debt and other creditors, it’s more likely to qualify as equity, however.

Ability to repay. This includes the company’s historic and future debt service capacity, as well as its credit standing and ability to secure other forms of financing. The stronger these factors are, the more appropriate it may be to classify the shareholder advance as debt.

Third-party reporting. Consistently treating an advance as debt (or equity) on tax returns can provide additional insight into its proper classification.

With shareholder advances, disclosures are key. Under GAAP, you’re required to describe any related-party transactions, including the magnitude and specific line items in the financial statements that are affected. Numerous related-party transactions may necessitate the use of a tabular format to make the footnotes to the financial statements reader friendly.

Need help?

Shareholder advances present financial reporting challenges that can’t be fixed with a one-size-fits-all solution. We can help you address the challenges based on the nature of your transactions and adequately disclose these transactions in your financial statement footnotes.

© 2018


2018 – 03/02 – How to classify shareholder advances

Category : Blog , sccm





Classifying shareholder advances is one of the gray areas in financial reporting. When deciding whether to report advances as debt or equity, ask yourself the following questions: Does management intend to repay the loan? Can the company realistically repay it? Have market-rate terms been negotiated and followed? And how is the transaction classified for tax purposes? Shareholder advances present financial reporting challenges. We can help you address those challenges and adequately disclose these transactions in your financial statement footnotes.