Al’s Column: Staying on the same page is key to success

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July 31/Aug. 7: Volume 31, Issue 4
By Tom Shay

In many ways, running a business is akin to playing team sports. And we all know what can happen when members don’t behave as if they are playing for the same team. (Perhaps you have seen that sports clip of the defender on a professional soccer team who, in his attempt to pass the ball to the goalkeeper, kicked the ball in the goal to score for the opposing team.)

There may be parts of our business where it can feel like the same thing is happening. By not working together it feels as if we aren’t playing on the same team. One of the places within a business where this can easily occur is the relationship between the owner and the accountant. This relationship is a partnership. Too often the owner thinks his role is to run the business and the accountant’s part is to take care of all “that numbers stuff.” In truth, the owner’s job is to be able to actively participate in the conversation with the accountant.

There are likely to be many decisions made about the business in which the accountant, along with perhaps an attorney, and the owner simply agreed— such as the filing of the business. A business in the U.S. is one of six legal entities—an LLC, “C” corporation, “S” corporation, partnership, sole proprietorships and LLP. One is best for your business with regards to protecting you, as an individual, from lawsuits. Potentially, the right entity could diminish your taxes.

Your business has assets that are subject to depreciation or amortization. There are options as to when either is reported. Doing so correctly can diminish the amount of tax liability in years your business is more profitable. Did you actively participate in how the depreciation was taken? Or did you passively accept what the accountant recommended?

When you borrowed money for your business, did the accountant and lawyer ask to look at the terms and covenants of the document? (The covenants are the guidelines of how you are required to operate your business for the length of the loan.) The covenants are generally calculated as ratios from your financial statements. Are you aware of what all the requirements are? Do you know how to calculate the ratios? Should these ratios go in the wrong direction, do you know what measures to take to correct it?

Related to these covenants and ratios is the issue of borrowing money. Think of the ratios as being similar to your personal credit score; the better your ratios, the greater the chance you may get the loan at a more favorable rate. The key is understanding how they are calculated and what you can do to improve them.

Has the accountant shown you how to accurately create a cash flow needs projection chart for the next 12 months? Many business owners have experienced a situation where they had an immediate need for cash. Looking around their business they see inventory or supplies that, if converted to cash, would solve the need. They just didn’t see that need when they made the purchase.

The opposite was making a smaller purchase than necessary because of a concern for future cash needs. However, the business found there was enough cash that they could have made the larger purchase. The cash flow projection would have solved both situations.

 

Join Tom Shay at The International Surface Event (TISE) on Wed., Jan. 31, from 8 a.m. to 9:30 a.m., in an interactive session, “What Your Accountant is Not Telling You.” Registration for TISE is now open at tisewest.com. For more tips from Tom Shay, visit profitsplus.org.

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