Tuesday, November 11, 2014YOUNGSTOWN, Ohio -- What’s self-evident to a certified public accountant isn’t always obvious to the owner of a small company.
A recent seminar led by four CPAs from the Youngstown office of Cohen & Co. presented owners of manufacturing concerns and bankers reminders about not losing sight of the basics as well as updates on both the Ohio and federal tax codes. The two-hour session, “25 Ways to Drive Profitability,” touched on everything from the benefits of converting to LIFO – last-in, first-out – accounting for inventory to how to retain good employees, from strengthening internal controls to IC-DISCs, from accelerated depreciation to the benefits of an energy audit.
Adam Timblin and Joe Damore, manager and senior manager of accounting and auditing, and Teri Grumski and Marc Mazzella, manager and senior manager in Cohen’s tax department, led the discussion at the Youngstown Country Club.
LIFO benefits the owner if he has reason to believe the cost of inventory will continue to rise, Damore said. LIFO freezes his cost of inventory the year he converts. The risk in converting to LIFO is that price can drop and hurt the company’s profitability. Moreover, LIFO simply defers his taxes; it is not a tax credit. The other risk, possible but unlikely, is that accounting rules could change.
If an company owner determines his business should have a website, Damore advised, owners should develop and post content that search engines should lead customers to. More important is enabling the customers to complete a purchase.
As the economy continues to improve, recruiting and retaining talent become more challenging and more expensive, Timblin said. “It’s more cost-effective to keep a good employee than find a replacement,” he observed.
Offering incentives is key. But, “the most effective incentives are not money but goods and more vacation time,” he’s found. A gift, such as a large-screen TV, reminds the employee what he did to earn the recognition every time he uses it or views it, the CPA said.
He advised that whatever incentive is awarded, “it should be closely related to the company’s strategic goals.”
In a small organization, because of the small number of employees, the separation and division of responsibilities makes it more difficult to have the internal controls auditors prescribe.
“The smallest companies tend to suffer disproportionately large losses because they have limited internal controls or hotlines,” Timblin said, “Manufacturing has the highest risk of any industry. Tools are always at risk.”
Citing the Association of Certified Fraud Examiners, Timblin reported, “The typical company loses 5% of its revenues to fraud. The median loss was $145,000, with 22% of cases involving losses of a least $1 million.”
At a minimum, strong internal controls mean, “You need to focus on ensuring the same employee does not have the authorization, record-keeping and custody responsibilities.”
Some measures companies took during the Great Recession should be re-examined, the CPAs advised, such as the owner updating his relationship with his bank. With their profitability more assured, they should review whether they need as large a line of credit, for example. “It makes no sense to be paying the costs on the unused portion of your line of credit,” Timblin said. And an owner could save interest expense by paying down debt, especially if there is no prepayment penalty or the penalty is less than the interest payments.
The Affordable Care Act and paying for employees’ health-care insurance remains high on the list of business owners’ concerns. “Your health-care provider should be working with you, Mazzella said, in determining the effect Affordable Care will have.
Some business owners are weighing whether to drop company-provided coverage, pay the penalty and send their employees to health exchanges. But this can send the wrong message to employees, even if the owner pays the difference so the employee breaks even buying insurance through an exchange. “You want to provide incentives so your employees stay with you,” Mazzella said.
Manufacturing remains a huge component of the economy of northeastern Ohio and research and development is essential to manufacturers’ success. Grumski took the seminar through R&D tax credits.
Even though the credits are set to expire Dec. 31, she said, CPAs expect Congress to extend them again after the November elections. “They extended them 15 times before,” she noted.
Any research conducted “must be useful in making the product or turning out an improved product,” she said. “The IRS [Internal Revenue Service] wants documentation and the [R&D] needn’t be successful to qualify” for the nonrefundable tax credit of 20% for the tax year over the base amount.
“The rules are pretty complicated,” she said, advising her listeners to keep in mind that the research, to qualify, must “be technological in nature” and take place in the United States, not abroad. Marketing surveys don’t qualify.
Converting a company’s vehicles to run on propane or natural gas instead of diesel or gasoline can earn a fuel tax credit, Damore said, allowing a company to increase its cash flow. Using propane to power forklifts in and around a warehouse, compressed natural gas in newer truck engines and other cleaner fuels in generators also earn tax credits, Damore said.
An energy audit to learn where and how a company can consume less energy or, if it can’t, schedule production for off-peak hours, can save a manufacturer on one of its biggest expenses, Timblin said. “Utility expenses are calculated based upon use and rate,” he said, “two variables that can be influenced by the company.”
The last way to drive profitability, Damore said, is forming or joining a buying group. Volume incentives “on certain indirect-spend items such as uniforms, payroll services, telephone services” can be negotiated using a third party.
He also advised “strategic buying,” that is, if the owner knows the price will go up, he should weigh whether it makes sense to increase inventory.
Copyright 2014 The Business Journal, Youngstown, Ohio.
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