By: Joseph Mohr MBA, CPA (Registered in Illinois)
Cue holiday music...
What do Christmas shopping, holiday parties, budgeting and audit and cash flow planning all have in common?
They are all best done in December.
While the production folks in most businesses are hustling at year end trying to make their numbers and get product out the door, this time of year is a slow time for most of us in Finance and Accounting. However, with a little planning and a little effort you can use this time to start the New Year off right!
Strategic issues in finance tend to be dealt with on a reactionary basis instead of with planning and foresight. If you follow our cookbook you can deal with your year-end issues and next year's planning at the same time.
Review Last Year to Plan for This Year
One of the first things to do in preparing your December list is to review last year's financial statements, disclosures and tax returns. We love to tuck these things away in the Second Quarter (or later) when they are done and revisiting them brings back bad memories but by doing this early we can make next year's Second Quarter a lot more pleasant.
If looking over the financial statements and the tax returns is not enough to get you going, we have a preliminary list of "Must-do's" in December and then some "Nice to do's" to help get you started. Once you complete the list below you can begin to address the strategic finance issues facing your firm.
Handle your "Must-do's"
Preliminary Year End Projection and Expense Planning
Do a quick projection of the year-end profit. This will help you when you reach out to your tax planning advisors. If your profit and cash flow are healthy for the year this is the time to consider cutting checks a little early January to get the expenses recorded in this year, in particular payroll taxes are a good item to consider accelerating. If only your profits are healthy but your cash flow is lagging a bit then you can consider trying to protect some of your profits (and cash flow) from taxes by looking over some of the following:
Intangible Assets
Invariably there are some intangibles or other items that get left on the books year after year. Now is the time to see if those still have value or if they have been impaired. Writing those down can provide a non-cash buffer to reduce taxes.
Receivable Review
Reviewing both your current receivables and your bad debt policy now can help you start the year off on the right foot. You can take the losses in the year in which they are incurred, reduce your taxes and better project cash flow for the New Year.
Inventory Obsolescence
Some of the inventory you have been carrying on your books for years can be written off to reduce your income this year. Most of us leave this until March 15 to get a handle on, but let's face it, if it is in the warehouse covered with dust now, it will probably be covered with dust in March.
Fixed Assets
Many times we just blindly update the fixed asset register from the prior year, adding in new purchases and setting their life for depreciation. If you take a look, you might find a bunch of old computers, printers and other fixed assets on the list that need to be cleaned up.
Covenant Compliance Review
Of course, tax and cash flow are not the only things that are important at year end. You need to remember to revisit your credit obligations and make certain that you are in compliance with all of your debt covenants. Something that is a simple adjustment now can make your life really difficult in March when you are giving your financial statements to the bank.
After those big ones, we tend to lose focus but now is also a good time to get to some of the nice to do's!
Payable Review
Many firms have an added incentive to get things off of their books before year end or are in a year-end cash crunch. If there are any payables you have in dispute or are contested, now is a good time to try and go for a blanket settlement and get those settled for less than you have them on the books.
Financial Projection for 2011
Don't let building next year's budget slip to June! In many small and mid-sized companies this important planning tool is not started until the first quarter. Properly done financial projections can help identify trouble spots in the New Year and allow early adjustment for things like losses, Bank covenants and cash flow issues. A small reduction in a recurring expense early in the year can add up to big savings by June or July of next year. Seeing it in black and white helps other Senior Managers make those hard decisions early. Include Debt Maturities and Financing concerns as well.
Short-term Strategic Cash Flow
Most of our clients have a great deal of cash at year end or none. Both of these present their own issues and opportunities. Those of you in the retail sector are typically cash flush in January and by March no one knows where the cash went. Oftentimes this is because advance rates change or debt pay downs occur or we take this as an opportunity to pay down payables. Making a very specific budget can help you identify expenditures that need to be made in February, March or beyond that cash can be reserved or rationed to pay.
Audit Preparation
That list of PBC's that an auditor requests year after year can be anticipated and made part of your year-end work. We can also make updating that part of our year-end work. Now is an excellent time to perform a fixed asset inventory as a way of moving forward with this. You can even work it into the exercise of determining Fixed Asset obsolescence as mentioned above. Doing this prepares you for an audit but also strengthens your books and records for the year-end.
Once all of these items are done, you know pretty much what your year end numbers and disclosure look like. This is not just an academic issue: you are not just shifting work to an earlier time; you are planning and identifying issues sooner. Once an issue is uncovered, planning to deal with it in the next year requires communication and strategic planning.
Facing the Strategic Finance Issues Before Year End
Now that the legwork is done, a skilled, experienced financial manager will be able to recognize and deal with the following Strategic Issues:
Going Concern and Other Audit Issues
If you received a "Going Concern" opinion from your auditor last year you are not alone. There were over 5,800 results for the term "Going Concern" searching 10-K's in the SEC's Edgar Database from January 1, 2010 to November 15, 2010. This is down from 5,900 from the previous year so we can either conclude things are getting better or that some firms are no longer filing.
In order to be one of the firms that is improving, instead of no longer filing, a complete and thorough discussion of this and other audit issues with your auditor in December can prevent surprises and heartburn in the Second Quarter.
Credit Extensions and Banking Issues
If debt is maturing, in this capital constrained environment, you need to be looking at options for extending it or renegotiating it well before its due dates. Further, if you have some issues that were identified above in terms of your covenants, you can review these in the context of your complete banking relationship as opposed to a discrete issue at renewal.
Everyone has more time and patience to deal with issues such as these during the more relaxed time in December, as opposed to the crunch time of line renewal or audit report issuance early next year. Getting started on your list can make your holidays merrier!
Nperspective would be pleased to discuss how to finish the year to get a head start on next year. Contact any of our CFO partners for additional information.
Please contact Janet Watson at 813.317.3460 or jwatson@npcfo.com.
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