Month: July 2022

Tips to Help You Manage Cash Flow During Volatile Times

As if the skyrocketing costs of materials and supply chain issues weren’t enough, managing cash flow carefully is even more important in light of pending stagflation, where the economy slows (with less spending and higher unemployment), while inflation and interest rates grow.

No doubt, you’re already aware of the impact supply chain issues and material price volatility are having on project schedules and budgets. By now, many had hoped focus would be shifting to a construction boom thanks to the Infrastructure Investment and Jobs Act. However, economic headwinds aren’t cooperating and may lead to another year or two before volatility subsides. All of this makes managing cash flow critical.

Let’s start with the basics. Cash flow is the money that comes in and goes out of your business to keep it running. You have positive cash flow when there is more money coming in than going out. Negative cash flow is the opposite and can be a sign your business is losing money or dealing with short-term timing issues with payments and billing. It also may mean you won’t have enough cash on hand to cover unexpected expenses.

Once you bid on a project, you must be ready to cover the costs required to purchase materials; pay vendors, subcontractors, and employees; get the work done (i.e., equipment and fuel); and cover unexpected costs that may arise. At the same time, if you’re like most contractors, you’re balancing this knowing that the money coming into your business in the form of payments will likely be delayed.

As reported in Construction Executive, the ideal is to make sure your operating budget covers the next 18 to 24 months and you have a cash flow model projecting cash flow for the next 6 to 12 months that you monitor closely, so you’re prepared to act accordingly whether cash flow dips or grows.

You need to relentlessly focus on planning, managing, and maximizing cash flow, overall and for each project. Know when certain activities will be complete and billed so you have positive cash flow on each project.

As revealed in Levelset’s 2022 Construction Cash Flow & Payment Report, this is easier said than done. A survey of more than 500 construction firms across the U.S. reveals only 1 in 10 businesses are always paid on time for their work. 90% of survey participants have 30-day payment terms, but less than 40% receive payment within that time. Slow payments can have a domino effect, resulting in wasted resources, lower profits, project delays and stoppages, and an inability to make payroll. It can also impact your ability to secure new credit.

You may find opportunity to improve cash flow by improving payment and collection processes. Consider adopting a customer prequalification process to ensure any one you do work for will have the money to pay their bills on time. Also explore whether you need to strengthen collections processes – there’s a lot of opportunity here as only about 40% of Levelset survey participants issue an intent to lien and 34% issue a demand letter. (Of course, getting legal counsel is a good idea in this situation.)

Beyond billing, there are numerous other opportunities to have a positive impact on cash flow:

Make sure proposals are profitable and realistic. Project owners know what’s going on with the supply chain and economy. Seeing smart proposals that address challenges fairly may be more attractive than risking going with a low-ball bidder who could have issues completing a job.
Protect your cash. Consider loans or lines of credit so you can keep cash on hand, but also balance this with an eye toward avoiding interest rates that could make payment unsustainable.
Review contracts with a fine-tooth comb. Challenge clauses that may increase risk to cash flow given supply chain issues. Avoid hard project bids that lock-in prices over a long period of time. Incorporate ways to share price volatility risks. Consider requesting a cash advance.
Relentlessly document and communicate scope and schedule changes. You have to manage client expectations and protect your business on an ongoing basis.
Check your insurance. Higher prices may require higher coverage. Also, if you’re stockpiling materials, make sure your policy will cover them.
Build relationships with suppliers. Talk with material supplier owners about materials storage and owners funding materials up front. Consider buying in bulk, shopping around, negotiating for the best deals, getting payment terms that align with the time it will take for you to get paid by clients, and exploring lines of credit or loans that your supplier may offer. Always have back up suppliers on hand and build relationships with more local and regional suppliers.
Monitor and forecast cash flow monthly. Identify the biggest cash flow risks up front and potential solutions so you’re prepared for the unexpected.
Stay informed. The Associated General Contractors (AGC) Inflation Alerts provide timely and comprehensive information to inform project owners, government officials, and the public about the impact of supply chain issues, material costs, and inflation on construction.

Having a professional accountant and tax partner can also help your cash flow, especially when you partner with someone that knows your industry and potential opportunities to maximize tax deductions and credits (i.e., IRC Section 179 and the Fuel Tax Credit). Interested? Give RBT CPAs a call. We’ve been around for more than 50 years, serving construction (and other clients) in the Hudson Valley. We’re one of the best in the region and among the top 250 in the country. We believe we’re successful when we help make you successful – especially during challenging times.

Are Employee Stock Ownership Plans (ESOPs) Making a Comeback?

Data doesn’t show a big resurgence in Employee Stock Ownership Plans (ESOPs), yet. Don’t be surprised if that changes, given the Great Resignation and increased competition for a shrinking pool of skilled workers.

Today, about 14 million employees participate in 6,500 ESOPs, which means there are fewer plans than in the past but more participants, according to the National Center for Employee Ownership. UPS and United Airlines are two examples of large companies that offer ESOPs.

What about going forward? Well, that remains to be seen, but we believe all indicators are pointing towards potential growth in the number of plans offered and participants. Here’s why:

Employers are having a hard time finding talent. Put simply, there are more jobs than people looking for jobs and, for the first time in a long time, employees are in the driver’s seat when it comes to deciding which company’s value proposition is worth their time and energy.
Small and medium sized businesses are competing against Fortune 500 companies for talent. To level the playing field, employers may need to sweeten benefits and compensation offerings. That includes adding an ESOP to a benefit plan lineup.
Current employees may be contacted by recruiters from companies that have ESOPs. Even if they aren’t thinking about switching jobs, hearing about a richer benefits and compensation package may pique their curiosity and interest.
Talent shortages can impact business results. That doesn’t even get into the investment lost recruiting, interviewing, background checking, selecting a candidate, and creating a job offer only to have a job candidate say “yes” to a better offer elsewhere.
Baby Boomers are retiring. As if the talent shortage isn’t challenging enough, employers are also facing what Forbes coined a silver tsunami.

Although there’s no one proverbial magic bullet to address staffing challenges, ESOPs do help attract, retain, engage, and motivate talent.

ESOPs can be an attractive addition to job offers for potential new hires and benefit programs for existing employees. An ESOP can be positioned as a way to enhance financial security and supplement retirement income. There’s also the added advantage that employees only pay taxes when they take a plan distribution (or they can opt to maintain the tax-deferred status by rolling over funds to an IRA or other qualified plan).

In addition to the potential monetary value, stock ownership can strengthen employee engagement by showing a company is making an effort to keep the employee around for a while and giving the employee an ownership stake in the success he/she helps create.

ESOPs also offer employers some valuable federal income tax breaks related to a portion of corporate stock and cash contributions, loans the plan takes out to buy shares, principal and interest payments, and tax-free earnings. What’s more, if you own a C-corporation and sell at least 30% of your stock to the ESOP, you may be able to defer capital gains taxes. Plus, there’s an abundance of research that shows companies that offer ESOPs are better able to weather economic uncertainties and storms than peers without ESOPs.

If you’re interested in learning more about the tax advantages of offering an ESOP or in exploring what an ESOP can do for your business, give RBT CPAs a call. We’re always here to help.

Proactively Manage Financial Reporting & Forecasting During Uncertain Times

No doubt, uncertainties stemming from the impact of inflation, supply chain issues, labor shortages, and more have you focusing on every aspect of your business, from overall strategy and pricing to contracts, inventory, purchasing, and more. The last thing you need are mistakes related to your financial reporting and forecasting. Making adjustments to reporting and forecasting to reflect how macroeconomic factors are affecting your business is important. Following are considerations to help you think through the factors that may impact reporting and forecasting compliance.

General Considerations

Are your business cost structures changing? Will this continue in the future?
Is the impact of uncertainties short- or long-term? How does that affect related accounting estimates?
How are your forecasts impacting accounting estimates for goodwill and other long-lived assets for impairments? Are valuation allowances for the recovery of deferred tax asset balances needed? Are your liquidity and going-concern presumptions affected?
Are you meeting U.S. GAAP and/or SEC disclosure requirements?

Inflation

With inflation increasing costs to acquire goods, inventory, packaging materials, and even employee pay, should you consider passing on increases to customers via price increases?
If your company has long-term revenue contracts impacted by increased costs that you may not be able to pass on to customers, your business may experience a profitability decrease or loss. How will this impact accounting for the contract? Which period do you record the loss?
If you are renegotiating long-term contracts like leases or supply agreements, do you need to reassess their classification and measurement?
Are interest rate increases and fixed-rate financial asset decreases impacting estimated credit and loan loss reserves?
Are you changing your company’s investment strategy and any related accounting and reporting requirements?
Are you using the right discount rate for pension-related liabilities? While pension liabilities and related employer contributions may be lower due to higher interest rates, are they offset by higher employee wages?

Labor

Are your labor costs increasing? What are the accounting implications? Can you offset higher labor costs with price increases?
Has your company increased hourly wages, bonuses, incentive, or stock compensation or benefits? Do you know the implications on your accounting practices? For example, which period should you recognize retention bonuses? Do compensation structure and workforce changes warrant changes to assumptions used for pension liability?
Is the labor shortage requiring you to operate at a reduced capacity? If so, are there costs capitalized into inventory that should be expensed now (i.e., rent or depreciation)?
Do you have the right people with the right skills monitoring your internal controls, including those related to IT?

Supply Chain

Are supply chain costs significantly increasing and included in inventory? Should you adjust the cost of inventory based on its expected net realizable value? Should you consider using different materials, other suppliers, and/or a price increase to manage supply chain increases?
How are you reporting raw materials, finished goods, and supplies on your balance sheet? What is the actual point in time that you take ownership of each? Do your accounting processes and internal controls accurately capture inventories?
Do your cutoff procedures accurately help you recognize revenue in the right period?
If you are adjusting manufacturing processes or using different materials to manufacture products, does this affect warranties – including terms and conditions, product life cycle, or expected claims – and related accounting?

If you need a partner to help guide you through accounting, tax, and bookkeeping during uncertain times, call RBT CPAs. We’re here to help and provide you with peace of mind related to your accounting, reporting and forecasting, so you can focus on all of the other things you need to do to survive and thrive in 2022 and beyond.

Cyberattacks Cost More Than Manufacturers Realize

How much can your organization afford to pay to end a cyberattack? How long can it last with operations shut down? What if the amount you pay represents just 5% of the total financial impact to your business for years to come and the balance isn’t covered by insurance?

Yes, it all sounds a bit hysterical and for good reason. The frequency and cost of cyberattacks are increasing rapidly. It’s estimated that a cyberattack occurs every 11 seconds, at an average cost of $22 million in 2022. According to Cybersecurity Ventures, global cybercrime costs will reach $6 trillion this year and $10.5 trillion in 2025. That doesn’t even get into the $170 billion companies are spending to defend operations against attacks.

You may think that because your business is small, it’s not worth a cyber criminal’s time – think again.

Manufacturers are among the most vulnerable because of their reliance on digital technology and the internet. While they’ve flown under the radar because of more lucrative targets like financial and institutions and insurance companies, a recent report by IBM identified manufacturing as the most targeted industry for cyberattacks in 2021. Almost one in four cyberattacks targets a manufacturer.

As TechTarget notes, “Cybercrime can affect a business for years after the initial attack occurs. The costs associated with cyberattacks — lawsuits, insurance rate hikes, criminal investigations and bad press — can put a company out of business quickly.”

Consider these stats:

“The average cost of downtime caused by ransomware between 2018 and 2020 has grown from 46,800 dollars to 283,000 dollars per incident, which is about a 7× increase.” (Source: CEOWorld Magazine)
“It takes an average of 287 days for security teams to identify and contain a data breach, according to the ‘Cost of a Data Breach 2021’ report releasedby IBM and Ponemon Institute.” (Source: TechTarget)
“For a smaller business, a ransom is often $3,000 to $10,000, or sometimes as large as $100,000. For large companies, ransoms are typically in the millions.” (Source: Association of Equipment Manufacturers)

As reported in Deloitte’s CFO Insights, a new Deloitte study – “Beneath the surface of a cyberattack: A deeper look at business impacts” – shows direct costs account for less than 5% of the total business impact of a cyberattack. Hidden costs are much higher and add up over several years. They can include insurance premium increases of 200%; a short-term credit rating downgrade resulting in higher interest rates; costs to repair equipment and facilities, additional resources to support business continuity, and losses due to inability to deliver goods and services; damage to customer relationships; devaluation of trade name; and loss of intellectual property ranging from trade secrets and copyrights to investment plans.

When weighing the expense of building up cyber security versus the potential cost to your business, make sure you’re weighing all the potential factors – especially the hidden ones.

If you need more data to justify your investment in cyber security, here are several resources:

2022 IBM Security X-Force Threat Intelligence Index

CISA Insights on Cyber Threats to Manufacturing

Accenture’s State of Cybersecurity Resilience Report 2021

World Economic Forum’s 2022 Global Risks Report

Trend Micro Incorporated’s The State of Industrial Cybersecurity

For more information about resources to help your manufacturing organization with cyber security, visit another RBT CPAs thought leadership article: Is Your Manufacturing Operation Cyber Secure?

Finally, if you’re interested in learning more about the tax and accounting side of building your cyber security, give us a call. RBT CPAs has been serving clients in the Hudson Valley for more than 50 years.

Make Money for Makerspace

Usually, new trends in education target a specific age group. Makerspace learning has been picking up steam over the last decade across all levels of education – from elementary schools to universities – making it an important curriculum, budget, and space consideration of educators and schools for all ages.

It is referred to in many ways: maker movement, maker learning, makerspace, and more. No matter the moniker you use, it’s one of the top trends in education and it’s growing in momentum. At the most basic level, maker education focuses on learning rather than teaching. It’s about making things hands-on and collaborating to find the best solutions.

You can find makerspaces in rooms, libraries, classrooms, dorms, and even businesses. (One school district even created a mobile makerspace vehicle to travel around to its various schools.) Makerspaces can focus on one area (i.e., art) or several (i.e., science, technology, engineering, art, and music). Even the NY Board of Education is getting in on makerspace bandwagon, with a $5 million grant to the City College of New York.

Today, there are more schools with makerspaces than schools that don’t have them. After all, they’ve been shown to have a positive impact on creativity, collaboration, communication, and problem-solving – all critical skills for the future. Three key considerations for creating and managing a makerspace:

Materials & Tools: Identify what materials you need (i.e., paper, markers, tape, pipe cleaners, material, yarn, etc.) and what tools (i.e., hammer, sewing machine, glue gun, software, goggles, aprons, etc.) and how many students you’ll have.
Staffing: Who is going to organize, manage and run the makerspace? Will you need full-time staff, part-time staff, or volunteers? What kind of training or professional development will they need?
Physical Space & Infrastructure: What kind of space do you need? Where can you get it? Does it have or will you need to purchase basics like tables and chairs and cleaning equipment, or will you need to purchase them? As for infrastructure, you’ll want to be able to schedule sessions and people; track inventory and budgets; and document/digitalize anything else that will help manage and streamline daily operations.

Perhaps the biggest consideration is funding. Many schools start small and build support, supplies, and funding over time. There are several different avenues to pursue funding. You may want to solicit supplies and funding from local businesses, organizations, and art groups. Consider holding donation drives, for everything from knitting and art supplies to tools and building materials. The end of the school year is the perfect time to let teachers, parents, and students know where they can bring any unused or unwanted supplies – the makerspace area. And there’s always crowdsourcing through organizations like GoFundMe or Adoptaschool.org.

Look for opportunities to recycle – it’s a great way to stock up on materials while supporting your district’s go green goals. Also, check out upcycling organizations like ReCreate and RAFT for ideas and supplies at a serious discount.

Grants big and small are available through businesses big and small – especially if their mission links to the focus of your makerspace. Also considering partnering with other functions in the school (i.e., the library) to leverage investments and equipment.

Makered.com has a number of free resources to help you get started and grow. The NY State Education Department includes numerous resources including how to get started from scratch, funding strategies, and even case studies revealing how places like Wappingers School District are growing makers education through all grades and schools.

While you’re focusing on how to build, expand, or maintain your school’s makerspace, let RBT CPAs help by focusing on related accounting and tax requirements and reporting. We are a leading accounting and tax firm in the Hudson Valley and New York. (We’re also among the top 250 nationally.) We have experience working with numerous educational institutions. Give us a call to find out how we can help you today.

Year-End Is Too Late to Get Started on ASC 842 – The Time to Act Is Now

The new lease accounting standard – ACS 842 – took effect for private and non-profit organizations for fiscal years starting January 1, 2022 (or 2023 for non-calendar year-end entities). While that means at the earliest your organization must account for all leases on your financial statements by the end of this year, there’s a lot of work to be done to meet the new standards. If you haven’t started, now is the time. If you wait until year-end, it will probably be too late.

First, a number of departments/functions may be affected by the change. This includes accounting, tax, real estate, equipment leasing, procurement, treasury, information technology, and legal. Consider creating a task force with representation from all impacted areas to put together a project timeline and plan. Second, there are several activities you’ll need to complete, from policy development to data management and extraction to technology design, workflow, implementation, and more. So, if you haven’t already started, you need to catch up now. Waiting for year-end is not an option.

If you need a refresher or to get reacquainted with ACS 842, following is an overview (originally published by RBT CPAs in August 2021). As always, the RBT CPA professionals are available to answer any questions you may have and to support your tax and accounting needs. Give us a call.

As a part of daily operations, most contractors have leased vehicles, buildings, trucks, construction equipment or other items to keep costs down and business running smoothly. Did you know that, in a matter of months, your leases will be accounted for differently due to the new lease accounting standard? While previously only capital leases were recorded on the balance sheet, effective for fiscal years beginning after December 15, 2021, all leases will be on the balance sheet. That translates to January 1, 2022 for calendar year entities, and fiscal 2023 for non-calendar year end entities. What does this mean moving forward? It means contractors need to make sure they have a thorough handle on all of their leases. Now is the time to review and evaluate contracts.

The new definition of a lease under ASC 842: “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” This slight change means that all contracts should be evaluated to determine if they fall within the scope of this new criteria. Contracts that were previously considered leases may no longer meet the lease criteria and vice versa. Be mindful of lease language when you are reviewing your contracts.

There will still be two categories of leases. The leases formerly known as capital will now be called finance leases. The classification criteria remain essentially the same as under the existing standard; the only major difference is the elimination of the bright-line percentages. All leases that do not meet one of those criteria will be classified as operating.

If a lease contract includes a non-lease element, that non-lease component must be accounted for as a separate contract distinct from the lease itself. For example, the cost of an equipment lease that includes a maintenance contract must be allocated between the two elements and accounted for separately.

Lease liabilities for operating and finance leases will all be accounted for in the liability section the same way capital leases currently are: split between current and long-term. The offset to the liability will be a right of use (ROU) asset. There will be two lines: a ROU asset – operating lease line, and a ROU asset – finance lease line. These ROU assets are all long-term.

The new standard was designed so that there should be minimal impact to your income statement. Operating leases will continue to be recognized as a straight-line expense over the life of the lease. Finance leases will continue to be frontend loaded because the interest is higher at the beginning of the lease than at the end.

The most significant impact will be on the company’s current ratio. Because the ROU assets are all long-term but the lease liability is split between current and long-term, the current ratio will be negatively impacted. This change will be particularly important for entities with debt covenants that reference the current ratio. If you have significant operating leases that may create an issue with your debt covenants, connect with your bankers now and make sure that they are aware of the new standard.

Ultimately, it’s important that both the borrower and the lender understand that this is a reporting change, not a change in a company’s financial situation. Having this conversation early on instead of waiting until the last minute will avoid confusion, and a lot of headaches.

RBT CPAs and Sickler, Torchia, Allen & Churchill, CPAs Merge Effective July 1, 2022

FOR IMMEDIATE RELEASE

RBT CPAs, Inc. and Sickler, Torchia, Allen & Churchill CPAs – both leading accounting, auditing, consulting, and tax firms in the Hudson Valley – have merged their practices effective July 1, 2022, resulting in greater accessibility, depth of knowledge and expertise, state-of-the-art technology, and enhanced services for clients.

The two firms are very similar in size and culture, with each bringing something extra to the table. RBT CPAs’ expertise spans a broader spectrum of industries, while Sickler, Torchia, Allen & Churchill CPAs has a larger presence and reach in Lake Katrine (Ulster) and Hudson (Columbia), as well as the Capital Region, Metropolitan New York areas, and the Berkshires.

“We are really excited about bringing our two firms together to leverage our combined talents and reach to offer even more value to our customers,” said Mike Turturro, Managing Partner & CEO, RBT CPAs. “Customers will continue to receive the personalized services they are accustomed to, while benefiting from the enhanced capabilities our combined organizations can deliver.”

Sickler, Torchia, Allen & Churchill CPAs Managing Partner Craig Sickler said, “Culturally, our two organizations are a very strong fit. We both started and grew up in the Hudson Valley and have been able to retain the personalized service levels often associated with small firms, while offering the know-how and experience of larger firms.”

Michael Torchia, Partner, Sickler, Torchia, Allen & Churchill CPAs, added, “We are really excited about what this merger will mean to our clients, employees, and the communities where we live and operate. Our two organizations truly complement each other and will enable our new combined business to deliver even more value while maintaining the highest levels of personalized service.”

The combined organization will maintain their current locations, staff, fee structures, and client service teams. Mike Turturro said, “Over time, we look forward to bringing our organization’s enhanced capabilities to clients throughout the Hudson Valley and beyond to show why and how our two organizations are better together.”

About RBT CPAs and Sickler, Torchia, Allen & Churchill CPAs: RBT CPAs and Sickler, Torchia, Allen & Churchill CPAs is the Hudson Valley’s largest CPA firm. The company services clients in construction, education, employee benefits, government, health care, manufacturing, and more. The dedicated professional team is committed to providing outstanding, professional, personalized services with the highest levels of integrity. Learn more about its diverse offerings and award-winning service at RBTCPAs.com.

For Media Inquiries Contact:

Erin Blabac
Eblabac@rbtcpas.com
(845) 567-9000 Ext. 269