Many family businesses make large year-end adjustments to their financial statements. Typical adjustments include depreciation, goodwill or customer list amortization, profit-sharing expense, bad debt expense and owner bonuses. This year-end juggle may be fine with you and your CPA, but it could be wreaking havoc with your banker and suppliers.
Often when businesses make large year-end adjustments, it’s because they’ve had a good year but want to minimize taxes. Your creditors don’t see it that way. If you’ve previously given your banker or suppliers interim financial statements with healthy profits that disappear at year-end, you could endanger your ability to obtain credit when needed if your company is not already extremely strong.
For instance, let’s say the tax collection point changes in mid-year (sound familiar?), and all of a sudden you need to increase your supplier line. In the past, you’ve given your supplier glowing interim statements. By year-end, however, the profits have disappeared thanks to a clever plan and adjustments devised by you and your CPA.
Unfortunately, what your supplier learned from your statement history is that your interim results are unreliable. His likely answer to your line increase request is, “Let’s wait for your year-end statement to decide.” Is his reluctance reasonable? Maybe. Maybe not. But you can’t really blame him when your profit keeps disappearing at year-end!
In order to have reliable interim financial statements that evoke confidence from your banker and suppliers, take the following steps:
- Accurately expense depreciation – When you purchase new assets, immediately obtain the correct depreciation schedules and expense the full depreciation each month.
- Accurately expense amortization – the IRS have become kinder with the treatment of goodwill and customer lists. Be sure you are expensing them properly.
- Write-off bad debts at 90 or 120-days delinquency– Don’t wait until the year-end to clean up your receivables. Remember that “write-off” does not mean “forget.” Be sure to continue active collection efforts on all written-off accounts.
- Estimate annual profit-sharing contributions and expense 1/12 each month- If, over the past five years, you’ve always contributed $60,000 and its likely you’ll keep doing it, expense $5,000 per month instead of waiting until the last month of the year to expense it all.
- Estimate annual owner bonuses and expense them no less frequently than quarterly. If you look at your bonus history, you will likely find that it’s either a fairly consistent dollar amount from year to year, or a range of percentage of profits. For instance, you may find that your bonus ranged from 10% to 30% of profit each year. Therefore, you could safely expense out 10% profit each month to be a little more accurate on your monthly profit and loss statement.
With cash expenses such as profit- sharing and owner bonuses, you can expense the amount on your profit and loss statement, without actually paying any cash by accruing the expense. Accruing expenses helps keep your cash balance stronger, which will also help you obtain credit more easily from your banker and suppliers.
If you’ve been guilty of the year-end shuffle, be sure to let your banker and suppliers know that you’ve changed your ways when you institute these monthly expenses. Although they may raise a questionable eyebrow and not whole-heartedly believe you until your year-end, you’ll eventually earn their respect and confidence in your monthly statements. The next time you need more credit mid-year, it should be a little easier.
