How your company looks on December 31st could be critical to getting the financial support you need in the following year from suppliers and bankers. Management decisions and the actions you take will determine just how strong your company looks at year-end. Here are tips to help your company look its best:
Maximize Cash – The more cash you have at year-end, the better. Ample cash proves to bankers, suppliers and other creditors that you have good control over your company’s finances.
Show a Profit – Creditors rightfully expect you to make money. Although your CPA may advise you to minimize profits for tax purposes, this strategy can wreak havoc on your company’s growth, particularly when trade lines and bank lines get capped by nervous credit managers.
Of course, the problem with keeping money in the corporation is double taxation. The corporation pays taxes in the year of the earnings, and then the individual pays taxes again when the money is paid out as a dividend. If you don’t need to take money out of your corporation for a number of years, however, this may not be as much of an issue. Consider the actual tax rates.
Manage Critical Ratios – Current ratio and debt-to-worth are the two ratios examined by creditors most frequently, and therefore are the ones you should control most closely. Through the timing of supplier payments, accruals and inventory, you can usually control your current ratio. Conversely, debt-to-worth can be controlled through liability management and retained earnings decisions. Manage your resources to stay at or above the industry averages using the chart on this page.
If your company is a blend of wholesale and retail all in one corporation, just use a weighted percentage method of the ratios to determine the average for a company with your sales mix.
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Current Ratio | Debt to Worth |
| Wholesalers | 1.5 | 2.2 |
| Retailers | 1.1 | 2.4 |
Get Your Financing in Order – If you used cash to pay for fixed assets this year and your current ratio or cash looks a little low, arrange for 75% financing of everything you purchased during this year. Be sure the loan actually funds prior to the end of the year.
If it looks as if you’ll have a cash overdraft at year-end, DON’T!! Borrow money on your working capital line. Creditors see overdrafts or negative cash as big red flags.
If you have balloon payments on term loans that are expiring on December 31 of next year or before, refinance them before year-end to keep ratios in order. You don’t want big balloon payments showing up in your current maturities of long- term debt on your year-end statement.
Actively Manage Inventory – Make sure all slow or dead stock has been liquidated before 12/31. If you’re concerned about increasing prices, stocking up by year-end won’t hurt your cash or ratios as long as you don’t have to spend any actual cash before 12/31. The purchases should show up entirely in accounts payable.
Clean up your financials – Now is the time to get rid of old uncollectible notes receivable, the loan to Uncle Fred, and whatever other odd and miscellaneous stuff show up on your statement. If you can’t get rid of them, at least hide them in a “Miscellaneous” category where creditors won’t see or pay attention to them.
Meet With Your CPA – Take three actions: First, review your bad-debt potential, write-offs and allowance accounts; second, insist upon a quote for year-end services including tax preparation; third, inform your CPA that you don’t want actual interest rates disclosed in the notes to your financial statement at year-end, particularly if you intend to bid out your banking needs for the next year.
In summary, you’ll find the small extra effort it takes for your company to look its best at the end of the year will pay off with suppliers, bankers and others who rely on your financial statement to make credit decisions.
