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Outsourcing the nonessential essential

April 24, 2018

Bookkeeping and accounting functions are essential for any business or not-for-profit organization. However, they are never essential to the organization’s purpose. Yet, many owners and managers spend inordinate time and concern on the bookkeeping. There is a practical solution that is a growing part of many accounting firms including mine.

A couple of weeks ago I heard one of my partner’s voice the following radio commercial:

“I’m Tom Angell practice leader of Withum’s private equity services group. Private equity emerging managers face the challenges of setting up and running a business when their main focus is fund raising and deal flow. You will need to setup your back office which will include your finance, compliance and investors’ relations departments. You will have to setup health insurance, payroll, retirement benefits and D&O insurance or you can hire a PEO to handle most of these functions. Documentation of HR evaluation and compliance policies are also important. At Withum we work with emerging managers providing the guidance and resources they need in order to get their organization successfully running.”

This got me thinking about why every business doesn’t outsource these functions. Bookkeeping is an involved process that includes billing customers and collecting the payments, payments to vendors and ascertaining receipt of merchandise or services and accuracy of the billing, payroll calculation and payment, benefit administration and payroll tax payments and filings, bank statement reconciliation, obtaining and reviewing insurance policies, setting up payment schedules, maintaining accounting records, back up and files and preparing timely financial statements for management and others that are required to receive reports. Further many smaller businesses do not have sufficient personnel to handle the full range of bookkeeping and in house accounting services that most companies and not-for-profit organizations usually or occasionally require. And bookkeeping employees sometimes get sick, or have personal emergences that keep them away from the office and these usually occur at the worse time [that’s the way it seems to always be].

One of our newer partners, Nina Chmura, has organized a new department that is dedicated to handling these services for clients. Already we have it fully staffed. Nina, Tom and I will be pleased to meet with anyone that believes this service could benefit them and we welcome a call to set up a no obligation meeting. I can be reached at 732.964.9329 or emendlowitz@withum.com

If you want to see a more inclusive explanation of these services, click here for a descriptive brochure:  https://partnersnetwork.files.wordpress.com/2018/04/withumworkflow-brochure-002.pdf

Earnings season

April 19, 2018

Last Thursday was the kick off for “earnings season.” This is the traditional start of the period when a large number of companies post their quarterly earnings. Question: Why is this significant?

Many companies are selling at prices not based on earnings, in particular Tesla, Amazon.com and Netflix. Yet, earnings are considered significant. Actually, earnings are a major factor that drive stock market values. Growing sustainable earnings reflect itself in higher market valuations, so Wall Street eagerly awaits the reports, and then seems to do what it wants anyway, but in the long run, earnings drive the valuations.

There are always exceptions and we have our share of them, but they are not so plentiful, so let’s overlook the exceptions and concentrate on the huge majority of companies. No matter how you want to value a company, growing sustainable earnings is the key element. Extensive specialized equipment, secret processes, pipelines of new products, undervalued land and buildings, company franchises and cash hoards are all nice but at the end of the day, it is the profits generated by the configuration of assets that determines the value, i.e. stock prices; and therefore the fuss over earnings.

A simple metric used to measure value is the price to earnings ratio or P/E. The P/E is determined by dividing the share price by the earnings per share (eps). For instance if the stock is selling for $30.00 and the eps is $2.00, the P/E will be 15 (30 ÷ 2). If the eps was $1.50 the P/E will be 20; if $3.00, the P/E would be 10; and if 75₵ the P/E would be 40. The greater the earnings in relation to the price, the lower the P/E, and the P/E would be higher for companies with low earnings per share. Generally optimistic stock owners will accept a high P/E while the risk adverse will seek out stocks with lower P/Es. A company with a traditionally low P/E would be considered cheap while one with a traditionally high P/E would be considered expensive. Sometimes the PE is based on future expected earnings and company growth giving a high P/E or a languishing company will have that condition reflected in a very low P/E.

Some specific comments about the current earnings cannot be overlooked by me. Many of the earnings’ reports include a one-time income recognition due to the reduced corporate tax rates. This is not sustainable yet is included in the earnings reducing the P/E ratios. Those companies that are reporting losses due to a write down of their deferred tax assets seem to be getting a bye and their prices do not seem to be dropping. The tax winners will not have gains of this magnitude in later years so that should cause future earnings to drop with a corresponding change in their P/E.

Current stock fluctuations seem to be politically based with concerns about possible trade wars, potential Federal Reserve actions, the midterm elections, hoped for economic growth or the suspected burgeoning of the federal deficit and growth of our national debt and its effect on inflation and interest rates. These will right or normalize themselves over long periods of time and that is why I suggest that investing in the stock market should not be done unless you are prepared to leave the funds in the market for at least seven years.

Earnings do drive prices. How and when is an unknown and possibly a mystic process, but over long periods, i.e. seven or more years, it seems to work. In the meantime, do not get too caught up with earnings season, but look at the long term.

Who pays the income tax

April 17, 2018

Today is tax day so is a likely time to see who pays the income tax. The most recent available data is for 2015 and was compiled by the Tax Foundation and is subject to their copyright. Here is a link to their full report: (https://files.taxfoundation.org/20180117125609/Tax-Foundation-FF570.pdf).

In 2015 there were 141,204,625 individual tax returns filed. The following chart does not include dependent filers. By way of perspective, the top 1% filed 1,412,046 returns and paid 39.0% of the income tax. The bottom 50% filed 70,602,313 returns and paid 2.8% of the income tax.

new chart

The top 1% paid $567,697,000,000 and the bottom 50% paid $41,125,000,000. This is income tax and does not include FICA and Medicare taxes which are paid by employees and their employers and the self-employed, and other federal taxes such as corporate, excise and estate taxes.

I hope you find this info as interesting as I did.

Call your aunt

April 12, 2018

Power Bites was published in 2010 and I was recently asked to revise it and after reviewing the book, I said I cannot since I don’t think I need to change or update anything in it. What I decided to do was to add to it and will get that process started, hopefully, in the next few months. While looking over the book, I saw a chapter that I am posting here since I think you would enjoy it. It is chapter 46 titled “Call Your Aunt.” This is not that much different from other life style tips I have suggested in these blogs, but I believe this short chapter says it quite well.

Call Your Aunt

  • You should take some time to smell the flowers.
  • Calling your aunt every once in a while cannot be a burden on you, but look at all the joy it will bring.
  • Every once in a while call an old friend, or an old friend’s widow(er). It brings joy to at least two people—them and you.
  • Volunteer—to help someone personally, or in an organization that helps people. Visit or call sick neighbors, or church, mosque, or synagogue members.
  • Buy a present or send a card or flowers for no reason at all. They even have preprinted cards like that. Buy crazy gifts for people you know. I once got my sister-in-law a left-handed ruler, and I always have packages of baseball cards and easy-to-learn magic tricks in my office to hand out to children that are dragged there by their parents when they can’t find a sitter when they come to meet with me.
  • It costs very little to create tremendous joy when you really care.
  • Everyone has a history. No one was born fully grown like Venus. Try to understand where each person came from, and what he or she has been through. Asking elderly relatives about their youth (assuming they are not the type of people who tell anyone in sight about it over and over and over) can be very enlightening for you, and you’ll be doing a good deed besides.

Reprinted from Power Bites: Short and to the Point Management, Leadership and Lifestyle Advice I Give My Clients! by Edward Mendlowitz, CPA ©2010. Available for sale at www.bn.com and www.Amazon.com

Free cash flow

April 10, 2018

This belongs with the financial statement ratios. A large number of publicly traded companies are now using free cash flow or a variation of it as a measure of performance. In some manner this is a better indication of a company’s profitability than the more typical measures.

Free cash flow shows how much cash a business generated that can be used for expansion, developing new products, reducing debt, or for payments to shareholders either with dividends or by repurchasing stock. When you think about it, how else would you measure profitability or operations?

Free cash flow is the operating cash flow less capital expenditures. The operating cash flow comes from the top of, or first section of, the statement of cash flows. This is the net income devoid of noncash income and deductions adjusted for changes in the working capital components. The reduction for capital expenditures represents the reality that most businesses with equipment are continuously adding additional equipment making that a normal recurring expenditure. EBITDA, a widely used measure is clearly off the mark and in my opinion irrelevant. Free cash flow compensates for this fatal shortcoming.

I would further adjust a company’s free cash flow by removing any unusual and nonrecurring gains or losses.

To better understand free cash flow I suggest reviewing Forms 10-K for companies you own stock in and seeing its treatment. Some 10-Ks I reviewed have four or five iterations of free cash flow. This is another measure to use when evaluating a company. The more appropriate data you get the better will be your decision.

Stupid gotcha managers

April 5, 2018

Yesterday I ran into a friend who told me that she left her job of 12 years and joined a new firm. Her reason was that she was limited in her overtime and when she did work, she was only paid straight time, not time and a half. Also, her new job was at a higher salary and they also promised her 8 hours of overtime a week at time and a half. When she gave notice and responded to her employer’s request for the reason, her employer said he would match it if she would stay. Stupid manager!

If she was worth the extra money, why wasn’t it routinely paid and why did it take her giving notice for them to offer the increase?

Much of what is done in business is done in good faith with a spirit of fairness, collaboration and cooperation. This should be pervasive and there should not be a one sided gotcha attitude by the boss. In matters of compensation and benefits the bosses usually carry the weig with employees accepting that situation. Even when it is unfair it still takes a lot for an employee to terminate the relationship. Usually the dissatisfaction manifests itself, subtly, with reduced performance leading to a cycle of low raises and further reduced performance and still lower raises until the employee leaves or is discharged.

Every business and organization with personnel not only relies on its people but needs to trust that they do the best job they can. Dissatisfaction is always is evident no matter how latent it appears; and it always costs even when that expense is not so obvious.

Each employee’s pay and benefits should reflect the value brought to the organization and not determined in a manner that the boss feels they could get away with.

Gotchas do not belong in a successful organization, or in one that wants to be successful. I know that in most organizations payroll and benefits are the largest category of expenditure and even small increases escalate throughout the organization; but losing longtime loyal and trained employees and the subsequent hiring and indoctrination of new people has a cost too. The latter spiraling process is a sure way to thwart forward movement or growth.

Manage your personnel the right way. If the employee is worth more, pay them what they are worth. If not worth what they are getting, then discharge them. Matching an offer made to someone who is giving notice makes you look like a fool and the employee feel like a sap.

Using financial controls to get started as a manager

April 3, 2018

Getting started as a manager requires many skills, one of which is to review financial data and use it as a method of controlling your department, division or company. Here is a way to get started. Every manger is responsible for an economic unit. For the CEO or COO It could be the entire company. For a foreman, it could be the production floor. For a team leader or sales manager it could be as little as a half dozen people. Whatever it is, controls are necessary and obtaining the right data can facilitate the management process. Therefore it is necessary to identify the proper information that will be received on a regular basis – daily, weekly and monthly.

For new or first time managers a starting point is review the available financial data, the payroll listing and department budgets. If possible, obtain copies of the information the predecessor received. Find out if there are any deadlines, benchmarks, past due deliveries, orders in progress and order backlog. Try to identify key personnel and those with special skills and qualities, or relationships with suppliers or customers. The next step is to tour the factory or offices to review the operations and internal controls.

Usually payroll costs are a major expense item, so it is a good place to start. Review the payroll listing categorized by department and function; along with annual pay or hourly rate, bonus arrangement or overtime policy and company vacation, sick day, time off and holiday policy and any other pay factors.

You then need to determine how many hours each employee actually works and the cost per hour worked. For example, an employee might get paid for 40 hours per week for 52 weeks giving 2080 hours they are paid for. You should then calculate the days or hours they do not work. Taking the Company’s policy into account, you might come up with, say, 240 of these 2080 hours are not worked leaving work or production hours of 1840. If you divide the employees’ total annual costs which is salary plus taxes and benefits by the 1840, you will get the actual cost per hour. Where possible group the employees to get the total payroll and hourly cost by department or function.

Once this is done, you should then calculate overtime by department and in some cases individual employee and extrapolate the overtime costs and possibly the hourly cost. This can be added to the base hours and payroll cost. This would now give you the average cost per hour worked per department that offers overtime. This usually falls under the direct labor departments and excludes overhead, administration, and sales departments.

The above is a way to get started and get a basic handle on the costs. Notice that you should get started with a large expense item where control is much more essential such as payroll. Starting with smaller cost items will not provide meaningful benefits even if large differences in them are found. Once done, changes can be measured and that then should lead to better control. Weekly measurement is much better than monthly which is far better than quarterly. The size of the unit and your level of management would determine the best periods to obtain the data for. And keep in mind, the financial information is only one part of your control mechanism. Good luck.