As 2013 winds down and this article is being written, our firm is wrapping up yet another tax planning season for many of our business clients. This is especially true for those who are S-Corporations or partnerships, whose results yield a direct and often dramatic effect on the owners’ personal income tax return. From this corporate tax scenario comes the annual rush to determine what the potential tax liability is and then a reconciliation of what tax has already been paid in versus how much may remain owed.
Unfortunately, sometimes (OK, most times) lost in this one-sided, potentially stress-laden discussion is: How did your company perform during the fiscal year? How did it perform compared to budget, compared to prior year, compared to long-term projections, compared to industry metrics? What is the process the business has in place to answer these questions in an intelligent and value-added manner?
One of the hardest discussions to have with your small to medium sized business client is about their budget process, who is responsible for it and to what depths it is used by management or ownership to make decisions prior to or during the course of a year. We all know the stereotype, that business owners are too busy working “in” their businesses and don’t have or provide enough time to work “on” their businesses. However, almost every successful business I know operates a disciplined annual budget process.
Ironically, most businesses begin their very existence embroiled within this process. One of the key initial requirements a new business must go through to secure their initial funding, whether it be investment capital, bank or SBA sourced capital, is to prepare and submit a set of projections up to and possibly including a full-blown business plan.
This process outlines specifically what the company will be producing or selling (revenues), the costs to produce that product or service (cost of goods sold) and the overhead necessary to carry out the business venture (S,G&A costs — selling, general and administrative).
This process provides lenders and/or investors a mechanism to communicate regarding both the viability of the entrepreneurial idea being proposed as well as for both sides to measure the ability of the company to sustain debt service requirements upon proposed amounts being borrowed or what timeline and potential rate of return their investment may yield.
Beyond these external focuses (lenders and investors), the budgeting process as a whole is a powerful tool for internal communication, goal-setting and team development. When done correctly it can be a “uniform” way of communicating up front to all departments or managers so expectations may be set forth in a clear and easily understood manner.
Next time you are meeting with one of your clients and inevitably the conversation includes the financial results of a recent situation, allow the conversation to include the question of how will that issue end up impacting the current year budget or forecast currently in place?
What comes next in that conversation could be one of the more important financial discussions you have had in quite a while. Business owners are so inundated with the relentless day-to-day array of issues, that they need their professional advisors, people like you and I to remind them of the critical steps necessary to sustain a successful long term going-concern enterprise.
Happy New Year and best wishes on a healthy and prosperous 2014!
James P. Schnell, CPA/ABV, CVA is a tax and business valuation partner with Mengel, Metzger, Barr & Co LLP and may be reached at (585) 423-1860.