Proposed tax code changes will require adjustments, eventually

The process of tax planning has historically involved some tension arising from ongoing movements of important pieces of a puzzle. This issue is particularly relevant this year.

“At the end of September, a nine-page summary titled, Unified Framework for Fixing Our Broken Tax Code, was released,” says Michael Viens, CPA, director of Tax Strategies at Kreischer Miller. “President Trump, legislators from both parties, tax reform proponents and critics, news media commentators and others all have opinions as to the merits of proposed tax changes as well as expectations for when and if enactment will occur in time to allow for effective tax planning for 2017.”

The framework specifies one effective date, that involving an opportunity for 100 percent expensing by businesses relating to capital investments in depreciable assets other than structures, which would apply to transactions occurring after Sept. 27, 2017. Best-case timelines for possible enactment of tax reform measures suggest December as the earliest date for the Senate approval, which would follow action in the House.

Smart Business spoke with Viens about how businesses should approach tax planning as changes to the tax code loom.

How should businesses approach year-end tax planning for 2017?
Do not wait for tax reform legislative actions to finalize before initiating current year planning. Effective planning often requires a fair amount of lead time for implementation and last ditch efforts in close proximity to the end of December can present formidable challenges.

Equipment purchases may not be received and placed in service in time. Funding arrangements to cover expenditures may involve credit or other financial transactions that take some time. Deferral of income may require some level of negotiation with other parties. Begin the planning process well before year-end while holding off on the final steps.

Following traditional tax planning approaches involving deferral of recognition of income while accelerating expenses should be valid strategies no matter what happens in the way of tax reform.

What are the relevant tax provisions that may change going forward?
A proposed material increase in the standard deduction may eliminate itemizing of deductions for many taxpayers going forward.

Acceleration of payment of certain items that may yield a tax benefit in 2017, but not in 2018, should be considered — for example, the timing of charitable contributions and payment of state and local income and real estate taxes. Be careful with taxes, however, in order to avoid the potential impact of alternative minimum tax should it still be around for 2017 and not go away until 2018.

Business capital investments will potentially be eligible for 100 percent expensing under tax reform proposals. Current law permits a 50 percent upfront write-off for qualifying capital expenditures, which is scheduled to drop to 40 percent in 2018.

Should tax reform run into legislative issues and current law provisions continue to apply, this would suggest a more favorable result if capital investments are placed in service this year rather than next year.

Effective tax planning may involve identification of the lead time for ordering and fulfillment processes and implementation of action steps developed to have equipment available with appropriate maneuverability in arranging a placed-in-service date this year versus next year.

What other changes might require action on the part of businesses?
Consideration should be given to updating partnership agreements, where applicable, to allow for new partnership audit rules that will be applicable for tax years starting in 2018.

These new Federal tax rules, where applicable, can require that adjustments be made at the partnership entity level with the partnership liable for any related underpayment of tax. Partnership agreements should be reviewed to determine whether any changes should be made.

The tax planning process this year will likely involve greater complexity than last year. More effective results can be achieved by not holding off in anticipation of tax reform that may or may not occur or for which effective dates may not apply looking back, but rather only going forward.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Your company tripped a bank covenant. Now what do you do?

If you have ever turned to your bank for a loan or line of credit, you know about bank covenants and have agreed to them. A covenant is a clause in the loan agreement that requires the borrower to do, or refrain from doing, certain things.

“These typically get a lot of attention prior to signing the documents, yet become an afterthought the minute the agreement is signed,” says David E. Shaffer, CPA, Director, Audit & Accounting at Kreischer Miller.

“However, post signing, we often find that owners have either missed a covenant or have done some action that violates a negative covenant (i.e. the covenant that says that you will only borrow from the bank and you just signed a zero percent loan for a truck).”

Smart Business spoke with Shaffer about the next steps for a company that has violated a covenant agreement.

What’s the best way to avoid surprises when it comes to covenant agreements?
The ideal time for a business to talk about bank covenants is when a loan is coming up for renewal or you are negotiating a new loan. Your bank will typically use the financial projections you provide to set the financial covenants. Consider putting something in the loan document that states how you might rectify a missed covenant, such as putting equity into the company, subordinating existing or new debt to shareholders or adding collateral to the loan (e.g. pledging some stock portfolio or cash).

Sometimes, despite everyone’s best intentions, companies fail to meet their bank covenants. When this happens, you should meet the situation head-on. If you are in the middle of the year and believe there is a chance you may not meet a covenant, review current projections to determine what steps can be taken to remedy the situation. If it is a leverage covenant (debt and/or equity), consider collecting accounts receivable more quickly, or requesting customer deposits to pay down liabilities. Or you might decide to defer some fixed-asset additions until the following year.

If it is a debt service coverage ratio and you do not expect to meet the projected income, this can be tougher to resolve by year-end. You can consider deferring owner distributions and/or making contributions so the covenant is met. Be sure to read the definition in the loan agreement.

What if you expect to violate a covenant and are in serious doubt about what to do?
Discuss the situation with your banker before you have violated the covenant. The earlier this discussion takes place, the better. Explain why you might not meet the covenant and ask if it can be amended for just the current year.

Remember, your loan officer does not want to have to explain the violation to his or her superiors. If it is the debt service coverage ratio (the most common issue-causing ratio that we see) and you have easily met the covenant in prior years, but something unusual happened in the current year, you will have a much better chance of getting the modification.

If you have already missed the covenant and it cannot be remedied, take the following steps:
  Notify the bank as soon as possible that you will need a waiver, but only after you and your key advisers have developed a plan to remedy the violation.
  Provide projections that show you will meet the covenant going forward.
  Consider putting more equity into the company or adding more collateral to the loan.
  Request a bank waiver. Keep in mind this could generate an additional fee and some loan terms may be changed (e.g. higher interest rate).

What are some other things to keep in mind?
Your bank is a key business partner and should be kept aware of what is happening in your business so there are no surprises (good or bad) when financial results are shared. If you maintain a good relationship, you will be in a much better position to deal with a covenant violation.

If you are a new customer and selected the loan based solely on price, the bank’s profit margins are slim and your banker will have much less leverage with his or her superiors to request and obtain a waiver. You may also experience higher waiver fees and an increase to your interest rate.

Insights Accounting & Consulting is brought to you by Kreischer Miller

A look into the best practices of the highest performing private companies

Mario O. Vicari has the opportunity to work with hundreds of private companies and he gets to see it all — from the very best performers to those that seem to constantly struggle and lots in between.

“The bell curve is truly at work here,” says Vicari, CPA, Director at Kreischer Miller. “The majority of private companies fall within the middle (wide) part of the curve, which makes them marginally better or worse than average. On the other hand, there are very few companies at the far ends of the curve, which puts them at the extremes of performance.”

Smart Business spoke with Vicari about the most common characteristics that define the top 3 percent of U.S. private companies.

   Strategy — Strategy is not just a one-day retreat to clarify next year’s plan. These companies consistently spend real time to consider their strategy. They look at how to clarify the plan and how to adapt it to a changing world where technology is disrupting everything and competitive threats are greater than ever. These companies have the discipline to get their heads out of the details and focus on the big picture objectives that drive their business forward. Strategy should be an intentional activity, not an afterthought.

   Culture/values — Great companies are crystal clear about their core values, which are exhibited in the culture at the company and the attitude of the people.  These companies have clarity about what they stand for and it pervades the culture. It’s not about big signs on the wall, but rather alignment to the values that are exemplified by the leaders of the company.

   Market niche — Most of the highest performing companies exploit positions in the market that others cannot see, cannot serve or don’t want. They exploit places in the market that offer a competitive advantage and are willing to make tradeoffs about what customers and markets to serve. They do not try to be all things to all people and don’t stray from the place where they have the best advantage. They are disciplined and stay in their niche.

   Customer rules — The best companies have rules around customer acquisition. They take the act of adding a new customer very seriously and are discerning about who they will work with and what margins and payment terms they will accept. They are not afraid to say “no” to a business that does not fit their rules.

   Execution — The best companies execute at a very high level because they don’t try to do too many things at once. Because they have limited resources, they know that they can only take on so many new things outside of the day-to-day operations and still be effective. They prioritize the most important items and focus on those.
Many companies have a laundry list of things that they want to do to improve the business and make the mistake of trying to do too many of these things at once while getting nothing done. The best companies work on two or three important objectives and see that they get fully implemented.

   People — When selecting people, these companies are very conscious of the person’s fit with the company culture. They look beyond the technical and experiential requirements of the job and are not afraid to deselect people when they have to. They will confront thorny personnel issues if performance becomes a concern or if the person cannot grow his or her skills in relation to the increased requirements due to the company’s growth.

   Capital allocation — The best companies are thoughtful about how to allocate capital after earning a profit. They know that value is created based on the free flow of cash in the business — not its accrual earnings.
Therefore, they are very discerning about investing profits in capital equipment, or making other investments and acquisitions until they are convinced that the return on invested capital exceeds the cost of capital from the investment. They are also careful about not letting their profits disappear on the balance sheet in the form of excess inventory and receivables beyond the level needed to support the growth of the business. This means that they generate and keep plenty of cash.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Wise companies explore every available avenue to reduce their tax liability

Three of the most common tax credits available to businesses are the research and development (R&D) tax credit, the health care tax credit and the foreign tax credit. Companies that can take advantage of these opportunities are able to save money by reducing their tax liabilities, says Richard J. Nelson, CPA, a Director in the Tax Strategies group at Kreischer Miller.

Smart Business spoke with Nelson about these tax credits and what companies can do to maximize their value.

How does the R&D tax credit work?
The research and development tax credit is the most widely used credit by businesses and was granted permanent status last year.

Businesses that utilize this tool include all types of manufacturing companies, architectural and engineering firms and software development businesses, as well as companies engaged in developing a particular technology to enhance their core business endeavors.

The Internal Revenue Service requires that qualifying research activities satisfy four tests: Activities must be technological in nature, they must be performed for a permitted purpose, the work must be undertaken to resolve uncertainty and there must be a process of experimentation. A good rule of thumb in estimating the credit is to take 10 percent of eligible R&D expenses.

The vast majority of eligible R&D expenses consist of the wages of the individuals working on the project. Other expenses, which are usually minimal, include materials and supplies which are consumed in the project and are 65 percent of the cost of contracted labor costs.

Beginning in 2017, qualifying businesses may offset the 6.2 percent Federal Insurance Contributions Act (FICA) portion of their payroll taxes using R&D tax credits claimed on their 2016 and future federal returns.

Qualified small businesses are defined as corporations or partnerships having gross receipts of $5 million or less during the taxable year. They must also not have gross receipts for any year preceding the five-year period ending with the taxable year. R&D tax credits are applied against quarterly payroll tax payments. In any given year, the maximum payroll tax offset allowed is $250,000. Unused credits may be carried forward and used against future payroll tax payments.

The second change allows eligible small businesses to use the credit to reduce their alternative minimum tax, as well as their regular tax. Eligible small businesses include corporations whose stock is not publicly traded, partnerships and sole proprietorships that had average gross receipts of $50 million or less during the prior three years.

Many companies are missing opportunities for the credit for expenses related to technology costs, specifically website design costs. There are also recent regulations that have been issued on internal use software. Not every website or internal use software will qualify for the credit, but it is at least worth investigating.

Who is helped by the health care tax credit?
The small business health care tax credit benefits employers that have fewer than 25 full-time equivalent employees, pay average wages of less than $52,000 a year per full-time equivalent (indexed annually for inflation) and pay at least half of employee health insurance premiums.

To be eligible for this credit, you must have purchased coverage through the small business health options program, also known as the SHOP marketplace. The maximum credit is 50 percent of the premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.

The credit is available to eligible employers for two consecutive taxable years. If you missed claiming the credit in a prior year, you may be eligible to file an amended return.

What benefits does the foreign tax credit provide?
If your company is paying income taxes to a foreign country or a U.S. possession, you may be eligible for a foreign tax credit. Generally, only income, war profits and excess profit taxes qualify for the credit. Foreign taxes can be taken as a deduction or as a credit. In most cases, it is to your advantage to take foreign income taxes as a tax credit.

Insights Accounting & Consulting is brought to you by Kreischer Miller

A proactive approach is best when considering your company’s future

There comes a time for every private company business owner to exit the business. Just as there is certainty with death and taxes, a business owner cannot ignore the fact that he or she will need to exit.
Planning for the event allows the business owner to exit on his or her own terms, says Mark G. Metzler, a director and Certified Exit Planning Adviser (CEPA) at Kreischer Miller.

Smart Business spoke with Metzler about things to keep in mind as you plan your exit strategy.

What exit strategy options are available to a private company business owner?
The most prevalent exit strategies include:
■  A strategic buyer — This person often is in the same business and is trying to increase market share, access new markets or acquire expertise or management resources.
■  A financial buyer — Generally referred to as private equity, venture capital or an investment fund. This type of buyer typically looks for undervalued companies, provides financial support and exits in the shorter to medium term.
■  Family members — This strategy may be accomplished through estate planning.
■  Employee Stock Ownership Plan  — An ESOP is considered a hybrid exit strategy as the owner is selling to a trust owned by the employees, but often is still managing the business.
■  Corporate partnership or joint venture — Allows the company to explore a relationship before jumping in with both feet.
■  Initial Public Offering  — A rather costly and complex option not suitable for most companies.

Why is choosing the right exit strategy so important?
Exiting a private business is complicated and often, the majority of the business owner’s wealth is tied up in the company. Unlike selling shares of your personal investments in Apple or Microsoft stock, selling your private company is not as simple as calling your broker or executing a trade in your E-Trade account.

When should owners think about exit planning?
As with many things in life and business, proper planning prevents poor performance. It’s never too early to think about exit planning and the most successful transactions occur where adequate planning has occurred. In order to allow for potential false starts, it is not unusual for owners to start the process five to 10 years prior to a contemplated event.

What first steps can be taken to ensure the right exit strategy and enhance value for the business owner?
Enhancing the business owner’s value begins with the process of identifying the owner’s business and personal goals and objectives. You cannot ignore this step. It’s critical that there is a clear understanding of these goals and objectives, as there are different advantages and disadvantages to each of the exit or transfer options.

It is also important to see the business through the eyes of the potential acquirers to understand how their various objectives and values fit with the seller’s personal and financial goals. Once this step is completed, finding the right buyer, preparing the business for sale and closing the deal can be accomplished.

What about the sales price? Isn’t money the most important aspect of an exit?
Companies that have been through the selling process understand that while everyone desires a fair selling price, money often isn’t the overriding factor.

Other motives, including employees, community, family and legacy are often very important to the seller and should not be ignored. Choosing the deal that’s right for the business owner may not be all about money. A business exit is an emotional event. Because the owner’s personal and professional identity is often associated with the business, there may be a psychological loss after an exit.

Therefore, owners should assess their readiness for an exit and evaluate life after the business. All business owners will exit their business at some point. Identifying the right exit is dependent upon, first, identifying your goals. You may then find that the rest of the process is just details.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Why a strategic approach is needed to lure superstar executives

When companies seek to strengthen their executive teams by luring premier talent from outside the organization, they need to offer potential recruits a compelling reason to make a change, says Tyler A. Ridgeway, Director, Human Capital Resources at Kreischer Miller.

“It’s still a buyer’s market,” Ridgeway says. “At the same time, A-plus players do not lack for opportunities and thus, can afford to be selective. These are individuals who have good jobs and are part of their company’s inner circle. And yet, they have an inner drive to continue to grow. It motivates them to consider new challenges that might satisfy these lofty ambitions.”

The challenge for companies is to craft a plan that entices these talented leaders to change course and join their team. It can be a delicate process that requires both salesmanship and a willingness to demonstrate vulnerability. Care must also be taken to ensure that any new additions will mesh with the existing team.

Smart Business spoke with Ridgeway about how mid-market companies can position themselves to locate and secure the best talent.

What constitutes superstar talent in business?
These are individuals who can help drive a business forward. A players quickly grasp the fundamentals of how a company functions, building both rapport and a common sense of purpose with the people on their team.

At the same time, they are adept at creating healthy tension with other departments that keeps everyone alert and stretching their capacity to achieve new goals. People who fall into this category want to be engaged in the growth of the business and expect to be part of the inner circle that is part of any important decision that gets made.

Does the recruitment of outside talent ever create insecurity on the management team?
Companies should consider internal candidates for management openings. However, if a succession plan has not been developed, it’s often an indicator that the talent within has been assessed and deemed incapable at the present time of filling these positions. If there are feelings of insecurity, leadership needs to find a way to get past that so the company can present a unified front to potential recruits.

Keep in mind that A players will typically study the company they are interviewing with as intently as that company is assessing them. If everyone is not on the same page and offers differing points of view about where the company is headed, it can quickly derail an interview and push the recruit to look for other opportunities.

What role does vulnerability play in the recruiting process?
The willingness to be vulnerable empowers trusted advisers to speak openly about what a company needs to take the next step. These are people who know the company and understand how it functions. They are familiar with what works and they are also aware of that organization’s flaws. If leaders are open to this level of honesty, it can help fill gaps that may be holding the company back.

As the process moves to the interview phase, vulnerability provides an opportunity to learn how recruits view a company’s flaws and what insight they have on how to solve these problems. Remember, these are people who love a good challenge. Businesses that can present an opportunity for a talented executive to step in and elevate that company’s performance, both operationally and financially, often have an advantage over competitors.

The key is presenting the challenge and then offering an incentive that can be obtained when success is achieved. If an executive is recruited to a $100 million company and is able to take that company to $150 million in revenue, that individual will expect to be compensated for his or her efforts.

When the rewards are shared with the existing members of the team, it’s a great away to alleviate any tension that may have existed about the new hire.

Companies that go after A-plus talent need to treat those individuals as they would their best customers. And they need to present a compelling case to these people as to why they should make a change and join a new business.

Insights Accounting & Consulting is brought to you by Kresicher Miller.

Make your company more attractive to buyers with a tax election

Sellers of middle-market companies are increasingly engaging advisers to perform sell-side due diligence before they go to the market. Part of the due diligence process involves evaluating tax structuring opportunities, including tax elections that deliver a step up in the basis of the assets for the buyer.

“Sophisticated buyers have understood this for a long time. Now, sellers are starting to appreciate a buyer’s desire for this, so they want to get out in front of it,” says Dave Godenswager, senior manager, Transaction Advisory Services at BDO USA, LLP.

Smart Business spoke with Godenswager about how deal structure impacts a company’s tax expectations during a sale.

What do you mean by tax elections that step up tax basis?

There are two ways to buy a business. A stock acquisition — easier to document from a legal standpoint and an advantage for certain customer contracts — is where a new owner purchases the stock or units of the business. In an asset acquisition, the assets of the business are sold to the buyer while the selling entity remains intact. In some cases, a stock transaction can be treated as a sale of the assets for tax purposes.

If a buyer purchases assets, or has the ability to treat the transaction as if he or she purchased assets, the buyer may be able to amortize the purchase price for up to 15 years, which in turn lowers the buyer’s future tax costs. This tax shield is compelling for private equity firms in particular because they typically want to hold a company for five to 10 years and are focused on the company’s cash position.

Buyers have historically keyed in on this, and middle-market sellers can use these techniques to make their company more attractive and marketable. They also can look at this when going to market, asking, ‘Is there a possibility we can monetize this or use it as a negotiating point?’

How does a seller know whether or not this is possible for his or her company?

Generally, as a seller, before going to market you want to consider your company’s tax profile to understand potential tax exposures and opportunities. You want to be in a position to say, ‘Yes, we’ve identified this and we’re taking certain steps.’ During due diligence, advisers can help determine if there is an opportunity to implement certain pre-closing reorganizational steps. For instance, consideration may be given to a Section 338(h)(10) or 336(e) election or perhaps an F reorganization, such that the seller is able to deliver a step up in the tax basis of the assets to the buyer.

Since many middle-market organizations are taxed as flow-through entities — S Corporations, limited liability companies or partnerships — they are uniquely positioned to deliver some of these tax benefits.

How important is this in today’s market?

It’s been a seller’s market — with few high-quality companies on the market, private equity firms are chasing the same deals. While the deal space is still hot for sellers, there is uncertainty about tax reform and what a potential border adjustment tax could mean for businesses. Understanding structuring opportunities gives the seller a better chance to get a transaction closed.

What else do sellers need to know?

Sellers want to understand and express the deal structure to the buyer before signing the letter of intent. Some structures may result in incremental taxes, and therefore sellers need to be clear with buyers that they intend to be compensated for these tax costs. Often, buyers are willing to do this because the tax benefits are compelling.

It’s also important to have an adviser who understands the structuring nuances in order to calculate an accurate gross-up payment. Historically, sophisticated buyers have had that, but sellers are realizing they need to make sure they are getting adequately compensated since incremental taxes could include recognizing ordinary income, built-in gains tax for S Corporations and certain entity-level taxes. Sellers also need to be focused on potential accounting method changes and the impact of deferred revenue as a result of the transaction.

The tax opportunities may not change the legal form of the deal, but there are certain provisions that will need to be tailored in the purchase agreement. It is a nice benefit that sellers can present to buyers to become more attractive in the market.

Insights Accounting & Consulting is brought to you by BDO USA, LLP

Employees play a critical role in protecting your company’s data

Cybersecurity is an ever-present concern for business leaders with valuable data to protect and multiple potential entry points to secure against being infiltrated by hackers, says Sassan Hejazi, Ph.D., Director of the Technology Solutions Group at Kreischer Miller.

“The companies that are most prepared have upgraded their protections on hardware devices and infrastructure, as well as implemented protocols to safeguard their materials,” Hejazi says. “However, even these proactive organizations face vulnerabilities.”

Cybercriminals tend to be quite resourceful and are constantly in search of new ways to wreak havoc on systems and networks everywhere. Your employees need to be aware of this constant threat and should be armed with knowledge and tools to help protect your company against an attack.

“A continuous awareness mechanism that begins at the top and cascades all the way down to new hires is the best solution,” Hejazi says. “Enable employees to not only identify security threats, but also to act as a deterrent towards such threats.”

Smart Business spoke with Hejazi about the tools available to reduce your risk of a cyberattack and the value of continuous employee training.

What steps are most effective in any cybersecurity initiative?
The measures you implement to secure your company need to be built around user awareness and training.

Technology changes on an ongoing basis as upgrades are made to both hardware and software and new tools and applications are developed. Educate employees so they know how to respond if they get a questionable email request. Ensure that they understand the risk of transferring data from your company network to a home network, where the employee or family members could inadvertently expose sensitive files to the outside world by visiting unsafe websites.

Keep in mind that even if these files are stored on the same computer the employee uses in the office, that computer is now being accessed through a potentially unsecure network. Also, laptops can be stolen. Take steps to encrypt important information so that even if it does fall into criminal hands, it will be difficult to decode.

It’s wise to implement practices that cover things likes printed files. These documents should not be left on the printer for any length of time, nor should they be left at someone’s desk where the information could also be exposed. Most security breaches occur due to human error. Even if it’s an unintentional lapse, it can still create a significant problem.

How can social engineering play a part in protecting your company?
Many middle-market companies have outsourced their IT duties, often through a help desk function that can be accessed by employees.

It’s important that someone be designated as the contact point to address these concerns, even if it’s not a full-time person who is on site every day. You don’t want a cyberattack to occur that could have been prevented had there simply been an IT person in place to field a question.

Online courses are another effective tool to teach employees about smart technology practices. You can subscribe to courses and develop an ongoing curriculum for your employee that addresses updates and changes as they occur.

Another successful strategy is penetration testing. Create a scenario such as a fake phishing email, send it out to a select group of employees and see who responds. It’s always better if an employee “flunks” this test and learns a valuable lesson in the process rather than respond to a real phishing email and expose your network.

You can also have a “stranger” walk into your office pretending to be a visitor and evaluate how your team handles the situation. Do they question it or assume that the person is OK and go back to whatever it was they were doing?

Take opportunities to not only protect, but verify that your protection measures are effective. You don’t need top-of-the-line IT protection if your company has limited financial resources. Develop a plan in which systems are updated on a regular basis and training and awareness is an integral part of your safety program. Costs have come down in recent years, so you should be able to find an option that is right for your business.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Three financial improvements to grow your construction company

Financial reporting in the construction industry is often only as good as your last estimate. From the initial bid to ongoing measurement of costs and to the final pricing of change orders, estimates impact every aspect of a construction project.

Therefore, it’s critical for construction companies to handle all estimation issues properly to increase company profitability and provide management with quicker, more accurate estimates, says Michael S. Essenmacher, CPA, Director, Accounting and Assurance at Barnes Wendling CPAs.

Smart Business spoke with Essenmacher about the three things you can do to ensure more accurate financial reporting on construction project estimates.

1. Avoid burden rate estimation errors
One of the most common errors in contract estimates is incorrect overhead or burden rates. Most construction contractors are very efficient at allocating direct costs such as labor, materials and subcontract costs. However, one of the difficulties when maintaining an accurate burden rate is understanding what costs need to be included.

Burden rates are used to measure indirect contract costs such as payroll taxes, depreciation, insurance and repairs proportionately across contracts in progress. Maintaining an effective burden rate involves constantly monitoring and understanding the composition of indirect costs.

For example, construction companies must understand how changes in workers’ compensation expenses and unemployment taxes affect the payroll tax component of the burden rate. Workplace injuries, layoffs and hiring additional employees can all impact this figure.

Another example of changing indirect costs is equipment usage rates associated with depreciation from new fixed assets or significant repairs to older fixed assets. Construction contractors often assume their burden rate is consistent from year to year; ignoring indirect cost changes that can affect it.

Burden rates should be evaluated annually to maintain their accuracy. Doing so will lead to more informed cost structures on contract bids and improved accuracy of contract costs and estimated costs to finish contracts in progress.

2. Utilize work in progress reports to track financial performance
The next step is to utilize this gathered data within work in progress (WIP) reports to accurately track financial performance. Management should evaluate WIP reports on an ongoing basis to better understand the reasons for variances.

By evaluating WIP within a reasonable timeframe (monthly), information is more readily available from project managers and employees handling change orders.

The timely analysis of WIP reports will provide better estimates of the cost to complete the project and improved comparisons across multiple periods and against completed contracts.

When analyzed with different criteria, these comparisons can indicate contract inefficiencies among project managers, business lines or offices within the company. Accurate WIP reports enable management to increase cash flow within the company through improved billing of customers.

3. Timely billing improves contractor relationships
Timely billing enhances the relationship between contractors and contract managers. When both parties are in agreement regarding the performance of contract work, pay applications are approved and are more likely to be paid quickly by customers.

A quick turnaround of billing will help increase accounts receivable turnover and cash flow, reducing the necessity to rely on lines of credit. A positive cash flow strengthens working capital within construction contractors, and strong working capital and cash flow lead to elevated bonding capacity and the ability to sustain larger contract backlogs. All of these aspects improve the company’s overall financial health and increase its stability.

Developing and maintaining burden rates, minimizing overhead costs, effectively managing contracts and improving estimates within WIP reports allow for additional revenue opportunities from more contracts.

These steps also improve the efficiency and cost management of construction contracts through accurate estimates.

Insights Accounting & Consulting is brought to you by Barnes Wendling CPAs

Develop employees to improve your bottom line

To build teams that deliver results, the groundwork must be laid from the start. This, in part, requires a framework through which strategic hiring decisions can be made.

“The more consistent companies can map their core values to candidates’ motivators in the early stages, it will lead to better decision-making,” says Laura Rohde, director of Human Resources at Skoda Minotti.

After onboarding, it’s important to develop employees. This can be done through coaching, mentoring and individualized training programs.

“By focusing on the individual, employers can better engage employees, which in turn benefits the organization,” she says.

Smart Business spoke with Rohde about strategic hiring and leadership development, and how this impacts the bottom line.

What are the keys to creating a framework to make strategic hiring decisions?

A talent selection framework should incorporate behavioral-based interviews that are geared toward identifying and discovering the behaviors the company wants its employees to exhibit.

Motivational fit questions can be used to gauge candidates’ passion for the job and how well they would fit with the company culture. That means measuring personal motivators against the company’s core values. The Birkman Method®, an assessment tool, is one way to measure the strength of a candidate and his or her personal motivators.

What is the significance of coaching and development programs to an organization?

Employees find success through learning. Fostering a lifelong learning culture helps companies get better. By contributing to employees’ development, employees gain skills and knowledge they can invest back into the company.

The tenets of a good coaching and development program are always tied to individual needs. Strategically, through The Birkman Method®, employers can identify what employees need from the work environment and from colleagues. That information goes into a report that outlines how best to approach a person, and how his or her work should be organized. It’s in essence a cheat sheet for managers that gives them an idea of how a person is wired and how to coach and develop them.

Also, VAK (visual, auditory or kinesthetic) tests can determine the type of learner a person is so managers can create an effective approach to training.

How can companies keep employees motivated and wanting to make change?

Get employees involved and engaged. It’s important that they feel their voice is heard and their input is valued. Treating all employees as owners helps them feel invested in the company.

Consider holding monthly staff meetings at all levels and having open forums. At these meetings, employees should be encouraged to bring forward issues and brainstorm or problem solve to develop solutions for them.

Accessibility is also important. By knocking down barriers between employees and management, they can co-create positive change together.

Also, if someone comes onboard and could be better used somewhere other than his or her current role or department, consider moving that person to a role that can better utilize his or her strength.

What are the keys to developing leaders?

Developing leaders requires delegation, cross training and setting stretch goals, all of which can help motivate the right employees to take their careers to the next level.

Another key is communication. Bring these employees to meetings and on client visits to let them see the company from more of a global perspective.

Managers should be approachable. Make time for these employees. Have an open-door policy, or at least times when they can interface with management.

It’s also important to lead by example. Managers become role models that exemplify the desired behaviors of future leaders, which means they need the self-awareness to know how they come across to ensure there isn’t a disconnect.

A company’s people are its greatest assets. Invest in them. Great employees will deliver exceptional customer service that impacts your bottom line.

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