Friday, December 10, 2010
Last weekend I attended a Holiday party a client graciously invites me to each year. We've all been to numerous Holiday parties over the years and they are generally good fun and we enjoy good company! This particular party last week was very different in one way...this company's marketing group put together a film production chronicling a number of subplots and themes (one such example is the "rumor" that tunnels exist below their office building which they were accessing by going under their desks...looked to be true!). The main message of the film was congratulatory in nature. This company, and its President, have been in business for 30 years.
The performance given captivated the entire audience for what seemed approximately 30 minutes, give or take, in duration. It wasn't as much the message that really grabbed my attention (no offense, 30 years in business is quite an accomplishment). No, it wasn't as much the message...it was the messengers that really made quite an impression on me. Virtually all the employees of the company were featured in this film (yes, it was good enough of a production to be called a film) and they were HAVING FUN! One of the ladies was even singing the "I want to be a billionaire so f*&^%!g bad" song at one point and then the original song played in the background...good times!
This company has figured it out, something special that can't easily be quantified or bottled. It would be great if we could all have organizations where the morale was at the high levels I saw depicted throughout this film, especially in these tougher times! Although not easily quantified, the business results are generally very directly correlated to the attitudes and morale of the team producing those results.
Earlier this month, I was connected with a contractor who was using a CPA who didn't have much construction financial/tax background. In reviewing the tax returns it was clear that the predecessor CPA hadn't taken the Domestic Production Activities Deduction ("DPAD") which many contractors qualify for. Generally, this deduction is calculated as 9% (for tax year 2010 and later years, it used to be less in previous years) of taxable income and can be significant. In the simplest terms, the deduction is permitted for taxpayers engaging in a number of activities including the construction of new, or substantially remodeled, real property. As always, I advise any contractor to consult with their tax advisor regarding their particular circumstances.
The contractor I refer to above will have nearly $500,000 in taxable income for 2010 and engages in the construction of qualifying real property. The basic, rounded math translates into a tax savings for this contractor of approximately $18,000. I arrive at this number by taking $500,000 and multiplying it by the 9% rate permitted by Section 199 ("DPAD") and arriving at $45,000. This $45,000 is a deduction (as opposed to a dollar for dollar credit against the company's tax bill) and as such will result in an approximate 40% savings (effective tax rate). The $45,000 result multiplied by the 40% effective rate is how I arrived at the $18,000...no small change!
This DPAD deduction had not been taken previously for this particular contractor and most likely would have been missed again for 2010. Please be sure you are considering this deduction for your business. If you are a surety professional, banker, attorney or other services provider be sure to make the contractors you are associated with aware as well.
Monday, November 8, 2010
I recently had lunch with Dave McPherson and Mike Germain of Watt, Tieder, Hoffar & Fitzgerald LLP. In addition to the fine company, they provided me with the letter you see below outlining some of the significant changes in the process of filing Mechanic's Liens taking effect January 1, 2011. The changes are outlined in the letter below along with their recommendations. They also included a sample copy of a lien which I included below their letter. As always, please consult with legal counsel before using any of the information provided below, in part or in whole, to ensure you are in full and proper compliance with the law. Additionally, Dave or Mike would be willing to provide legal counsel if need be.
Monday, October 11, 2010
Tuesday, September 14, 2010
As we head towards the fourth quarter of 2010, we’re hopeful for a better 2011 and, if you haven’t started doing so already will begin mapping out our plans for our businesses and team members for next year. It’s the time of year to meet with our teams and begin planning for the next one to two years and beyond. It’s an important and sizeable task businesses face each and every year however many don’t have a framework for how to go about establishing a strategic plan and/or individual goal setting. This article will focus on how to go about individual goal setting for each of your key management members. Once you have a plan and direction for your business, it’s important to have all key members of management structure personal goals in order for the company to achieve its objectives as well as the individual having a better defined road map for success. I hope to provide some insights and ideas about how to go about doing just that in a meaningful and effective way.
Monday, April 12, 2010
“Cash is king.” “Cash is the lifeblood of any organization.” These ubiquitous sayings explain what every contractor already knows: cash is one of the most critical components to a construction company’s success and stability.
In addition to developing cash flow forecasting at the planning stage of every contract, contractors also need a system at the corporate level to monitor cash flow in a proactive and timely manner. This system, known as cash flow reporting, provides the data necessary for analysis and decision-making. But what exactly constitutes good cash flow reporting?
In the world of construction, business owners should view and understand cash flow from two perspectives: across the entire organization as a whole and at the job level.
Company-Wide Cash Flow Reporting
Many contractors struggle to understand the peaks and valleys of cash flow as it affects the entire organization. Outside the Balance Sheet and the Income Statement, one of the most overlooked financial statements is the Statement of Cash Flow. This report is based on General Ledger activity and shows how changes in balance sheet and income statements line items affect cash. The information is generally broken down into three sections: Operating, Investing and Financing.
Why is this information so important to contractors? Mainly, it has to do with the fact that Income Statements are used to see company profitability, and Balance Sheets are used to satisfy creditors, manage inventory and collect receivables... but both miss the flow of cash in and out. A prepared Income Statement, for example, may show revenues that have been reported but not yet collected and expenses that have been reported but not yet paid. In the same sense, an increase in A/R billings does not necessarily mean in increase in cash, and the posting of an A/R invoice (which increases a company’s Income) has no effect on cash. A Cash Flow Statement, in contrast, identifies the cash that is flowing in and out of the company via cash receipt transactions: accounts receivable collections, A/P invoice payments, payroll liability payments, and so on.
Most good accounting systems that operate on an acrual method should offer a standard Cash Flow Statement generated within the General Ledger. When reviewed regularly, this report gives construction business owners a much clearer understanding of their company’s financial position than can be learned from the Income Statement and Balance Sheet alone. Negative cash flow from operating activities, for example, may raise a red flag as to why the reported net income is not turning into cash. Or a large increase in accounts receivables may uncover problems with billing or collection procedures.
Cash Flow By Job Reporting
Most construction projects are considered individual profit centers, each with its own cash cycle. Therefore, in addition to the Statement of Cash Flow that shows cash activity on a company-wide basis, contractors should also pay attention to cash flow by job to see how each project affects cash flow for a given period. Analyzing cash inflow and outflow by project allows contractors to identify profitable jobs that are funding themselves as well as underperforming jobs that are possibly being funded by other jobs.
Good construction-specific accounting software should make it easy, if not automatic, to prepare a Cash Flow By Job report. Some systems even incorporate this all-important report into their executive “dashboards” so that the information is displayed graphically and is available on a real time basis. (See Sample Report #1) At a minimum, the contractor should be able to see cash received or collected via cash receipts per job minus what was paid out of AP and payroll. It’s important to note that when defining Payroll Cash Paid to Date, the report should include not net payroll (employees’ wages) but rather gross payroll (employees’ wages plus FICA, FUTA, SUTA, Workers’ Compensation, prepaid insurance and other burdens).
For a more detailed look at cash flow by job, contractors will want a report that also includes a Revised Contract Amount, a Revised Estimated Cost, Gross Profit, Open Payables and Open Receivables per job (See Sample Report #2). Using this information – in conjunction with Cash Collected and Cash Paid to Date out of A/P and Payroll – construction business executives should be able to see the percentage of cash flow to contract and the percentage of cash flow to gross profit. Not only does this allow contractors to alter cash flow projections based on actual cash activity, but it also provides invaluable information on cash flow trends via jobs or types of jobs. In the long term, that can lead to better cash flow forecasting.
Proper cash flow management is essential for all businesses, but it is especially important in the cyclical, project-based world of contracting. To properly monitor cash flow activity, construction executives need to regularly view and understand reporting from two perspectives: the company-wide Statement of Cash Flow and the project-level Cash Flow by Job report. And with today’s sophisticated construction accounting applications, they can easily accomplish both.
Monday, February 15, 2010
Employment Practices Liability Insurance is a relatively new form of business line insurance however every business employing people should absolutely have this coverage. Claims made against employers are increasing during these difficult economic times. Wrongful termination lawsuits are on the rise as businesses have had to lay people off over the past year or so. Letting people go, either via termination for cause or reduction in force, in full accordance/compliance with accepted human resources practices is very difficult for most businesses; even those with Human Resource professionals in-house. The exposure for employers is significant and appropriate coverage should be maintained.
If you are unfamiliar with this type of insurance and/or uncertain you have appropriate coverage, I strongly encourage you to contact your insurance broker today to discuss your company’s exposure and how best to address it.
Tuesday, January 12, 2010
As if owning and managing a construction business on a daily basis wasn’t challenging enough, especially given the economic headwinds in recent times, contractors must be aware of the potential liability which arises from doing business with unlicensed subcontractors. In summary fashion I’ll highlight the more important facts/points of a case which illustrates the potential pitfall.
The case of Sanders Construction Company, Inc. v. Martin Cerda [And five other cases] is important because it further established and maintained the liability of a General Contractor for the unpaid wages of his/her unlicensed subcontractors. The following summarizes the basic facts which were not in dispute:
- In September 2006 disputes arose regarding the quality of the subcontractor’s work
- After Sanders discovered the subcontractor’s license had expired prior to June 2006, Sanders continued to work with the contractor
- Sanders was paying the subcontractor and did not believe he was responsible for paying the subcontractors workers
- The subcontractor ceased work on the project in January 2007
- The workers ceased work either in December 2006 or January 2007
The hearing officer cited the holding in Hunt Building Corp. v. Bernick (2000) 79 Cal.App.4th 213, 220: “Labor Code section 2750.5 operates to conclusively determine that a general contractor is the employer of not only its unlicensed subcontractors but also those employed by the unlicensed subcontractors.” The hearing officer decided Sanders was the statutory employer of the workers employed by the subcontractor, entitling them to wages and interest. (§ 98.1, subd. (c).) The hearing officer declined to award waiting time penalties because he deemed there was a good faith dispute about whether Sanders was the employer.
Sanders filed an appeal and lost, with the superior court adopting the reasoning of the Labor Commissioner. Like the hearing officer, the superior court relied on Hunt and its interpretation of section 2750.5.
There are many issues to be aware of, many items to verify including ensuring the current and active license status of any subcontractors you do business with. The alternative of staying on top of items such as this could be a potentially crushing expense.