Trends – Roth&Co

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The pandemic has made many companies rethink what flexibility looks like in the workplace. Hybrid work schedules are becoming increasingly common, as are flexible work hours. Employees are more concerned than ever about their work-life balance and the culture of their workplace. All these factors have brought the perennial idea of the four-day work week back into the public discussion.

The concept is simple – employees would work four days a week while being paid the same and earning the same benefits, but also while maintaining the same workload. The thinking is that by reducing their work week, organizations could operate with fewer meetings and more independent work. Governments across Europe have started experimenting with the four-day work week. Last year, Kickstarter became the latest in a string of organizations to announce they were experimenting with a four-day workweek.

Research suggests that reducing work hours can decrease employee stress, and improve well-being without impacting productivity, but only when implemented correctly. To illustrate, in a recent study about New Zealand’s move to the four-day workweek, researchers Helen Delaney and Catherine Casey found that not only was work intensified following the change, but so were managerial pressures around performance measurement, monitoring, and productivity. It is simply not sustainable or reasonable to expect already frazzled employees to keep working with existing workloads for fewer hours or less days.

While reducing employee hours or workdays is certainly not for every business, there may be companies out there whose employees will benefit from a shift to less hours or days. A recent Harvard Business Review article outlines a six-step guide to help leaders plan and implement a four-day workweek.

Shifting your mindset – For a four-day workweek to be successful, leaders must shift their mindsets to value actual productivity, not just hours worked. While hours worked is an easily quantifiable metric, it often doesn’t correspond to the actual value added to an organization.

Employees and leaders define goals and metrics together – Both employees and leaders should be actively involved in the planning process and should jointly answer important questions on implementation. Whether there is a joint work group or just regularly scheduled meetings between leadership and employees, here are some questions that should be considered: How will the organization measure productivity? Which days or hours should we take off? How can we keep the change from negatively impacting our clients, customers, and other stakeholders? What steps can we take to increase our productivity?

Communicate internally and externally – Internally, the biggest questions will likely be about how the change will affect people’s jobs. Be clear about your reasons for trying out the four-day workweek and assure your employees that it will not negatively affect their pay or benefits. Externally, many companies worry about what their clients will think if they reduce hours. Those worries can often be addressed by simple communication. Identify which customers or stakeholders might be affected and ensure the scheduling change is communicated clearly. You may be surprised about how receptive they‘ll be to the change.

Run a Pilot – Now it’s time to act! Remember that in the pilot stage, the goal isn’t to get everything right from day one; it is about creating the tools and processes your organization needs to make reduced work hours possible. During this time, problems will arise. Try your best to address them as they happen and create an environment where people feel safe sharing their thoughts and concerns.

Assess the Pilot – Once the pilot is complete, analyze the results using different metrics. Group interviews can provide insight into employees’ experiences, and job satisfaction surveys can help identify trends in stress levels, work-life balance, and quality of life. As far as productivity, relevant metrics will depend on your industry, such as number of sales or average completion time of projects.

Implementation – Leaders will need to work across the organization to embed the new practices into the workplace culture. Be sure to remain focused on productivity — not hours worked — as the metric of success. Track metrics over the long term and adapt your processes according to what they show. Every organization will uncover its own challenges when moving to a reduced work hours policy, but with constant communication and staying flexible, most issues can be addressed quickly.

Workplace norms have shifted over the last two years. Today we find ourselves in a transitional period in the American workplace and we have the chance to remake our concept of work before things go back to the way they were. It’s an opportunity leaders must not squander. While no change comes easily, leaders willing to embrace the changes have a chance to push their businesses ahead of the competition by having more engaged employees who better service their clients.

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Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

August 1

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)
File a 2021 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

If a calendar-year C corporation, pay the third installment of 2022 estimated income taxes.
If a calendar-year S corporation or partnership that filed an automatic six-month extension:
- File a 2021 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
- Make contributions for 2021 to certain employer-sponsored retirement plans.

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Business owners and investors are understandably concerned about skyrocketing inflation. Over the last year, consumer prices have increased 8.3%, according to the latest data from the U.S. Bureau of Labor Statistics. The Consumer Price Index (CPI) covers the prices of food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. This was a slightly smaller increase than the 8.5% figure for the period ending in March, which was the highest 12-month increase since December 1981.

Meanwhile, the producer price index (PPI) is up 11% over last year. This was a smaller increase than the 11.2% figure for the period ending in March, which was the largest increase on record for wholesale inflation. PPI gauges inflation before it hits consumers.

Key impacts

For your business, inflation may increase direct costs and lower customer demand for discretionary goods and services. This leads to lower profits — unless you’re able to pass cost increases on to customers. However, the possible effects aren’t limited to your gross margin. Here are seven other aspects of your financial statements that might be impacted by today’s high rate of inflation.

1. Inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is measured at the lower of 1) cost and 2) market value or net realizable value. Methods that companies use to determine inventory cost include average cost, first-in, first-out (FIFO), and last-in, first-out (LIFO). The method you choose affects profits and the company’s ending inventory valuation. There also might be trickle-down effects on a company’s tax obligations.

2. Goodwill. When estimating the fair value of acquired goodwill, companies that use GAAP are supposed to apply consistent valuation techniques from period to period. However, the assumptions underlying fair value estimates may need to be revised as inflation increases. For instance, market participants typically use higher discount rates during inflationary periods and might expect revised cash flows due to rising expenditures, changes in customer behaviors and modified product pricing.

3. Investments. Inflation can lead to volatility in the public markets. Changes in the market values of a company’s investments can result in realized or unrealized gains or losses, which ultimately impact deferred tax assets and liabilities under GAAP. Concerns about inflation may also cause a company to revise its investment strategy, which may require new methods of accounting or special disclosures in the financial statement footnotes.

4. Foreign currency. Inflation can affect foreign exchange rates. As exchange rates fluctuate, companies that accept, hold and convert foreign currencies need to ensure they’re capturing the correct rate at the appropriate point in time.

5. Debts. If your company has variable-rate loans, interest costs may increase as the Federal Reserve raises interest rates to counter inflation. The Fed already raised its target federal funds rate by 0.5% in May and is expected to increase rates further over the course of 2022. Some businesses might decide to convert variable-rate loans into fixed-rate loans or apply for additional credit now to lock in fixed-rate loans before the next rate hike. Others may restructure their debt. Depending on the nature of a restructuring, it may be reported as a troubled debt restructuring, a modification or an extinguishment of the debt under GAAP.

6. Overhead expenses. Long-term lease agreements may contain escalation clauses tied to CPI or other inflationary measures that will lead to increased lease payments. Likewise, vendors and professional service providers may increase their prices during times of inflation to preserve their own profits.

7. Going concern disclosures. Each reporting period, management must evaluate whether there’s substantial doubt about the company’s ability to continue as a going concern. Substantial doubt exists if it’s probable that the entity will be unable to meet obligations as they become due within 12 months of the financial statement issuance date. Soaring rates of inflation can be the downfall of companies that are unprepared to counter the effects, causing doubt about their long-term viability.

We can help

Inflation can have far-reaching effects on a company’s financial statements. Contact us for help anticipating how inflation is likely to affect your company’s financials and brainstorming ways to manage inflationary risks.

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How often does your company generate a full set of financial statements? It’s common for smaller businesses to issue only year-end financials, but interim reporting can be helpful, particularly in times of uncertainty. Given today’s geopolitical risks, mounting inflation and rising costs, it’s wise to perform a midyear check-in to monitor your year-to-date performance. Based on the results, you can then pivot to take advantage of emerging opportunities and minimize unexpected threats.

Appreciate the diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Interim reporting can be especially helpful for businesses that have been struggling during the pandemic.

For example, you might compare year-to-date revenue for 2022 against your annual budget. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new ad campaign or alter your pricing. It’s also important to track costs during an inflationary market. If your business is starting to lose money, you might need to consider 1) raising prices or 2) cutting discretionary spending. For instance, you might need to temporarily scale back on your hours of operation, reduce travel expenses or implement a hiring freeze.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. A low stock of key inventory items might foreshadow delayed shipments and customer complaints, signaling an urgent need to find alternative suppliers. Or, if your company is drawing heavily on its line of credit, your operations might not be generating sufficient cash flow.

Recognize potential shortcomings

When interim financials seem out of whack, don’t panic. Some anomalies may not be caused by problems in your daily business operations. Instead, they might result from informal accounting practices that are common midyear (but are corrected by you or your CPA before year-end statements are issued).

For example, some controllers might liberally interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude costly year-end expenses, such as profit sharing and shareholder bonuses. Interim financial statements, therefore, tend to paint a rosier picture of a company’s performance than its year-end report potentially may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, management’s estimate using historic gross margins. Similarly, accounts receivable may be overstated, because overworked finance managers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Proceed with caution

Contact us to help with your interim reporting needs. We can fix any shortcomings by performing additional procedures on interim financials prepared in-house — or by preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.

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Let’s not try to sugar-coat this; 2022 has been brutal from a financial standpoint. The stock market has officially entered into a bear market, inflation has been producing nasty headlines and interest rates have gone haywire.

Let’s explore what has been happening under the surface.

Emerging out of the Covid recession many aspects of the economy were out of whack. For starters, many were out of work, so the government footed the bill by paying enhanced unemployment programs on top of other stimulus and business borrowing programs.

Giving the people extra money and not being able to spend it on vacations and restaurants as they were all closed, meant that American families’ balance sheets improved. So, although there was this once-in-a-lifetime pandemic and financial disruption, savings rates actually went up.

Once we emerged from the pandemic, people were desperate to spend. Demand was extremely high. But broken-down supply chains meant that demand outpaced supply which in economic terms creates inflation.

All this extra cash in hands of the American public, along with very easy monetary conditions from the Federal Reserve, also created an asset-buying frenzy. The stock market, real estate market, cryptocurrencies along with other assets caught a huge bid. The S&P 500 rose 113% off the pandemic lows, houses all over the U.S. were selling for 20%+ above the asking price, and speculative assets like non-profitable growth companies and cryptocurrencies were up hundreds of percentage points in just a few months creating a bubble environment.

The inflation pressures, which started in earnest in the middle of 2021, has put the Federal Reserve on its heels. At the start, they kept on saying that the inflation spike is “transitory”. But as it turns out, it is way stickier than they anticipated.

This experiment of money printing is something we wrote about in May of 2021, and I guess the debate should be settled.

Being that the Federal Reserve’s dual mandate is maximum employment and stable prices, they needed to jump into overdrive and slow inflation. The core way they do it is by raising interest rates.

Slowing the economy by reducing the circulation of money in the economy is the chief outcome of raised rates. When this slowdown spreads through the nooks and crannies of the economy, spending slows, so demands drop. The hope is that prices should come down.

This plan can come along with collateral damage. The R-word. Okay, I’ll say it, a recession.

By slowing the economy, spending goes down, so income goes down, so rents fall, so foreclosures go up… You get the picture. The Fed may try to accomplish one thing by slowing the economy, but there may be a price to pay.

Fed Chair Powell was asked during a recent press conference if he believes that we will have a “soft landing”, he responded “softish”. That is admitting to a lot in Fed Speak.

There is a case to be made that this is not the worst thing. The stock market is already paying the piper as it is, why not complete the process? If we manage to avoid a near-term recession, we’d only be temporarily preventing the inevitable: Recessions are a normal and natural part of the economic cycle and the longer we go without one, the worse the imbalances will be when we get there.

50% of Nasdaq stocks are off 50% from their highs. Once we got to this point, why go back up to new highs only for a recession in 2024?

So, if the recession comes, how can you prepare for this?

For starters, keep your leverage low. Purchasing real estate and other assets on leverage works great when the economy is humming. But when rents fall, vacancies are up and business profits fall, being left holding the bag with all the debt can prove costly. As Warren Buffet famously said, “only when the tide goes out do you discover who’s been swimming naked.” It may be time to de-leverage and sell some higher-risk assets.

Diversification is as important as ever.

From a stock market perspective, it’s very difficult to try to time it right. Markets tend to bottom out before the actual recession is wreaking havoc on the economy. Take the covid drawdown for example; the market bottomed out way before daily deaths spiked. The wealth destruction happened mostly before the virus was spreading in the United States.

The same would be with other economic events. The market is a forward-looking mechanism. The selling for an anticipated recession could be long over once we are actually in one. Trying to time the in and out right is almost impossible.

From an employment perspective, be nimble and ready to do additional tasks to keep salaries up to current levels. Layoffs are a nasty part of a recession and those who bring massive value to a company are the last to be tampered with.

As gloomy as this sounds, it is also a huge opportunity. As Sir John Templeton said, “for those properly prepared, the bear market is not only a calamity but an opportunity”.

So, keep your emotions in check, try not to do anything drastic, it’s not the time to score style points, and don’t try to overthink things. And don’t hesitate to ask for help.

The 4-Day Work Week

2022 Q3 Tax Calendar: Key Deadlines for Businesses and Other Employers

How Inflation Could Affect Your Financial Statements

Private Business Owners: Don’t Wait Until Year End to Evaluate Financial Performance

The R Word