The Inventory Balancing Act
May 02, 2024 | BY Shulem Rosenbaum, CPA, ABV
Inventory is a critical component of most businesses’ Balance Sheet, but managing inventory effectively is often a challenging balancing act. A business needs to keep enough inventory on hand to meet its customers’ needs – but holding on to too much inventory can be costly. What are some smart ways to manage inventory more efficiently, without compromising revenue and customer service?
Reliable counts
Effective inventory management starts with a physical inventory count. An accurate count of inventory provides a snapshot of how much your company has on hand at any one point in time. This is easier said than done. The value of inventory is always in flux, as work is performed and items are delivered or shipped. To capture a static value as of the reporting day, companies may “freeze” business operations while counting inventory. For larger organizations with multiple locations, it may not be possible to count everything at once; so, they often break down their counts by physical location.
Accuracy is essential to calculating cost of goods sold, and to identify and remedy discrepancies between a physical count and inventory records. And there are always discrepancies. Errors made in data entry, shipping errors, inaccurately labeled products, theft, and sometimes even intentional misstatements are all common factors that can throw off an accurate inventory count.
Benchmarking studies
After a business has calculated its inventory as accurately as possible it can compare its inventory costs to those of other companies in its industry. Benchmarking is the process of measuring key business metrics and comparing them against other companies in the industry to see how the business is faring and how to improve performance. Trade associations often publish benchmarks for gross margin, net profit margin, or days in inventory, and a business should strive to meet — or beat — industry standards.
Efficiency measures
What can you do to improve your inventory metrics? The composition of your company’s cost of goods will guide you as to where to cut and what to modify. Consider the carrying costs of inventory, such as storage, insurance, obsolescence, and pilferage. You may be able to improve margins by negotiating a net lease for your warehouse, installing antitheft devices, or opting for less expensive insurance coverage.
To cut your days-in-inventory ratio, compute product-by-product margins. You might stock more products with high margins and high demand — and less of everything else. Consider returning excessive supplies of slow-moving materials or products to your suppliers, whenever possible. In today’s tight labor market, it may be difficult to reduce labor costs. But it may be possible to renegotiate prices with suppliers.
Inventorying your inventory
Management usually directs its greatest efforts into the growth of its business, which is appropriate; but this focus often puts inventory management on the back burner. This can be a costly mistake. Speak to your accounting professional for help in researching industry benchmarks and calculating inventory ratios to help minimize the guesswork in managing your inventory.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
The Messy Minds of Investors: How Emotions Cloud Judgment
May 02, 2024 | BY Our Partners at Equinum Wealth Management
Last month, the world mourned the loss of Nobel laureate Daniel Kahneman, a pioneer in behavioral economics. His work shed light on the complex workings of our minds, where emotions often influence financial decisions, sometimes with negative consequences.
For instance, Eli Whitney, the man credited with revolutionizing the cotton industry, invented the cotton gin. This machine, as Wikipedia describes it, “quickly and easily separates cotton fibers from their seeds,” significantly increasing productivity. However, Whitney’s business decisions entangled him in a web of issues. Instead of opting for a sustainable approach, like selling the machines with a modest royalty, Whitney and his partner demanded an exorbitant one-third cut of any harvest using their gin. This excessive fee proved unacceptable to plantation owners and legislators and led to widespread piracy and imitation of their invention. Whitney, rather than becoming immensely wealthy, spent his days in court battles, barely breaking even.
Financial history is filled with similar stories of individuals succumbing to greed.
The Duality of Risk: Fear and Greed in the Herd
Shifting gears for a moment, let’s consider zebras. These fascinating animals typically graze in large groups called dazzles. Zebras who graze in the center of the dazzle have access to less desirable, matted grass but enjoy relative safety from lion attacks. Conversely, those on the periphery feast on lush green grass but are more exposed to predators.
This behavior exemplifies the interplay of fear and greed that influences our own decisions. The “greedy zebras” venture out for better food, while the fearful ones remain in the safer center.
When Emotions Take the Reins: Investing and the Fear/Greed Cycle
These same fear/greed emotions significantly impact investment decisions. When the market flourishes, and others seem to be profiting effortlessly, greed often takes hold, luring us into riskier investments.
The period between 2020 and 2022 serves as a prime example. With exceptionally low interest rates, many risky ventures appeared successful. This fueled envy among some investors and caused greed to cloud their judgment. Consequently, many made high-risk investments right before the Federal Reserve raised interest rates. This action, akin to a “lion attack” in our analogy, devastated many investors who had been “grazing outside the dazzle” at those risky investments.
The Kahneman Compass: Mitigating Emotional Biases
The key takeaway is that an investor must develop a broad perspective and identify potential risks. Are you venturing too far from the safety of the dazzle?
The insights of Daniel Kahneman offer invaluable guidance in this regard. He emphasized the importance of understanding cognitive biases, which can lead to poor decision-making. By taking a step back, critically evaluating initial reactions, and considering different viewpoints, individuals can lessen the influence of emotional impulses and make more informed choices. Additionally, Kahneman recommended seeking feedback from others and establishing frameworks for decision-making to counteract these biases.
While no method is foolproof, and even experienced investors make mistakes, being aware of these biases and attempting to assess risks is a crucial first step.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
CFOs and Tax Leaders: A Synergy That Generates Better Tax Function
May 02, 2024 | BY Michael Wegh, CPA
CFOs and Tax Leaders share responsibilities and goals – but need to do a better job collaborating. These two pivotal business roles share responsibility for the financial stability, profitability, and growth of their businesses, but when they are not aligned on the strategic value of the tax function, the company will suffer the consequences.
BDO’s Tax Strategist Survey found that 78% of CFOs believe that the tax function offers strategic value to the broader business, and 75% believe the tax function is invited to weigh in on business decisions before they are made. In both instances, there is a clear signal that CFOs see the merits of fully engaging with the tax function.
However, tax leaders’ responses to the same survey seemed to tell a different story. Only 27% of tax leaders say that they were sufficiently involved in a wide enough range of business decisions to meet the threshold of a “tax strategist” — the type of tax leader who regularly takes a seat at the table to provide strategic input outside the traditional areas of responsibility of the tax function.
This disconnect creates an interesting challenge: if CFOs believe tax leaders are already adding sufficient strategic value, they may fail to include them in the wider decision-making process. This oversight could prevent leveraging the full potential of a tax team, leading to missed tax opportunities or even increased tax risk or liability. Tax leaders, for their part, believe they can be more involved, so something appears to be lost in translation. How can CFOs and tax leaders work together to enable a more strategic tax function?
Expanding Roles: CFOs and Strategic Tax Functions
The tax function’s role is expanding and becoming more complicated. Tax leaders must navigate increasing regulatory complexity, as major domestic U.S. tax policy changes occur with greater frequency. International trade treaties and regulations have changed markedly due to new presidential administrations and expanding geopolitical conflicts.
Tax leaders are increasingly involved in reputation management amid heightened demand for tax transparency from regulators and other stakeholders. Tax leaders and CFOs must work together to manage competing priorities of maximizing shareholder value and ensuring the company is not overpaying tax, while at the same time managing public scrutiny related to total tax contribution.
Tax Leaders: Learn to Speak the Same Language
In turn, tax leaders need to understand how the CFO’s role is evolving. Learning to speak the language of business and finance beyond tax means understanding the strategic priorities of the CFO and the business and how the tax function can positively impact those goals. Tax leaders must make sure that their highly technical tax language translates across the business so that tax planning strategies can be effectively communicated to the C-suite and accurately deployed.
Expanding the range of metrics and key performance indicators (KPIs) used to measure the tax function’s impact on the company can also help align goals and foster communication. Alongside essential benchmarks like effective tax rate or accuracy of tax returns, new benchmarks may dovetail with the CFO’s other goals – like capital allocation and risk management, helping to bring the tax function’s insights to a wider audience.
Developing the ability to calculate and communicate the tax implications of business decisions and policy shifts in terms that matter to the broader business is key to the tax leader becoming a trusted advisor to the CFO. Showing leaders across the company that the tax team can focus on bottom-line impacts while attending to technical tax details can demonstrate how the tax function’s abilities extend beyond compliance and into strategic value.
CFOs: Keep the Lines of Communication Open and Provide the Right Support
For CFOs, keeping the lines of communication open with tax leaders is essential to successful strategic tax planning. Inviting tax leaders to the table when major decisions are made is important, but will be merely symbolic if tax leaders do not have the resources they need to make strategic contributions. The CFO should work closely with tax leaders to ensure the tax team is equipped with the necessary resources, including skilled personnel, an effective staffing model, advanced technology, and ongoing training and development. This kind of support simplifies dealing with complex tax situations and allows tax leaders to focus on strategic contributions by automating routine tasks and providing actionable data insights.
CFOs and Tax Leaders: Foster Alignment in Action
When CFOs and tax leaders set goals together, communicate, and keep each other accountable, the magic can start to happen. Their alignment will drive better business outcomes, enhance decision-making, mitigate tax risk, and improve operational resilience. When well-aligned CFOs and tax leaders are strategic partners, they can unlock the full potential of the tax team and leverage highly technical knowledge to provide bottom-line value to the entire business.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
A Look at Some of This Year’s Dirty Dozen
May 02, 2024 | BY Ahron Golding, Esq.
The IRS’ annual “Dirty Dozen” list informs taxpayers about current tax scams, schemes, and dodges that could put their money, personal data, and security at risk. The purpose of the IRS’ Dirty Dozen is to warn taxpayers away from tax traps designed for them by corrupt promoters and shifty tax practitioners.
What schemes made the list for 2024? Here are some areas of impropriety that the IRS wants you to know about:
Social media: Not the ideal place for solid tax advice
Want some bad tax advice? There’s a lot to be found on social media. Scouring social media for answers to your tax problems could lead to identity theft and onerous tax debts.
Two of the recent schemes circulating online relate to the misuse of your W-2 wage information. One scheme involves encouraging people to use Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals) to claim a credit based on income earned as an employee and not as a self-employed individual. This credit was valid for Covid years 2020 and 2021 but is no longer operative. The second scheme encourages the invention of fictional household employees and the filing of Schedule H’s (Form 1040), Household Employment Taxes, to claim a refund based on false sick and family medical leave wages that they never paid. The IRS is on the lookout for these deceptions and will work with payroll companies, employers, and the Social Security Administration to verify W-2 information.
Beware of ghost preparers
“Ghost preparers” are a common scourge that emerges during tax season. These are unqualified, and sometimes unscrupulous preparers, without valid preparer tax identification numbers (PTINs), who offer filing services. They will often encourage taxpayers to take advantage of tax credits and benefits for which they do not qualify.
“By trying to make a fast buck, these scammers prey on seniors and underserved communities, enticing them with bigger refunds by including bogus tax credit claims or making up income or deductions,” says IRS Commissioner Danny Werfel. “But after the tax return is filed, these ghost preparers disappear, leaving the taxpayer to deal with consequences ranging from a stolen refund to follow-up action from the IRS.”
The IRS encourages taxpayers to check their tax preparer’s credentials and qualifications. A qualified preparer will always ask for the taxpayer’s receipts, records, and tax forms to determine his or her total income, and proper deductions and tax credits. Stay on top of your own data; an unethical tax preparer may try to boost your refund by taking false deductions or creating bogus income to claim more tax credits. E-filing a tax return using a pay stub instead of a Form W-2 is against IRS e-file rules and should serve as a bright red flag to the taxpayer.
The IRS warns taxpayers to beware of preparers that utilize shady payment terms like ‘cash-only’ payments or fees based on a percentage of the taxpayer’s refund. Taxpayers should also be suspicious if a tax preparer encourages them to have their refund deposited with them, instead of depositing it directly into their own personal bank account.
Beware of offer in compromise “mills”
Internal Revenue Service also renewed its warning to taxpayers regarding Offer in Compromise (OIC) “mills”. These are the unscrupulous preparers you’ve heard all over the media promising to make your tax debts disappear.
“These mills try to pull in steep fees while raising false expectations and exploiting vulnerable individuals with promises that tax debt can magically disappear,” says IRS Commissioner Danny Werfel.
The IRS’ Offer in Compromise is a viable option for the taxpayer who can’t meet his tax obligations, provided that he is able to justify financial hardship. The IRS evaluates every OIC application on a case-by-case basis and considers each taxpayer’s unique circumstances, factoring in the taxpayer’s income, expenses, asset equity, future earning potential and ability to pay. Taxpayers must be able to support and document their claim and pay an application fee to start the process. To confirm eligibility and prepare a preliminary proposal, taxpayers can use the IRS’ online OIC Pre-Qualifier Tool found here: https://irs.treasury.gov/oic_pre_qualifier/
While the OIC offers a chance for negotiation with the IRS, allowing taxpayers to present reasons for their inability to pay their full tax debt, it is a complex and time-consuming procedure governed by IRS guidelines. Aggressively marketed OIC mills that promise to resolve outstanding tax debts for pennies on the dollar are deceptive. Taxpayers who fall victim to these schemes may find themselves in even worse financial situations, facing increased debt and legal repercussions.
If you need to reduce your tax liability, reach out to your accounting professional and steer clear of predatory OIC mills.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.