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Increasing Cash Flow
Accessing the necessary capital to grow the business is vital to long-term success.
As a business matures, one of its biggest issues for continued growth is the ability to increase or to at least maintain the cash flow needed to keep current with the payroll, operating expenses, and the amortization of any loans. Additional sales mean an increase in accounts receivable balances. How well these accounts are managed is critical to the cash flow success of the laboratory. Employees may have to be added to manage the increased flow of business. Does the laboratory have the invested capital or the borrowing capacity to continue its growth? Sources of revenue from new customers and increases in business from existing customers should contribute to profit but may slow the growth of cash flow. Without good cash management facilities, the profit may force the company out of business because of the inability to collect the receivables in a timely manner as the profit converts to cash.
Sources of Capital and Borrowing Capacity
When capital and borrowing capacity are discussed, the typical response is to go to the owners for capital and to the banks for increases in borrowing availability. In today’s tough economic climate, however, borrowing has virtually ceased for small businesses. Banks are just not lending anymore unless there is such a solid financial position shown on the books of the company requesting the financing that the lender feels as if the loan is not needed. That seems to be when loans are granted today. The ability to raise capital in today’s marketplace is also severely limited because investors are nervous about the safety and quality of investments.
The effective use of experienced financial advisors can offer the laboratory owner expert guidance in securing innovative methods for increasing the business’ cash flow. The use of an advisor with the knowledge of which organizational structure is best for the business is one way that owners can increase cash flow. An S corporation, as an example, requires the laboratory owner to draw a salary that is considered reasonable for purposes of the Internal Revenue Service guidelines. This means that the owner’s salary cannot be very low and the dividend payment very high in order to avoid payment of payroll taxes associated with each payroll period.
In the business structures of an LLC or LLP, the laboratory owner can draw a guaranteed payment from the business and no payroll taxes are required at all from the laboratory, which would immediately reflect an increase in cash flow to the company. The owner is responsible on a quarterly basis for the self-employment tax that is paid in combination with a quarterly estimate of the federal income tax. This increases the cash flow to the business by the amount of the social security tax (doubled because the owner’s payroll consists of employer and employee shares, because he or she pays both halves of the tax) and Medicare tax (the owner pays both halves again as employer and employee). The potential savings in income tax as well would inure to the laboratory if treated as an LLC or an LLP when equipment purchases are made and financing is required. As an LLC or an LLP, the debt counts as if it is the owner’s capital so that losses from the depreciation expense flow through the laboratory to the owner’s personal tax return. The S corporation, on the other hand, cannot count the loan against the equipment as capital unless the loan to the S corporation comes from the owner and not from a lending institution. A knowledgeable advisor of the current tax code, typically a CPA, can assist the laboratory owner enormously with cash flow. The ability of the CPA to present financial data to a bank and to have that lender rely on the his or her presentation of the laboratory’s financial data lends credibility to the numbers.
Other Areas of Assistance
Income tax savings from the creation of employee benefit programs that defer taxes, such as employer-sponsored qualified retirement plans, is another area of expertise that can be offered by a financial advisor. These plans create immediate income tax savings, which can be reinvested to increase the net worth of the business and to assist in the presentation to lenders and investors of the laboratory’s balance sheet. The letterhead of an “outside” CPA firm is an important ingredient of credibility for those not familiar with the inner workings of a dental laboratory.
When conventional methods of cash flow management are not available, knowledge becomes key to the success of any business. The availability of professional advisors and the financial understanding they have can benefit the business and its owner. It is important to find the right advisor, one with experience in cash flow management. Read professional publications, speak to suppliers and customers to find out whom they have retained. These sources will be excellent referrals for success in the process of choosing who is right to represent your business.
About the Author
Bruce Bryen, CPA, is a managing partner of Bryen & Bryen LLP, Certified Public Accountants, in Marlton, New Jersey. For more information, please contact Bruce at 800-988-5674 ext. 112.