Thursday, March 17, 2016

How to Have Considerable Cash Clow for Small Companies

A successful business is not only having the right product or leading the market, there is also a lot going on behind the scenes and a great part of it is having a rigorous recordkeeping practice and a very solid cash flow. A healthy cash flow is not only a sign of a profitable business, but also businesses (especially smaller ones) need to prepare for future events; market changes and meet tax and other obligations. However, history has shown us that the lack of understanding of basic accounting principles have made small businesses fail. So here is a brief introduction on how to keep track of your cash flow. 

Image courtesy 401(K) 2012 on Flickr
First, let’s define an operating cycle. It is the complete loop through which cash flows, from purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash and tells you the amount of time you should be able to finance, according to your operating cycle from purchase to receivables. This period of time should be carefully taken into account, especially since capital providers (most likely lenders) require a return on their investment; hence the longer the operating cycle, the more cash you need to minimize the amount to be financed without actually running out of cash.

Another reason for analyzing your cash flow is that it will show whether your daily operations generate enough cash to meet your obligations and if the more cash outflows actually mean major cash inflows from sales. In turn, these movements will determine if your whole operation cycle result in a positive cash flow or in a net drain. To avoid the latter, here are some recommendations to have a healthy cash flow to help make your company profitable, sustainable and, if it’s in your plans, bigger.

1. Plan ahead. Make sure you are aware and have an updated list of your financial requirements such as premises, equipment, staff and working capital. It is always safer to have enough cash at hand to meet next month’s cash obligations. That way you will ensure you can meet such obligations, and an accurate cash flow projection will help you identify and eliminate deficiencies or surpluses in cash and compare figures to those of past months.

2. For most startups and small businesses you will not need certified financial statement, compiled statements, which an accountant prepares with a letter stating that the numbers are based on the information you have provided, will be just fine. Keep frequent financial statements at least on a monthly basis in order to compare your income to that of previous periods. The ultimate objective will be to design a plan to provide a well-balanced cash flow, so when excess cash is revealed it could be that there is excessive borrowing or idle money that could be invested; or if on the contrary cash-flow deficiencies are found, business plans could be implemented to provide more cash.

3. Always keep an eye on key income statement percentages. For example if you are in the manufacturing business, the cost of your goods sold percentage should be more or less the same as the competitor’s.

4. Do not delegate the authority of signing checks or purchase orders. Always keep track of the cash outflow. And never use the money that you have withheld for payroll, sales or for other taxes. This money belongs to the Internal Revenue Service, Social Security Administration and your state’s sales tax authority and you will need it to pay your obligations to them. 

5. Try to collect your receivables as quickly as possible. The longer it takes a firm to collect a customer’s unpaid balance, the more revenues it loses because it is less likely that you will receive full payment. But the faster you collect them, the shorter your operating cycle will be.

Image courtesy Simon Cunningham on Flickr
6. Apply stricter credit policies to make more customers pay their purchases in cash to increase your cash on hand and reduce uncorrectable accounts. However, bear in mind that the tighter the credit, the less opportunity for clients to purchase your products or services; so keep an eye on how tight the rope must be to allow some room for adjustments.

7. One of the biggest weaknesses of small businesses is setting the price of their products or services. Pricing is the key element to getting a profit and having a good cash flow; so have a clear and complete knowledge of your product’s market, distribution costs and competition and monitor them frequently to make adjustments when necessary.

8. If necessary, take out short term loans such as revolving credit lines and equity loans to cover your cash flow problems.

9. Not all increase in sales actually means more cash flow. You may have sold on credit, meaning that your accounts receivable would increase but not your cash. It will take up to 30 days or more for receivables to be collected, and in the meanwhile your inventory will have depleted and will need to be replaced, leaving your company’s cash reserves quickly drained. Use a computer to help you track this critical data and give you time to consider those situations and be prepared.

10. And finally watch what you spend and why. Expenses should be carefully analyzed to make sure they are necessary and reasonable. When it comes to accounts payable, if a supplier offers you a discount for early payment, take it; but if there is no discount and you have 30 days to pay do not pay in a week. And whatever you do, always be aware of penalties for late payments and keep your credit record as clean as possible. 

Monday, March 14, 2016

What You Need to Know About Corporate Taxation

Image courtesy GotCredit on Flickr
Becoming a company carries a new range of legal commitments and responsibilities.  One of those responsibilities is corporate taxes.  Whether they like it or not companies are affected by them.  The concept might be alarming at first but understanding its generalities and who it affects helps its management. Corporate taxes have been a frequent topic in the news and the headlines of articles and major publications because it is a major concern for big and small businesses.  Let’s talk about a little more about corporate taxation.


Corporate taxes are levied on the profits a corporation, large or small, generates by all levels of government.  Corporations are legal entities, not individuals or the owners of a company.  As such, corporate taxes can be considered the equivalent of the personal income tax an individual pays. The rates and laws of corporate taxes vary notably across multiple countries, since different governments and nations perceive corporate taxation differently. This is why companies have chosen to have their headquarters in specific places where corporate taxes are way lower.  One example is seen in companies that have moved to the Republic of Ireland (Irish tax rate is only 12.5%) compared with the rate they would have to pay in the U.K. 

Mobile capital: the example of the U.S.

Another example could be seen in the United States.  This country has one of the highest corporate tax rates in the world. It is 35% and almost 40% when state taxes are added.  For this reason, some American companies have “relocated” outside the country, through mergers with or purchases of a foreign company.  This way they become a foreign entity and can be still managed from the U.S. but because of their headquarters address (at least on paper) they are no longer subject to U.S. corporate taxes. They are taxed according to that foreign country’s rules. Therefore, this business behavior is increasingly seen due to high corporate rates that companies are trying to avoid.

Another reason for this tax behavior in the case of the United States is because its corporate tax system could be considered different compared to most other developed countries systems.   This country taxes corporations based on the profits they make worldwide as opposed to profits they make at home.  On the other hand, other countries tax corporations for the business that takes place in their own territory. So there are American companies earning money overseas, and since they do not have to pay U.S corporate tax until they repatriate these moneys, their profits are sitting overseas as a mechanism to avoid  bringing the money home and paying American taxes.

Corporate taxes are a matter of debate in many countries due to their economic impact.  Thus, there is some concern that being tougher on taxes may do more harm than good. Those who favor higher corporate taxes argue they give governments the assets to fund programs (education, hospitals, security), to raise revenue, to encourage specific investments in specific industries, to stimulate economic growth (basically taxes provide many nations with a large source of income) for the welfare of the nation.  Others argue that lower rates help companies hire employees and producing goods, thus boosting an economy.  Although, the desire for some companies to pay lower taxes and reduce their tax bill is understandable, there are some that simply do not want to pay it at all.  And of course, they are considered by many unpatriotic corporate citizens.

What can be done about the taxation system?

Image courtesy 401(K) 2012 on Flickr
When companies leave, particularly in the case of the U.S., the country loses significant tax revenue, money that would probably be reinvested into the nation through more jobs, more improvements, more infrastructure, and prosperity in general terms.  This situation undoubtedly preoccupies the government and for this reason it is experiencing an increasing pressure to stop it, and the approach do not seem to be yielding the results expected regarding foreign inversion.  It is believed that when companies prefer business overseas to protect their income they are betraying their nation.  This situation has forced the government to implement strategies to close these tax “loopholes”, obligating companies to stay loyal to the U.S. and keep their capital into their jurisdictions. 

The bottom line is that taxes have been affecting decisions in companies concerning location and investment to manage and control their tax obligations. Because corporate taxation plays a special role in economies, nations should consider the complexity of the topic and design reforms that improve the welfare of all the parties affected and reduce the risk associated. As it was said by Kate Elliot from Rahtbone Brothers PLC:  “A total lack of tax planning is bad for investors and evasion is illegal, but we know companies operate in grey areas.  The key thing for investors is to understand where a company sits on this spectrum: how light or dark grey its tax practices are.”

Thursday, March 10, 2016

Here's Everything You Need to Know About Mergers and Acquisitions

Mergers and acquisitions of companies

Image courtesy Stavos on Flickr
External development is a form of corporate growth that results from the acquisition, participation, association or control of a company, companies or assets of other companies, broadening their current businesses or venturing into new ones. The most widely used term in corporate jargon is mergers and acquisitions (M&A).

The reasons for a company to choose external development (fusions, acquisitions, alliances...) as opposite to the internal one may have its origins in:

1. Economical reasons
       Cost reduction: through economies of scale or economies of scope by the integration of two companies whose productive and commercial systems are complementary to each other, thus creating synergies.
       To acquire new resources and capacities by means of the union or acquisition of another company.
       Substitution of the management team: often, when the management is substituted, a greater increase in value occurs.
       Obtaining tax incentives that can increase the benefits of the acquisitions and mergers, thanks to the existence of exemptions or bonuses.

2. Market power reasons:
       It can be the only way of penetrating an industry or country, due to the existence of strong barriers to entry
       When the mergers and acquisitions occur through an horizontal integration, an increase of market power of the resulting company is pursued, and as a consequence, a reduction of the level of competition within the industry.
       When the mergers and acquisitions occur through a vertical integration, companies who act in different stages of the productive cycle are integrated. The goal in these cases is to obtain the advantages of the vertical integration as soon as possible, both backwards and forwards.

Types of external development

Company merger: it’s the integration of two or more companies in such a way that at least one of the original ones disappears.

Acquisition of companies: trading operation of blocks of shares between two companies, keeping their legal entities.

Cooperation or partnership between companies: this is an intermediate formula, bonds and relationships are established between the companies, without losing the legal entities of any of the participants, who keep their legal and operative independence.

In terms of the type of relationship that is established between the companies, they can be classified as follows:

       Horizontal: the companies are competitors of each other and they belong to the same industry.
       Vertical: the companies are located in different stages of the complete product exploitation cycle.
       Conglomerate: Companies have very different activities from each other.


Image courtesy Kyle MacDonald on Flickr
These are unions between two or more companies, where at least one participant loses its legal entity.

1. Pure merger:
Two or more companies of an equivalent size agree to merge, creating a new company to which they bring all of their resources, dissolving the original companies (A + B = C)

2. Merger by absorption
One of the companies involved (absorbed) disappears and its patrimony is integrated into the absorbent one. The absorbent company (A) continues to exist, but it accumulates into its patrimony the corresponding to the absorbed company (B).

3. Merger with partial contribution of assets:
A society (A) contributes only a part of its patrimony (a) next to the other company with which it merges (B), be it to a new society (C) created in the merger agreement, or to another pre-existent society (B), which as a consequence increases in size (B’), it is necessary that contributes assets (A) does not dissolve.


Company participations or acquisitions take place when a company buys part of another company’s capital stock, with the intention of dominating it completely or partially.

The acquisition or participation in companies will allow different levels or degrees of control according to the percentage of capital stock of the acquired company in its power and according to the way in which the rest of the bonds are distributed among the other stakeholders: large stock blocks in the hands of a few individuals or a large number of stakeholders with scarce individual participation.

The buyout of a company can be done through a conventional purchase contract, but in the past few decades, two financial formulas have been developed.

1. Leveraged buyout:
It consists in financing an important part of the purchase price of a company by the use of debt. This debt is insured, not just for the patrimony or creditworthiness of the buyer, but also for the assets of the acquired company and their future cash flows. This way, after the acquisition, the debt ratio usually reaches high values.
The purchase may be made by the company directors themselves. In this case we’ll find ourselves before a “management buyout” (MBO). The reason why they might make the decision of purchasing the company for which they work could be to lead it towards the appropriate direction.

2.  Share Acquisition Public Offer

The Share Acquisition Public Offer is produced when a company makes a purchase offer, of all or part of the capital stock, to the stakeholders of another listed company under a specific set of conditions, usually related to price, percentage of capital stock and time.