MANUFACTURING & DISTRIBUTION
Winter 2013
PLANNING AHEAD:
Getting Your Company Ready for the Future
What are the parallels in your business and industry? With
so much evolving so fast, it’s hard to keep up, let alone
get ahead. But that’s what progressive manufacturing and
distribution business owners must do: anticipate trends,
prepare for change and get their companies ready for
tomorrow.
Consider looking past your daily performance dashboard
and planning for the future of your business in light of these
emerging trends:
Workforce Woes
The American workforce is aging. According to the AICPA’s
CPA Horizons 2025, someone in America turns 65 every 8
seconds, and that rate will continue for the next 20 years.
One-third of the U.S. population will be over 65 in 2025.
The entry-level labor pool will shrink over the next 10
years, from about 15 percent of the work-force to just 12.5
percent, with only one-eighth of the workforce made up of
16-to-24-year-olds.
Where will you find your next generation of employees?
With so many young people pursuing a college education,
there’s already a shortage of skilled laborers in the
manufacturing arena.
What to do: To ensure a ready workforce, you may
need to grow your own. One option is to work with
other local manufacturers to invest in trade schools. Or
consider launching your own formal training, internship or
apprenticeship program.
Customer Changes
By 2025, more than half of U.S. households will be
multicultural. This “beiging” of America, combined with the
aging population, creates a different landscape for all types
of products.
Who’s designing and developing your products? Consider
configuring a collaborative R&D team that integrates
diverse input and direction. Your products must be attractive
to future buyers.
What to do: Who’s designing and developing your
products? Consider configuring a collaborative R&D team
that integrates diverse input and direction. Your products
must be attractive to future buyers.
Economic Unknowns
With the deficit up and unemployment numbers higher than
desired, entrepreneurs must look at new business sectors
to spur growth. The renewable energy sector, for example,
is predicted to grow into a $5.7 trillion global industry by
2035, and one-third of U.S. GDP will come from healthcare
in 2025. The home healthcare services industry will grow
46 percent by 2020, while elder care and disability services
will grow 74 percent.
What to do: Are you supplying a growing industry? If not,
how can you use your company’s core strengths to develop
and produce products that will be in demand in the future?
Global Priorities
Looking abroad, the changes are dramatic as well. In the
next 10 years, 75-90 percent of economic growth will be
in developing nations. India has an average growth rate
of 8 percent and one of the largest middle classes in the
world. China’s GDP will double in the next 10 years to $7.1
trillion. The total GDP of the BRIC (Brazil, Russia, India and
China) countries will surpass that of the G-7 in 2027.
Futurist consulting firm Weiner Edrich, Brown, Inc. predicts
a “rebalancing of the world,” where the eastern and southern
parts of the globe are beginning to rise relative to the north
and west. The developing world’s population is growing
eight times faster than the population of industrialized
nations. Latin America and China are expected to reach a
99 percent literacy rate by 2030.
What to do: What’s your global position? If you’re not
exporting, it may be time to explore foreign markets and
get to know what customers overseas are looking for. Even
if you don’t export directly, it’s wise to stay abreast of global
buying trends so that your products can accommodate
them.
Be Proactive
The goal of looking ahead is to be proactive, not reactive.
Don’t wait for change to pass you by. Rather, dive into
the future, examine your options and be prepared to take
advantage of the opportunities ahead.
Data source: AICPA CPA Horizons 2025
MANUFACTURING & DISTRIBUTION | Winter 2013
p2
WORD TO THE WISE
Avoid Surprises with Cash Flow Forecasting
If cash is king, this makes cash flow forecasting a noble
pursuit.
•
How much do you need to reinvest in equipment
each month, and how will this be financed?
A cash flow forecast estimates how much cash will flow
in and out of a company over a period of time. Owners
of manufacturing and distribution companies use cash
flow forecasting to identify potential cash crunches, plan
for financing and analyze how the business is performing
relative to its strategic plan.
•
How much money do you need to pay
down
short-term
and
long-term
debt?
Knowing what to expect in terms of cash flow is especially
helpful for seasonal businesses because it lets executives
plan more accurately and spend more efficiently throughout
the year. This type of forecasting is also important for
businesses with a concentration of customers. Having
fewer customers means potentially greater variability in
cash flow, especially if one or two big customers is having
trouble paying.
Getting Started
Many manufacturers and distributors roll cash flow
forecasting into their budgeting every year. It’s a very
straightforward process involving a few key drivers:
•
How much net income do you think you’ll have
every month?
•
How quickly are your customers paying? Most
manufacturers and distributors have receivables
days outstanding in the range of 35-55 days, so
invoices in September become cash in October
and November.
•
•
How quickly do you have to pay your bills, including
payroll? Some manufacturers and distributors
are employee intensive, which means they have
regular and substantial cash payroll commitments
every two weeks or so. Other companies are
vendor intensive and can pay a bit faster or slower
depending on cash flow.
How quickly does your inventory turn over? This
ratio should align with purchasing and sales
forecasts.
Once these numbers are calculated and entered into a
12-month spreadsheet model, you can easily see how
your company’s cash moves in and out of the bank — and
where any deficits might be lurking.
Review the forecast at the beginning of each month, noting
the receivables and payables due in the next 30 days.
Does the difference between your company’s income and
expenses equal the amount you originally estimated? If not,
you’ll need to take quick action — ramping up collections
efforts, for example — to make the numbers work.
What If?
One of the most important parts of cash flow forecasting
is manipulating the numbers to analyze various “what if?”
scenarios.
For example, suppose yours is a seasonal business and
the weather poorly affects your income during what should
be your busiest months. What will that dip in revenues do to
your cash flow? Or, say one of your major customers slows
payment by 10 days every month. How will that slower
income stream impact your ability to pay your existing debt
or buy new equipment?
Most owners find that modeling these “what if?” scenarios
is a helpful stress reducer. It allows them to anticipate
both good and bad circumstances and use their resources
wisely. Most important, it helps them avoid surprises, see
abnormalities and make quicker corrections.
Remember: Without a cash flow forecast, you’re overlooking
a critical part of your business planning process. So it’s
wise to get started right away.
Our firm can help you with your cash flow forecast. Contact
John Oeltjen, CPA today to schedule a time to talk about
next steps. Via telephone at 314.862.2070 or by email at
joeltjen@muellerprost.com.
MANUFACTURING & DISTRIBUTION | Winter 2013
p3
TAX TOPICS
Be Aware of State and Local Tax Liabilities
With so many important things to think about, many
business owners don’t consider state and local taxes
(or SALT) to be much of a concern. But, if you’re doing
business — any business — in another state, you may be
subject to SALT, which can significantly impact your cash
flow and effective tax rate.
It all comes down to a concept referred to as nexus. This
refers to any connection between your company and a
given state that would indicate that you have a presence
in that state and might therefore owe income or sales
taxes there. Note that nexus does not necessarily require
a physical presence, such as an office or warehouse in the
state. For example, your company may have nexus simply
by having employees living in the state.
near a state border, where employees may
live in one state and work in another. In this
case, withholding can be complicated because
it involves both states’ laws, although some
adjoining states have reciprocation agreements.
If you are a distributor traveling through
several states, you may be subject to
payroll tax in various states, depending on
how aggressive the states are about what
constitutes employees’ physical presence.
•
Nexus does not necessarily require a
physical presence
Defining Nexus
Nexus is defined differently for different types of taxes.
Having nexus for sales tax purposes doesn’t necessarily
mean your company will have nexus for income tax
purposes. Here is what you should know:
Income tax – Generally, if your company derives income
from sources within a state, has a physical presence in a
state or has employees who live in a state, it is subject to
income tax there. Of course, defining “sources within a
state” is not always easy.
Public Law 86-272 specifically restricts a state from
collecting income tax on income derived from employing
a salesperson in a state, as long as his or her orders are
fulfilled in another state. This is a very limited exception
and severely restricts what the salesperson can and
cannot do in the state, and covers only sales of tangible
personal property.
•
Payroll tax – Generally, companies must
collect and remit payroll taxes in every state
where employees are located. This is relatively
straightforward unless your company is located
Sales tax – If you ship goods to other states,
you will likely be required to collect and remit
sales tax in those states. In theory, consumers
are already supposed to pay sales tax on
online purchases. But in reality, not many online
retailers collect sales tax everywhere they
should. As Internet sales continue to grow, it’s
likely that all states will eventually require outof-state sellers to collect and remit sales tax.
A bill called the Marketplace Fairness Act
would allow states to choose to collect tax from
online businesses with more than $500,000
in sales in their states. Interestingly, Amazon
is backing the bill, but eBay, Overstock
and other online retailers are opposing it.
•
Franchise tax – About half of the states impose
a franchise tax for the privilege of doing business
in the state. This tax is calculated on a basis other
than income, such as the company’s net worth or
gross receipts. This type of tax is imposed under
various names — business tax, margin tax or
commercial activities tax.
Don’t Neglect SALT
Given their current economic challenges, most states are
hungry for revenue, so they are getting more aggressive
about collecting SALT. If there’s a chance your company
might be subject to these taxes, don’t look the other way.
Neglecting a tax liability can result in significant penalties
and interest.
MANUFACTURING & DISTRIBUTION | Winter 2013
p4
Take Advantage of Commercial Building Tax Deduction
Thanks to the Energy Policy Act of 2005, commercial
building owners can benefit from the Section 179D
tax deduction for installing energy efficient HVAC
and hot water systems, upgrading interior lights
or making improvements to the building envelope.
The incentive applies to both new construction and
renovations.
To claim the incentive, certification must be
performed by an independent, professional engineer
or other qualified individual. Materials and systems
must be placed in service before December 31,
2013, but there’s currently a proposal in the Senate
to extend the deduction beyond this year.
The Basics
For manufacturers and distributors, the Section
179D deduction may be relevant beyond their own
facilities.
While capital improvements to buildings are generally
depreciated over a lengthy 39 years, this incentive
allows an immediate deduction of up to $1.80 per
square foot. To qualify for the full $1.80, energy and
power costs must be reduced by at least 50 percent
when compared to a hypothetical reference building
built to an outdated standard that’s not difficult to
meet.
For reductions of less than 50 percent, buildings may
still qualify for partial deductions of $.60 to $1.20 per
square foot, depending on the energy savings. The
IRS issued Notice 2012-26 last spring that made it
easier for certain projects to qualify for the partial
deduction by lowering the required energy savings
percentages.
Going Beyond
Manufacturers and distributors of energy-reducing
HVAC and hot water systems, lights or materials that
increase the energy efficiency of a building envelope
can use this program to drive sales. In effect, the
deduction acts as a federally subsidized incentive to
purchase your products.
Contact John Oeltjen, CPA to find out how you
might benefit from the Section 179D deduction. Via
telephone at 314.862.2070 or by email at joeltjen@
muellerprost.com.
Mueller Prost PC offers practical solutions and insightful advice to individuals, businesses and non-profit organizations,
providing a full range of audit, tax, accounting and business advisory services. The experience of our more than
80 accountants, engineers, operations leaders and former business owners gives us a unique and comprehensive
perspective to address the needs of growing organizations. In addition, we leverage our membership in PKF North
America (an association of more than 100 legally independent accounting and consulting firms) to enhance our
national and international capabilities. For more information, visit www.muellerprost.com.
The firm offers a full range of professional tax, audit, accounting and management advisory services to the
manufacturing and distribution industry.
For more information, please contact John E. Oeltjen, CPA at 314.862.2070 or joeltjen@muellerprost.com.
Advising with Vision®
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