Thoughts on Tax Reform

It is impossible to escape the constant talk about extending the Bush Tax cuts. On the Income side, the tax increases are going to be rather significant. On the Estate Tax side they may be even higher. I never thought I would be praising George Steinbrenner but when you look at the potential consequences to his heirs, he timed his death rather well. By dying July 13th, it is estimated he saved his family between $350,000,000 and $500,000,000 in Estate Taxes. Actually prompting a couple of members of Congress to call for re-imposing what some of us call the death tax rates at last year’s rate for all of this year. Simply because they think that this missing money is the government’s share of the deceased wealth.

In Ohio the Republican candidate for Lt. Governor was chided in the press for admitting that when she was a practicing CPA, she advised wealthy clients to move to Florida, a state without an Income tax or a Death tax. Of course, the press ignored the fact that she was simply doing what she was being paid to do, provide advice on how to legally save taxes.

Now we hear from the President and some members of Congress that continuing the tax rates which we presently have would cost too much. But don’t they actually mean that the Federal Government will simply collect less Revenue? I guess they must be speaking of the opportunity cost to the Federal Government. I mean if balancing the budget is such a big deal just cut spending, its what you and I do when our revenue falls.

I do have a suggestion that should allow both sides of this debate to do what is right for the American people. For the one side extending the current rates for top earners isn’t fair to the lower earners. In other words the successful have a responsibility to bail out those less successful. On the other side we hear that you will hurt small companies which have chosen to be taxed at their owners personal Income Tax rates rather than Corporate Income Tax rates. A former client and I last year went through an analysis of how many people they would have to lay off as a result of the potentially higher taxes since they were a Partnership and taxed at the partners personal Income Tax rates.

So here is my compromise, extend the tax cuts for all but the highest bracket, BUT EXEMPT ALL INCOME from Schedule C, E page 2, and F from the higher brackets. This would protect those small businesses that transfer their income to their owner’s tax returns through Schedule C (sole proprietors), Schedule E page 2 (Sub-S Corporations & Partnerships) and Schedule F (Farmers).


© Strategic Financial Leadership, Inc. 2010

Recovery Eludes Small Business

The Business Cycle Dating Committee of the National Bureau of Economic Research determined that the present recession began in December 2007, more precisely; the last economic expansion reached its peak in December 2007. Please note that the committee did not report the expansion had peaked until almost one year after the peak. The committee only works from actual indicators and as such have not yet dated the end of the recession. Even if we were to assume that we hit bottom a year ago, this recession would be twice the length of the average post WWII recessions.

Normally during and after economic slumps you will see an increase in the rates of self-employment, as tight labor markets lead fired workers to venture out on their own. Bloomberg Businessweek ran a story dated September 3, 2010 which shows that the actual number of self-employed persons has dropped. There were 8.68 million people working for themselves in August 2010, the fewest since January 2002, according to Labor Department data released in September. That’s down 13 percent from a record 9.98 million reached in December 2006, 12 months before the latest recession began.

So WHY? Banks say that there is a lack of demand for commercial loans, yet there are fewer people working for themselves. Some economists blame the drop in self-employment on lack of bank financing. While others think what we may be seeing is the result of self-employed businesses failing.

Whatever the answer is, these are very unusual economic times. I heard an economist from the Federal Reserve yesterday and he referred to this as a time of Unusual Uncertainty. It’s difficult in uncertain times to look to the future and step out in faith to start a business. I wonder how long the uncertainty will last and how many businesses will not be around because they ran out of cash.


© Strategic Financial Leadership, Inc. 2010

Remember our Troops at war

The past few months have not brought good news for us from Afghanistan. I have read stories about Americans being tired and just wanting it to go away. I think the first war with Iraq in the early 1990’s has spoiled us into believing that all war’s are quick and clean. You just need to have more smart bombs than the other guys. Afghanistan and the 2nd war with Iraq have changed that somewhat.

A few years ago I read Horse Soldiers by Doug Stanton. It is the story of a band of U.S. Soldiers who were the first into Afghanistan. The title comes from the fact that when their helicopters landed they were not met by trucks to go into battle with. They were met by men on horseback, and they would ride into battle on horseback as well.

One of my favorite stories from the book might help to illustrate what our troops are up against. In what became known as one of the most famous intel reports of the war, Captain Mitch Nelson explains to his boss why it appears not much is going on in Afghanistan. After spending days on horseback Captain Nelson arrived back at his outpost [it was a 4 hour trip on horse over difficult terrain in the dark] in the US, word had finally leaked out that there were US Special Forces in Afghanistan. The pundits and think tank artists were filling the internet with dismal assessments on our chances.

So headquarters does what they often do, start asking blistering questions down the ranks. When the question came to Captain Nelson it was in the form of “When are you guys gonna get off your asses and do something?” Captain Nelson was tired, hungry and very angry. At first he tried to cool down and sleep when that didn’t work he wrote an email which found its way through the channels to the Secretary of Defense. Here is a part of what the man said:

“I am advising a man on how to best employ light infantry and horse cavalry in the attack against Taliban T-55’s [tanks], mortars, artillery, personnel carriers, and machine guns – a tactic which I think became outdated with the invention of the Gatling gun. [The mujahideen] have done this every day we have been on the ground. They have attacked with 10 rounds of ammunition per man, with snipers having less than 100 rounds – little water and less food. I have observed a PK gunner who walked 10 – plus miles to get to the fight, who was proud to show me his artificial right leg from the knee down.

We have witnessed the horse cavalry bounding overwatch from spur to spur to attack Taliban strongpoints – the last several kilometers under mortar, artillery and sniper fire. There is little medical care if injured, only a donkey ride to the aid station, which is a dirt hut. I think [the mujahideen] are doing very well with what they have.

We could not do what we are doing without close air support – everywhere I go the civilians and mujahideen soldiers are always telling me they are glad the U.S.A. has come. They all speak of their hopes for a better Afghanistan once the Taliban are gone.” Captain Mitch Nelson – US Army

So please take some time today to pray for the troops fighting over there, even if you don’t agree with the war, please uphold these brave people who are doing things you and I could not.



© Strategic Financial Leadership, Inc. 2010

WHAT IS THIS WORLD COMING TO?

"Ethics in its broader sense, deals with human conduct in relation to what is morally good and bad, right and wrong. It is the application of values to decision making. These values include honesty, fairness, responsibility, respect and compassion."

Rushworth Kidder
President, Institute for Global Ethics

I open with the above quote from the Institute of Management Accountants website because I have been thinking a lot about ethics recently. Perhaps it is because my oldest son recently graduated from High School and is about to embark on a new era. Or perhaps it is the result of a conversation I had with a Corporate CPA and an article I read by another CPA. I have further discussed both with two other CPA friends and the three of us are in agreement “WHAT IS THE WORLD COMING TO?”

The conversation I mentioned above occurred in a CPA ethics continuing education class. We were asked to discuss the question of borrowing earnings from the following period into the current period in order to make the numbers we were supposed to make. I always thought that this was a very black and white answer. Instead, I was confronted by the answer that it depends. Were the statements for internal consumption only, or were they to be presented to people outside the business. Now between you and me, the answer to that is; it doesn’t matter. Besides are you only going to fudge the work for internal use?

Then a few weeks later I get an email from an association I belong to with a question posed by a practicing CPA; “IS IT EVER ALRIGHT TO COOK THE BOOKS?”. Again, I thought the answer to this was rather black and white but when reading the blog attached to the question determined that this fellow didn’t think it was black or white. He believed that it was alright to cook the books in order to make the numbers better reflect what management wants to show. Please trust me, I am not making this up.

For the record, I believe that an ethical person would respond in both of these cases with a flat NO, NEVER, NO WAY. Of course, that is based upon my values, my reading of right and wrong. And what I was taught are the values that are supposed to be held by CPA’s, CMA’s and other professionals in the accounting field.

I came across a book last winter based on the recommendation from a cousin of mine. It’s called Cowboy Ethics, What Wall Street Can Learn From the Code of the West. The author James P. Owen lists ten key principles which he believes embody the core principles of the working cowboy. They are Honesty, Loyalty and Courage. The last one “KNOW WHERE TO DRAW THE LINE” I believe provides the answer to the two ethics questions I discussed above. Or perhaps the 9th principle “REMEMBER THAT SOME THINGS AREN’T FOR SALE” would answer it as well.

At the beginning of every day, we need to commit ourselves to doing what is right because it is right.

Please check out Mr. Owen’s book on Amazon.com

Robert W Lynch Jr. Earns CFE Credential

Austin, TX – March 23, 2010- The Association of Certified Fraud Examiners (ACFE), the world’s leading provider of anti-fraud training and education, is pleased to award Robert W Lynch Jr, of Loveland, Ohio, the globally-preferred Certified Fraud Examiner (CFE) credential. In order to become a CFE, an anti-fraud professional must meet a stringent set of criteria and pass a rigorous exam administered by the ACFE.

Lynch has successfully met the ACFE’s character, experience, and education requirements for the CFE credential, and has demonstrated knowledge in four areas critical to the fight against fraud: Fraudulent Financial Transactions, Criminology & Ethics, Legal Elements of Fraud and Fraud Investigation.

Lynch joins the ranks of over 23,000 business and government professionals worldwide who have also earned the CFE certification. Lynch is currently President of Strategic Financial Leadership, Inc in Loveland, Ohio.

CFEs have the ability to: Examine data and records to detect and trace fraudulent transactions; interview suspects to obtain information and confessions; write investigation reports, advise clients as to their findings and testify at trial; be well-versed in the law as it relates to fraud and fraud investigations; and understand the underlying factors that motivate individuals to commit fraud. Certified Fraud Examiners (CFE’s) on six continents have investigated more than 1 million suspected cases of civil and criminal fraud.

About the ACFE
The ACFE, the world's premier provider of training and education for fraud detection and deterrence, has nearly 50,000 members, sponsors more than 125 chapters worldwide and provides anti-fraud educational materials to over 100 universities. Identified as “the premier financial sleuthing organization” by The Wall Street Journal, the ACFE has captured national and international media attention. For more information about the ACFE visit www.ACFE.com.

FRAUD

A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

The above legal definition of fraud is very broad and covers a lot of actions. However, in the world of business fraud is often simply taking something that doesn’t belong to you. It can occur once, or as often is the case, many times.

Why do people commit fraud? Although each case will be different, most can be reduced to that famous Willie Sutton quote about robbing banks, because that’s where the money is. A book titled “Other People's Money: A Study in the Social Psychology of Embezzlement” first published in the 1970’s reports on the research of Donald Cressey. Having interviewed many convicted fraudsters, he came to the conclusion that almost all fraud cases begin with living beyond ones means. To the embarrassment of spending more than they earn, add the ability to commit fraud due to their work and rationalizing the action and you have Cressey’s famous Fraud Triangle.


So what can you do to protect your business from becoming the victim of fraud? 1) Have a good system of Internal Controls. 2) Review your processes to make sure that the Internal Controls are not being circumvented. 3) Have a Fraud Policy complete with system for alerting a designated person to investigate fraud complaints. 4) Educate your staff about the cost of fraud to both the company and its employees. 5) Know your staff well and what personal problems they are facing. 6) Stop putting your staff in situations where they might be tempted to commit fraud.

This last one is in my personal list of mistakes owners make when trying to save resources. They expect all of their staff to have the same ethical make up that they have, or worse, they may think that their staff will be more ethical than they are.

There will be more coming from me about ethics in the future.




© Strategic Financial Leadership, Inc. 2010

Debt Financing

There is an old adage that banks only loan money to those who don’t need it. Since 2007, that adage has more and more become reality as we have faced such a severe credit crunch. Organizations that have had bank relations going back two to four generations are finding themselves with reduced credit at a time where credit is vital to staying in business. And they are sometimes the fortunate ones.

It’s not that the banks are purposely squeezing their customers. Many are faced with regulators telling them they have to reduce their exposure in certain industries. The bank can’t comply by calling the notes of their underperforming clients as those loans might slide into the non-performing loans. The result is that good long term customers are forced to find financing at a different bank.

How do you prepare for the unexpected in such turbulent times? The first step is to focus the organization on producing Cash Flow from Operations. The difference between cash flow and Net Income is that cash flow for an organization is like blood flow for our bodies. It also tells a bank how their loan will get paid back. Adding a cash flow statement to the monthly financial reports allows management to monitor cash flow and set in motion events that can improve it. Building a cash flow forecast to the documents a company presents to its bank allows the bank to see when it will be re-paid. Of course a forecast needs to be revised and adjusted to meet market conditions.

An increase in revenue may lead to an increase in Net Income. However if the resulting sales are increasing Accounts Receivable and are not being collected, cash flow will suffer. At the same time, collecting Accounts Receivable quicker than sales, you will be generating cash flow from operations. Accounts Payable also feeds into cash flow. Paying down accounts payable consumes or reduces cash flow while stretching your payables improves cash flow. That as well as non-cash expenses are all accounted for in the Cash Flow statement. We start with Net Income, add back non-cash expenses and then adjust out changes in Balance Sheet accounts to determine how much cash flow we generated from operations.

There is an old accounting saying “Profit is an opinion, Cash is fact”. Managing cash flow allows an organization to be proactive in planning what it needs to do to in order to meet its obligations while implementing its strategic plan. Keeping your bank aware of your progress builds a relationship. However, building relationships with multiple banks is a strategy that will allow an organization to survive difficult credit markets and have cash to be ready when the economy rebounds.

© Strategic Financial Leadership, Inc. 2009