The Difference Your Method of Accounting Can MakePosted on March 14th, 2016
Outsourced Accounting Department, Inc.
A while back I was doing some consulting for a well established private ambulance business that was having trouble getting approval for a $30,000 bank loan to buy two wheelchair transport vehicles. When I met with the owner, I asked to see the information that she gave to the bank. It was a classic situation I see with many small businesses – using cash-basis tax returns to provide to the bank, and in this case, with multiple entities and extensive intercompany transactions – such that no one could tell how the business was really doing by looking at the financials. At the same time, another business adviser was using this same information and advising her that she needed to let go of several paramedics — the life blood of her company, because her direct labor costs were “too high.” And ironically, management had been complaining about not being able to attract and retain quality employees from the local labor market.
The first thing we did was go back two fiscal years and recast the accounting on an accrual basis as I discussed in my recent article, “‘Profit’ vs. ‘Taxable Income’,” and then combined the businesses for financial reporting purposes and eliminated the intercompany transactions. The end result revealed a company that exhibited strong earnings, but slowly turning accounts receivable creating a severe strain on cash flow. Moreover, when we compared our numbers to an industry study we obtained from the ambulance association, we discovered that as a percentage of revenues, our direct labor costs were actually lower, not higher than the industry average. At this point, we slammed on the brakes to review exactly what was going on.
Next, and perhaps most amazingly, we did a survey of the labor market and discovered that the company’s wage rates were far below the competition, which explained why the company was having a difficult time attracting and retaining quality employees. And the employees that were left had found ways to get around this by helping each other to abuse the company’s overtime policy. The remedy? We gave the employees an across-the-board pay raise and simultaneously cracked down on overtime abuses, and in the end, everyone came out ahead.
The final outcome of all of this was almost as unbelievable. First we wrote a business plan based on the revised numbers and obtained approval in only two weeks for bank financing totaling $650,000 (after previously having been declined for only $30,000 as stated above). This included a working capital line of credit, and a revolving line of credit to enable the company to purchase vehicles with just a phone call to the bank. We then looked into the accounts receivable turnover issue and discovered a production bottleneck in the billing department, which was quickly addressed and eliminated by bringing in temps to catch up our billing, and then addressing some personnel issues in the billing department.
None of this would have been possible without first correcting the company’s method of accounting and financial reporting. And by the way, the company’s method of reporting for tax purposes was left unchanged.