Stephen Merritt, CPA, PC | Certified Public Accountants | (757) 420-5778
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- Understanding Goodwill in Accounting
- Hidden Costs Of Employee Turnover
- Building a Resilient Supply Chain In Your Business
- Navigating the Gig Economy: Tax Challenges
- July and August Days
- Office Hours
Understanding Goodwill in Accounting
You might know the word “goodwill” as the name of a local charity where you can drop off household items you no longer need. It might also be something that’s talked about at church. But in accounting circles, goodwill is something completely different.
Goodwill is an account on the balance sheet of certain businesses. It falls into the category of assets, and specifically, it’s an intangible asset. An intangible asset is something that is not physical. Examples of other intangible assets are copyrights, patents, and trademarks.
Goodwill arises when one company purchases another. When a company pays more for the company that it is acquiring, the difference is booked as goodwill. Goodwill represents the extra value that the acquisition provides for the purchasing company.
When one company buys another, the assets and liabilities of the acquired company are taken over by the purchasing company. They are recorded on the purchasing company’s books at their fair value. The balancing entry between the fair value of the assets and liabilities purchased and the purchase price is booked to the goodwill account.
What could lead a company to pay more for another company? Things that are not on the balance sheet but are valued could include a solid customer base, great employees, brand reputation, the company name and what it means, technology owned by the company, and a great reputation for customer service.
Normally, an intangible asset like goodwill would be amortized, but it is not. Amortization is when a portion of the asset is expensed each year. A patent, for example, is amortized over its useful life, not to exceed 20 years. Amortization is comparable to depreciation. Some physical assets are depreciated, while some intangible assets are amortized.
Before 2001, goodwill was amortized for up to 40 years, but the accounting rules have changed to something less arbitrary. Goodwill must be checked each year for “impairment.”
Goodwill impairment happens when the value of the acquisition declines after it has been purchased. One of the most famous impairments write-downs occurred right after this new accounting rule was implemented. In 2002, $54.2 billion in impairment costs was reported for the AOL Time Warner, Inc. merger.
More recently, in 2020, a few of the largest impairment write-downs included companies, such as Baker Hughes, Berkshire Hathaway, and ATT, due to the latter’s acquisition of DirecTV in earlier years. In 2022, impairment write-downs included Teladoc Health and Comcast. Covid-19 was in part responsible for a large number of impairment write-downs in recent years.
If impairment is required to be booked, the journal entry will look like this:
Debit Impairment Expense (increases expenses and therefore reduces profits)
Credit Goodwill (reduces the asset amount)
If your company has acquired other companies and you have a goodwill account on your balance sheet, you can work with your accountant to determine how to check for impairment and if you are required to correct your books.
The Hidden Costs of Employee Turnover and How to Reduce Them
Is high employee turnover an issue in your company? If so, you may already realize how costly it is. It affects your bottom line and cuts into your profits. Or maybe, it’s so bad that it’s turning your profits into losses. The question is, are you doing everything you can to reduce the costs associated with the turnover?
To control the costs, first, we must know what they are. Only then can we tackle them. Here’s a list of the most common costs associated with employee turnover.
- Hiring costs
- Advertising costs
- Time spent screening resumes, scheduling interviews, and interviewing candidates
- Background check costs
- Signing bonus, if any
- Time spent setting up the new employees in payroll, IT, HR, completing forms, setting up equipment, generating badges, and more.
- Training costs
- Time spent training the new employee
- Costs of any required training courses on safety, sexual harassment, timesheet, and other required onboarding training, etc.
- Costs of mistakes made by new employees
- Productivity losses while new employee gets up to speed
- Extra supervisory costs monitoring new employee
- Vacancy losses
- Costs of overtime while other employees cover vacant shifts
- Productivity losses while the job is vacant
- Disruption of peers, including fears of them being next if it was an involuntary termination
How to Reduce Turnover Costs
Here are some ideas for reducing or avoiding these costs before they occur.
1. Create a positive culture. If your workplace is a positive, nurturing place to be, people may be more likely to stay. Create a place where employees can become good friends. That way, they are less likely to leave.
2. Review your pay package. Pay slightly more than your competitors. Or provide above-average benefits for your employees. Include perks that are less expensive, yet valuable to employees.
3. Consider overstaffing. This puts less pressure on all of your employees.
4. Automate and streamline your hiring process. This can keep hiring costs down when you do need to hire.
5. Create a healthy work environment. Listen to your employees and make sure their needs are being met so they can do the best job possible for your business. Provide them with the tools they need to do their job well.
6. Hire slow, fire fast. If you do have a worker who is dragging the entire team down, get rid of them fast.
7. Train your first-line supervisors and managers to be excellent bosses. People skills and supervisory skills do not normally come naturally but can be learned. Many voluntary terminations occur because people dislike their boss.
8. Be consistent with raises and performance reviews. Employees expect annual raises in most industries, even if it’s just a cost-of-living adjustment. Let employees know how they are doing on a regular basis, and formalize the process at least annually.
9. Conduct exit interviews. Find out why people are leaving by conducting exit interviews. You may have to dig deep to find out the real reason, as most people don’t want to burn their references. Take action if it’s something in your control.
10. Delegate projects. Keep the job interesting for employees by delegating low-risk projects that are fun for them to do.
11. Communicate purpose. Help employees understand the importance of the job they do, and help them connect to the deeper meaning of their job and its place in the world.
Many of these ideas have costs associated with them. Your accountant can help you do a cost-benefit analysis to determine the specific costs and if the benefits will outweigh the costs. Then you can create a plan to tackle and reduce the high, hidden costs of employee turnover in your business.
Building a Resilient Supply Chain in Your Business
Supply chain breakdowns continue to stymie small businesses, causing them to lose sales and profits. Whether your business has been affected or not by supply chain delays and shortages, it’s a good idea to take steps to make your supply chain as resilient as possible.
Your supply chain starts with the acquisition of materials that go into what you sell. It includes the production of your products and services. And it doesn’t end until the customer receives the product or service you offer, as well as any help they need to consume your product.
Here is a process to help you evaluate your supply chain and improve its resilience, to avoid future bumps in the road.
Start with an Inventory of Your Suppliers
To evaluate your supply chain, a good place to start is to make a list of vendors. An easy way to get this vendor list is from your accounting system. Make lists from your list:
- Primary vendors that are crucial to your business. This includes vendors from which you purchase goods for resale, and can also be vendors such as your online shopping cart because if it goes down, you lose sales. These are you, mission-critical vendors.
- Secondary vendors that provide support indirectly, such as maintenance to machines you use or vendors that provide human resource benefits. Your business won’t be terribly disrupted if something happened to these vendors.
Once you’ve made your lists, let’s focus on your primary vendors first. If this list is large, you may want to further prioritize it by sorting the vendors you are most dependent on to the top of the list.
For each vendor on your primary list, do some research to find alternatives. You want to develop a deep bench of suppliers who can support your business. If one supplier has trouble meeting your orders, you will be more prepared and can consider switching. You’ll need to develop relationships with these alternate vendors, and perhaps even use them a time or two to test the relationship.
Many factors can go into selecting alternate vendors: price, quality, service, delivery time, shipping costs and methods, country of origin, location of warehouses, troubleshooting effectiveness, and much more. You know your industry best and what you need, so you can develop a table of criteria to evaluate potential new vendors. The ultimate goal is to have backup plans all along your supply chain.
Once you’ve gone through your primary list, you can start on the secondary vendors.
Large companies have entire purchasing departments to do this kind of work. If your business is small, you may be able to delegate portions of the list to trusted and well-trained employees. Know this type of work can take a long time. It will also be changing as new vendors spring up and older vendors retire or go out of business.
Internal Operations Including Selling and Distribution
Now that you’ve taken care of your suppliers, the next big step in supply chain efficiency is to standardize your operations. Take a look at your internal operational processes to ensure they are as efficient as possible. Create policies and procedures to ensure quality and customer satisfaction.
This includes reviewing the production process as well as selling and distribution, all the way to customer service. You may have covered this while you assessed your vendor list, but if not, you can do it now.
One example is how you get your product or service to your customers. Be sure there is an alternate method in case your primary distribution method breaks down.
Again, this is a marathon, not a sprint. Take your time to do this project right, and it will benefit you for years to come.
Risk versus Reward
In some cases, it may simply not be cost-effective to have a fully developed contingency solution. It may be more cost-effective to take the loss if it happens. You’ll want to evaluate the circumstances and come up with the right solution that works for your business.
Take the time you need to improve your supply chain resilience, and your business will be more valuable and more profitable for it.
Navigating the Gig Economy: Tax Challenges
Navigating the Gig Economy: Tax Challenges for Workers and Businesses
The gig economy refers to a labor market characterized by short-term contracts or freelance work as opposed to permanent jobs. It encompasses a wide range of industries, from ride-sharing and food delivery services to freelance writing and graphic design. Instead of being classified as traditional employees, many workers in the gig economy are considered independent contractors or self-employed individuals.
Tax Challenges for Independent Contractors
As an independent contractor, one of the primary challenges is managing taxes. Unlike employees who receive a regular paycheck with taxes withheld by their employers, independent contractors are responsible for calculating and paying their own taxes. This means that they need to set aside a portion of their earnings to cover income taxes, as well as self-employment taxes (which is the equivalent of Social Security and Medicare taxes withheld and paid by an employer).
Moreover, independent contractors may not have access to the same tax benefits as employees. For example, they may not be eligible for certain deductions, such as those related to employee benefits, health insurance premiums, or retirement plans. This can make it more difficult for independent contractors to reduce their taxable income and overall tax liability.
Another complication for independent contractors is deducting business expenses. In traditional employment, employees may be able to get pre-tax reimbursement/deductions for certain work-related expenses, such as transportation costs or home office expenses. However, independent contractors must carefully track and document their business-related expenses to claim deductions against their contractor income.
Common business expenses that independent contractors may incur include equipment or tools, software subscriptions, licensing costs, marketing expenses, and professional development costs. Keeping detailed records of these expenses is essential for accurately reporting deductions and minimizing taxable income.
Tax Challenges for Businesses
On the flip side, businesses that hire independent contractors also face tax challenges in the gig economy. When companies hire employees, they are typically responsible for withholding and remitting payroll taxes on behalf of their workers. However, when they engage independent contractors, the tax obligations differ.
Businesses that hire independent contractors are not generally required to withhold payroll taxes for them. Instead, independent contractors are responsible for reporting and paying their own self-employment taxes, which include Social Security and Medicare taxes. However, in some cases, businesses are required to comply with backup withholding rules when independent contractors provide the wrong Taxpayer Identification Number (TIN) or incorrectly report income on a tax return, which means that the business must withhold a certain percentage from all future payments to that contractor and deposit the withholdings directly with the IRS. Furthermore, misclassifying employees as independent contractors can lead to severe tax consequences and potential legal issues for businesses – IRS can assess back payroll taxes for payments that are later deemed as wages, and there can be legal ramifications for not providing certain benefits to those who are truly employees but being disguised as independent contractors. Therefore, businesses must ensure compliance with tax rules and laws surrounding worker classification.
Tax Compliance and Future Considerations
To navigate the tax challenges in the gig economy, both workers and businesses should prioritize tax compliance and proactive planning. Independent contractors should set aside a portion of their earnings to cover taxes and consult with tax professionals or use tax software to ensure accurate reporting. Keeping organized records of business expenses is crucial for maximizing deductions and reducing taxable income.
Businesses, on the other hand, should carefully review worker classification to ensure compliance with tax laws. Consulting with legal and tax professionals can help businesses determine whether a worker should be treated as an employee or an independent contractor. This can help avoid potentially costly penalties and liabilities associated with misclassification.
July and August Days
Here are some Days to Remember in July and August!
July 4th- The 4th of July
A time for grilling and drinking something cold! July celebrated the Declaration of Independence by the Continental Congress on July 4, 1776.
July 15th- Pet fire Safety Day
Pets are family!!! Put tips into practice and have a fire drill plan ready if disaster strikes. Your fur babies will love you for it.
July 24th- International Self Care Day
July 24th promotes self-care as a vital foundation of health. Taking care of yourself includes your whole self: physically, mentally and emotionally. Do something nice for yourself today!
August 17th- National Thrift Shop Day
Get your thrift on! If you need to redecorate, change your style, expand your music or library, the thrift store is the perfect place to do that! Thrift stores are budget friendly and have unique pieces everyone can enjoy.
August 26th- National Dog Day
Celebrate your fur baby! August 26th encourages dogs of ALL breeds be considered for adoption. No matter the breed, a dog is a man’s best friend.
August 30th- National Beach Day
Celebrating national beach day helps promote the opportunity to help keep those relaxing places clean.
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