Day: January 13, 2023

Wrapping Up 2022 with an Eye Toward Succeeding in 2023 and Beyond

In construction, year-end closing is a misnomer. That’s because the actions you take not only impact your 2022 books, business results, taxes, and financial statements. They can also inform your business strategy for the year ahead, while putting you in the best position for year-end close 2023 and beyond. What should you do to maximize the benefits your company can reap from year-end closing? Consider these seven factors:

Percentage of completion. Construction contractors’ financial statements should be prepared on a percentage of completion basis of accounting to comply with Generally Accepted Accounting Principles (GAAP). This requires contractors to list what jobs are open, the contract values of those jobs, and estimated total costs to determine estimated gross profit per job. This will be compared to total actual costs and billings at the balance sheet date, and income will be adjusted for any over and/or under billings.
Estimates for work in progress. Are there any open jobs where you are estimating you will lose money? What is driving those results? By analyzing what’s happening on a monthly basis, you and your project managers may be able to make course corrections to have a positive impact on 2023 income and future financial statements. If this is the result of low bidding or an estimate mistake, reviewing on a regular basis may help to pinpoint where additional costs were incurred and can be used to help avoid future profit swings and contract losses.
Profit fade. Reviewing project estimates and financials with project managers on a monthly basis can also be useful in that you are seeing profit fades or additional estimated income in real time. This allows any potential issues to be identified and addressed in a timely manner.
Bonding and insurance. The work you perform may require you to be bonded. Work with your insurance broker to find a surety for bonding purposes. Once your books are clean, look at your balance sheet to determine working capital (current assets minus current liabilities). A general rule of thumb is that 10x this number is your potential bonding capacity. Other factors to consider are business equity, profitability, and any outstanding loans between owners and/or affiliated companies and your construction entity.
Labor burden/workers’ compensation. Round up all insurance information from the year, including monthly invoices, policy premiums, audits, etc. to calculate actual insurance expense. Since labor burden is allocated to jobs, this number would have an effect on your over/under billings. Be sure to look at what is pre-paid versus payable, so you expense the right amount.
Break-even point. Do you know how much you need to sell to break-even? Calculate your break-even point using an average of your overhead for the year and an estimated total gross profit on jobs. Know how much in sales you must do to make money before the year even starts.
Backlog. By evaluating your open jobs at the end of the year, you can also determine how much profit is left that you’re going to realize for each job in 2023. Utilize this measure for the whole portfolio of your jobs to pre-determine an estimated gross profit for the coming year. You can use this to help figure out your breakeven, and any additional jobs may just be icing on the cake or backlog for 2024.

RBT CPAs has been a leading accounting, tax, audit, and business advisory firm serving construction companies in the Hudson Valley and beyond for over 50 years. If you’re already a client, you can trust your RBT CPA team will be addressing all the considerations previously mentioned when we meet with you for year-end closing. If you’re not currently a client but interested in learning how our CPAs specializing in the construction industry can support your 2022 year-end closing with a keen eye toward maximizing financials in 2023 and beyond, give us a call today.

Are Increasing Interest Rates Impeding Growth Plans? Consider this Lower-Interest Financing Option

With the Federal Reserve Board increasing interest rates seven times in 2022 and another hike likely next month, you may be hesitant about taking out loans to move forward with growth plans and investments in new products, technology, and equipment. What if we told you (or reminded you) there is a funding program available to eligible manufacturers in New York State that can save you 2% to 3% in interest, while supporting business growth?

The Empire State Development Linked Deposit Program (LDP) helps existing businesses in the state secure reduced-rate financing to improve productivity, performance, and competitiveness. Loans are available for 2% or 3% lower than the fixed interest rate a lender would normally charge (depending on factors like where your business is located; whether it is minority or woman owned; if it’s for a defense industry diversification project; the lending institution’s 4-year CD rate; and more). With the LDP, you may qualify for higher levels of funding and funding may be available even if you have less than stellar credit.

This is made possible by New York State, which makes a linked deposit of funds to induce a lender to charge the borrower a lower rate for the first four years of the loan. The lender pays the state a reduced rate of interest on its 4-year deposit (in the form of a CD) and it reduces the interest rate charged on the borrower’s loan by a like amount. Translation: You pay 2% to 3% less than the lender’s going interest rate on the loan.

Who’s eligible? If your manufacturing firm has 500 or less full-time employees based in New York State, you may qualify.

What can an LDP loan be used for? Prepare strategic plans to improve productivity and competitiveness; introduce modern equipment and/or purchase or expand facilities as part of a modernization plan; improve production processes and operations; introduce computerized information, reporting and control systems; reorganize or improve work systems; adopt total quality and employee participation programs; develop and introduce new products; identify and develop new markets; buy out viable companies; and obtain working capital for modernization activities to improve competitiveness and productivity, while creating or retaining jobs.

How much can I get? There are no loan minimums. The maximum for each linked deposit is $500,000 and the lifetime limit is $2 million. You can have up to three LDP loans for up to $1 million at any given time.

How much can I save? 2% to 3% on loans for a four-year term. So, if you’re approved for a 3% reduction on a $500,000 loan and the lender’s interest rate is 7% on the loan, your rate will be 4%. So, you stand to save $60,000 over the life of the loan.

EXAMPLE OF 3% REDUCTION:	Without LDP	With LDP
Loan Amount	$500,000	$500,000
State’s Deposit	– 0 –	$500,000
Lender’s Interest Rate on Business Loan	7%	4% (with 3% reduction)
Lender’s Interest Rate on C/D	3%	0% (with 3% reduction)
Estimated Savings to Borrower (4 yr. term)		$60,000

While the uncertain economic environment increases the temptation to curb spending as much as possible, as reported in Forbes, “Some experts say that economic downturns can present the best opportunities for growing a business while others are retreating.” If you agree with the later and are interested in learning more about the LDP, visit the Empire State Development Link Deposit Program for more information, including frequently asked questions, a list of lenders, an application, and more.

For additional insights, including how this may affect your accounting and taxes, give RBT CPAs a call. We’re a leading accounting, tax, and audit firm serving the Hudson Valley and beyond for over 50 years and we believe we succeed when we help you succeed.