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Strong working capital is necessary for businesses with an eye toward growth and expansion. Defined as the difference between a company’s current assets and liabilities, working capital plays a major part in providing resources for growth and cash flow. 

Although the calculation may seem relatively simple, the impact of working capital is a bit complex.

What Is Working Capital?

The calculation of working capital is straightforward:

Current Assets − Current Liabilities = Working Capital

“Current” is a keyword in this calculation. The assets used in figuring working capital are generally limited to those that can be successfully converted to cash within 12 months. This limits the components to the most immediate debts and liquid assets.

Working capital provides a snapshot of a company’s short-term cash flow. If a company has positive working capital, it probably has the opportunity to propel growth, expansion, and investments. If working capital is negative, the company may have problems funding projects and paying off credit bills.

Calculating working capital may seem easy, but it reflects differently on different industries. Businesses that have long production cycles — auto manufacturers, machinery producers, aerospace companies, electronics makers, and others — typically need more working capital to source materials, maintain assembly lines, and set up distribution.

Businesses with short production cycles, such as retailers and service-based companies, do not require as much working capital. Their core activity is marketing a pre-made product or service and selling it to others — sometimes dozens of customers over a single day. This means they can get short-term funds fairly quickly, so they can navigate around the lower capital.

What Is Included in a Company’s Current Assets and Liabilities?

Current assets in a working capital calculation may include:

• Cash on hand
• Cash equivalents
• Accounts and notes receivable
• Prepaid expenses
• Inventory (if applicable)

Current liabilities might cover:

• Accounts payable (supplies, rent, property taxes, operating expenses)
• Wages payable
• Portions of long-term debts that must be paid within 12 months
• Accrued tax payable
• Dividends paid to shareholders
• Advance capital funding a current or future project (unearned revenue)

Working capital gives a more immediate picture of a company’s current financial health, daily operations, short-term liability, and overall efficiency.

Working Capital and Cash Flow

Working capital is directly related to liquidity and cash flow. However, the difference between positive and negative working capital is a bit more nuanced.

When a company has positive working capital, it can pay off short-term obligations and invest in growth more easily. While it’s better to have positive working capital than negative, too much working capital in reserve might signal trouble. The company may be using cash inefficiently, stocking excess inventory, or just holding on to too much idle cash. It’s not a “good problem to have” — it’s a cash flow management issue.

Similarly, negative working capital isn’t always a sign of impending doom. Some companies — retailers especially — frequently operate under negative working capital. That’s because they handle multiple transactions a day and cash is always coming in. 

If the company’s suppliers or creditors have agreed to extended payment terms, it has more money coming in than it has to pay off suppliers. This implies positive cash flow even if the working capital remains negative.

Generally speaking, most companies want to eventually get to a point of positive working capital. But if carefully managed, negative working capital can be endurable, at least in the short term.

Raising Working Capital

Businesses have a few options if they’re looking to maintain positive working capital and improve liquidity. In basic terms, they need to increase assets and decrease liabilities.

To increase assets, a company can put cash in savings, increase its inventory, prepay discount expenses, or (carefully) extend credit to lessen the effect of bad debts.

To reduce liabilities, a company can negotiate for better credit terms with its suppliers or service providers, manage spending, and steer clear of incurring nonessential debt.

Guidance on Managing Working Capital

A fractional CFO can offer plenty of resources for improving working capital. They can refine cash flow to speed up the conversion cycle. They can manage inventory levels and credit policies to streamline liquidity. They can provide keen insights into budgeting, projections, and risk management — all the components that intersect to analyze working capital.

The fractional CFOs at Zabel & Co. can optimize your company’s working capital and cash flow to put your business in the most advantageous position. Get in touch with us to find out more.

The end of the year is in sight. Businesses are about to take on the annual ritual of reviewing their finances and preparing their yearly tax returns. While some companies are ready to handle their tax statements in-house, others are considering outsourcing their tax filing to professionals.

Businesses have a few options for tax season. Some rely on professional tax preparers, especially if their finances are simple and relatively straightforward. Tax specialists, however, focus almost entirely on taxes. If an organization’s financials are especially complex, a more qualified professional might be needed to act in an advisory role.

Certified public accountants (CPAs) are well-rounded financial consultants who cover a broad range of services. Budget planning, regulatory compliance, income stream strategy, and auditing support are just a few of the areas CPAs can manage.

What level of support does your business need during tax time? This blog takes a close look at situations that might require more comprehensive financial services.

Tax Preparers’ Role and Responsibilities

Some small businesses have finances that are simple and uncomplicated, especially if they’ve not been in operation all that long. A sole proprietor or single-person limited liability company (LLC) may only need help getting its annual tax reports over the finish line. In those cases, a tax preparer might be sufficient and cost-effective.

Tax preparers help small businesses organize their income and expense reports for tax purposes. They perform functions like: 

• Spotting opportunities for deductions or tax credits
• Managing payroll taxes for Social Security and Medicare
• Estimating quarterly tax payments
• Preparing state and local tax filings on top of federal returns

A business with a steady income, a small but effective team, and modest assets may only need a tax preparer at filing time. 

However, it’s important to note that tax preparers are not required to be licensed and therefore aren’t tightly regulated. Although rare, some tax preparers also take an aggressive approach to estimating deductions, knowing they aren’t likely to face disciplinary actions. The company, in contrast, may face closer scrutiny.

A small-to-medium-sized company focused on growth may need more thorough financial advice and support than a tax preparer can provide.

What a CPA Can Do

An established business generating income and looking to expand needs a sure hand at tax time — one that can handle the more complex needs of a growing company. That’s exactly what a qualified CPA provides. Some of the specific areas a CPA can address include the following.

Intricate Tax Structures

Some small businesses operate in multiple states or even internationally. They may be owned by several partners with diverse interests and priorities or have run into legal issues with their finances. 

All these conditions can make the company’s tax profile particularly complex. A CPA can manage all these tax structures while keeping the business in compliance. They can also help prevent financial mishaps down the road.

Optimizing Rental and Investment Properties

CPAs assist businesses that have commercial, rental, or investment properties in settling their tax affairs. A rental property is subject to complex taxes due to depreciation, revenue, and management expenses. A CPA’s job is to limit their client’s tax liability by helping property owners find all the deductions they can take at tax time.

Business Growth and Change

Perhaps the most important job a CPA can do is prepare a business for sustained growth. When a company changes its legal structure, acquires new assets, or merges with another company, a CPA’s role is essential. 

Times of transformation change businesses from top to bottom, especially where taxes are concerned. Experienced CPAs have guided companies through expansion and success.

Support During Tax Audits

As a business grows, its tax exposure increases. A slip-up or misfiling can trigger an IRS audit, which can threaten the company’s fortunes. CPAs are fully licensed to represent businesses during audits. They have deep knowledge of current tax codes and legislation and can help you avoid expensive mistakes that lead to legal fines.

When your business is poised for growth or already on the road to success, a CPA can manage all the financial aspects that arise, including taxes. They can be essential partners in scaling your business for profitability.

Get Tax Time Help From Zabel & Co.

Zabel & Co. supports small businesses through all their financial needs. Whether you need a tax advisor, accountant, growth coach, or fractional CFO, we can help. Contact us for a free profit acceleration analysis.

Minnesota recently enacted a new rule governing contractors and employees. This rule took effect on July 1, 2024. 

These new regulations will primarily impact employees in the construction industry and contractors that operate in this sector. If you misclassify employees as independent contractors, you could incur severe penalties and reputational damage.

Repeat offenders could incur personal liability. Therefore, you must familiarize yourself with what’s changing and what’s remaining the same so you can make sure workers are classified appropriately. Here’s what you need to know. 

Fine Amounts Got Steeper

Minnesota increased the fines for contractor misclassification violations. These increases apply to both construction and general workers. If your business misclassifies workers, it can incur a fine of up to $10,000 per violation.

That’s not all. You could also incur personal liability for repeat violations. This means that the state could fine you directly, and misclassified workers may have grounds to file a lawsuit. Even a single lawsuit could cost your business tens of thousands in legal fees and tarnish your reputation. 

What About the Five-Factor Test?

Minnesota will continue to use the five-factor test to determine whether a non-construction worker is an employee or an independent contractor. You should consider the following variables to determine how to classify a worker: 

• Control over the means and manner of performance
• Mode of payment
• Furnishing of tools and materials 
• Control over the location where the work was done
• Right of discharge

The Minnesota Department of Labor and Industry (DOLI) has established 34 different industry-specific tests for workers’ comp purposes. These tests are used to determine whether a person is eligible for workers’ comp benefits in the event of an injury.

It’s a good idea to consult with a legal professional to ensure that you are in compliance with state laws. Failing to classify workers correctly can lead to significant financial penalties and reputational damage. 

The New 14-Factor Test

The construction industry will face the most significant changes as a result of the new rule. DOLI replaced the existing 9-factor test with a 14-factor variant that draws attention to the timing of the services provided. This new test introduces more specific rules regarding business registration and tax reporting. 

To quality as an independent contractor, the person must:

1. Establish and maintain a separate business from the person who received the services
2. Own, rent, or lease tools and equipment to perform construction services
3. Provide construction services to multiple persons 
4. Hold federal and Minnesota tax identification numbers, file business or self-employment income tax returns, and receive 1099 forms
5. Be in good standing with DOLI
6. Have a Minnesota unemployment insurance account (if required by law)
7. Obtain workers’ comp insurance
8. Hold current business licenses and certifications 
9. Operate under a written contract
10. Submit invoices and receive payments
11. Retain control over the means of providing specified services
12. Incur the main expenses and costs
13. Assume responsibility for the completion of services
14. Be able to realize additional profit or suffer a loss 

These additional provisions also specify that the worker must meet all of these conditions at the time they provide services. This change to the law’s verbiage is especially important because it makes misclassification an ongoing concern throughout the project.

Suppose that you hire a subcontractor to remodel a kitchen. If they fail to renew any state-mandated licenses during the project, the worker will no longer meet all 14 criteria of an independent contractor. Therefore, you must do your part to ensure that all subcontractors remain compliant with the new law. 

How You Can Stay Compliant

You must be proactive about maintaining compliance with the new rules. Regularly review worker classifications and all relevant paperwork to verify that they meet the criteria of the 14-factor test. Make sure your contracts and tax reporting practices meet the new requirements as well.

If you’re unsure about how these changes will impact your business, Zabel & Co. can help. Our team of consulting professionals can identify key areas of concern and implement strategies to mitigate risks of non-compliance. Contact our team today, and let’s chat about your workforce management needs.

Small to medium companies have been near the core of American business for decades and remain there today. It’s more important than ever for these businesses to develop financial management skills and habits for the prospect of success. Here are a few actionable, powerful steps your business can take for financial well-being.

Keep Detailed Records

Accurate and thorough record-keeping is crucial in developing a business. Set up a wide-ranging base of financial records, including income, expenses, cash flow, budget management, tax information, and other categories pertinent to your business.

A detailed record system helps business owners make informed decisions and maintain compliance. It also helps to cut down calculation errors and inefficiency.

Reconcile Bank Statements Every Month

Reconciling your financial records with your bank statements every month bolsters accuracy and finds discrepancies that need to be fixed. Look over both to find errors, unapproved or duplicated transactions, missing payments, and other fiscal details.

This step can help you maintain a steady cash flow, prevent fraud, and develop a clear picture of your financial growth over time.

Prepare a Monthly Profit and Loss Statement

A monthly profit and loss (P&L) statement gives you a clear overview of business operations and financial performance. A solid P&L report tracks revenue, cost, and expenses that help you find profit opportunities, discover market trends, and improve your decision-making. It can also help you build a budget and make better projections.

Manage Cash Flow With a Fractional CFO

A fractional CFO — something Zabel & Co. can help you with — is a part-time financial specialist who builds business strategies from an objective standpoint. They analyze business data to improve cash flow and liquidity. This gives a small business the opportunity for advanced financial knowledge without having to commit to a full-time employee.

Plan for Unexpected Expenses and Slow Customer Payments

Unforeseen events happen in every business but may have outsized effects on smaller companies. Delayed customer payments can also affect your bottom line.

Create strategies and contingencies for dealing with surprise expenses and shortfalls. These can include building an emergency fund, offering incentives for prompt customer payments, and laying out clear payment terms.

Re-Invest in Your Business

Small and medium businesses rely on reinvestment. It allows them to fund upgraded equipment, business expansion, employee training, and other important business practices. Reinvesting can also strengthen your market presence and competitive edge by fostering innovation, better performance, and sustained growth. Adjust your reinvestment allocations from time to time.

Evaluate Cost Savings Measures

Review your expenses to find opportunities for savings. Find budgeted items that can be reduced, cut, or optimized. This can include upgrading or renegotiating vendor agreements, reducing overhead, and slimming down or streamlining operations. Cost savings evaluation is another area where a fractional CFO can be of great assistance.

Keep Separate Accounts for Business and Personal Finances

Maintaining separate bank accounts for company and personal finances is crucial. Tracking each separately can eliminate budget mix-ups and back you up should any legal problems arise. It can also make tax preparation much easier.

Put Yourself on the Payroll

Some business owners leave themselves off the company payroll to accelerate business growth and mitigate taxes. However, in most cases, owners should put themselves on the payroll to earn dependable, documentary income. It can help you build transparency and streamline planning efforts.

Let a Professional CPA Handle Your Taxes

Business owners should be focused on finding ways to earn revenue and expand. Tax planning can get in the way of that process, however. Enlisting a professional CPA lets you refocus on business operations. CPAs also have experience and knowledge that can help you avoid audits, find deductions and tax credits, and meet compliance regulations.

Zabel & Co.: Steering Companies Toward Success Zabel & Co. helps small to medium companies build a successful framework for profitability and growth. We support business owners by coaching business growth, advising on technology and taxes, and serving as fractional CFOs. Our goal is to drive you toward success in both business and life. Contact us to find out more.

Running a successful business requires planning. Even though a business owner might have excellent instincts and a hearty work ethic, these traits are far more functional in the context of well-designed blueprints. One of the most important topics that planning can address is how your business will turn a profit, both now and in the future.

Profit planning establishes how your business will earn revenue over a designated time. It entails objectively assessing your current status, outlining your business goals, and designing sustainable cash flow. A solid profit plan will also include a strategy for monitoring progress and allocating resources. It’s a virtual roadmap for success.

What Is Profit Planning? Profit planning is setting up a financial outline of how a business owner aims to become profitable over a given time. The plan takes several financial elements under consideration to project future earnings. It helps business owners and managers set goals and milestones to reach, and it serves as a reference point for business decisions.

A good profit plan identifies core metrics and data collection methods. It also specifies how managers and employees use the results to point the way forward.

The plan doesn’t need to be unnecessarily complex or overthought. At the outset, you just need a few measurable goals that you can aim for over a year or so. What’s most important is that these goals are defined and written down, along with details about how progress will be monitored and measured.

Depending on your business structure, there are many ways you can plan how your business will handle profit. For example, you may broaden your offerings or services, expand to other regions, ramp up your marketing and sales strategies, or enhance customer retention.

Your profit plan should also address how you can control expenses to protect profits. This can include streamlining operations, negotiating with suppliers and vendors, and implementing cost-effective technology. It’s important to know how much money and capacity you need to improve production. This can make it easier to plan for expansion and growth.

Why Is Profit Planning Important?

Profit planning builds a strategic foundation for attaining your business goals. It accounts for strategic resource allocation to support your business objectives, setting

realistic forecasts for revenue and expenses. This information guides your decision-making so you can anticipate obstacles and take advantage of opportunities.

A complete profit plan includes methods for monitoring and recording performance metrics. This data sets a standard for production rate and can show deviations from normal operations. Businesses use this information to enact corrective actions to maintain consistency.

Profit planning sets up a framework for financial stability and success. It can include strategies for increasing liquidity and contingency planning for unexpected events. A solid profit plan also establishes a sense of accountability in the organization for maintaining long-term sustainability and continued success.

Steps for Creating a Profit Plan

To get you started, here are the basic steps for building a comprehensive profit plan.

· Set Profit Goals: Define realistic, achievable, and detailed financial targets you want to reach

· Project Revenue: Use market analysis and past performance data to estimate future sales

· Budget for Expenses: Outline all anticipated operational and material costs, both fixed and variable

· Analyze Break-Even Points: Figure how much sales volume you need just to cover expenses

· Project Cash Flow: Estimate cash inflow and outflow to maximize liquidity

· Set Performance Metrics: Implement key performance indicators (KPIs) to monitor progress and make modifications as needed

· Make Contingency Plans: Set backup plans for dealing with risks and business changes

· Review the Finished Plan: Evaluate your profit plan from time to time and update it as needed.

By following these steps and shaping them to your specific needs, you can create a solid profit plan with achievable goals and growth plans.

Turn to Zabel & Co. for Help Whether your business is just about to launch or has been around for years, Zabel & Co. can help you plan for its success. We offer a no-cost profit acceleration analysis, which takes about 45 minutes of your time. Email Todd Zabel to set up your call with our team!

Your business is only as healthy as its finances. And while it’s easy enough to talk about reaching financial wellness or optimizing your business’s financials, strategizing how to do so can be a lot more complex. Not sure where to start? Here are five steps to optimize your company financials in 2024.

Monthly Accounts Analysis

Before you make any changes, you should always start by taking a close look at your accounts. Analyzing your financial statements each month might not sound like a big deal, but it’s the best way to catch problems and inaccuracies early. 

When you have one or more financial experts poring over your accounts every month, your company can enjoy a whole host of benefits, including:

• Correcting small discrepancies before they become major issues
• Ensuring regulatory compliance
• Forecasting future performance
• Building trust with partners and customers
• Ensuring accurate tax planning

Of course, to make sure your company reaps all the benefits of each analysis, you should make sure you have a strategy for implementing any changes your team decides on.

Reconciling Bank Statements

Reconciling your bank statements is a critical part of auditing your finances, so it’s something you should include in your monthly account analysis. 

When you reconcile your statements, you make sure that your internal records match those kept by your financial institution. This process helps you make sure your records are accurate at all times. It’s also critical when it comes to identifying embezzlement and other kinds of internal fraud.

Assessing Outstanding Invoices

If your business deals with a large number of invoices each month, it’s easy to forget one or two. If that becomes a habit, your business misses out on revenue. And if that revenue goes on your books before the invoice has actually been paid, you might think you have more capital to work with than you do.

To maximize your company’s financial health, you should make it a priority to assess outstanding invoices each month. If invoices are past due, make sure you reach out to clients to collect payment. 

If late payments are becoming a significant issue, it might be time to implement new policies like:

• Early payment discounts
• Late fees
• Automatic payment reminders
• Upfront billing

In cases where a client persistently refuses to pay, you may need to weigh the costs of taking legal action or hiring a debt collector.

Understanding Cash Flow

For many business owners, cash flow is the first thing that comes to mind when they think of optimizing financials. “Cash flow optimization” is a very broad goal, but it can be broken down into three key elements:

• Increasing your cash inflow
• Decreasing your cash outflow
• Improving the timing of cash inflows

The larger and more complex your company is, the more challenging it becomes to understand and optimize cash flow. Hiring a financial expert — even part-time or temporarily — is essential if you want a clear understanding of your current cash flow and how to improve it.

Working With a Fractional CFO

Generally, larger businesses seem to have an easier time organizing and optimizing their finances. That might seem counterintuitive, but larger companies have a major advantage over smaller companies when it comes to leadership — they often have a dedicated chief financial officer (CFO). 

Unfortunately, for startups and smaller companies, hiring a full-time CFO simply isn’t practical, but that doesn’t mean you have to do without. 

A fractional CFO is a contracted CFO who can work with your business on a part-time or even per-project basis. With the right fractional CFO, you get the benefit of expert guidance without having to pay a full-time salary and benefits.

Make Your Business Financially Stronger Than Ever

When it comes to optimizing your financials, nothing matters quite as much as having a strong financial leader. Fortunately, this doesn’t mean you need to hire a full-time CFO. At Zabel & Co., we take pride in connecting your company with the resources and expertise needed to grow. If you’re looking for a fractional CFO or want to see what else we can achieve together, get in touch with us today.