Tag Archives: capital expenditures

Increase Cash Flow, Reduct Debt

Increasing Cash Flow, Becoming A Debt-Free Company

How much debt financing is right for a business? In today’s low-cost money environment, the “easy” answer might be “as much as you need” because it is inexpensive (depending on a company’s financial situation). However, the credit environment has tightened significantly during the past two years because of the stress that has been placed on the financial markets. Low-cost money really isn’t that easy to come by.

Possibly the more important question may be, what would it take to run the business without any debt? As the B2B CFO for a number of small- and mid-sized businesses, I can attest to the fact that operating a business on the cash flow generated from operations is easier and less stressful than being saddled with a lot of debt. It also increases control over the company.

With a good focus on cash flow and a deliberate plan to reduce debt, it is possible to achieve the objective of becoming a debt-free company. The elements of a robust cash flow plan will likely include a sound understanding of the classic elements of the sources and uses of cash. In simple terms, you want to increase the sources of cash and reduce the uses of cash to the extent possible.

Sources of cash:
·         Improve the efficiency of revenue generating processes
·         Collect customer receivables faster
·         Turn inventory faster and reduce the inventory balance
·         Lengthen supplier payment terms, request early pay discounts, or take full use of existing terms
·         Reduce operating expenses
·         Increase gross margin of products or services

Uses of cash:
·         Increase working capital in all its forms — A/R, inventory, etc.
·         Increase interest expense as a result of increasing debt or rates
·         Increase operating expenses – payroll, benefits, rent, travel and entertainment
·         Capital expenditures
·         Add employees or contractors
·         Decrease gross margin

Successfully implementing these actions so that the sources outweigh the uses will increase cash flow in the business. The CFO is then able to turn this into a comprehensive financial plan to determine when the business can be debt-free. Without debt in the business, owners are no longer reliant on other entities for success.

Debt isn’t always a detriment. In fact, by the end of the year, my firm will have helped clients obtain more than $200 million in debt financing. These clients have largely been growing businesses in which a loan can be very helpful to support capital expenditures and increased working capital to support additional revenue. When used properly, growth-supporting loans are paid off when revenue growth and increased profitability are achieved.

Unfortunately in a difficult economy, too much reliance on debt has become a way of life for many businesses versus a vehicle for growth. As we enter a year when the economy has at least stabilized, eliminating or reducing debt is one beneficial goal to achieve for companies.

For more information about increasing cash flow and becoming debt-free, visit B2BCFO.com.

PetSmart earnings increase

PetSmart Earnings Increase 39%

PetSmart, Inc. reported earnings of $0.85 per share, up 39% compared to $0.61 per share in the first quarter of 2011. Net income totaled $95 million in the first quarter of 2012, compared to $71 million in the first quarter of 2011.

Total sales for the first quarter of 2012 increased 9.4% to $1.6 billion. The increase in net sales was partially impacted by $2 million in unfavorable foreign currency fluctuations. Comparable store sales, or sales in stores open at least a year, grew 7.4%, benefitting from comparable transactions growth of 3.3%. Services sales, which are included in total sales, grew 8.3% to $181 million.

During the first quarter, the company generated $150 million in operating cash flow, spent $36 million in capital expenditures, distributed $15 million in dividends, and repurchased $175 million of PetSmart stock. The company ended the quarter with $341 million in cash, cash equivalents and restricted cash and zero borrowings on its credit facility.

“We are pleased to report another quarter of solid earnings growth,” said Bob Moran, Chairman and Chief Executive Officer. “Our performance in the first quarter was due to strength across all three merchandising categories, as well as across services, further solidifying our position as the leading pet specialty retailer.”

“As a reminder, 2012 contains a 53rd week. For all of 2012, we anticipate comparable store sales growth in the mid-single digit range, and total sales growth in the 9% to 10% range. We are raising our earnings per share guidance from a previous range of $3.02 to $3.16, to our current expectations of $3.19 to $3.31. The impact of the extra week is estimated to be $120 million in sales and $0.16 in EPS,” said Chip Molloy, Executive Vice President and Chief Financial Officer. “For the second quarter of 2012, we are expecting comparable store sales growth in the mid-single digit range, and earnings per share between $0.61 to $0.65.”

For more information on PetSmart, visit PetSmart’s website at petsmart.com.

Three Things Building Owners Need To Know To Reduce Their Taxes - AZ Business Magazine June 2010

Three Things Building Owners Need To Know To Reduce Their Taxes

In today’s economy everybody is looking for ways to improve their cash flow, especially as it relates to real estate. Implementing tax-saving strategies is certainly a way to help cash flow in the current year, and in some cases these strategies will provide benefits for years to come. While there are numerous strategies for lowering taxes, three of the more popular current items for building owners are outlined below.

Repair and maintenance deductions
The difference between deductible expenses and capital expenditures can mean significant tax savings for property owners who perform regular maintenance and repairs. The key is when certain costs can be considered expenses that are deductible from current income.
Generally, taxpayers must capitalize expenditures that:

  • Substantially prolong the life of the property.
  • Materially increase the value of the property.
  • Adapt property to a new use.
  • “Put” the property into a useful condition.
  • By contrast, taxpayers may be able to deduct expenditures for:
  • Routine maintenance.
  • Incidental repairs.
  • Equipment and materials that “keep” the property in an ordinary, efficient operating condition.

In most cases, taxpayers will reduce taxes by classifying an expenditure as a repair and taking the current deduction, rather than recovering the cost through depreciation. The IRS has recently adopted more liberal standards for expensing large-ticket items previously considered capital investments.
The difference between repair and maintenance, and capital improvement can be subtle. For example, the wooden shingles on a building are damaged. Replacing the roof with new wooden or asphalt shingles would be considered maintenance and repairs, and it would not have to be capitalized. However, upgrading to a maintenance-free roof system with an expected lifespan of 50 years would have to be capitalized as a long-term improvement to the building.

Many building owners have improperly classified maintenance and repair costs as capital expenditures, creating opportunities to go back and reclassify certain expenditures and recover previously paid taxes.

To claim the deduction, the building owner must submit Form 3115 to request an automatic change in accounting method. The accounting change allows the taxpayer to claim a current-year deduction for expenditures that should have been a deduction in a prior year.

Cost Segregation
Under IRS guidelines, most buildings constructed, purchased or renovated since 1986 are eligible for a cost segregation study. The goal of the study is to make sure business owners are using the appropriate depreciable life for their assets. A cost-segregation study allows a building owner to change the useful life of certain assets and take advantage of any tax savings that may result.

The standard depreciation period for most commercial buildings is 39 years. When buildings are constructed (or renovated) many companies incorrectly use the 39-year depreciation life, even though parts of a building should be depreciated over a much shorter period. Special use items, such as floor coverings, fixtures, and specialty electrical and HVAC equipment, often can be depreciated over a shorter term. It is best to complete a cost-segregation study in the year a building is acquired, although the IRS does allow adjustments to prior depreciation deductions. If the proper amount was not claimed in prior years, depreciation not previously claimed is now allowed as a deduction in the current year by filing Form 3115.

Section 179D Energy Efficiency Deduction
This popular deduction allows the owner of a commercial building to qualify for deductions of up to $1.80 per square foot for buildings that are constructed or renovated to reduce total annual energy use.

The primary beneficiaries are owners or lessees of commercial property and certain residential buildings. Government buildings, such as schools and universities, courthouses, jails, and office buildings, also may qualify. However, since government entities do not pay tax, the deduction can be transferred by written delegation to a tax-paying entity, such as an architect or engineer.

Qualified property owners are able to claim the $1.80-per-foot deduction for buildings constructed or renovated to save 50 percent or more of total annual energy costs as determined by national engineering standards.

Energy savings must be achieved by constructing or retrofitting any of the envelope, interior lighting, or heating, cooling and hot water systems. A building not meeting the 50 percent savings requirement may still qualify for a portion of the deduction. Before the 179D deduction can be claimed, the property owner must obtain independent certification of energy savings from a professional engineer or third-party contractor using software qualified by the Department of Energy.

Arizona Business Magazine June 2010