Recently I was talking with a CPA about the legal structure of a client vis-à-vis tax related issues. First, let me say that I’m not a CPA and I rely on tax matter experts for both my own and all client tax matters. That said, the conversation was centered on the best structure to take advantage of the company’s loss situation. As the CPA explained to me why the current structure worked best, I couldn’t help but interrupt. I said, “I don’t do losses. I’m not here to manage losses; this company is going to be profitable. I fully expect a profit in the most recent month and the profit picture for 2016 is going to be very different than 2015”. “Well”, he said, “you’re right; we need to have a conversation about the structure.”
What I don’t understand is why anyone would focus a structure on utilizing losses as opposed to eliminating them in favor of profits. Now, I certainly understand that start-up companies have periods of losses and in that case, maximizing the tax benefit of them makes sense. But, in this case, we are talking about a company that is far from the start-up stage.
In my experience, losses happen primarily when leaders don’t plan for profits. There is an inexplicable complacency that overtakes some businesses where they exist year in and year out making a few dollars in some years and losing in others. Sometimes this is a function of a business that has taken in other people’s money and the executive team doesn’t have sufficient skin in the game; investors have grown weary, written off their investment, or don’t know how to fix the problem. Other times it may be the case of an entrepreneur who has gotten the business as far as he or she can go and needs help in getting it to the next level but doesn’t know where to turn or how to fix the problems that exist (for more on this, see What Got You Here, Won’t Get You There!)
But it doesn’t have to be this way. You can develop a Profit Culture where everyone is focused on driving the business to higher levels of profitability day-after-day, month-after-month and year-after-year. This includes your executive team, your outside advisors, rank and file employees, and even vendors. Clearly, going from a culture that’s languishing to one that’s focused on profits requires a shift and it starts at the top. Further, it must involve everyone. The entire leadership team must adopt the profit mindset. And if your outside advisors aren’t focused on helping you to drive profitability and are willing to accept the status quo, then it’s time to seek new advisors. Vendors can and should also be engaged in helping you find ways to improve efficiency and therefore profitability. Every employee needs to be engaged as well. Sharing information about company performance is one of the keys to engaging this powerful group. I realize it can be intimidating at first to share profitability and performance metrics outside of a small group, but employees can’t be expected to pitch-in and help if they don’t have an awareness of company circumstances.
Losses can be turned into profits and at times at an astonishingly fast pace. I’ve overseen year over year swings of $3 million going from a $1.5 million loss in one year to a $1.5 million profit in the next. Nothing we did was rocket science, but it did represent a complete shift in mindset of the leadership team and nearly everyone in the company. Rather than “protecting” people from the realities of the business, we shared them so that the entire team could be engaged in the successful turnaround.
Sure, losses can have value as a tax deduction under certain circumstances, but wouldn’t you really rather have profits?
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected] The archive of these monthly newsletters is posted at the Resources section of homza.com
your cash is flowing. know where.®
Ken Homza Copyright @ 2016 Homza Consulting, Inc.