The First Quarter Cash Blues Business Expert and Author Jerry L. Mills Shares Key Strategies that Help Business Owners Keep Cash Flowing in the First Quarter of 2007

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The holidays are over and we are all ready to get back to work. Well, at least those of us that own businesses are ready to get back. There are, after all, customers to satisfy, employees to manage and, usually, income taxes to be paid. Jerry L. Mills, business author and founder of B2B CFO® the nations largest CFO firm that serves mid-market companies, talks about after-holiday season and business cash-flow perspective. He discusses a few key things that owners can do to keep cash from becoming a problem in the first quarter of 2007. t

The holidays are over and we are all ready to get back to work. Well, at least those of us that own businesses are ready to get back. There are, after all, customers to satisfy, employees to manage and, usually, income taxes to be paid.

The after-holiday season can be stressful for some businesses from a cash-flow perspective. Let's go over a few key things that owners can do to keep cash from becoming a problem in the first quarter of 2007:

1.    The financial covenants on your line of credit

2.    Cash vs. Accrual method on income tax reporting

3.    Dates the tax returns or extensions need to be filed

4.    Enough cash to pay the 2006 income taxes

5.    Enough cash to pay the 1st estimated tax payment for 2007

Financial covenants on your line of credit

Most business lines of credit expire within three to four months after the calendar or fiscal year-end of a business. You should know when your line expires and be prepared to face your banker for the annual review.

The loan documents for your company's line of credit will most likely include a section on financial covenants. It is often easy for a business owner to overlook these covenants on the day the loan is closed. They are usually excited about the business opportunities the line of credit will offer and do not always consider the fine detail in the loan documents. Bankers are starting to include terms such as "compiled" financial statements in the fine print of loan documents. Most business owners are not aware that full-disclosure compiled financial statements issued by an independent CPA firm can cost $10,000 or more in today's market. Bankers also are including terms such as "unaudited reviewed" financial statements and many business owners are not aware such a document can cost in excess of $20,000.

Bankers have a right to include such language, but they also have an obligation to explain the potential costs of such terms to their clients. Unfortunately, some bankers do not always get into a lot of detail about the costs and obligations of such matters.

Many loan covenants also include such terms as "current ratio," "debt-to-equity ratio," and so forth. The loan documents should quantify your obligation on these issues. It is wise to know your ratios and be prepared to explain to your banker where your company stands long before the line of credit matures.

Cash vs. Accrual method on income tax reporting

Most entrepreneurial businesses start reporting their income taxes on the "cash basis" when they first start the company. The logic is usually sound: it sometimes makes sense to pay income taxes on cash actually collected than to pay taxes on customer receivables that have not yet been converted to cash.

Many growth companies can get away paying on the cash basis for a limited period of time. The bad news is the IRS requires a company to convert to the accrual basis after the company averages $10 million dollars or more for a consecutive three-year period. The really bad news is the IRS will make the company to report 100% of the income from the conversion from cash to accrual if the IRS finds the company is in violation of this rule. This can possibly be devastating to a business owner. Do the math: suppose the conversion of cash to accrual is $2 million dollars and the tax rate is $35%. It would be tough to write that $700,000 check!

The good news is the IRS will let you defer the gain on the conversion from cash to accrual over a four-year period if you file the proper election forms by the proper due dates. Visit your tax CPA immediately if you feel you may possibly be in this situation. Don't' let a busy schedule take a lot of unnecessary cash out of your business.

Tax return due dates

There are many types of legal entities today, C-corporations, S-corporations, LLC's, partnerships, etc. Ask your tax CPA to give you a schedule for the 2007 due dates for the tax returns and the extension dates for the same.

I am always surprised about the number of C-corporations that are being used today. I am curious when business owners first talk with me and tell me they have been advised to form and operate their company in a C-corporation. When asked why a C-corporation is being used the answers vary, such as, "I want to sell my stock some day to an investor," or "Because I was advised to do so by my attorney or tax accountant."

I don't want to burst your bubble, but unless you do an IPO, nobody is going to buy your corporation's stock. Instead, they will buy the assets of the company at a fair-market value. Pre-IPO stock usually has little or no market value.

A C-corporation is a bad tax vehicle to use. This is the entity that caused the phrase, "double taxation," to be a part of our lexicon. There is also a risk of some built-in gains on retained earnings with a C-corporation.

C-corporations also limit the ability to use certain pass-through tax advantages.

Remember, late filings or using the wrong legal entity will most likely cost you cash.

Cash to pay the 2006 income taxes

Do you know the amount of income taxes you will need to pay in 2007 for 2006? If not, you should . You should also know where the cash is going to come from to pay those taxes. Your December 2006 internal financial statements should be issued between the 15th and 25th of January, 2007. Have your internal people calculate the income taxes. Then, set money aside to pay the taxes on time.

Cash to pay the 2007 estimated income taxes

It is often easy to forget that the first installment payment for 2007 is typically due the date the 2006 income taxes are due. It is also easy to overlook the IRS requirement to pay around 110% of the prior year taxes in order to avoid certain penalties. Know these amounts and set cash aside to pay timely.

A little planning might prevent your company from experiencing the First Quarter Cash Blues.

About the Author:

Jerry L. Mills, CPA is the founder and CEO of B2B CFO® ( He graduated with an accounting degree from Arizona State University and worked in public and private accounting before staring B2B CFO®. He is a CPA and a former audit manager with Arthur Andersen & Co. Mills is the author of "The Danger Zone - Lost in the Growth Transition" - a non-fiction business book aimed at business owners. The book was released in June of 2006. The book is sold online through and also on Amazon.

About B2B CFO®

With headquarters in Phoenix, AZ, the firm was founded in 1987 by Jerry L. Mills, B2B CFO® and is the nation's largest CFO firm serving entrepreneurial, growth and mid-market companies. Its partners have an average of 25 years of experience and each individual partner is a senior level executive with a broad range of experience. Please visit online at

For information on B2B CFO please contact:

Jerry L. Mills, CPA

Founder & CEO




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