Preventative Maintenance: Is It Broken Yet?
Mar 24, 2014
Have you heard the term “world class maintenance”? I am by no means an expert on the subject, but my understanding is that it refers to performing consistent preventative maintenance on machines and other equipment on a regular basis before a breakdown occurs to minimize or eliminate downtime.
When I first heard it, it made perfect sense. Anyone who works in manufacturing surely knows that unscheduled down time can be costly. I was speaking with someone the other day who works for an auto manufacturing plant, and they follow the WCM theory. I found it very interesting however when he started telling me about all of the overtime he worked two weeks ago because of a particular robot that kept going down.
The production line that he was working on was machining with two mirror lines both feeding into an end line washing station before heading to staging and assembly. The robot was in the washing component of the line. The purpose was to pick up the part after it had been machined and rotate it around for thorough washing. He proceeded to tell me that the motors on the robot had been replaced twice in the past few months and management did not want to stop the line to do so.
So my first reaction was why are we fixing the robot after the fact? If we were doing our preventative maintenance (PM) wouldn’t we have known there is a problem with the motor? Now I know you can’t catch everything in a preventative fashion because sometimes things break unexpectedly. But twice? The new motor breaks again and no one wonders what is going on? I do not have the knowledge, nor the skill to fix a machine of such nature. However, as I kept probing with questions I found out the Company had all of the parts to perform the PM for nearly a year, and did not do it. Anyone as intrigued as I was?
Here’s the cincher, the robot used to perform the washing function was NOT waterproof! Hence, the motor kept getting wet and burning out. This particular person had only been privy to the last two motor changes. Apparently there had been more. They were waiting on the robot to “die” before they replaced it with the one that had been “waterproofed”.
I can tell you that this individual spent almost three full days including overtime working on the second breakdown. Did anyone look at this? Does it really make sense when we have the replacement robot to keep repairing the old one? The cost of new motors that are going to knowingly fail, the downtime on the line, the wages and overtime of the maintenance crew, all for what? I asked him why and this was the answer I received: “we don’t stop. Management does not want to stop the line for anything and to schedule a shutdown of the line to replace the robot is failure because we are unable to produce anything.”
Can someone please explain? In my world, we would have saved more money by scheduling the down time and replacing the robot one time as opposed to the numerous times spent trying to repair it, knowing that it would not work. This one seems obvious to me. Better decision making will result in better costs. Matter of fact, just being logical will result in better costs!
Categories: Cost Accounting
Tax Blueprint for the Construction Industry
Mar 20, 2014
In an effort to help collect more of the taxes owed to Uncle Sam, the IRS is providing information to educate the construction industry. “Contractors, subcontractors, as well as individual workers need to be aware of everything that counts as income and proper accounting methods so they pay their fair share of taxes,” the tax agency stated in a Fact Sheet. “They also need to be aware of all deductible expenses so they don’t overpay their taxes.”
The IRS continues to zero in on what it calls the “tax gap” — the amount between the taxes that are voluntarily paid and the amount the tax agency believes is actually due.
To this end, the IRS has issued a series of documents to provide better understanding of the tax code. One example is specifically directed at the construction industry.
The tax agency emphasizes instances where taxpayers failed to report, or under-reported, income from construction activities. This applies to individual workers as well as contractors and subcontractors. Following are the highlights:
Accounting Methods
Generally, income and expenses are based on either the cash method or the accrual method of accounting. “Either method must clearly reflect a consistent treatment of income and expenses from year to year,” the IRS notes.
Many construction businesses use two different tax accounting methods: one for long-term contracts and an overall method for all other items, which is often the accrual method.
1. Accrual accounting: This method requires reporting income in the year earned and expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.
Two commonly-used accrual methods are used in the construction industry:
- Under the “completed contract method,” all income and expenses from a contract are reported when the project is completed and accepted by the customer.
- With the “percentage of completion method,” income is reported proportionate to the costs incurred to date as compared to total estimated costs for the contract.
2. Cash accounting: As the name implies, cash receipts are reported as income when received and expenses are reported when paid. For this purpose, “receipt” occurs when a contractor has unrestricted access to income. Contractors who are able to receive money in one year, but chose to defer receipt, must include the cash as income in the earlier year.
Note that a C corporation, or a partnership with a C corporation as a partner with average annual gross receipts exceeding $5 million, may not be allowed to use the cash accounting method.
Deductible Expenses
It is well-established that a construction business can deduct its “ordinary and necessary” business expenses. An “ordinary” expense is one that is common and accepted in the construction business. A “necessary” expense is one that is helpful and appropriate for the construction business. Note: The expense does not have to be indispensable to be considered necessary.
Several common business expenses that may be deducted in the year they are incurred are:
- Utilities;
- Car and truck expenses;
- Advertising;
- Employee salaries;
- Trade association dues;
- Rent expense;
- Supplies;
- Continuing education;
- Small tools expected to last one year or less;
- Steel toe work boots; and
- Business licenses.
On the other hand, expenses for business assets that are expected to last more than a year must be capitalized and depreciated over their useful lives. Some examples of these assets include:
- Cement mixers;
- Compressors;
- Ladders;
- Other heavy machinery; and
- Buildings and real property.
Be aware that personal expenses such as clothing that can be worn off the job site, fines and penalties, and the non-business use of vehicles or computers, can’t be deducted. Other expenses, including certain meal and entertainment expenses, may be deductible in part or only if certain conditions are met.
Reminder: The burden is on you to comply with the prevailing tax laws and regulations. If you have any questions regarding your responsibilities, consult with your tax adviser.
Categories: Construction & Real Estate
Profit Does Not = Cash
Mar 20, 2014
Recently, I was talking with one of my new business tax return clients and she commented to me that she realized she had a tax profit this year but it did not seem to have much to do with her cash. We have scheduled a meeting to discuss this with her further. I am sure many of you have had this same issue. What answer would you give?
There are many different ways to determine what your “profit” is for the year. There is GAAP reporting that would calculate profit a certain way, accounting for accruals, prepaids, depreciation over longer periods than tax, etc. Then there is tax reporting that may be similar to GAAP, but most certainly would have accelerated depreciation methods. Tax may also be on a cash basis where the accruals and prepaids, receivables, and payables would need to be reversed. Then of course there is management profit, which may still be a different number. Which number is right is only relevant for what you are trying to do. If you are doing a tax return, then you need to determine your taxable profit, or loss. If you are having an audited financial statement then GAAP basis profit, or loss, would be necessary. Neither of these may be the best methods to look at to make management decisions.
Many things effect our profit. In a manufacturing environment, you may be costing your product ineffectively which is effecting your bottom line. You may also have excessive inventory at the end of the year that you are unable to expense and have not sold, which again effects your bottom line and cash. You still spent the money to build the inventory, you just have not sold it to recognize profit, or the full expense.
Other simple reasons exist as well. If you are a company with a large amount of debt the principle payments of that debt is not an expense but it most certainly takes cash. If you pay a lot of your debt, you may still have a high profit, because the cash was not left for deductible expenses. Also you may be a cash basis taxpayer where your receivables have dramatically decreased from the prior year, which will add income to your bottom line, etc.
It is important to realize what your goal is and what rules you should be following for that goal, and understanding income does not necessarily equal cash flow.
Categories: Cost Accounting
Self-Employed Retirement Savings
Mar 20, 2014
When you’re self-employed, you need to prepare for your future. You don’t have an employer providing any backup. But you can save for your future financial needs through a tax-favored retirement plan.
If you’re self-employed or the owner of a small company, you should be able to find a plan that fits your needs. Some possibilities follow.
Flying Solo
If it’s just you and your business, a solo 401(k) plan may be an attractive choice. For 2014, the tax law lets you defer up to $17,500 of your compensation as a regular 401(k) deferral and make additional contributions to the plan up to 25% of compensation (or 20% of net self-employment income). Total 2014 contributions generally can’t exceed $52,000 or 100% of compensation, whichever is less.
If you are age 50 or older, you can also make an additional “catch-up” contribution. You choose how much to contribute to the plan each year, within tax law limits. When profits are down, you don’t have to make any contribution at all.
A SIMPLE Solution
With a SIMPLE retirement plan, you — and your eligible employees — can defer up to $12,000 of compensation in 2014. The plan may allow participants age 50 or older to make additional catch-up contributions of up to $2,500 (in 2014). And you are required to contribute in one of two ways: by matching employee contributions dollar for dollar, up to 3% of compensation, or by making a contribution of 2% of compensation for each employee who’s eligible to participate in the plan.
SEP to the Future
A simplified employee pension (SEP) plan may be ideal if your business has mostly lower paid employees and high turnover. Plan fees are generally low, and you can contribute 25% of your compensation — or 20% of net self-employment income — up to a maximum of $52,000 in 2014.
If you do have employees, you must contribute for each one who meets the plan eligibility criteria at the same percentage of compensation as yourself. However, you can vary the contribution amount from year to year and forgo making any contributions in years when profits drop.
Kudos for Keoghs
A Keogh plan for the self-employed may be structured as a defined contribution plan (e.g., a profit sharing plan) or a defined benefit plan. Annual contributions to a profit sharing plan may vary, but are limited in 2014 to 20% of net self-employment income or $52,000, whichever is less.
With a defined benefit plan, an actuary determines how much must be contributed each year to fund the pension benefits promised under the plan. Tax law limits apply.
Note, if you are establishing a new plan, a tax credit may be available for half of the first $1,000 in administrative and retirement-related education expenses for each of the first three plan years.
Set-up for some plans can be complicated, so you’ll probably want help from your financial professional.
Categories: Healthcare & Dentistry
A Little Employee Appreciation Goes A Long Way
Mar 18, 2014
What’s the number one reason that employees stay with an organization? Usually, it is simply because they enjoy working with their supervisors, according to numerous studies. An employee who doesn’t feel appreciated may start looking for another job – and that can cost your company a small fortune. Don’t underestimate the value of saying “thank you” and “good job” to staff members.
Building good relationships between staff members and their bosses can pay off handsomely for your company. In fact, some experts estimate that the cost of replacing an employee ranges from 29 to 46 percent of the person’s salary.
The key to lowering your turnover rate is to tell employees when they’ve done a good job and let them know the company values them. While there are many ways to encourage a company culture that appreciates talent, here are seven effective suggestions:
Run profiles. Use your company newsletter to run brief stories about key employees. Make sure you include the people in the mail room to top management. Outline their accomplishments at work, as well as their personal interests or hobbies. Include a photo so everyone can recognize them.
Send memos. If someone from another department pitched in on an important project, thank the employee in a memo or e-mail and send a copy to his or her supervisor.
Put it in writing. Urge managers and supervisors to send hand-written thank you notes to individual staff members at least once a year. The notes should be thoughtful, with details of the employee’s contributions to the company and the department. A hand-written thank you makes a bigger impression than e-mail or typed letters.
Give praise in public. Acknowledge your staff members’ achievements in a public forum, such as a staff meeting. Or hold semi-annual ceremonies to publicly reward employees for their achievements. Be sure to recognize all kinds of excellence, from the receptionist who is complimented by customers to the janitor who goes the extra mile.
Take them to lunch. Provide a budget that supervisors can tap into once a month to take an outstanding employee to lunch. This helps develop relationships and a $20 lunch goes a long way toward making employees feel appreciated.
Tailor your appreciation. There’s no one way to pay tribute to your best employees. You can recognize outstanding staff members with a formal “Employee of the Month” program or use a less formal system such as a face-to-face compliment.
Promote two-way communication. Good managers spend more time listening than talking. Maintain an open-door policy. Employees who feel comfortable communicating with you will feel valued and be more inspired to deliver their best work. Get to know your team. Frequent interaction with your staff allows you to get to know each employee on a personal level.
Categories: Uncategorized