Factoring' can deliver fast cash for firms?? Process involves the outright sale of your accounts receivable to a factor company

Owners of small or medium-sized businesses (SMBs) that find themselves in immediate need of cash to pay suppliers or staff, to take advantage of a business opportunity, or to simply to stay afloat through a downturn, could turn to ‘factoring' as an option.

Factoring is the outright sale of your accounts receivable to a factor company, which bears the risk of collection. It is not a process to be entered into lightly.

The selling business is entitled to cash that, at the moment, is in the form of an accounts receivable that may not become cash for 30 to 60 days or more. By factoring, or selling, the receivable to a factoring company (a specialized financial institution), the business can realize the cash immediately.

The receivable then becomes the property of and collectible by the purchaser.

The purchase price in a factoring transaction is usually calculated as the face amount of the receivable less a small discount. The discount represents the factoring company's administration and financing fee, recoverable when the receivable is collected at its full-face amount.

Although we do not usually label them as such, many of our everyday transactions are forms of factoring. For example, a receivable is usually factored every time a consumer uses a credit card. The credit card company pays the retail establishment a discounted amount and assumes the responsibility of collecting the full transaction amount from the cardholder. As well, certain chequing, coupon and guarantee transactions are also considered forms of factoring.

Criteria applied by factoring companies

Unfortunately, not every SMB has access to factoring because factoring companies apply very restrictive criteria of acceptability to the offered receivables:

• Unconditional rights of payment.

• Creditworthy payor.

• Verifiable receivables.

• Controllable receivables.

Unconditional rights of payment only

Factoring companies will generally only purchase “receivables” defined as rights of payment, such as where the underlying goods or services have been fully performed and accepted by the indebted party so that the money is owed without conditions or set-off.

Creditworthy payor

The indebted party must be creditworthy, usually governments and large companies. Most factoring businesses refuse invoices from distressed industries or industries such as construction where disputes can often make collections a problem.

Verifiable

The amount due must be independently verifiable by supporting documentation and through actual contact with the indebted party.

Controllable

The company selling the receivable must instruct the indebted party that payment must be irrevocably made to the factoring company. In many cases, the factoring company will want to be assured the customer has acknowledged receipt of instructions for re-direction of the payment.

A prospective client rarely approaches a factoring company with such a level of understanding of the above factors that a verifiable, controllable, and unconditional right of payment from a creditworthy payor can be immediately offered for sale. More typically, the client describes in general terms a financing or cash flow problem that the factoring company must first analyze and interpret to determine whether factoring is the solution.

Although the four criteria provide the analytical framework, they are more guidelines than strict criteria. Factoring companies are forced to assume varying degrees of risk. Over the years, they have developed tools now commonly used to determine and manage such risk. However, the practices of individual factoring companies can differ significantly.

Discount rates and fees

The amount charged to discount a receivable usually ranges between 4 per cent and 10 per cent of the face value of the invoice, and 6 per cent is widely regarded as the norm for invoices due 30 to 60 days from the date of purchase. This means that factoring can only be an option if the client enjoys good gross margins.

The factoring fee is not in any sense a pure financing charge. By its nature, the purchase of a receivable is a time-consuming and expensive process involving due diligence and management of the collection process. Marketing to and serving a narrow segment of the business community is also expensive.

Excerpts from The Financing Toolkit for Small & Medium Businesses by Gary A. Fitchett, CA, provided by the Canadian Institute of Chartered Accountants. For more information go to www.knotia.ca/store, or www.cica.ca/financing.

Tax tip: Missing the filing deadline could mean missing out on credits and benefits

Did you know...

... that even if you don't owe taxes, you should file your 2009 income tax return by April 30, 2010 to be eligible for some tax credits and benefits, such as the goods and services tax/harmonized sales tax (GST/HST) credit and the Canada Child Tax Benefit?

Generally, individual taxpayers have until midnight on April 30, 2010, to file their 2009 income tax and benefit return. Self-employed individuals and their spouses or common-law partners have until midnight on Tuesday, June 15, 2010, to file their income tax and benefit returns; however, any balance owing for 2009 must still be paid by April 30, 2010.

You can use NETFILE or EFILE (if you use the services of a tax preparer) to file your return online. You can use TELEFILE to file your return by phone or you can complete the return on paper. Regardless of the filing method that you choose, make sure you have receipts and documentation to support the claims made on your 2009 return. Keep all your records for at least six years after the end of the taxation year to support your claims in case your return is reviewed by the Canada Revenue Agency (CRA).

The CRA's electronic services offer a quick, easy, and secure way to manage your tax affairs. Services like My Account, Quick Access, My Payment, Represent a Client, and My Business Account, are useful year-round to track your refund, check your benefit and credit payments and your RRSP limit, set up direct deposit, and much more. For more information about the CRA's electronic services, go to www.cra.gc.ca/electronicservices.

How To Implement a Profit Sharing Plan.

A lot of clients asked me about profit sharing - Hence, I found this great article written by Peter VanDen Bos for Inc. Magazine.

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How to create a profit sharing plan that motivates your employees and drives revenue.

A smart CEO understands that employee performance is tied directly to how vested they feel to the company they work for. That's why many companies have begun to consider profit sharing plans, because they can be a powerful incentive for employees to work harder for the company and gain a sense of satisfaction from knowing they'll all get a cut of the profits. It's also likely that the added productivity will increase the overall financial performance of the company.

Sue Holloway, an expert in compensation at WorldatWork, a human resources organization focused on employee benefits, explains that the objective of a profit sharing plan "is to foster employee identification with the organization's success." By implementing such a program, the CEO is saying, "We're all in this together, and everybody's focused on profit," says Holloway.

Recent statistics show just how popular variable pay programs, including profit sharing plans, have become. Eighty percent of businesses surveyed by WorldatWork reported having some sort of incentive or bonus program in 2009. So how do you make sure your plan will achieve financial results for your company, while increasing employee productivity and morale?

First, make sure you're profitable. And make sure you expect to continue making money for at least the next three years, to the best of what you can anticipate, says David Wray, president of the Profit Sharing/401k Council of America, a national nonprofit association of 1,200 companies committed to those employee benefits. "If you announce the plan and you have no profit sharing for a couple of years, it loses its credibility as a motivating force," Wray explains. "If you have a bad year and you don't pay that year, then people usually get it."

please click here to read the rest of the article in INC. magazine.

Dangerous temptation? Don't withhold the GST

Here is a great article from Larry Macdonald from the Globe and Mail:

How do you end up owing more than $150,000 in Goods and Services Tax and Provincial Sales Tax? For bar operator Debbie, it all began when a heart attack forced a former boyfriend to sell his bar and banquet facility south of Ottawa.

The buyer was a businessman whose religion forbade him from owning a liquor licence, so Debbie, whose last name has been withheld, agreed to run the bar until he found someone to take it over.

There was trouble right off the bat, with her former boyfriend demanding payment up front for inventory. “That meant no reserves were banked for the lean winter months,” Debbie said.

“I had just enough money to keep some employees, who were mostly single mothers.” By the time control was passed to new managers, “about $8,000 to $10,000 in late GST and PST payments” had accumulated under her business number.

Later, she discovered the new managers were diverting tax remittances toward their numbered companies. By the time they fled, GST and PST were both in arrears by more than $100,000 on Debbie's account.

The PST obligation was cancelled after Debbie explained her situation to provincial authorities. She was not so fortunate with the GST; with interest and penalties the liability is now estimated at more than $150,000.

CRA looking at compliance measures

Debbie is but one of the many business people who have not remitted GST on time to the Canada Revenue Agency. Her plight shows how quickly cash- flow problems can escalate and can put business owners in jeopardy with the taxman.

According to a CRA report released in April of 2009, approximately one in four businesses were late for at least one reporting period in 2007.

The most common reason for failure to meet filing obligations was ensuring funds on hand didn't run dry, an analysis from the Canada Revenue Agency said.

(The CRA allows businesses with annual taxable supplies of $1.5-million or less, to file annually. But business can choose to remit GST monthly or quarterly. By choosing more frequent GST reporting periods, businesses can better stay on top of their tax obligations, accountants say. Penalties for overdue GST payments start at six per cent per year.)

To heighten deterrence, the CRA report urged the federal government to prosecute more firms and to increase the publicity of punishments. These and other measures remain under review, with decisions slated for next spring at the earliest.

“The CRA is still in the planning and development stages and a formal evaluation of the outcomes of these initiatives is anticipated beginning in March, 2011,” noted CRA spokeswoman Caitlin Workman in an e-mail.

Carrots versus sticks

Failure to remit GST and other taxes is not always intentional, says Corinne Pohlmann, vice-president of national affairs at the Canadian Federation of Independent Businesses. “We're not so big on using sticks instead of carrots.”

Debbie's case involved misdirection by business associates. For most other business persons, it's usually a simpler matter – such as confusion over what products are exempt from the GST or a misunderstanding about filing requirements.

For example, “some annual GST filers may remit taxes by the filing deadline of June 15, not realizing the payment deadline is actually April 30,” Ms. Pohlmann says. “Many businesses want to do the right thing. Educational approaches are often more appropriate for first-time offenders than penalties or prosecutions.”

Dealing with the taxman during a cash crunch

Some businesses go into denial and keep cash problems to themselves. By the time they start talking to their accountant or bank, they may have lost many options,' Ottawa chartered accountant John Wright says.

“Firms that sell on a cash basis are less susceptible to falling behind on their GST remittances than firms selling on credit,” observes John Wright, a chartered accountant who does cash-flow modelling at McLarty and Co. in Ottawa.

“If a firm is remitting GST on a monthly cycle and doesn't typically get paid until 60 or 90 days after the sale, problems can arise when customers further extend payment – as often happens in an economic downturn,” he adds.

“At least file with CRA to avoid paying the penalty,” Mr. Wright recommends to firms facing cash crunches. “Then a business just has to pay interest on overdue balances when they begin remitting again.

“If a business ignores CRA, the agency will get tough. But if the business talks to them and at least tries to make arrangements to pay what it can, CRA is usually more understanding.

“The sooner a business realizes it has a cash problem and takes action, the better,” Mr. Wright says. “This is probably the most important thing to do.”

“Some businesses go into denial and keep cash problems to themselves. By the time they start talking to their accountant or bank, they may have lost many options for solving their problem. It's easier to deal with cash shortages at an early stage.

“The banks don't like it when a business gets behind in its tax remittances. If they have loaned money to the company, they see a late tax filer as a higher lending risk, and may cut back on credit,” he adds.

“We had one client come to us in a ‘special credit' situation with their bank [separated from their loan officer and transferred to a unit that assesses their viability]. I told them if they had come to us three months before, we could have done a lot more for them.”

How are they doing now?

“Still hanging in. … We helped them find a second-tier bank willing to give them a line of credit. But they're still struggling. It's hard to catch up once a company gets behind, with the higher cost of financing and so forth.”

Taxation of a Family Trust Income - Reminder of important issues to consider

Here is a great article written by Gisele Prevost, CGA, TEP, LL.M (tax) - Tax partner at the accounting firm Raymond Chabot Grant Thornton located in Ottawa, Ontario.

Taxation of a Family Trust Income - Reminder of important issues to consider:

The trust is independent from its settlor, trustees and beneficiaries;

Income Distribution:
There are several ways to distribute income to a beneficiary. The revenue may be paid by way of cheque, expense reimbursement or by way of note payable. Regardless of the form of payment, the income legally belongs to the beneficiary and, in the case of minor children, may only be paid out for the child’s needs. When the beneficiary turns 18 years of age, amounts paid or payable each year to that beneficiary and that were not distributed to the beneficiary legally belong to the beneficiary.

Income distributed/allocated to any beneficiaries is taxed in their hands and is deductible in the trust’s tax return. Distributions must meet certain conditions :

1st Condition: Income must have been paid or become payable to the beneficiaries in the year in question (i.e. before December 31);

2nd Condition: Due to the “kiddie tax” rules provided in tax legislation, only some types of income can be distributed/allocated to minors; we recommend that you verify the income type prior to making any distribution; and

3rd Condition: Since the amount of income for tax purposes that is equivalent to non-eligible expenses cannot be distributed to beneficiaries, it, therefore, must be taxed in the trust.

Any funds distributed/allocated from the trust to a beneficiary must have an accompanying resolution signed by the trustees. If tax authorities review a trust file which does not contain appropriate legal documentation to support that, either the funds were paid to the beneficiaries in the year in question, or were used for the benefit of the beneficiary, or the beneficiary received a demand note payable to him (her), the tax authorities could claim that no funds/revenue was paid/payable to the beneficiary. The tax authorities could deny the trust’s tax returns (T3) for such amount and/or the amount could be taxed in the trust (plus interest on the unpaid tax).

There must be documented evidence of the cash payments/demand loan covered by the trust’s resolutions. In the case of the spouse and adult children, the simplest proof of payment is the trust’s cheque to the spouse or children, or proof the funds were deposited in their personal accounts. In the case of minor children, income can be distributed by cheque and deposited in their personal accounts or by paying expenses for the children using the money owed to them (courses, sports, tuition, clothing, etc.). A proper resolution should be prepared to reflect the use of such funds. You should keep the related invoices for the expenses covered by this resolution. For any of the beneficiaries, proof of payment could also be a demand note payable to the beneficiary.

When a trust income is not distributed/allocated to the beneficiaries during the year, the income is taxed in the trust and the balance constitutes a tax-paid net capital that can be remitted to the beneficiaries without any further income tax.

Finally, it is important to mention that any contribution from a beneficiary to the trust (ex. depositing cash into the trust account, or paying the trust’s expenses) could result of the application of attribution rules or could ‘contaminate’ the trust (for tax purposes). If attribution rules apply, the income distributed/allocated to a beneficiary could be considered to be the income of another person and will be taxed accordingly. If the trust is contaminated, a subsequent distribution of an asset from the trust to a beneficiary could create a tax impact if the value of this particular asset increased through the time.