Books and records. Bookkeeping. Accounting. Tax returns and quarterly filings. Business owners typically view these as required administrative duties and consider it an expense. Have you ever thought about your accounting systems as more than an expense, and how it may benefit you, above and beyond reporting numbers and forms?  

In the early 2000s, I worked in finance for a subsidiary of a regional bank that served as a back-office processor for mutual funds and investment firms. I had the opportunity to work closely with the subsidiary’s first-ever Chief Information Officer (“CIO”). As a processor, the company was a heavy consumer of information technology (“IT”) expenses that accounted for 20% of the company’s entire operating budget. Within the IT budget, about 75% of costs were for non-discretionary expenses such as maintenance, software and hardware updates, and compliance.

The new CIO had ideas of how to consolidate systems and reduce the IT maintenance expenses to deploy the savings into new products and enhancements. His mantra was, “We need to view IT as a profit center, a contributor, and not a cost center.” Many, including his peers in the C-suite, were skeptical.

After a few years, the CIO left the states to become the CIO of his native country’s largest bank. His mission was to consolidate and update systems that were 40 years old; this involved more than $1 billion over four years.

The bank was the first of significant size to move its IT infrastructure to “the cloud” via Amazon Web Services. Even before the multi-year overhaul was less than 40% completed, the bank reported savings of tens of millions of dollars. The infrastructure spending ratio was flipped upside down so that infrastructure was 26%  of the budget instead of 76%, allowing the firm to invest the savings in product development.

How does this apply to your business? The IRS website asks the question, “Why should I keep records?”[1] Keeping good records allows businesses to do the following:

  • Monitor the progress of your business
  • Prepare your financial statements.
  • Identify sources of your income
  • Keep track of your deductible expenses
  • Keep track of your basis in property
  • Prepare your tax returns
  • Support items reported on your tax return

Recent events (COVID-19) have given businesses incentives to keep excellent books and records, which could benefit your business. With the Paycheck Protection Program (“PPP”), payroll and payroll cost recordkeeping became valuable,  not only to secure the PPP loans but also for loan forgiveness.

Although outsourced payroll processors such as ADP and Paychex created customized PPP compliant reports, both made errors in the payroll formula that had to be corrected. Further, not all companies use payroll processors. Businesses with the granularity of vacation costs, paid time off, benefits, and local employer taxes were in a better position to obtain the maximum amount of eligible PPP funds.

Additionally, while the goal of the business portion of the CARES Act was to help businesses cover operating expenses, many companies have suffered a loss of profits as well. Unless explicitly covered, virtually all commercial insurance policies exclude business interruption claims due to communicable diseases and civil authority orders, such as shutdowns.

Just as there were victim compensation funds after the events of September 11, 2001, there may be future legislation at the state and or federal level to fund and provide a mechanism for companies to recoup lost profits. Although it was eventually withdrawn, New Jersey was the first state to propose a bill that would mandate insurers to cover COVID-19 related losses under their business interruption policies. Other states, including New York, Pennsylvania, Louisiana, Ohio, Massachusetts, and South Carolina followed suit. However, none of the proposed bills has passed yet. [2]

A business interruption lost-profits claim typically requires a detailed comparison of the affected period when the loss occurred vs. the same period in the prior year. For example, to document the damages and file a  hypothetical proof of claim from April 1, 2020, to September 30, 2020, would require a detailed, side-by-side comparison with how the business performed from April 1, 2019, to September 30, 2019.

Does your system have the capability to provide detailed, customized reports? Are you performing bookkeeping regularly, such as weekly, or biweekly, rather than at month or quarter-end, or when payroll and estimated taxes are due?  Make sure you have the best practices in place so that your financial reports are an asset for your business.

Michael Bankus, Sobel EAC Valuations