Author: Robert L. Sommerville, CPA | Partner
Technology-focused companies never have too much cash! The costs of keeping up with technological change, the demands of rapid-growth scalable technologies on working capital, or the desire of owners to avoid dilution from new investors result in tech companies being perennially undercapitalized and striving to preserve cash. Equity capital is very expensive, and effectively using debt financing is difficult for early-stage companies. That leaves “other people” and “tax authorities” as the primary sources of ways to conserve cash.
This article describes some techniques that early-stage technology companies can use to accelerate cash collections and defer cash expenditures — generally without expending too much effort to achieve the goal.
Tax credits are one technique that can provide cash flow for either the company and/or its owners. Some of the incentives that may be available include:
Virginia Investment Tax Credits
Early stage companies based in Virginia and raising capital from local investors should determine if the business is focused on specified fields of technology that enable investors to receive a Virginia income tax credit of one- half of their investment in eligible companies. For example, a person making a $100,000 equity or sub-debt investment in an eligible company gets a $50,000 credit against Virginia income taxes for the year. Up to $50,000 can be used in one year, with any unused credits carried forward. This attractive tax treatment should enable the Company to negotiate a larger investment, receiving more up-front cash than if not eligible for the credit.
Virginia Research and Development Tax Credits New companies may be eligible for the refundable tax credit, which is 15% of the first $167,000 (up to $25,050) of qualifying research expenditures. If the company does not pay Virginia income taxes, the Commonwealth will issue a check for the credit. Credits earned by pass- through entities go to the owners. Similar R&D tax credits, though not refundable, are available for federal tax purposes and can be carried forward.
Once the company has progressed from development stage to an ongoing business model, management should look at relationships with customers and vendors to see if they are willing to agree with terms that enhance the company’s cash flow. Some of the available methods, include:
Customer Retainers and Progress Billings
Companies with unique technology or services desired by customers can often negotiate advance payments on contracts or progress bill as services are performed as a way to accelerate cash collections from customers. Be prepared to offer a discount in exchange for the early payment preference.
Negotiate Vendor Payment Terms
Companies with high growth prospects are attractive to vendors and service providers. Often, with clear and timely communication, companies can induce vendors to accept extended payment terms of 60-75 days or more, which helps to stretch-out cash requirements.
Once the company is profitable and paying income taxes, it’s time to make elections that help to accelerate tax deductions. Here are two easy tips:
Companies can make an automatic election (by filing Form 3115 with the income tax return) to deduct the amount of certain prepaid expenses such as insurance premiums, maintenance contracts and property taxes under the “economic performance” concept. This accelerates deductions for tax purposes while allowing the “prepaid” asset to continue for financial reporting.
FASB standards require the accrual of many expenses which are not deductible under income tax regulations. Companies should review their accruals to see if any qualify for tax deduction under the “recurring item exception.” For tax purposes, all events must have occurred as of year end that establish the fact of the liability, that the amount can be determined with reasonable accuracy, is expected to be paid in not more than 8-1/2 months and relates to items expected to be incurred from year-to-year. The tax accounting change to accelerate the tax deduction for accrued liabilities is also made using Form 3115.
Having a good business plan, adequate capitalization and strong internal controls are the best ways to assure sufficient cash flow. Contact your Keiter team leader if you want to learn more about cash management practices.
Contact your Keiter team leader or firstname.lastname@example.org, if you want to learn more about cash management practices.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.