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Étienne Fiset
Partner | CPA, CIRP, LIT

The climate of economic uncertainty is likely to prevail again in 2024. How can you manage your business to remain in sound financial health?

More than ever, agility is the key to ensuring your company’s financial health. Foresight is essential. The ultimate tool for making informed decisions: financial forecasts.

Make your financial forecasts on a monthly basis

In order to see fluctuations and anticipate your cash requirements, you need comprehensive forecasts, including results, balance sheets and forecast changes in cash. They will enable you, as a manager, to navigate more prudently through periods of economic upheaval.

Although this exercise is usually done on an annual basis, it is useful to prepare your financial forecasts on a monthly basis. In more critical situations, you can even do them on a weekly basis. That way, you can stay on track and anticipate any shortfall before your finances deteriorate.

This important management tool is also used to compare actual results with forecasts. Thanks to a rigorous analysis, you’ll be able to quickly identify the corrective measures you need to take to avoid financial problems, should they arise.

Anticipate risks to remain profitable

This will enable you to identify more quickly the need for additional financing, such as a temporary line of credit or a down payment from the owners, to make up for a shortfall. In light of the figures, you might also have to adjust your selling prices to deal with cost inflation and maintain your business’s profitability – without undermining your competitiveness.

With the pressure of repaying financial aid linked to the pandemic crisis, the burden is getting heavier for companies. Companies that are unable to repay the loan by the January 18, 2024 deadline will be left with an additional debt of $60,000 and will forfeit the $20,000 subsidy. On a monthly basis, this represents approximately $1,800 to repay the loan (of $60,000), an additional burden on finances. Review your company’s financial capabilities to help you determine whether it is in a position to withstand this additional outflow of funds, so that you can make the necessary decisions.

Plan ahead… even for the unexpected

Financial forecasts are based on many assumptions. It is therefore normal for variances to occur as a result of unforeseen circumstances. Even if these are difficult to anticipate—nobody has a crystal ball, after all—it can be useful to study different scenarios. Sensitivity analyses should be conducted when preparing your financial forecasts, to assess the impact of a drop in income or an increase in interest rates on your company’s current financing.

What do you do, for example, if your company loses a major client overnight, resulting in a major cash shortfall? Financial forecasts are an excellent tool for determining the financial cushion that your company will need to absorb this shock, while minimizing its impact.

Keep a close eye on your accounts receivable

Managing receivables also becomes strategic. One or more clients who don’t pay their bills on time leads to a reduction in liquidity, as well as an increase in the use of your line of credit, which in turn increases the interest charges you will have to pay. All of which could eventually turn into cash flow problems. Monitoring accounts receivable must be rigorous and flexible at the same time.

Establish clear payment terms with your clients. In the event of non-payment, remind them and make a settlement agreement. You also need to know who your most loyal and reliable clients are. Sometimes cutting ties with clients who are often late with their payments can be a difficult decision, but one that is necessary for the company’s financial health. You also need to make sure to keep only the profitable clients.

Call on your teams

Vigilance does not stop at the numbers. When things go wrong, you need everyone’s input. Your employees may have innovative ideas for improving production or services, reducing losses, and so on. These are solutions that often don’t cost much to implement. Working closely with your staff can improve engagement, which is crucial in the quest for stability.

10 Jan 2024  |  Written by :

Étienne Fiset is an expert in recovery and reorganization for businesses and individuals at Raymond...

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Ghyslain Cadieux
Partner | B.B.A., CPA | Management consulting

In 2024, improving a company’s financial and operational performance should be at the top of the list of commitments to be made.

A business’s financial aspects are often neglected by managers who focus more on improving business or manufacturing processes. Many companies do not employ specialist financial resources or even draw up annual budgets. They don’t carry out costing analyses, and end up setting the prices and rates for their products or services based on those of the competition.

Monthly monitoring of financial results

However, in these times of inflation and increased risk of recession, it is just as important to focus on the financial and operational performance of your business, in order to maximize its value.

By monitoring its financial results on a monthly basis, a company will be able to see the increase in its costs or the erosion of its profit margins as the months go by, becoming more agile in the face of economic upheaval.

For example, it will be able to know along the way whether it needs to compensate for this increase in costs by raising its prices or by improving its operational capacities.

What is looming in the coming months is the risk of an increase in certain costs, while our businesses will be under pressure to lower prices because of the economic slowdown. So, it’s on the margins that everything is going to come down.

By analyzing the costs per client and per product, it is possible to pinpoint the profitable and less profitable elements. In the field, for example, there are companies where 34% of clients are not profitable and 26% are generating losses. The ratio measuring marginal contribution will be of real importance in setting your prices without losing your shirt.

Management and production: Eliminating waste

By taking a closer look at financial performance, the company will be better equipped to determine its growth objectives and implement the necessary actions for improving its operational performance. And growth does not necessarily mean adding resources or production capacity to achieve its goals.

It makes more sense to turn to lean management and production methods, which focus on identifying and eliminating the waste that greatly reduces an organization’s efficiency.

Sources of waste

Here are a few examples of sources of waste:

Overproduction

There’s no point in producing more than demand, at the risk of generating too much inventory, wasted space and tied-up capital.

Stock accumulation

Unnecessary storage generates costs, and it is preferable to improve the supply chain.

Wait time

Delays, caused in particular by a lack of raw materials, equipment breakdowns or IT problems, are unproductive periods that obviously do not add value to businesses.

Unnecessary travel

Employees need to reduce the amount of time they spend travelling or handling things.

The importance of better operational optimization is such that a company could improve its production by more than 20%, without even having to add staff or equipment. In these times of labour shortages and economic uncertainty, such a strategy is bound to pay off.

In the age of robots and artificial intelligence

The digital transformation of businesses is another way of improving a company’s financial and operational performance. It must be at the heart of the business model and corporate development, which can now exploit a host of new technologies to improve their management and production methods.

In the age of robotics, wireless sensors, software, the Internet of Things (IoT), augmented reality, artificial intelligence (AI) and other cutting-edge technologies that can increasingly connect with each other, the digital shift offers the opportunity to create a smarter factory that can further optimize an organization’s management and production processes. We are even at the dawn of Industry 5.0, which takes this transformation even further by placing greater emphasis on the interaction between digital technologies and employees.

A digital plan will be needed to assess your situation, determine the processes to be put in place and prioritize the steps required to achieve your performance objective. For each process, an assessment of the expected benefits will be carried out. The selection of technological tools requires a structured approach that fits in perfectly with the digital plan.

Competitive advantage

This new development gives companies a competitive advantage and the opportunity to increase their market share. Companies that are slow to convert to digital technology perform less well and find it harder to grow, according to a number of studies.

Help with recruiting and retaining employees

This digital transformation not only has the advantage of making management and production activities more efficient, but also of tackling the labour shortage, while promoting employee recruitment and retention.

Automation and robotization initiatives enable companies to offer workers value-added jobs instead of performing tasks that may be repetitive or even dangerous.

According to a study by Sous-traitance industrielle Québec (STIQ) for dealing with the labour shortage:

  • 93% of companies had resorted to wage increases, but
  • 52% have implemented technology.

Pay rises are often a temporary solution with a limited impact on increasing the value and quality of an organization.

Transformation supported by financial aid

Companies can even benefit from government financial assistance to support their digital transformation projects. One example is the Canadian Digital Adoption Program (CDAP).

Thanks to the ESSOR program, they can also carry out a diagnostic to find out more about their digital maturity and implement appropriate solutions.

Experts from Raymond Chabot Grant Thornton have been certified to carry out this digital audit and support businesses in their initiatives. However, companies wishing to take advantage of the government’s financial assistance should act quickly, as the ESSOR program is due to end on March 31, 2024.

10 Jan 2024  |  Written by :

Ghyslain Cadieux is expert in managment consulting at Raymond Chabot Grant Thornton. Contact him...

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Sylvain Gilbert
Partner and Vice President | CPA, M. Fisc. | Tax

In 2024, some tax issues have changed with regard to corporate sales and employee retention. Which ones and what will they change for you?

First of all, owners who are thinking of transferring control of their business to one or more members of their immediate family will benefit, as of 2024, from new measures that will make the transition easier, thanks to the harmonization of Québec’s taxation of intergenerational transfers of family businesses with the new rules announced by the federal government in its 2023-2024 budget.

Transfer of a family business: a tax reduction of over $542,000

To put it plainly, this is the greatest tax gift to family business owners in a long time. An entrepreneurial couple selling their business to family members for $1 million, for example, could each benefit from a tax reduction of some $266,550 instead of giving this money to the tax authorities.

To prevent family business owners from giving their children an advantage when transferring a business, the government had adopted tax measures that many consider unfair. Government authorities took it for granted that parents were transferring the business at a price lower than the fair market or open market value, thereby enabling them to pay less tax.

Smoother rules for corporate sales

Since 1985, the Income Tax Act has stipulated that entrepreneurs are exempt from capital gains tax if they sell their business to a third party, but are taxed at a rate of up to 48.7% if a family member buys the business.

In 2016, the Québec Finance Minister introduced amendments to the Québec Taxation Act that made it easier to transfer a family business to members of the same family, but subject to a number of conditions.

At the federal level, new measures were adopted in 2020, but under different conditions to those in Québec, which made them difficult to manage. Full harmonization of the rules has changed all that.

The new measures indicate that the transfer must be made immediately within 36 months or gradually over a period of 5 to 10 years. The tax authorities have also removed the requirement to provide the Canada Revenue Agency with an independent valuation of the fair market value of the sale of the business. However, managers have every incentive to transfer their business to the next generation at the right price, as the government reserves the right to assess the transaction for a period of between 6 and 13 years.

Labour shortage: tax breaks for employees

Faced with a labour shortage, companies need to be increasingly imaginative when it comes to recruiting and retaining employees. From cash bonuses and reimbursement of public transport costs to the granting of shares and other incentive programs, here are some initiatives that will help companies retain and attract employees.

Performance bonus in cash or shares

The annual cash bonus, paid on the basis of performance, is the most common way of rewarding employees. Bonuses paid in shares are much less common, but deserve just as much consideration, since they have no tax impacts for the company and are highly advantageous from a tax point of view for employees.

Stock option plan

More widespread in listed companies, this formula enabling employees to subscribe to their employer’s shares should also be more widely used by SMEs. However, managers must accept a certain dilution of the shareholding, except in the case of preferred shares. The percentage of a company’s shares reserved for stock options usually varies between 5% and 15%.

A direct equity stake

The purchase of shares at a reduced price is another type of incentive that enables employers to reward and retain key employees.

Creation of a joint stock company

Setting up a joint stock company can be a useful way of facilitating the transfer of a business to key employees. The company then pays dividends that enable employees to accumulate the capital they need when they eventually buy an interest in the organization.

Creation of an employee trust

Legislative changes currently under consideration are expected to make the creation of an employee benefit trust much more attractive from a tax perspective. This formula allows employers to set up a trust in order, once again, to allow employees who are beneficiaries of the trust to buy out the company. Employers then retain greater control over the company’s shareholding than in the case of a stock option plan.

Gifts and rewards

Employers can treat their employees to gifts and rewards that will not be considered taxable benefits if their value does not exceed $1,000 (Québec tax) or $500 (federal tax).

Public transport allowance

Paying for public transport for employees is a financial incentive that entitles employers to tax deductions equal to twice the expense incurred.

In 2024, should we incorporate or not?

Many self-employed people or registered business owners wonder whether it would be advantageous to incorporate. Incorporation certainly offers a number of tax advantages, and the situation must be analyzed on a case-by-case basis.

However, companies generating net income of at least $50,000 or more should look into the matter. Incorporation brings with it tax advantages specific to this type of legal vehicle. In return, they must accept certain constraints, in particular the obligation to file financial statements and tax returns separate from those of the owner, unlike self-employed workers or registered businesses.

Lower tax rates

One of the main advantages is the tax rate of an incorporated company compared with that of an individual. There is a major difference, where a company will be taxed at rates of between 12.2% and 26.5%, while an individual’s marginal rate can rise to over 53.31%.

Capital accumulation

At the same time, the low tax rate allows the incorporated company to accumulate more capital more quickly, which it can use to make investments and expand.

More flexible remuneration

Incorporation offers greater flexibility in terms of remuneration and taxation. It is possible to pay yourself a salary or dividends and thus choose a remuneration with a more advantageous tax rate than that of a self-employed person or income from a personally-operated business.

Tax deferral

An incorporated company can defer the payment of taxes, but be careful: this is a deferral, not an elimination.

Granting of tax credits

An incorporated business is entitled to tax credits, in particular the Tax Credit for Investments and Innovation (C3i), which allows a business to reduce its costs for the purchase of manufacturing and processing equipment, as well as computer equipment, including management software packages. This credit varies between 15% and 25% for the years 2024 to 2029.

Company versus legal entity

A business and an individual have separate legal personalities. That’s why incorporation can help protect personal assets in the event of a lawsuit, since it’s usually the business that will bear the cost, not the self-employed person or the registered business.

For the benefit of employees

Incorporation gives businesses with employees more options, particularly when it comes to remuneration. In some cases, it allows them to avoid losing benefits linked to government programs such as child benefits, Old Age Security pension or certain tax credits.

Capital gains deduction

A business that can be sold will benefit from the capital gains deduction if it is incorporated.

To determine what is most advantageous for you from a tax point of view, consult your expert. They will help you make the right choices.

09 Jan 2024  |  Written by :

Sylvain Gilbert is a taxation expert at Raymond Chabot Grant Thornton. Contact him today!

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