Ontario Apprenticeship Training Tax Credit

The Ontario and Federal Governments have offered the Ontario Apprenticeship Training Tax Credit incentive for a while now and although most dealership owners take advantage of it, there are still many out there that either don’t claim the credit or don’t feel it’s worthwhile.

There is an Ontario and Federal combined credit of approximately $12,000 for every year that a dealership employs an eligible apprentice. The credits are filed in connection with the annual corporate tax filings for the corporation.

There are certain nuisances to the credit that an accountant can work through, yet for the most part, as long as all conditions are met (which is generally the case for an apprentice hired to work in the service department of a new auto dealership), the credit can be quite significant as many dealers hire multiple apprentices over multiple years.

I am an accountant after all so humour me while I do a little math: let’s say a dealership hires 2 apprentices every year for 3 years – that’s approximately a $72,000 credit ($12,000 x 2 x 3), or ~$61,000 after taxes. That must be worthwhile to any dealership owner.

I think what prevents owners from taking action is the fear of time spent and wasted. However, even if you spend an hour or two with an account and it turns out you don’t qualify, you’ll know what you need to do next year to start qualifying moving forward. Or at least you won’t be left wondering if you’re missing out on significant money. Seems like a win-win situation to me.

Also note that if you have not filed credits for prior years, there is an opportunity to amend prior year tax returns and file the necessary paper work for the credit.

As a side note: it’s important that your dealership maintains the required records, including contracts, as it’s quite common for the CRA to request this information following the filing of the corporate tax returns. 

- David

Financial Statements for Dummies

Financial Statements for Dummies

As a Chartered Accountant in public practice, I have provided assurance on approximately 500 sets of financial statements over the last 10 years. In the process, I have analyzed statements to assess the ongoing viability of different businesses and I have seen what happens when companies fail to act on what their statements are telling them. I will try to sum up the most valuable points of financial statement analysis in this “Financial Statements for Dummies” blog.

Financial statements are typically prepared for a 12 month period. They provide a record of all the transactions that occur during that period, including the payment of related income taxes. There are adjustments to reflect transactions that occur with no cash transacted.

First Step – level of work:

The first thing you should do when you look at a set of financial statements is check if the company in question was audited or reviewed. This information should be clearly stated on the report that accompanies the statements. If there is no report with the statements, you can assume the statements were not audited or reviewed and therefore, there is no objective party providing assurance that the statements accurately reflect the company’s operations.

When accountants conduct a review engagement, they assess the ‘plausibility’ of the financial statements through analysis , inquiry and discussion. An audit includes the same analysis, inquiry and discussion, plus additional substantive work and review of controls to assess the ‘reasonability’ of the financial statements. An audit provides a higher level of comfort that the financial statements fairly represent the company’s operations and it is the standard for public companies , whereas a review provides a lower level of assurance.

Take a close look at the review or audit report to make sure the company has an unqualified opinion, meaning that the external accountant performed their work and the statements are not materially misstated.

Second Step – accounting standard:

The next item I would review is the basis of accounting meaning what accounting standard is the company following. In Canada, private companies will typically be using Accounting Standards for Private Entities (ASPE) for December 31, 2011 year-ends going forward and public companies will be using International Financial Reporting Standards (IFRS). The basis of accounting is important because if you are comparing two sets of financial statements, you want to ensure the accounting policies are the similar.

Also pay close attention to the financial statement notes. Look for issues such as Going Concern, Risks and Contingencies as any one of these can allude to significant issues in the company.

Third Step –analysis:

I have learnt over the years that users look at financial statements for different reasons and therefore different parts of the financial statements are important to each of us. Financial statements are generally prepared for general use to allow for different user requirements. As a result, in preparing this article, I will touch upon some of the more common areas of financial statement analysis.

Comparative analysis
This is an amazing tool if used correctly. Comparing sales, expenses or other balance sheet items year over year can identify many critical issues. Be careful to look at the year over year dollar change as well as percentage change. The dollar change may look small, but percentage-wise it can be significant. For example, if your gross profit (revenue less cost of sales) decreases from 12% to 10% the following year, it may seem like an insignificant 2% change year over year. In reality, the gross profit has decreased by 17% (2%/12%) year over year. This seemingly small change can be indicative of significant issues such as fraud, rising input costs that are not being passed on the customer, downward pressure on prices which is shrinking your revenue or a host of other issues.

Ratio analysis
Financial statement ratio analysis can be used to evaluate a company’s liquidity, efficiency, long-term solvency, profitability and more.

Liquidity ratios look at a company’s ability to meet its short-term obligations. The current ratio looks at current assets : current liabilities. A current ratio below 1 means that the current liabilities exceed the current assets. Clearly this is not good and it could indicate that the company will have trouble meeting its liabilities.

Inventory turnover is used to assess a company’s efficiency. It can tell you how many times inventory is turning over and how long inventory is sitting on the shelves. The longer inventory sits, the longer it takes for the company to make money. The same goes for accounts receivable (AR) turnover, if AR turns over twice per year, it essentially means it takes about half a year to collect AR.

Ratios can be compared year over year or compared to some industry standard. If the ratios are drastically different from one year to the next, or if they are different than the norm for the industry, you need to find an explanation.

Net worth
The net worth of a company is the assets minus the liabilities and it represents what is left for the owner once all assets are liquidated and liabilities are settled. This is an area that is commonly looked at in a purchase and financing arrangements.

Cash flow statement
The cash flow statement provides details as to where cash was used and received throughout the year, and if analysed correctly, can uncover significant matters. For example when reviewing the cash flow, you may see large non-cash items received throughout the year. In this situation the income may look great, but if much of the income was non-cash, it may have no real benefit to the company.

Fourth Step –Intangibles:
The financial statements may include items that are considered intangible, i.e. goodwill, leasehold improvements or intangible assets. Often times these assets are ignored by the banks and outside investors because they carry no tangible value, are not readily saleable and are typically part of an overall valuation of the company.

In conclusion, financial statements can be very useful if you know what you are looking for. If your objectives are simple, then the review of the financial statements can be as quick as just looking at the net income and moving on, but if your objectives are more involved, then following the process above would be appropriate.

-- David Hertzog

Lessons Learned and Forgotten

It has been over a year since GM Canada began notifying many dealerships that they would be required to close their doors. Several of the dealers who lost their dealerships have experienced financial distress and may never recover. What is very sad to the outside observer is that many dealers saw, or should have seen, the writing on the wall years earlier, but were so ‘emotionally attached’ to their dealership that they were not able to react appropriately. Many kept throwing good money after bad until it was too late. Granted, the ‘dethroning’ of the largest auto manufacturer in the world may never happen again, but the lessons that could have been learned from this seem to have fallen on deaf ears.

Businesses, and more specifically auto dealers, continue to be emotionally attached to their product preventing them from operating objectively. The auto industry is becoming ever more saturated and individual dealers are seeing more and more risk in managing cash flow and liquidity. There are a vast number of dealers out there who feel that as long as they weather the tough economic climate, they will eventually prevail. Are they taking on too much risk for themselves and their families?

As an accountant, I profess that I have a conservative bent while dealers tend to be entrepreneurial risk takers. I agree that it takes risk to make money, but the risk needs to be controlled. Strong business plans and financial forecasts help entrepreneurs make informed decisions about the level of risk they are assuming, and strong creditor proofing can mitigate the amount of capital being put at risk, however often times little to none of this preliminary work is done. Usually it’s, “Let’s make a deal and then worry about the legal and accounting aspects.” I have found that the preparation of even a simple financial forecast can significantly change the decision making process and as a result I recommend my clients do this when budgeting for the following year or consider acquiring a business.

The demand for vehicles varies each month and fluctuates by manufacturer. Honda may be the hot product for 2011, but Hyundai could be the front-runner for 2012. Many dealers structure their businesses on the premise that they will attain certain sales numbers per month, however when those sales numbers don’t materialize, what is the back-up plan? Usually there isn’t one. I tell all my dealership contacts to ensure they have diversified their product lines so that when one hurts, the others can take over. A strong body shop, used car dept, leasing, parts and so on can help take over if new car sales drop.

Another way to weather the storm is to run a lean and mean operation. Too often I see dealers reacting to low volume in sales by suddenly cutting 10-30% of their overhead. Why is this only done when times are dire? If the dealership could survive on less, why would they maintain such excess? I guess GM set the tone by running ‘FAT’ for many years, and then, when sales volume plummeted, GM reacted just like the dealers by cutting costs and running lean. With increased competition, I hope that running lean will be the new norm rather than a cyclical short-term fix.

In conclusion, it is not only important to set aside money in the boon years, but it is also vitally important to critically review your dealership (with an outside advisor) to ensure you do not have tunnel vision and your rose colored glasses are not the wrong shade. In a later blog I will discuss some of the ‘savings’ options for your company.