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COMMENTS
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Ken,
Just a couple of comments on your answer to the alarm company that is selling equipment and billing it over 5 years. You are correct that accountants like us should stick to accounting. Having been in the industry for 20 years, I recognized that this was a legal issue hidden in an accounting issue, and, knowing our industry, I also recognized that this type of situation was outside of the intent of the typical monitoring/installation agreement. Instead of wrapping him (her) self up in the accounting ramifications, the accountant should have been deferred to the company’s attorney for contract advice.
Per the accountant “The issue, while different, is not that complex,” It is complex, and the accountant has decided to also be the company’s legal counsel. It is not “different”, I see this all of the time in the Security Industry, but perhaps that is because all of our clients are in the Security Industry. It also points out that the accountant doesn’t understand the industry. In this case the alarm company appears to be using accrual accounting for its books and cash basis accounting for its tax return. I differ with Ken when he says that cash is the best method to use for both books and taxes. Accrual basis books provide a better picture of the financial performance of the company by matching revenues and expenses. For example, a company that has $30,000 of RMR and bills on calendar quarters would have “good months” in January, April, July, and October, and “not so good” months the rest of the year. Accrual accounting allocates billings, receipts, and payments to the month in which they belong to better match the expenses. Accrual accounting is beyond the capabilities of most bookkeeping and billing staff, but a simple matter for most accounting firms. What isn’t simple is knowing a client’s business well enough to determine whether the benefits of using accrual accounting for the books (and many times even tax reporting) outweigh the cost. In most cases the cash to accrual conversion can be accomplished in just a few hours each month.
In addition to generating more accurate financial statements, accrual accounting may even generate tax savings. To decide if accrual accounting is right for your company takes accountants with experience in the alarm industry.
Most tax professionals are capable of preparing taxes well enough so that their clients don’t pay an egregious amount of taxes (or end up in jail), but they don’t understand the nuances of the Security Industry well enough to work within the rules to ensure that you pay the only taxes that the IRS intends you to.
Mitch Reitman
Reitman Consulting Group, Inc.
Fort Worth, TX 76133
817-698-9999
WWW.REITMAN.US
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Ken
For some reason the Red Flags on this one caught my attention...
1st: "Budget Allowances" (clearly they have under budgeted for their needs).
2nd: They want to finance the purchase for 5 years.
3rd: They want you to make special accommodations for their needs & change your basic business model.
It seems to me that the wrong questions are being asked by the alarm company. If a potential customer can't pay for the system they "need", then the alarm company should be asking themselves if the customer is really worth taking on at all? If they need to finance the purchase over 5 years, do you think they will really be around for another 5 years? Is the system is overdesigned & could it be scaled back to something closer to their budget (w/ provisions to expand as their budget expands)?
I suppose that if the customer has been a long time customer with a solid payment history AND the alarm company has faith that they will maintain for 5+ years (or that the alarm company is prepared to take legal action to collect if they don't), then it might be worth it. BUT, as general rule of thumb, I like to do business with people who can afford our services. If they can't, then they are welcome to call our competition.
By the way...it is my understanding that (from a tax related standpoint), you can only declare a "loss" for monies you have paid out of pocket, but not for any profits lost. So, if done the way the customer is requesting, any profits you make will come at the latter part of the 5 year term. If they default mid-way, you get no profit & ended up working for cost. This IS a question your accountant is qualified to answer. Smile
Jessica Webb
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Ken
I would like to add my own experiences to the article titled “Beware of the retail installment sale”
While I personally prefer to lease a commercial system rather than sell it outright, due to increased RMR, I don’t do this for residential work. Too messy with consumer laws, possible marital issues, sales of the premises, etc. Personally, I prefer to stay away from residential work when I can. My comments are related to commercial work, as I would not consider a residential arrangement in the way proposed by the OP.
It seems every time I get a potential client that wants to build a sale around service only fees, they are also reluctant to sign a personal guarantee. I have passed on almost every installation where the potential client isn’t willing to have the deal written up as it actually is. A lease and a service agreement. If the installation involves equipment being installed (other than a communicator), it is a lease in my view. What happens if they want to cancel service? What happens if they go belly up? Do I want to try to remove my equipment that is now used? Business decisions are based on a risk/ reward basis. Unless I can get an internal finance rate that gives me oodles of profit, I won’t lease equipment on a larger installation.
Just as an observation, most of the aforementioned potential clients were restaurants or small businesses with limited funds available. In each case, while driving past the locations, they were all out of business within nine months. I didn’t lose these sales, just aggravation.
Mitch Cohen