Masonry Magazine April 2003 Page. 34
Financial Strategies
product sales by revenue category and labor sales separately. The list of revenues by product can then be compared to direct costs of purchases, labor and possibly sales commission directly attributable to the subject category. Adding up the columns you will get Total Revenues to begin with and Total Direct Costs, resulting in Gross Profit. An interesting point for consideration on most masonry jobs is to include work-in-process as an asset somewhere, as often costs will include actual supplies and labor paid out already but the completed work has not been billed by the end of the accounting year.
From Gross Profit you want to deduct General and Administrative Expenses. There are policy decisions to be made here dealing with depreciation, amortization, prepaid costs and other expenses having to do with the owner's salary and expenses, which you may want to consider carefully. For example, automobile expenses can be handled in two ways. One is to pay the entire cost of key employee vehicles and charge a taxable amount to personal use; the other is to have the employee contribute cash as a payroll deduction for some prescribed amount of the total cost, like 40 percent.
In addition, most people know the smart strategy for paying owner salaries is to maximize them at the FICA level, approximately $84,000 times 6.8 percent, and take any other monies as dividends or advances bonused into the next tax year at the end of the current year. Thus the withholding taxes on additional key salaries will let you leave a profit in the company for debt structuring purposes, taking the same compensation, but reducing expenses by that amount. The tax rate operating as a "C" corporation is 15 percent on the first $50,000, so if you are a small business you can probably save money on the company paying tax at a low rate, which assists you with cash to amortize corporate debt.
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Buying Real Estate
ANOTHER INTERESTING METHOD of making your company look better for financing, especially if you are buying real estate for company use, is to buy the building using the company lease as collateral. In this uncertain market there often will be a good buy on a commercial property where someone has foreclosed and a user-buyer is needed. The bank will be selling the property at a relatively low price and you want to use personal credit with the company lease being there as additional collateral to make the rate lower.
Typically a $1 million building with 20,000 square feet-or a $50 per square foot price is a good buy today in most smaller-to medium-sized communities. But rent for such buildings may be $5 per square foot, delivering $100,000 in income.
Yet you can probably borrow $1 million at six percent interest, based on a lease with a good credit risk. The payments may be $75,000 per year and the tenant (company) picks up the taxes and maintenance as well. The depreciation on a $1 million building will typically be five percent of $800,000, or $40,000 per year, using straight line 20-years as a depreciation life. This will shelter the amortization plus $25,000 in cash flow, tax-free, in the short run.
Of course, a depreciated building may be subject to depreciation recovery on future sale, which may be some years off. Typically a deal structured in such a manner can result in the entire $1 million being available for borrowing, if not entirely, from a bank, then from a combination of bank and seller financing. Since the lease on the building is not a direct long-term liability-only the current portion of leasehold payable needs to be a liability on the balance sheet-this strategy leaves more room for additional corporate financing,