95% of distributors have risk in this area and we now know how the States will find you!

Most of our FCFO clients are disregarding state sales tax nexus issues and are racking up significant liabilities. One large distributor client is out of compliance in over 25 states and faces a $1 million liability – ouch! And compliance is relatively inexpensive compared to the potential risk.
John Byron, owner of Prosperity Promotions, engaged our FCFO team to complete our exploratory audit so that he could understand the status of his finances. Sales tax liability is one of the many topics we review, and Prosperity was out of compliance in multiple states. Our FCFO team coached the Prosperity team and assisted in getting them registered and compliant.

The most common feedback we get from distributor owners and Controllers is “well I’m not too worried about it – I mean, how will California find me if my business is located in NY?”. Here’s how they found one of our clients – the State of California conducted a routine sales tax audit on a large tech company in California. They noticed many invoices from an out-of-state promotional product distributor that didn’t charge sales tax. This triggered an investigation of the distributor, who was found to be out of compliance. Now the distributor is faced with paying back taxes they didn’t even collect, in addition to fines, penalties, etc.
And the risk doesn’t go away with time, it only grows. If you are a larger distributor that hopes to sell your business as an ongoing concern, as opposed to an asset sale, this issue will be found during due diligence and will interrupt or delay your sale. And if you are selling the assets of your business, you will retain this outstanding liability, even after the sale of your business. Who needs a sales tax audit during retirement?

The good news is that maintaining compliance is not difficult and costs relatively little compared to the risk.

Your Controller will have a one-time project to determine which states require your compliance and then registering with each state is just paperwork. You’ll then have a monthly remittance report to run, just like you do in your home state. Compliance requirements vary by state, but Avalara has a nice report that tells you which states require your compliance. If your Controller doesn’t have the time to fill in the monthly reports, Avalara will even do that for you, albeit at a cost.

Ignoring your economic nexus requirements comes with risk, and as John Byron says, “I’m too pretty for prison”!

Accruing commissions properly can have a significant impact on your P&L!

This is one of the most common accounting issues we see when doing our internal audit style FCFO reviews, which ultimately leads to financial statements that are simply inaccurate by significant amounts. While the variance will depend on your sales volume and commission model, we see 6-figure inaccuracies frequently.

Scoby Bros has a fully commissioned sales team which makes commission a significant expense. Our exploratory review determined a commission expense adjustment was needed that reduced profitability on the books by over $100,000.

Scoby Bros. President Luke Scoby mentioned “The good news is that this didn’t negatively affect our cash flow, and it reduced our 2023 taxes! Getting Alexis at Promo Consulting to clean up our books was a great investment and now she provides a month-end service with oversight to make sure our books are accurate after every month end. This provides us with a much better idea of actual profit, and we can finally trust our P&L when making business decisions”.

Another distributor client was facing a $500,000 discrepancy regarding commission accruals, so if you pay lots of commissions, this is a topic you should pay attention to.

 Commissions are your second largest expense after COGS, so they have a big impact on profitability. Most are paying commissions based on the industry standard “paid-on-paid” model which is good for cash flow. But what’s missing is expensing your commission in the same month as the revenue & COGS so that your monthly profit is accurate. It’s ok to delay paying the commission on an invoiced order until after the invoice is paid, but you need to expense the commissions on your P&L in the same month the invoice is done. This is where “accruals” come into play so that profit is accurately reflected on your P&L at month end.

Accruals wouldn’t be such a big deal if we had consistent sales every month. But that’s not how the promo industry works, and we typically see monthly sales differ by as much as 50% over the course of 12 months. If your P&L shows big profit for one month and then much less, or even a loss, next month, accruing commission properly is likely the issue.

The good news is that accruing commissions at month end is as simple as adding one extra step to the month end process. Syncore has a report designed specifically for this purpose, which gives you the information you need to enter one general journal entry into QuickBooks to complete the process. Other ERP and accounting systems should have an easy way to handle this as well.

Making good business decisions requires accurate financial statements, and accruing commissions is one of the easiest ways to get headed towards trusting your P&L!

A significant inventory accounting mistake led to the overpayment of tens of thousands of dollars in income tax!

LogoBranders owner Terry Southern wasn’t thrilled with her Controller, but she had no idea she had been systematically stealing from her for the past 5-years.