10 ways of influencing your company’s result
By being proactive, you can affect issues such as the last row of your company’s income statement. If your financial year is the calendar year, now is the time to have preliminary financial statements prepared so that you can still influence the result.
For many Finnish companies, the turn of the year also means the end of the financial year. You can still influence the last row of the income statement before the turn of the financial year, however.
A company may have a variety of reasons to optimise its result. One company wants to improve the result, while another wishes to avoid a heavier tax burden and a third wants its result to be as good as possible with as light tax burden as possible. It is nevertheless good to keep in mind that the available methods require consistency. The principles chosen for preparing the financial statements need to be followed year after year. The accrual and valuation solutions selected may only be changed for weighty reasons, such as changes in the company’s operations or if the decrease in the value of property has been faster than expected.
Proactivity and a systematic approach must also be kept in mind. Proactivity is important especially when the company is doing badly to ensure that the equity is preserved. In contrast, if the company is doing too well, a good plan ensures that you can get away with only paying a little more tax.
We listed ten ways of influencing your company’s result:
1. Delivery times
When the company carries out manufacturing, you can influence the turnover by scheduling deliveries. If the delivery is made before the end of the financial year, the profit is recognised as income. If the delivery is only made after the end of the financial year, the product is included in the inventory as an acquisition cost. Playing around with the invoicing date does not help; the important thing is the date of delivery. In practice, this means, for instance, that if the customer is fine with the goods being delivered on the second week of January instead of the last week of December, a bit of the result can be transferred to the next year.
2. Change in the value of inventories
You can influence the result by changing the inventory valuation method. The selected method may have a significant impact on the value of the inventory. There must be reasons for the change, and it must be a long-term solution. Expanding the business is often a good reason for changing the valuation method. The company can also take indirect procurement and manufacturing costs, such as transport and insurance costs, into account in the value of the inventory. The interest of a loan related to production can also be included in the value of the inventory. Taking such costs into account requires drawing up cost estimates.
3. Transferring purchases
If the past year has been poor, transferring purchases to the next financial year may help with improving the result of small companies in particular. In contrast, if the result needs to be reduced, making some future purchases earlier can be considered.
For example, you should think about whether to lease a car, in which case the leasing payments decrease the result, or buy it on hire purchase, in which case it can be depreciated in full and deducted in taxation, if the car has been used for business purposes during the tax year. However, it should be noted that testing a device or machine does not constitute deployment as referred to in the legislation. A depreciation deduction in taxation can consist of a maximum of 25% of the undepreciated value of the equipment in taxation.
Buying office supplies or coffee for the staff for the next year already at the end of the year may also make a small difference. In that case, they can be recorded directly as tax deductible expenses. This means, however, that these deductions will not be available next year.
4. Wages and salaries
Entrepreneurs who own their business can draw wages as needed, when they are not in an employment relationship with their company. If they do draw wages, however, they need to do it systematically and ensure that it is recorded in the payroll accounting, so that the withdrawal is not confused with a loan or a hidden dividend. Wages also always cause indirect expenses for the company. Self-employed entrepreneurs are a special case, because the entrepreneurs themselves, their spouses or children under 14 years old cannot draw wages from the company.
5. Depreciation according to plan
When new machines or equipment are purchased for the company, you need to consider how long is their estimated service life. The time limit for activation is the financial useful life of three years. Predicting the future is difficult, which is why there is a bit of room for flexibility here. An implemented depreciation plan can only be changed for justified reasons. With regard to new purchases, it must be kept in mind that the time of commissioning determines when the depreciations can be made. For example, equipment, machines or devices acquired at the end of the financial year that are not yet used for business do not grant the right to deduct the depreciations in taxation.
Small companies are exempt from planned depreciations, and therefore they can deduct depreciations in taxation in accordance with the maximum depreciation allowed.
6. Activating the development costs
A company that does product development may be able to activate its costs as development costs on certain conditions. The result of the financial year improves, when the development costs are activated in the balance and they are depreciated annually.
Development refers to developing new or significantly better products, processes, equipment, raw materials, systems or services for production. Development costs may include the wages and social security contributions of people participating in the activity, or external services.
In limited liability companies, partnerships and cooperatives, however, the amount of distributed assets cannot correspond to the amount of activated development costs.
7. Activating intangible assets
The result can be improved by activating intangible assets. They include, for instance, fairly large repairs of rented business premises. A company can choose whether to record the cost all at once, or is it deducted as an annual cost.
Taxation must nevertheless be taken into account. A good example of this is a major renovation of a restaurant that operates on rented premises:
According to the Finnish Accounting Act, the costs could be deducted all at once, but in taxation it can also be considered as a measure with a long-term impact, which is why it must be deducted as depreciation. In that case, it is advisable to act in the same way in both cases.
8. Operating provision for wages
A self-employed individual or a partnership, in which the partners consist only of natural persons, can make an operating provision for the wages that have been paid. The provision can be used to transfer taxable income to be taxed in a following year. Making a provision reduces the result, while removing one increases it.
An operating provision can consist of a maximum of 30% of the wages subject to withholding tax paid during the 12 months before the end of the financial year. If full provisions have been made in previous years and there are now less wages, the provision must be removed. You can get the maximum benefit out of the provision when it can be planned, so that provisions are made in good years and removed in bad years.
9. Recording credit losses
It may be possible or even recommended to change the credit loss recording practices, if recording them has been delayed. Unpaid invoices can be recorded as credit losses after demands for payment have been made a few times.
The amount of the receivables affects the type and amount of debt collection measures. The debtor does not need to be bankrupt for the credit loss from the sales receivable to be recorded. Sometimes companies nevertheless keep receivables in the balance for too long. If the money has not been received within six months and a few payment demands have been made, it is most likely a credit loss.
10. Debt as capital
The company can save in financing costs, if it changes the loans granted by the shareholders to the company, i.e. the company’s debt, into an equity item. After the change into equity, the financial items in question do not generate interest expenditure any longer.
Optimising the result
A systematic approach. Changes related to making investments or the delivery of products, for instance, should be planned well in advance before the end of the financial year. Starting early is especially important if the company is not doing well.
Consistency. Take account of the principle of consistency required by the Finnish Accounting Act. When the principles of drawing up financial statements are changed, it is a long-term choice that must be followed from one financial year to another.
Tax planning. Do not confuse tax planning with tax evasion. Tax planning is legal within the framework of the tax regulations.
Get expert help. Your own accountant or accounting firm will help you to review your situation.