Accountant to the Stars

An interview with Robert E. Martin, C.P.A. Georgia Ragsdale, CEO Watermark Financial, Inc.

Q: We are in a transition period, what do you think some of the next steps will be to help us move forward? 

A: A lot of prices will be coming down to more realistic values, for buyers entering into the market there are going to be some real opportunities.

Q: In terms of where we are in our world of taxation, if you had to open up your crystal ball, it seems as if we are heading towards higher taxation rates in several areas. 

A: We are heading towards higher taxation rates in a number of areas, the biggest concern will be that we will see our 15% long term capital gains rate go up. The government is not totally ignorant of the fact that we can’t keep on taxing people at higher rates without having negative impact. The President this week just signed a major bill having to do with reorganizing the federal mortgage companies and also providing tax benefits for first time homeowners.

Q: In terms of corporate interests and small business interests what do you see the advantages for people in business that some people might not know about? 

A: The biggest advantage for small businesses, particularly people who are just starting out, some people might not know about is the flexibility to move from one investment to another without being tied down to a large corporate structure. It is true that sometimes the borrowing costs may be smaller for a small business, but not having the flexibility may offset the negatives to have to pay a higher cost for borrowing.

Q: And what about the fact that so many jobs are being shipped overseas, certainly it makes sense from a corporate level, how are we compensating for that in our tax base, or are we? 

A: A lot of our high technology is still doing well. Also, the value of the dollar going down it is not as advantageous to outsource. In addition, what we are seeing in the accounting business we are seeing a lot of concerns for sending your data outside the country. While they use a US portal, there is no place to visit and check up on things. Some businesses have tried outsourcing and are now pulling back a bit.

Q: From your point of view, what are the common mistakes that you see businesses make? 

A: The biggest mistake is not having enough working capital. Businesses that grow too quickly, there is a demand for their services or product that they can’t meet because they don’t have the working capital, the money doesn’t come in fast enough to grow the business.

Q: What do you think about the advantages for small business owners buying versus leasing their property? 

A: Well the advantage of owning obviously is that you can share in the capital gain, get the advantage of the appreciation of the building goes to you – assuming marketing values are going up. If you are leasing, you continue to pay more but do not get the benefit of the property going up.

Q: So in your opinion, if someone qualifies for a 90% loan, would there be any time that you would not recommend buying a property? 

A: It depends upon the type of business, a lot of businesses have to build up inventory – they may not be able to tie up that much potential borrowing power in real estate. But also, they may have to change locations may not be able to invest in real estate. It is one option that businesses should look at.

Q: If you were going to run your business by the book without any other concerns, what would you say is a good ratio to asset value to the amount of debt to the cash reserves. In a perfect world a client who is doing everything right, what do they look like? 

A: A business has to have enough cash reserves to at least cover 3-4 month downturn. I have seen companies where the recent increase in energy costs have had the companies within 1 month choking, and what this tells me is that they were playing it to close. If the increase in gas of $1 causes a company to run out of cash in one month, this tells me they do not have enough reserves.

Q: Right, I know that when we look at people as borrowers, we want to help them to understand how the bank is going to look at the – obviously now in a very constrained environment, the banks want to see people with very significant reserves and this is something that a lot of people, especially developers and real estate investors just don’t have. 

A: Part of the problem has been the 100% financing at times without a cushion, and everyone needs a cushion. Everyone thought the increase in the property values wouldn’t decrease and of course we know now that this was not the case. One of the things we can do now is to watch inventory, look at bill paying, one way to increase your reserves is to run your business meaner and leaner.

Q: Is there anything thing that you would like to bring everyone’s attention to? 

A: Yes, one of the most frustrating things now is that we are seeing more and more tax legislation. What is frightening about some of the legislation is that it is retroactive – you may have a deal closed and the legislation now applies to that transaction. One of the bills that passed recently was retroactive back to three months ago, in this case it was favorable but it could act the other way. You have to monitor tax laws much more closely than in the past.

Q: Do you ever see any possibility of hope for less complicated tax codes? 

A: With all the engineering that the congress is trying to do, but that doesn’t seem possible.  You hear people talk about the flat tax, but with all the different businesses with different margins there are certain internet companies making 20-30% profit and there is nobody trying to put a windfall profit tax on them and yet there is some movement to put a windfall profit tax on oil companies that only make 10%. It would be very difficult to institute a flat tax.

Q: This is certainly an interesting time. 

A: Yes, it is, but if you look back over times when great fortunes were made it is at the bottom of the market and not the top. Hopefully we are bottoming out right now and people will pick up some great opportunities.

Q: One last question, are there growth industries that your eye has gone to as a place for big opportunity moving into the future. 

A: As it has been in the past, I think it will be in the future – Real Estate will continue to be one of the strongest markets. If you look at where the greatest fortunes have been made, it has been in real estate. If you look at the renters, it has increased  and I think that will continue in the future as long as people coming out of college have high student loans and consumer debt they  can’t afford to buy homes, so people who own rental properties and apartments will tend to do well long into the future.

Thank you very much Bob!

Bob Martin , CPA, MBA has been a CPA for 30 years and he founded his own firm, Robert E. Martin & Associates, in 1984.  His firm provides accounting, tax and planning services for a variety of clients particularly in real estate, oil and gas industries and hospitality industries.  He can be reached at: Bob@MartinTX.com