Exploring the Future of…
ACES Consulting, LLPNovember 6, 2015
ACES Consulting, LLP“Our Experts, Your Success”
Tue Tran, CPA
DirectorFederal, State and
Local Tax, Tax Credits/Incentives
Anisa Din, CPA
Sr. Manager
Andrea Alvarez,
CMCSr. Manager
Corporate Audit, Financial
Management
IT Consulting, Information and
Knowledge Management
Kevin Nguyen
Engagement Consultant
Mergers and Acquisitions,
Corporate Infrastructure
Jordan Anwer
Business Analyst
Strategy and Organization,
Financial Management
Recommendations
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
Recommendations
• Replace system with SAP MEVI-RUS
• Expand production in Sullivan, TN
• Hire and train additional workers
• Finance projects with long-term bonds
Cost
Costs
• ERP: $850,000 over 8 months, plus maintenance and consulting fees
• Expansion: $1.5 million plus rent
• 15% payroll increase
• Up to six months of production shock
• Up to $300,000 annual interest
Cost
Benefits
• 20% increase in output
• Permanent increase in efficiency, productivity, and internal controls
• Technological superiority
• Minimum tax savings of $1 million
Saddles Inc. Overview
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
S.W.O.T Analysis Strengths• High quality • Brand loyalty• Product
Differentiation
Weaknesses• Production
capacity• Weak
supporting departments
• Outdated ERP
Opportunities• Growing
demand• Potential
expansion• Room for
growth
Threats• High sales concentration • Active poaching
In Comparison to Industry LeadersBrands that we will use as a benchmark:
• Danier
• Tandy Leather Factory
• Fossil
• American Saddlery Inc.
- Fossil
- American Saddlery Inc.
Audit Counsel
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
AR = IR x CR x DRHIGH RISK1. Biggest
asset2. Easiest
asset to manipulate
3. Incentive to manipulate
HIGH RISK1. Old system of
control with the ERP system
2. Periodic vs. perpetual inventory method
3. Segregation of duties
4. Managements oversight of internal controls
Risk of Material Misstatement
5% LOW RISKAuditors would have to do more testing in order to achieve a low audit risk
Critical Assertions – Inventory
• Do the assets exist?Existence
• Is the account valued correctly?• Is the account recorded accurately?
Valuation or Accuracy
• Does the company really own the assets that are being reported?
Rights and Obligations
Procedures Performed for Each Assertion
Existence
• Vouching documents
• Observe and recount
• Investigate significant difference
Valuation or Accuracy
• Evaluate estimates
• Check consistency of costing method
• Compare cost or market data
Rights and Obligation
• Confirmations• Review
inventory on consignment
POSSIBLE PROBLEMS DURING AUDIT: VALUATION DIFFICULTIES
Tax Counsel
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
Tax Services
ACES
• Filing jurisdictions• Inventory reservesCompliance
• Maximize savings for capital projects
Strategic planning
Tax JurisdictionsU.S. federal income tax
International taxes where applicable
State taxes where there is substantial nexus• Essentially physical presence
• No sales or use tax
Income Tax
Franchise Tax
Excise Tax
Property Tax
Texas New Mexico Tennessee
Apportionment FactorCalculated based on• Property value
• Payroll expense
• Sales to customers
Everywhere
In-state
Significant State TaxesNM Income Tax TX Franchise Tax TN Franchise Tax TN Excise Tax
Rate 7.3% 0.95% 0.25% 6.5%
Levied on Income Income Net worth/property Income
Apportion Medium High Low Low
Net tax due Medium Medium Low Low
Accounting for Inventory ReservesAnticipate
loss• COGS• Create reserves
Actual loss
identified
• Empty Reserves• Inventory
Income Statement
• Realize costs before goods sold• Tax due per books
Tax Treatment
Reg. §1.471-2(f)
Basic principle: Cannot deduct
estimates
Cannot deduct inventory reserve
Cost
Net Tax Effect • Reduce COGS for inventory reserve recorded
• Deduct business loss when inventory sold/disposedGAAP Tax
Potential Tax Savings
Deductible expenses
State & local tax
R&D tax credit
State & local tax
NM Income Tax TX Franchise Tax TN Franchise Tax TN Excise Tax
Rate 7.3% 0.95% 0.25% 6.5%
Levied on Income Income Net worth/property Income
Apportion Medium High Low Low
Net tax due Medium Medium Low Low
Why Tennessee?
State & local tax
Low property tax in Sullivan county 50% property tax
Full costs
$225,000
$200,000
FastTrack grants
Jobs tax credit
Machinery tax credit
Operating Improvements
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
CostOperating and
Technology Issues
• Difficulties in bookkeeping
• Unable to meet demands• Outdated ERP
Inefficiencies
Risk if no action is taken
• Productivity• Missing out on growth
opportunities
Strengths• High quality • Brand loyalty• Product
Differentiation
Weaknesses• Production
capacity• Weak
supporting departments
• Outdated ERP
Opportunities• Growing
demand• Potential
expansion• Room for
growth
Threats• High sales concentration • Active poaching
Solutions to Issues• Implement new ERP
system (SAP MEVI-RUS)• Expand• Improve infrastructure
& internal controls• Retrain employees
Cost
Current Plan
Option 1:
• Outdated
• Not cost-effective
Option 2:
• Too slow
• High risk
Why ACES for ERP Implementation?
SAP MEVI-RUS designed for industry
Comparable price, higher value
Systems integration - the whole thing
Project management
Product functional specialists
Trainers
ERP Restoration
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
Enterprise Resource PlanningPurpose:
integrate all functions that will serve all company objectives• Improve information sharing• Enhance business
performance• Promote service efficiency
Efficiency & Effectiveness
Timely Decision-Making
Quick ROI
Infrastructure20%
ERP Software20%
Implementation60%
Chart TitleERP Solution Components
Major Reasons for Adopting ERPUpdated ERP
Target Clients > 20 users
Partner Profile IT Consultants
Success Factors Project Management
Offer Tailor Made Solution
Deployment Local/On-Site
Growth StrategyCustom Development YES
Annual Growth Numerous More Clients
Transaction Engine
ERP Functionality
Finance
Human Resources
eBusiness
Customer RelationshipSupply Chain
Management
Data Analysis
Implementation: $850,000
8 Month Process
ERP Cost/Benefit Analysis
Hardware ($228,000)
Infrastructure ($165,000)
Space Planning ($24,000) Training ($175,000)
Utilities and Software ($182,000)
Organization/Staff ($76,000)
Investment in a New ERP
Total Cost: $850,000
Cost
SAP MEVI-RUS for ERP
• Technological edge vs. competitors
• Efficiency & accuracy
• Out-of-box, customization-free
• Cloud-based storage (no server rooms)
• Higher benefits than costs
Physical Expansion
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
Expansion Option 1
Mergers and Acquisitions
Expansion Option 2: Rent & Furnish Facility
Warehouse56,000 square foot space
24 foot ceiling heightLocated on I-26
$2.4/square foot per year($11,200/month, $136,000/year)
Expansion Option 2: Rent & Furnish FacilityPros:
• More control• New equipment• ERP convenience
Cons:• No potential gain from
intangibles
Plan and Timeline
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
Initiation Planning Analysis & Design Realization Transition Operation
Major Phases of ERP Implementation
ERP Key Implementation DatesProject Kickoff
February 1, 2016
Functional Process ApprovalMay 29, 2016
CRP Pilot Complete-Go/No GoJune 26,
2016
End-User Training Begins
July 1, 2016
Data Conversion
BeginsSeptember 4,
2016
Go Live!
October 10, 2016
Saddles’ Internal Responsibilities
Full-Time Staff
Phased Implementation
Approach
CommunicationJob-Specific
End User Training
Project Board
Project ManagerOverall User Coordinator
Business Integration Lead
Procurement User Lead
Procurement Functional Team
IT Technical Stream Lead: Implementation/Development
Procurement Stream Lead
HR/Payroll User Lead
HR/Payroll Stream Lead
Finance User Lead
Finance Stream Lead
HR/Payroll Functional Team
Finance Functional Team
Implementation Team Structure
Financing
Saddles Inc. Overview
Financing
Tax Counsel
Operating Improvements
ERP Restoration
Physical Expansion
Plan and Timeline
Audit Counsel
Recommendations
Long-term bonds• Limited access to outside equity
• No public offerings at this time
• Interest expense is tax-deductible
A Brighter Future, Together