The goal of most business owners is to increase the value of their company. However, in many cases this discussion does not arise until the business owner decides it’s time to sell the company. In most cases, this is too late in the game to have the discussion. Business owners that focus on building shareholder value throughout the life of their companies will create healthier more profitable companies than those that do not. In many cases, these healthier companies will in turn, lead to stronger economies, higher living standards and more career opportunities for individuals.
In the real market, you create value by earning a return on your invested capital greater than the opportunity cost of capital. The more you invest at returns above the cost of capital the more value you create (i.e. growth creates more value as long as the return on capital exceeds the cost of capital). Business owners should select strategies that maximize the present value of expected future cash flow or economic profit.
There are two key drivers of company value: the rate at which the company is growing its revenues, profits and capital base and the return on invested capital (relative to the cost of capital). These value drivers make common sense. A company that earns a higher profit for every dollar invested in the business will be worth more than a similar company that earns less profit for every dollar of invested capital. Similarly, a faster growing company will be worth more than a slower growing company if the both are earning the same return on invested capital.
If we look at the key drivers of company value more closely, here is what we find:
Profit Margin: This reflects the portion of revenue that remains as profit after paying operating costs, such as manufacturing costs, R&D, sales, general and administrative etc.
Asset Productivity: This term refers to the amount of Revenue that you generate from each dollar invested into Operating Assets (i.e. Revenue/Operating Assets). These assets may include such things as property plant and equipment. The more productivity we get out of existing assets or the same productivity we get from fewer assets, the higher the return on invested capital. This higher productivity typically leads to higher revenue, profits and company value.
Growth: A growing company and a stream of cash are worth more to investors than if it were constant or declining. Profit growth is what’s important; a growing company has the opportunity to generate more profits faster and as a result receives a higher value.
There are two fundamental ways to improve profits: increase revenues and or reduce costs. Increasing revenue can be done by:
Strengthen pricing: Success here may mean charging more, holding prices flat, or even slowing price declines. When increasing prices with a repeat customer, you will often need a compelling business reason, such as fuel cost pass-through, severe supply shortages, or a breakthrough new product feature. Analysis on competitor’s prices and your product advantages/disadvantages can give you a solid footing in price negotiations. If you have a large number of customers (like a retail store), you can experiment with different prices to see the impact on sales volume and then set prices to optimize profits. Some customers are willing to pay more than others, and you should look for ways to set different prices for these different customers.
Optimize Product/Customer Mix: Some products are more profitable than others. Likewise, some customers are more profitable than others. When your operations are constrained (e.g. by manufacturing capacity or personnel), you may want to cut low-profit products and customers to make room for high-profit ones. Be careful here not to shoot your golden goose by losing a key customer that you will need later on.
To reduce your product/service cost, set specific goals and incentivize your employees to achieve them. You may set a goal to reduce manufacturing spending by $1M and then pay out $100K in incentive if the goal is achieved. Set goals and incentives each period, and make it a part of your company culture and a point of pride. To help seed cost reduction efforts, identify your largest cost drivers (like raw materials, rent, utilities, and labor), break up the spending categories, and assign a team to each area.
R&D spending is another important focus area for improving profit margin and in turn company value. There are two things to consider when optimizing your R&D investment – setting the right budget and managing R&D productivity. To set the right R&D budget, start out by looking at how much other companies in your industry spend as a percentage of revenue. If your industry spends 10% of revenue on R&D, then this may be a reasonable starting point for your spending. If you have a high growth business relative to your industry, your spending may need to be a larger percentage of revenue. R&D productivity should reflect the quality of the R&D projects that are funded (i.e. are you funding worthwhile projects), speed (i.e. are you getting new products to market quickly), and efficiency (i.e. was the cost reasonable).
Optimizing SG&A spending is an important part of improving profit margin and growth. It is about setting the right spending budget and managing and rewarding productivity. You can again get started by looking at how much other companies in your industry spend as a percentage of revenue and then back into your implied spending level. Define your processes; identify value add steps; and eliminate all other steps. This approach often yields 30% cost improvements. Look to optimize sales, determine what a sale is worth to the company; consider the incremental revenue; the longevity of the revenue stream; and the cost to produce, deliver, and support the product volume. Ensure that sales compensation is heavily commissions based. This helps align incentives, but it also helps ensure that you are not investing more in sales than what you are getting in return.
Look separately at assets that are directly involved in generating revenue (like factories or delivery trucks) and those that are not (like office buildings). For revenue generating assets, look for opportunities to increase output. You may be able to stagger employee break time to keep equipment running; identify your bottleneck assets and improve their availability; or start running a facility 24 hrs a day. There are probably hundreds of ways to improve here, so think of this as continuous improvement rather than a one-time effort.
If you have assets that are not being effectively utilized 90% of the time, you may want to consider selling them.
For assets that don’t directly drive revenue, look for ways to eliminate waste. For example, what would it take to consolidate from three buildings to two? Does every employee need their own desk, or can frequent travelers share a few community desks? What if employees worked from home once per week? Can you use cubicles instead of offices? What about outsourcing some services to save cost and reduce assets?
Growth is a powerful lever for improving company value. Simply put, a growing stream of cash is worth more than if it were constant or declining. Driving growth requires time, motivation, and resources. The best way to manage for business growth is to assign an individual or team to focus on it, free up necessary resources, set goals and incentives, and hold the team accountable. Good ideas will never materialize without proper growth management in place. Once your highly motivated and skilled team is ready to embark on their mission, looking at your products and customers is a good place to start.
Sell more of your current products to your current customers
Sell your current products to new customers who are similar to your current customers.
Sell adjacent products that leverage your core strengths
Partner with a complementary business in a way that is mutually beneficial. For example, each company may introduce the other to their customers in order to grow revenue for both companies.
Advertise through the right channels. Where and how are your target customers being educated on products that you sell, and how can you advertise there?
Some businesses suite themselves well to a sales-force, either internal or contracted. The gauge is whether a sale brings in enough profit to afford the sales commission. If your business model can afford to send sales reps out after new customers, this can be a powerful sales approach.
If your product or service could enhance the offering of other companies, you should consider licensing your product.
The goal of most business owners is to increase the value of their company. Increasing focus on the rate at which the company is growing its revenues, profits and capital base and the return on invested capital is critical to driving business value. Business owners that focus on building shareholder value throughout the life of their companies will create healthier more profitable companies than those that do not. In many cases these healthier companies will in turn lead to stronger economies, higher living standards and more career opportunities for individuals.
Please let us know if you have questions regarding business value creation or any other financial, accounting or tax planning issues. We can be reached at (480) 980-3977.
Business owners, just by their very nature, are greater risk takers than the average person on the street. In many cases, the process of starting a business requires that the entrepreneur put a significant portion of everything they have worked for on the line, based on a belief that their efforts will lead to success. Furthermore, once the risk of starting up is over, other risks, with the potential of even greater opportunity, continue to entice business owners.
Large contracts, new products, acquisitions and expansions into new markets are just a few of the risks. These opportunities along with increased competition are just some of the reasons entrepreneurs need to take a serious look at placing the business at risk again and again. Much of the research about appropriate risk taking, warns against overconfidence, that biases in human behavior against risk might lead business owners to overstate the likelihood of a project’s success and minimize its downside. Such biases were certainly much debated during the financial crisis.
Often overlooked are the behavioral forces, company structures and reward systems that lead businesses to become risk averse or unwilling to tolerate uncertainty even when a project’s potential earnings are far larger than its potential losses. The profit forgone by choosing a safer alternative, putting less money at risk with a shorter time to payoff could result in underinvestment that would ultimately hurt company performance, share-holder returns and the economy as a whole.
Mitigating risk aversion requires that companies rethink activities associated with investment projects that cause the bias, from the processes used to identify and evaluate projects to the structural incentives and rewards used to compensate employees. Much of the typical risk aversion related to smaller investments can be attributed to a combination of two behavioral biases. The first is loss aversion, a phenomenon in which people fear losses more than they value equivalent gains. The second is narrow framing, in which people weigh potential risks as if there were only a single potential outcome instead of viewing them as part of a larger portfolio of outcomes.
Reduce the Effects of Risk Aversion
Diversify Risks Across Multiple Projects
If the same employee faced not one decision but five, the story would change. The employee’s range of outcomes would no longer be an all-or-nothing matter of success or failure, but instead a matter of various combinations of outcomes, some more successful, some less. In other words, combining risks can lead to a striking reduction in risk aversion.
Evaluate employee performance based on a portfolio of outcomes, not single projects.
Wherever possible, employees should be evaluated based on the performance of a portfolio of outcomes, not punished for pursuing a more risky individual project. Reward skill, not luck. Companies need to better understand whether the causes of particular successes and failures were controllable or uncontrollable and eliminate the role of luck, good or bad, in structuring rewards for project owners. They should be willing to reward those who execute projects well, even if they fail due to anticipated factors outside their control, and also to discipline those who manage projects poorly, even if they succeed due to luck.
Promote an organization-wide attitude towards risk that guides individual decisions.
Encourage employees to explore innovative ideas beyond their comfort levels, ask for project ideas that are risky but have high potential returns. Encourage further work on these ideas before formally reviewing them. Require employees to submit each investment recommendation with a riskier version of the same project with more upside or an alternative one.
Consider both the upside and downside.
Business owners should require that project plans include a range of scenarios or outcomes that include both failure and success. Doing so will enable project evaluators to better understand their potential value and their sources of risk. In many cases,downside risks are seldom fixed. If you look at the opportunity creatively and objectively, there are often ways to decrease the downside and reduce the risks. The range of scenarios evaluated should not simply be the baseline scenario plus or minus an arbitrary percentage. Instead, they should be linked to real business drivers such as penetration rates, prices, and production costs. By forcing this analysis, business owners can ensure that the likelihood of a home run is factored into the analysis when the project is evaluated and they are better able to thoughtfully reshape projects to capture the upside and avoid the downside. One rule every business owner needs to follow, if you do not have the time to determine what the downside is, pass on the opportunity.
Have a Contingency Plan
Even though the majority of time and effort spent evaluating an opportunity will not, and should not, be directed towards the downside, it is important to have a back-up plan. The contingency plan needs address how the company would recover in a worst case scenario. From there, a step-by-step plan can be designed. The major value of having a contingency plan is that if the ship starts sinking, benchmarks and plans to take action have already been devised. A contingency plan can also help keep the business focused on going forward with the knowledge that a back-up plan is in place.
Utilize Your Trusted Advisors
At times like this, you need to rely on the opinions of your advisors. Talking to the company’s accountant, banker, attorney, or other business people can provide a wealth of information based on their professional or life experiences. The purpose of listening to these individuals is not necessarily to do what they say, but to build a foundation of information upon which to base the decision.
Monitor Your Results
Compare your actual results to your projected results on a regular basis. If the project is not going according to plan, understand what is causing the diversion and take action to correct it as soon as possible. Also, understand at what point you begin execution of your contingency plans. Monitoring project results on a regular basis can allow you to identify when a project is not on track and gives you the time to make the necessary course corrections to get it back on track.
Business owners, just by their very nature, are greater risk takers than the average person on the street. However, often overlooked are the behavioral forces, company structures and reward systems, that lead businesses to become risk averse or unwilling to tolerate uncertainty even when a project’s potential earnings are far larger than its potential losses. The profit forgone by choosing a safer alternative, putting less money at risk with a shorter time to payoff could result in underinvestment that would ultimately hurt company performance, share-holder returns, and the economy as a whole. Utilizing techniques to encourage employee risk taking, evaluating performance on a portfolio of outcomes, considering a project’s upside and downside, having a contingency plan, utilizing your advisors and monitoring performance, can have a significant impact on a business owner’s ability to effectively manage risk.
Please contact Pinnacle Business Solutions if you have questions concerning managing business risk or any other financial or business planning issues.
Business credit cards have been around for many years, but only recently explicitly targeted true entrepreneurs by offering special financing incentives. Now, major credit card issuers are going after the small business market with a diverse array of credit card products. What isn’t explicitly stated in most credit card offer’s is the fact that business owners can leverage startup and working capital. Furthermore, streamline the buying process for essential business purchases. They may also provide capital solutions for new employees who do not have sufficient personal credit to cover their business expenses.
Credit Card Overview
Credit Cards Can Help Extend Company Cash Flow
For businesses that rely on consistent cash flow for supplies or contractors, a business credit card that can aid in purchases before invoicing customers is ideal. For example, a computer manufacturer may use a credit card at the beginning of the month to buy materials from its computer parts supplier and then pay the card off when the statement comes at the end of the month and its customers have paid for their computers. This way money paid out by the company does not need to come from the computer manufacturer’s cash accounts.
Credit cards offer flexible credit limits, some include fairly generous spending limits while other have no preset spending limits. If your business spending needs increase dramatically due to inventory purchases, a credit card with a flexible spending limit can give you the short term working capital you need to continue doing business. Credit cards can also help businesses on the record keeping side, which is crucial for proper business management. Credit card statements, particularly year end statements, report spending by category which will help the business managers monitor their spending more closely. Having these statements will also make it easier for your CPA to prepare your business tax return.
Credit Card Solutions
Business credit cards come in a variety of sizes and shapes. There are small business credit cards, company credit cards and corporate credit cards offered by the major issuers of Visa, MasterCard and American Express. In general, small business credit cards are targeted at privately held small businesses with less than 100 employees. The unique characteristic of these cards is that they are most often guaranteed by the employee, the business, and the business owner or principal of the firm.
Company credit cards are targeted at companies that have been in business for 2 to 3 years, and are consistently generating revenue and profitability or have a higher net worth (i.e. greater than $1M). These cards are often guaranteed by just the employee and the business. There are also company credit cards available that only have to be guaranteed by the business. However, the company will have to secure the combined credit limit on these cards with some type of collateral such as cash or certificates of deposit held in an escrow account at their bank.
Corporate credit cards are offered to Fortune 500 sized companies and are generally issued in the name of the corporation. As with the nature of corporate structure in American business law, the corporation is considered an individual, and the liability for repayment is placed upon the organization and not the individual using the card. The secondary responsibility between the company and its employees is set and enforced using human resource policies.
Credit Card Terms
Most credit cards contain terms and conditions that cover how the card can be used, what kind of charges the card holder will incur, and a preset monthly spending limit based on business credit history. That spending limit could range from $1,000 to $50,000 per card depending on the company. Some cards do not have a preset spending limit, however, the outstanding balance on these cards is required to be paid off each month.
Many cards charge the holder a fee to use the card such as an annual fee ranging from $0 to $200 per card. All cards come with a stated annual interest rate (or APR) which is charged on all outstanding balances that are carried over from month to month. Interest rates can range from introductory limited time annual interest rates of 0% to annual interest rates as high as 18% APR. Beware of credit cards that offer a very low introductory rate for a limited time, say the first six months, to get your business and then automatically convert to a regular APR of 15% to 18% after the six month period has ended.
Many credit cards offer rewards for making purchases. Rewards can take the form of travel rewards, discounts on autos/gas purchases, discounts on retail purchases, contributions to various types of savings plans and cash back. Cash back awards can range from 1% to 5% of the value of the purchases made.
Find The Card That Is Right For Your Business
Before you select a credit card for your business, ask yourself a few questions.
- How many cards do I need for my business/employees?
- What kind of purchases will my business make with the card?
- Where will my employees use the card; domestically or internationally?
- How much will my business charge on the card?
- Do I plan to pay the card off every month?
- Who will be responsible to guarantee payment of the outstanding balance on the credit cards?
- What credit card rewards could be most effectively utilized by the business?
Knowing the answer to all of these questions will help you determine which credit card solution will work most effectively for your business.
If used properly they can be quite effective in addressing a business owners startup and working capital needs and help streamline the buying process for essential business purchases. They may also provide capital solutions to new employees who do not have sufficient personal credit for business expenses and can even help businesses with their record keeping!
The verdict is still out on the effectiveness of the Tax Cut and Jobs Act (“TCJA”) with increasing GDP, lower unemployment and increasing wages offset by increases in our nation’s deficit and debt (105% of GDP in 2018). That being said, there are several provisions of the TCJA that will impact businesses and individuals in 2019. Here are a few of the key provisions you will want to be aware of.
C Corporation Tax Rate
The C Corporation tax rates changed to a flat rate of 21% effective January 1, 2018. This includes personal service corporations.
|Taxable Income||Tax Rate 2019/2020|
|Less than $50,0000||21%|
|$50,000 – $75,000||21%|
|$75,000 – $10,000,000||21%|
|Greater than $10,000,000||21%|
Qualified Business Income Deduction
Effective January 1, 2018, in the case of a taxpayer other than a C Corporation there shall be a deduction with respect to any qualified trade of business of an amount equal to the lessor of:
- 20% of the taxpayers qualified business income
- The greater of:
a. 50% of the w-2 wages of the qualified business
b. The sum of 25% of the w-2 wages of the qualified business plus 2.5% of the unadjusted basis immediately after acquisition of qualified property
*Please note that the w-2 limitation (2 above) does not apply to any taxpayer whose taxable income for the year does not exceed $321,400 MFJ and $160,700 single. The w-2 limit applies fully for a taxpayer whose taxable income is in excess of the threshold amount by $100,000 MFJ, $50,000 single. Also, note that if your business is a Specified Service Trade or Business (i.e. Health, Law, Accounting, Financial Services) and your taxable income exceeds $421,400 MFJ and $210,700 single, you no longer qualify for the deduction.
Section 179 Expense Limitations and Modifications
The maximum amount a taxpayer can elect to expense under sections 179 is increased from $1,000,000 in 2018 to $1,020,000 Furthermore, the deduction limit or phase out began at $2,500,000 in 2018, this limit is increased to $2,550,000 in 2019. The Section 179 limit for SUVs, Trucks, Vans over 6000 pounds GVWR is $25,000. A truck or van that is a qualified non-personal use vehicle is not subject to the annual depreciation limit.
Taxpayers are required to take and additional first year special depreciation allowance for certain qualified property. This deduction is calculated after taking any Section 179 and before any regular depreciation deduction. This additional depreciation taken on new or used property is held at 100% from 2018 to 2022. This increased deduction also applies to Longer Production Period Property and Certain Aircraft. After 2022, the deduction is reduced 20 percentage points each year until it reaches 0% for qualified property and 20% for Longer Production Period Property and Certain Aircraft in 2027. The additional first year bonus depreciation for vehicles purchased after 9/27/17 remained at $8,000 for 2019.
Qualified Opportunity Funds
This new tax provision provides an effective deferral mechanism for short and long-term capital gains from current investments in nearly all asset classes including stocks and other securities. Unlike Section 1031 “like-kind” deferral, qualified opportunity zones will provide: (i) the ability to invest only the gain rather than the entire current investment, (ii) a broader range of investments eligible for the deferral, (iii) a potential basis step-up of 15 percent of the initial deferred amount of investment, and (iv) an opportunity to abate all taxation on capital gains post-investment.
The new provision allows taxpayers to defer the short term or long-term capital gains tax due upon a sale or disposition of property if the capital gain portion of the sale or disposition is reinvested within 180 days in a “qualified opportunity fund”. A “Qualified Opportunity Zone Fund” is a corporation or partnership that invests at least 90 percent of its assets in qualified opportunity zone property. A Qualified Opportunity Zone is a population census tract that is a low-income community that is designated as a qualified opportunity zone. The governor of each state and the US Treasury Department certify the qualified opportunity zones within a state. In Arizona portions of Phoenix, Scottsdale, Glendale, Tempe and Mesa have been designated as Opportunity Zones.
Limitation of Business Interest Deduction
Effective January 1, 2018, the deduction of business interest will be limited to the sum of:
- Business interest income of the taxpayer for the tax year
- 30% of the adjusted taxable income of the taxpayer for the tax year
- The floor plan financing interest of the taxpayer for the tax year
The amount of any business interest not allowed as a deduction for any taxable year shall be treated as business interest paid or accrued in the succeeding taxable year. There is an exemption from this provision for certain small businesses with average annual gross receipts of less than $25 million for the proceeding 3 tax years.
Repeal of 2 Year Net Operating Loss Carryback and Limit of Carryovers
For losses arising in taxable years after December 31, 2017, the NOL deduction is limited to 80% of taxable income. Furthermore, the Tax Cuts and Jobs Act repeals the 2-year carryback provision except for farming businesses and property and casualty insurance companies.
Limitation of Excess Business Losses of Non-Corporate Taxpayer
Effective January 1, 2018, any excess business losses of the taxpayer shall not be allowed. Where “excess business loss” means the excess of aggregate deductions attributable to the business of the taxpayer over the sum of:
- The aggregate business income/gain of the taxpayer
- $250,000 single and $500,000 MFJ
Research and Development Expenditures
Currently taxpayers may elect to deduct certain expenses for research and development in the current year. Effective after December 31, 2021, research and development expenses will be required to be capitalized and amortized ratably over a 5-year period.
Business Meals and Entertainment Expenses
Effective January 1, 2018, businesses may no longer deduct expenses generally considered to be entertainment, amusement or recreation, membership dues with respect to any club organized for business, pleasure, recreation or other social purpose or a facility used in connection with any of the above. Taxpayers may continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.
The seven Individual Income Tax Brackets will remain as follows:
Income Tax Brackets for 2019
|(10% Below)||Married Filed Jointly||Single|
|Beginning of the 12% Bracket||$19,400||$9,700|
|Beginning of the 22% Bracket||$78,950||$39,475|
|Beginning of the 24% Bracket||$168,400||$84,200|
|Beginning of the 32% Bracket||$321,450||$160,725|
|Beginning of the 35% Bracket||$408,200||$204,100|
|Beginning of the 37% Bracket||$612,350||$510,300|
The marriage penalty is removed in every bracket except 37% for 2018 – 2025.
Standard Deduction/Personal Exemption
Effective January 1, 2018 through 2025, the standard deduction and personal exemption will change as follows:
|Standard Deduction (Single)||$12,200|
|Standard Deduction (MFJ)||$24,400|
Capital Gains and Qualified Dividend Rates for 2019 are as follows:
|Taxable Income (MFJ)||Taxable Income (Single)||Tax Rate|
|Less than $78,750||Less than $39,375||0%|
|Less than $488,450||Less than $434,550||15%|
|Greater than $488,850||Greater than $434,550||20%|
Net Investment Income Tax
This rate remains at 3.8% for 2019 and applies to modified AGI above $250,000 MFJ and $125,000 Single. An individual is subject to the net investment income tax on the lessor of net investment income (i.e. gross income from interest, dividends, annuities, royalties, rents, gain on disposition of property) for the year or or modified adjusted gross income for the year exceeding the threshold amount.
Additional Medicare Tax
This rate remains at .9% for 2019 and applies to wages and self employment income in excess of $250,000 MFJ, $125,000 Single.
State and Local Taxes
Effective January 1, 2018, an itemized deduction is allowed up to $10,000 for state and local income and property taxes, prior to this date this deduction was not limited.
Qualified Residence Interest
Effective January 1, 2018 through 2025, the qualified residence interest deduction and home equity indebtedness deduction are limited as follows:
|Acquisition Indebtedness Limit (MFJ)||$750,000|
|Home Equity Indebtedness Limit (MFJ)||$0|
Miscellaneous Itemized Deductions
Effective January 1, 2018 through 2025 these deductions are suspended.
Alternative Minimum Tax (“AMT”)
The AMT exemption amount increases from $109,400 in 2018 to $111,700 in 2019 MFJ, $70,300 in 2018 to $71,700 in 2019 Single. Furthermore, the phase out threshold for the exemption is increased from from $1,000,000 in 2018 to $1,020,600 in 2019 MFJ, $500,000 in 2018 to $510,300 in 2019 Single.
Shared Responsibility Payment
Effective January 1, 2018, the shared responsibility payment enacted as part of the Affordable Care Act is reduced from $272 per month (Single), $1,360 per month (family of five), to $0 for both categories.
Child Tax Credit Enhanced
This credit was held flat at $2,000 per child from 2018 to 2019. The phase out for the credit was held flat at AGI of $400,000 MFJ and $200,000 Single from 2018 to 2019. There is also a $500 credit for qualifying dependents other than qualifying children.
There are many provisions in the Tax Cuts and Jobs Act legislation that will impact businesses and individuals in 2019. It is in your best interest to understand these changes in the tax law as they could impact both your business and personal bottom lines!
Please let us know if you have questions concerning the 2019 federal tax law changes or any other tax compliance or planning issues, we can be reached at (480) 980-3977!
One of the greatest benefits you can provide to your staff is a retirement plan. Retirement plans provide benefit to the employee as well as the employer. Retirement plans allow you to invest now for financial security when you and your employees retire. As a bonus, you and your employees get significant tax advantages and other incentives.
Employer contributions are tax-deductible. Assets in the plan grow tax-free. Flexible plan options are available. Tax credits (small employer) and other incentives for starting a plan may reduce costs. A retirement plan can attract and retain better employees, reducing new employee training costs.
Employee contributions can reduce current taxable income. Contributions and investment gains are not taxed until distributed. Contributions are easy to make through payroll deductions. Compounding interest over time allows small regular contributions to grow to significant retirement savings. Retirement assets can be carried from one employer to another. Saver’s Credit is available up to $2000 for married couples. The employee has an opportunity to improve financial security in retirement.
Individual Retirement Arrangements (IRAs)
You can contribute if you (or your spouse if filing jointly) have taxable compensation but not after you are age 70½ or older. The most you can contribute to all of your traditional IRA in 2013 is the smaller of, $5,500, or $6,500 if you’re age 50 or older by the end of the year, or your taxable compensation for the year. Your contribution must be made by your tax return filing deadline (not including extensions). For example, you have until April 15, 2014, to make your 2013 contribution. You must start taking required minimum distributions by April 1 following the year in which you turn age 70½ and by December 31 of later years. Any deductible contributions and earnings you withdraw or that are distributed from your traditional IRA are taxable as ordinary income. However, it’s still a great deal considering the net present value of that tax you pay in 30 years is significantly less (~90% less) than if you were to pay the tax on that income today. Please note that if you are under age 59 ½ you may have to pay an additional 10% tax penalty for early withdrawals unless you qualify for an exception. You cannot take a long term loan against your IRA account.
You can contribute at any age if you (or your spouse if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts. Your contributions aren’t deductible, but your investment earnings grow tax free. The contribution limits and filing deadlines are the same as the traditional IRA. You are not required to take required minimum distributions. Qualified distributions (made after the 5 year tax year period) are not taxable. Otherwise, part of the distribution or withdrawal may be taxable. If you are under age 59 ½, you may also have to pay an additional 10% tax penalty for early withdrawals unless you qualify for an exception. You cannot take a long term loan against your IRA account.
A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals). Employers can contribute to employees’ accounts. Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts). There is a limit on the amount of elective deferrals that you can contribute to your traditional or safe harbor 401(k) plan is $17,500 for 2013. You can take a loan against your 401(k) up to $50,000 or 50% of vested account balance, whichever is less. The elective deferral/catch up contribution age 50 and older limit increases to $5,500 for 2013.
There are other limits that restrict contributions made on your behalf. In addition to the limit on elective deferrals, annual contributions to all of your accounts – this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts – may not exceed the lesser of 100% of your compensation $51,000 for 2013. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $255,000 for 2013. Although contributions are not treated as current income for federal income tax purposes, they are included as wages subject to social security (FICA), Medicare, and federal unemployment taxes (FUTA) or by most State governments until they are distributed. A 401(k) plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities.
- Traditional 401(k) plans allow eligible employees (i.e., employees eligible to participate in the plan) to make pre-tax elective deferrals through payroll deductions. In addition, in a traditional 401(k) plan, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both. These employer contributions can be subject to a vesting schedule which provides that an employee’s right to employer contributions becomes non-forfeitable only after a period of time, or be immediately vested. Rules relating to traditional 401(k) plans require that contributions made under the plan meet specific nondiscrimination requirements. In order to ensure that the plan satisfies these requirements, the employer must perform annual tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, to verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.
- Safe harbor 401(k) plans. A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.
- SIMPLE 401(k) plans. The SIMPLE 401(k) plan was created so that small businesses could have an effective, cost-efficient way to offer retirement benefits to their employees. A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans. As with a safe harbor 401(k) plan, the employer is required to make employer contributions that are fully vested. This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year. Limits on the amount of elective deferrals that a plan participant can contribute to a SIMPLE 401(k) plan are different from those in a traditional or safe harbor 401(k). The limit is $12,000 in 2013. The catch up contribution is $2500 in 2013. Employees who are eligible to participate in a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans of the employer.
403(b) Plans – A tax-sheltered annuity (TSA) plan is a retirement plan, similar to a 401(k) plan, offered by public schools and certain 501(c)(3) tax-exempt organizations. An individual may only obtain a 403(b) annuity under an employer’s TSA plan.
SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. SIMPLE IRA plans do not have the start-up and operating costs of a conventional retirement plan. They are available to any small business – generally with 100 or fewer employees. Easily established by adopting Form 5304-SIMPLE, 5305-SIMPLE, a SIMPLE IRA prototype or an individually designed plan document. Employers cannot have any other retirement plan. There is no filing requirement for the employer. The employer is required to contribute each year either a: Matching contribution up to 3% of compensation, or 2% non-elective contribution for each eligible employee. Employees may elect to contribute. Employee is always 100% vested in all SIMPLE IRA money. The amount the employee contributes to a SIMPLE IRA cannot exceed $12,000 in 2013. The catch-up contribution limit for SIMPLE IRA plans for 2012 and 2013 is $2,500. These plans are relatively easy and inexpensive to set up and operate. The employees share responsibility for their retirement. There is no discrimination testing required. Although, they have Inflexible contributions and lower contribution limits than some other retirement plans
SEP Plans (Simplified Employee Pension)
A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP. The Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay. It is available to any size business. It is easily established by adopting Form 5305-SEP, a SEP prototype or an individually designed plan document. If Form 5305-SEP is used, the business cannot have any other retirement plan (except another SEP). There is no filing requirement for the employer. Only the employer contributes. Employee is always 100% vested in (or, has ownership of) all SEP-IRA money. They are easy to set up and operate and have low administrative costs. They also have flexible annual contributions – good plan if cash flow is an issue. However, employer must contribute equally for all eligible employees and SEP’s do not provide for participant loans.
A SARSEP is a Simplified Employee Pension (SEP) plan that was established before 1997. Permits employee salary reduction contributions. Meets the following participation requirements annually based on all eligible employees (even those hired after 1996): At least 50% of eligible employees must choose to make employee salary reduction contributions for the year. Had no more than 25 employees who were eligible to participate at any time during the preceding year.
Payroll Deduction IRAs
Under a Payroll Deduction IRA, employees establish an IRA (either a Traditional or Roth IRA) with a financial institution and authorize a payroll deduction amount for it. A business of any size, even self-employed, can establish a Payroll Deduction IRA program. Payroll Deduction IRAs have the same limits as other IRAs.
Contributions to a profit-sharing plan are made by the employer only and are discretionary. There is no set amount that you need to make. If you can afford to make some amount of contributions to the plan, then go ahead. If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money goes into a separate account for each employee. If you establish a profit-sharing plan, you can have other retirement plans. You can be a business of any size. However you are required to annually file a Form 5500. This plan offers greater flexibility in contributions as contributions are strictly discretionary. It is a good plan if cash flow is an issue. However, administrative costs may be higher than under more basic arrangements. You will also need to test that benefits do not discriminate in favor of the highly compensated employees. Contribution Limits: The lesser of 25% of compensation $51,000 for 2013. Participant Loans are permitted under this plan.
Defined Benefit Plans
Employers can generally contribute (and, therefore, deduct) more than to other types of plans. Substantial benefits can be provided – even with early retirement. Vesting can be immediate or spread out over a seven-year period. Benefits are not dependent on asset returns. If you establish a defined benefit plan you: can have other retirement plans, can be a business of any size, need to annually file a Form 5500 with a Schedule B, need to have an enrolled actuary determine the funding levels and benefits cannot be retroactively decreased. Significant benefits are possible in a relatively short period of time. Employers can contribute (and deduct) more than under other retirement plans. Deduction limit is any amount up to the plan’s unfunded current liability (see an enrolled actuary for further details). These plans provide a predictable benefit. They can be used to promote certain business strategies by offering subsidized early retirement benefits. However, these are the most costly type of plan and are the most administratively complex. An excise tax applies if the minimum contribution requirement is not satisfied.
Money Purchase Plans
Money purchase plans have required contributions. Employers are required to make a contribution, on behalf of the plan participants, to the plan each year. Employees may also contribute to these plans. With a money purchase plan, the plan states the contribution percentage that is required. For example, let’s say that your money purchase plan has a contribution of 5% of each eligible employee’s pay. You, as the employer, need to make a contribution of 5% of each eligible employee’s pay to their separate account. A participant’s benefit is based on the amount of contributions to their account and the gains or losses associated with the account at the time of retirement. It is possible to grow larger account balances than under some other arrangements. However, administrative costs may be higher than under more basic arrangements. You are required to test that benefits do not discriminate in favor of the highly compensated employees. An excise tax applies if the minimum contribution requirement is not satisfied. Contributions are limited to the lesser of 25% of compensation or $51,000 in 2013. Annual filing of Form 5500 is required. Participant Loans are permitted.
Employee Stock Ownership Plans (ESOPs)
An employee stock ownership plan (ESOP) is an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/ money purchase plan. An ESOP must be designed to invest primarily in qualifying employer securities as defined by IRC section 4975(e)(8) and meet certain requirements of the Code and regulations. The IRS and Department of Labor share jurisdiction over some ESOP features.
Retirement plans can help you attract and retain better employees. Furthermore, this can help you improve company performance and reduce new employee training costs. If you questions regarding retirement plans or any other tax planning strategies, schedule a consultation with us today!
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
If you get a call from the “IRS” threatening you with lawsuits or jail unless you pay up immediately … guess what? It’s a scam. IRS impersonation and tax scams by phone, email, postal mail and text are ongoing. Criminals use more and more creative ploys to trick taxpayers and tax preparers. Don’t be a victim.
The IRS doesn’t initiate contact with taxpayers by email, text message or social media channels to request personal or financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.
Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.
The IRS will never:
- Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.
- Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
- Require you to use a specific payment method for your taxes, such as a prepaid debit card.
- Ask for credit or debit card numbers over the phone.
- Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:
If you don’t owe taxes, or have no reason to think that you do:
- Do not give out any information. Hang up immediately.
- Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
- Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.
- If you know you owe, or think you may owe tax:
- Call the IRS at 800-829-1040. IRS workers can help you.
A phishing scam is an unsolicited, bogus email that claims to come from the IRS, your bank, your credit card company, or your employer. They often use fake refunds, phony tax bills, threats of an audit or request personal or financial information. Some emails link to sham websites that look real. The scammers’ goal is to lure victims to give up their personal and financial information. If they get what they’re after, they use it to steal a victim’s money and their identity.
If you get a ‘phishing’ email, the IRS offers this advice:
- Don’t reply to the message.
- Don’t give out your personal or financial information.
- Forward the email to firstname.lastname@example.org. Then delete it.
- Don’t open any attachments or click on any links. They may have malicious code that will infect your computer.
Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.
Please let us know if you have questions concerning these IRS tax scams or any other tax compliance or planning issues.
Note: The information contained in this material represents a general overview of tax regulations and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
Data Source: Internal Revenue Service
Many business owners believe they are so involved with their business, they know every intricate detail, and the last thing they need to spend their time on is a financial plan. They can keep track of all the financial issues their business faces in their head. Others believe that as long as their top line revenue number is growing, they will be fine. “What does a financial plan do for my business?” they say, “it’s outdated as soon as it’s finished”.
What many of these business owners don’t realize is that what may have worked for them when they started their business, may not work for them as their business grows. Their business becomes more complex, involves more employees and requires capital equipment and outside financing. There are many issues businesses face on a daily basis that can be resolved or minimized by a solid financial plan. Here are just a few to think about:
Financial Plans help business owners anticipate cash flow problems.
Many businesses complain of never having enough cash in the bank to make payroll, pay their suppliers or buy needed supplies for their business. Their business is generating more revenue each month; however, they never seem to have enough cash to pay their bills. What they do not realize is that many times as a business grows, it uses more working capital. If they do not plan for these increased working capital needs by establishing other sources of financing, they will continue to face these cash shortages.
A financial plan can provide business owners with a look into the future and enable them to anticipate increased cash flow needs today, secure necessary financing needed in the years to come, and avoid cash shortfalls and business interruptions down the road.
Financial Plans help business owners stay in compliance with bank loan or credit requirements.
Many businesses work with banks to get the capital needed to finance their growth. Oftentimes they do not realize that the bank has certain reporting requirements that accompany its loans. Many of those reporting requirements include such things as: monthly or quarterly financial statements, financial plans as well as maintaining certain financial ratios (i.e. debt coverage, profitability, liquidity, solvency) on an ongoing basis. The banks, as well as other business partners, want assurance that the business owner is mining the store on a regular basis. They need to know that their loan or the credit they extend is in good standing and the company is still in a position to pay it back.
A financial plan helps a company to more effectively manage its financial performance, to achieve its financial goals and required performance ratios. It also enables it to make commitments to its business partners and meet those commitments even in challenging times.
Financial Plans help business owners take advantage of opportunities to grow their business.
Opportunities for new business come along every day. However, many business owners do not have a good process for comparing those new business opportunities to their current business opportunities. Instead, they make a gut feel decision to take on the new business opportunity or pass. This oftentimes results in a suboptimal decision and in some cases can bankrupt the business.
A business with a financial plan will be able to compare those opportunities to its existing plans, financially evaluate the benefits and risks of the opportunity, and calculate the projected return on investment for the opportunity. As a result, the business will be better able to take on those opportunities that improve its overall financial performance and pass on those opportunities that worsen it.
Financial Plans give business owners something to measure their progress against.
Studies have shown time and time again, the more a business measures its performance against established goals, the more likely it is to improve its performance.
By establishing performance goals, business owners set achievement levels to work toward and a method of measurement to evaluate actual performance. Business owners can translate those goals into detailed individual goals for their employees, such goals might include: sales/month, bids/month, projects completed/month, output/month, designs/month etc. Performance toward these goals can then be reviewed on a weekly or monthly basis to identify success or failure.
Financial Plans allow business owners to get in front of their business and plan for softness in the market.
Many companies get surprised by softness in their market; they have not adequately planned for the downturn. Furthermore, they have not built up the necessary reserves and/ or established the necessary financing that their business will need when revenues decrease. As a result, softness in the market can put them out of business.
A financial plan enables a company to plan for the future and understand how their business will perform in an up or down market. Financial plans enable a business owner to look at various market scenarios and see how they impact their business before they happen. Armed with this information, they will be better able to establish a financial structure that can weather an upturn or downturn. They will also be better able to establish the necessary outside financing they need to support them during these soft periods.
A financial plan allows business owners to properly plan for growth.
Many businesses see revenues rising and immediately begin hiring more employees and buying expensive capital equipment, only to let those employees go and fire-sale their equipment a short time later to preserve cash flow. This approach can be very costly and time consuming, not to mention the devastating impact it can have on employees and company moral.
Utilizing a financial plan can help business owners plan for the market upturns and downturns and can help business owners smooth out those peaks and troughs in their business. It can also help business owners explore different options for supporting a significant increase in revenues such as subcontracting. A financial plan can help business owners: establish cash reserves to be used in a downturn instead of laying off staff or help business owners identify softness in certain months throughout the year that can be supported by additional sales in other markets. Planning for the future can also enable their company to negotiate volume discounts with its suppliers, thus lowering their costs and improving the company’s overall profitability.
There are many issues businesses face on a daily basis that can be resolved or minimized by a good financial plan. Financial plans help business owners anticipate cash flow problems, stay in compliance with bank loan or credit requirements, take advantage of opportunities, give them something to measure their progress against, allow them to get in front of their business and plan for softness in market, and enable them to properly plan for growth. Now is a good time to prepare your financial plan for 2020 and beyond. Please give us a call today at (480) 980-3977 to get started!
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
Does this sound familiar? I know my business, why do I need a written plan? I have the plan in my head. My time is better spent running my business rather than writing about it. The plan will be obsolete the day after I write it.
While business and strategic plans are used regularly in many Fortune 500 corporations, there are still those small businesses who have yet to embrace them. It is surprising, given that studies show that 85% of the small businesses that developed business plans were in business after 3 years. This is not bad when you consider that 7 out of 10 businesses fail in the first 3 years of operation.
Having a comprehensive business plan is one of the keys to a successful business. It helps a business owner not only crystallize their thoughts and ideas about a business venture, but it also helps them maintain a focus for the business today and in the future. This can actually save the business owner time in the long-term, as the business grows and becomes more complex.
It is a useful document when communicating your business to outside investors, business partners, employees, customers and suppliers. It helps to educate these partners on your company goals, objectives and your plan to achieve success. It also lets them know how they fit into your plan and what’s in it for them.
It’s also not a bad idea if you are planning to buy or sell a business or obtain a Small Business Administration (SBA) loan (the SBA requires them). Although many lenders don’t require a formal plan, if you want to make a good first impression on the bank and effectively answer your lenders questions you will need to have prepared a business plan. In many cases, the business plan will help increase your chances of getting the financing you need for your business.
Pinnacle Business Solutions have prepared over 50 and reviewed over 500 business plans. These plans can take many sizes and shapes depending on the size and complexity of the company. However in general, the document should be a comprehensive one that covers the next 3 – 5 years and includes all the aspects of running your business such as:
- Executive Summary
- Market Analysis
- Competitive Analysis
The business plan should be a cohesive document with all its components aligned. For example, the marketing and sales plan should be aligned with the revenue projections included in the financial plan.
A business plan can usually be done in 20 to 40 pages. The executive summary included in the plan should be no more than two pages in length and should include the key information from the plan. This executive summary can be given to business partners and investors to introduce your business and give them enough information to determine if they should proceed further with you.
The business plan is a tool to help the business owner more effectively manage their business, so the business owner or management team should be actively engaged in the process of preparing it. The knowledge gained by the business owner when preparing the plan is extremely valuable and can help them to refine their business strategy.
Using outside advisors to help the business owner write the plan can be very helpful, especially if the business owner has never written a plan before or the plan is going to be used with outside investors or business partners. These advisors can also save the business owner time be doing a lot of the research and writing of the business plan. A business owner should know their business plan inside and out as this will enable them to be much more prepared to communicate this plan to outside investors and partners.
Once the plan is complete, it should be used as a living document and kept up to date. It should be updated for changes in the business, at a minimum annually. It should also be reviewed on a regular basis (i.e. monthly or quarterly) to determine whether or not the business is heading in the right direction and meeting its goals and objectives. Most Fortune 500 corporations go through the strategic planning process in Q2 and Q3 of each year. This allows them adequate time to complete the plan before the new year.
Having a good business plan is one of the keys to a successful business. Studies have shown that businesses with business plans are much more likely to be successful than those without plans. If you find yourself making those excuses for not having a plan, it’s not too late. Set aside some time to put your plan in place for 2019 and beyond. A good business plan will pay for itself many times over!
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
For a growing business, having a manageable level of debt can be an effective way of doing business. While some small business owners are proud of the fact that they’ve never taken on debt, that’s not always a realistic or optimal approach. Significant growth often demands considerable capital, and getting that money may require you to seek a bank loan, a personal loan, a revolving line of credit, trade credit or some other form of debt financing.
The question for many small business owners is: How much debt is too much? The answer to this question will lie in a careful analysis of your cash flow and the specific needs of your business and your industry. The guidelines below will help you analyze whether taking on debt is a good idea for your company.
Explore your reasons for borrowing
There are a number of scenarios that may justify taking on debt. In general, debt can be a good idea if you need to improve or protect your cash flow, or you need to finance growth or expansion. In these cases, the cost of the loan may be less than the cost of financing these moves through ongoing income or external equity.
Some common reasons for seeking a loan include:
Working capital – when you’re looking to increase your company’s workforce or boost your inventory and sales.
Expanding into new markets – when companies enter new markets, they often face a longer collection cycle or must offer more favorable terms to new customers; borrowed funds can help weather this period.
Making capital purchases – you may need to finance new equipment in order to move your business into a new market or expand your product line.
Improving cash flow – if you have less than 10 years left on an existing long-term debt, refinancing can improve cash flow.
Building a credit history or relationship with a lender – if you haven’t borrowed before, taking out a loan can help in developing a good repayment history and can help obtain financing in the future.
Before taking out a loan or any other kind of debt financing, you should spend time planning your capital needs. This point cannot be emphasized enough. Many companies fail to do this planning and find themselves in a tight situation when they need the financing. The worst time to take on any kind of debt is during a crisis. A sudden loss of trade credit, the inability to meet a payroll or other emergency could force you to take on debt immediately, resulting in highly unfavorable terms. A plan forecasts your cash requirements, allowing you to determine what you will need and when you will need it. Planning ahead will give you time to explore all possible borrowing sources, negotiate the most favorable terms and allow you to determine if your company has the ability to make the principle and interest payments on the new debt.
A capital plan should consist of a complete review of your income statement, balance sheet and cash flow statement to help you analyze current cash flow, assets and liabilities. It should also consist of a 3 year financial statement forecast to evaluate how your business is projected to perform in the future with this new financing.
Examine short-term vs. long-term debt
Just as you need to be certain you’re taking out a loan for the right reasons, you also need to make sure you’re taking out the right kind of loan. Taking out a short-term loan when a longer term loan is required can quickly create financial problems. You may be forced to take unnecessary measures (such as selling a piece of the business) to meet the obligation. For instance, if you experience a temporary rapid increase in sales (such as that brought on by increased seasonal demand), then you should look at a short-term loan. In general, use short-term loans for short-term needs. This will help you avoid the higher interest expenses and more restrictive conditions of longer term borrowing.
If the growth will continue over a long time, take a look at longer term options. Such options may include an expanding line of credit (based on sales), accounts receivables, inventory ratios or term loans between 5-10 years.
Base new debt on current needs
When interest rates are low and money is cheap, you may be tempted to take out loans to buy equipment or make other capital purchases. If that’s the case with your business, be sure to base your decision solely on your current needs. The possibility of rates increasing is not a rationale for spending money on something you don’t need.
For a growing business, having a manageable level of debt can be an effective way of doing business. Significant growth often demands considerable capital, and getting that money may require you to seek debt financing. Taking the time to plan for your growth needs and identify the right type of financing for your business, can really help to ensure your company is positioned for success.
With the cost of healthcare increasing each year, should you be considering a High Deductible Health Plan with a Health Savings Account for your company?
A High Deductible Health Plan (“HDHP”) is a new health plan product, that when combined with a Health Savings Account (“HSA”) provides insurance coverage and a tax-advantaged way to help you and your employees save for future medical expenses. The HDHP/HSA gives you greater flexibility and discretion over how you and your employees use your health care dollars.
Who would benefit from an HDHP/HSA Plan?
If your medical expenses are generally limited to preventative care, you should definitely consider an HDHP; especially if you have the ability to make additional voluntary contributions to your HSA to accelerate the accumulation of funds for future medical expenses. However, If you have significant medical expenses that do not approach catastrophic limits, you are probably better off in a traditional plan. An HDHP plan has a higher annual deductible compared to traditional health plans. For 2006, an HDHP has a minimum annual deductible of $1,100 for single and $2,200 for family coverage. They also have maximum out-of-pocket limits of $5,000 for single and $10,000 for family.
Health Savings Accounts
An HSA account is a tax sheltered trust account that you own for purposes of paying qualified medical expenses for yourself and your family. Your HSA voluntary contributions are tax deductible. Additionally, interest earned on your HSA account is tax free. Furthermore, tax free withdrawals may be made for qualified medical expenses. Unused funds and interest left in the account at the end of the year are carried over, without limit, year to year. You own the HSA account, so all the dollars in this account are yours to keep – even when you change plans or retire. Your HSA is administered by a trustee or custodian who helps to manage the contributions and withdrawals from your account as well as manage the investments that the funds in the account are placed in.
How will the HSA save my company and employees money?
An HSA account will save you money through lower premiums, tax savings, and money deposited into your account that can be used to pay your deductibles and other out-of-pocket medical expenses in the current year and future. The funds in your HSA account can be invested in: bank accounts, annuities, certificates of deposit, stocks, bonds and mutual funds. However, your HSA custodian or trustee may offer only some of these types of investments, so you will want to understand these limitations before you choose your HSA custodian or Trustee.
What is the process for setting up an HSA?
First, you must elect a high deductible health plan. Generally, once the plan receives your company enrollment, the plan will mail you an information packet that includes banking forms for you to complete. When the plan receives the completed forms the plan will notify the administrator of the HSA (generally this is a bank). The administrator will then set up your employee accounts and your health plan will deposit pass through premiums payments into the account. Keep in mind that not all employees are required to use the same plan administrator, the employee can choose their administrator and what type of investments they will make with their contributions. Any investment allowed for IRA’s is allowed for HSA accounts.
With the cost of healthcare increasing each year, you may want to consider a High Deductible Health Plan with a Health Savings Account for your company. These HDHP/HSA accounts can lower your insurance premiums, reduce your tax bill and give you more flexibility to determine how your health care dollars are used. They can also be one additional benefit you can offer your employees!