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.

Businesses

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.

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:

1. 20% of the taxpayers qualified business income
2. 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.

Bonus Depreciation

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:

1. Business interest income of the taxpayer for the tax year
2. 30% of the adjusted taxable income of the taxpayer for the tax year
3. 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:

1. The aggregate business income/gain of the taxpayer
2. $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.

Individuals

The seven Individual Income Tax Brackets will remain as follows:

Income Tax Brackets for 2019

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:

Capital Gains and Qualified Dividend Rates for 2019 are as follows:

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:

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.

Business Benefits

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 Benefits

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.

Roth IRAs

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.

401(k) Plans

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.

SARSEP
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.

Profit-Sharing Plans
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 phishing@irs.gov. 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.

Conclusion

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
• Vision/Mission
• Goals/Objectives
• Market Analysis
• Competitive Analysis
• Strategy
• Product/Services
• Marketing/Sales
• Operations
• Financials

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.

Plan effectively

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.

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.

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!

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.

The U.S. Small Business Administration reports that approximately 40,000 businesses close their doors or file for bankruptcy each month. Many of these businesses were buried in debt without a viable plan to dig themselves out and had hopes that things would get better. Getting a business out of, or in control of its debt requires a plan that can be executed with discipline and patience. It requires spending time and effort to properly repay your creditors to the extent your business is able.

Debt restructuring is a process of negotiating new payment terms with existing creditors with a purpose of satisfying your creditors based on a budget you can afford in an effort to avoid lawsuits and bankruptcy. Restructuring includes reducing the amount owed and/or stretching out the time period for making payments to creditors. Debt restructuring can keep you in business, extend your payments over time and possibly save you money. If a true hardship is properly presented to your creditors, many will go outside of their normal collections procedures. Furthermore, many creditors can save money (collection fees, legal fees) by working a deal out with you. We should note that debt restructuring does not preserve your credit score. Most likely your business credit score will decrease during this process.

Here are some of the key components of debt restructuring

• Determine how critical your debt problem is
• Identify which debt needs to be restructured
• Project how much you can afford to pay toward these debts on a monthly basis
• Consider the future profitability of your business
• Determine how much time and effort you can devote to the restructuring process
• Create affordable settlement offers
• Negotiate with creditors and collectors and reserve funds

Signs that you need to restructure your debt

1. Having difficulty paying current bills as well as past due debts
2. Putting off debts you had planned to pay
3. Already negotiated payment terms with creditors, but can’t afford them
4. Paying smaller creditors while dodging larger creditors that potentially pose a bigger threat
5. Being contacted by a collection agency or being sued
6. Bouncing checks
7. 30% or more of your payables are over 90 days past due

Which creditors should be restructured?

You don’t have to renegotiate with all creditors. Some creditors will do business with you on a COD or cash basis while you negotiate the past due balance with them. If they refuse to do business with you, their competitors may take advantage of the opportunity to get your business. First, you should put your creditors into 3 groups:

Group 1

• No longer want to do business with you
• You no longer need to do business with them
• Have stopped giving you credit
• Are not critical to your survival
• Have threatened or placed you in collection

Group 2

• Are still willing to sell to you
• Are not pushing for any past due balance
• Their products or services may be important, but can be repurchased somewhere else

Group 3

• Are critical to your survival. Without their products or services, you would be forced to close your doors. There is absolutely nowhere else you could get those products or services

Once you have classified your creditors, add up the amounts you owe each group. The first thing to make sure of is your ability to pay Group 3 according to their terms. All of Group 1 should be restructured; review Group 2 to determine how much should be restructured. The tighter your cash flow is the more of Group 2 should be restructured. Add up all the debts that should be restructured.

Settlement offers

A complete settlement proposal to your creditors should include a discussion of your hardship (i.e. personal tragedy, disaster, serious business problems etc.), your proposed payment plan and your business history which gives the creditor a summary of your historical financial performance and the basic reasons for the hardship. Don’t expect your creditors to settle quickly and easily, they won’t. Each will react differently. The goal of restructuring is to satisfy creditors with what you can afford. This will be done with combination of reducing debts and extending payments out over time.

Negotiate with creditors and reserve funds

The day you send out your first set of offers is the day you should set aside the amount of your monthly budget. These funds are sacred and should not be used for anything else. Keep records of how much has been set aside and how much has been paid out. Your creditors won’t necessarily take your first settlement offer. However, the longer it takes for a creditor to settle, the more money you can accumulate for future settlement purposes. Use your reserve funds prudently. Just because a creditor makes an offer that sounds good, doesn’t mean you can or should take it. In some cases, a generous offer from a creditor may still be unaffordable, especially if it requires all the funds to be paid immediately. Lastly, realize that things don’t always go as planned. An unexpected business problem can arise and derail your repayment promises. Stay on track by having a plan and retaining your credibility with creditors and business partners by keeping them informed of any changes that may affect them.

Closing

If your business is: starting to have difficulty paying current bills and past due debts, being contacted by a collection agency, bouncing checks or has 30% or more of its payables are over 90 days past due, you may want to give serious consideration to debt restructuring. It could be the difference between staying in business or having to close your doors.

Don’t become a statistic! If your business is experiencing problems with debt please give us a call at (480) 980-3977.

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.

The manufacturing industry can be significantly impacted by changes in such things as commodity prices, labor rates, technology, tariffs and duties. This industry can present challenges from a financial perspective to its participants. Some of these challenges include management of inventory, capital equipment, profit, cash flow, financing and solvency.

Inventory

One of the larger challenges manufacturers can face is effectively managing inventory. Not holding enough inventory can result in stock-outs and missed sales opportunities. On the other hand, holding too much inventory can result in increased carrying costs and risk of obsolescence. Manufacturers need to stay on top of and monitor their inventories at all times to ensure they are building the right product at the right time. They should also look for ways to reduce the manufacturing cycle time; from sourcing raw materials to completing finished product. The shorter this time, the less inventory that has to be carried. Manufacturers that are able to turn over their inventory more frequently, are able to quickly respond to changes in the market and demand. They are also able to minimize the working capital they need for their business. Keeping inventory fresh reduces risk (should the market change directions or the overall economy slow down).

Capital Equipment

From equipment to robotics to software, these items have a significant impact on a company’s performance. For example, manufacturers are increasingly leveraging the Internet of Things (IoT), which entails the interconnection of unique devices within an existing Internet infrastructure, to achieve a variety of goals including cost reduction, increased efficiency, improved safety, meeting compliance requirements, and product innovation. Roughly 63% of manufacturers believe that applying IoT to products will increase profitability over the next five years and are set to invest $267 billion in IoT by 2020. Nearly a third (31%) of production processes and equipment and non-production processes and equipment already incorporate smart device/embedded intelligence.

Manufacturers are continually challenged with maintaining up to date capital equipment to remain competitive in the marketplace. If you hold manufacturing equipment too long it will be become obsolete and inefficient. However, buying new equipment prematurely and it may become difficult to install, run, manage and maintain. It can also be under-utilized. Manufacturers need to ensure they have the have the right equipment for the job today and in the future. They could benefit tremendously from a well thought out capital purchase plan that enables them effectively plan for growth.

Profit

The manufacturing industry is very competitive, which puts pressure on product pricing and can result in low bottom-line profit margins. It is critical that businesses in this industry operate as efficiently as possible. This includes effectively managing capital equipment, ensuring that you have the right equipment for the job, that the equipment is utilized 95%+ of the time and that it is well maintained. It also includes utilization of subcontract manufacturers for certain types of work that require special equipment. Maintaining good controls over indirect spending is also important. These indirect spending areas include: people, utilities, rent, supplies and insurance. Maintaining highly productive employees is key. Taking the time to hire the right people for the right position is critical. Also, ensuring they are well trained, motivated, have clear expectations and that they are delivering the desired results for the company. Reviewing insurance coverages on a regular basis is also important. Making sure you have the right insurance for your business today and into future and working with your insurance carrier to do everything you can to reduce your risk of loss with solid business processes. Many businesses in this industry have significant rent expense for buildings. Business owners need utilize their building efficiently and ensure unused space is not excessive. This will help keep rent expense, property taxes, insurance and utility costs at a minimum.

Cash Flow

The manufacturing industry has historically been a very high-volume business with very low gross margin and profit margins. The industry can also be characterized by long lead times and shipment times for parts and products. This can result in large accounts receivable and account payable balances on an ongoing basis. If customers are slow to pay their invoices (i.e. >30 days), this can quickly present challenges from a cash flow perspective. If a product does not get completed correctly there can be a claim regarding the product, and collection can be delayed. Manufacturers should consider taking deposits from customers upfront to cover hard costs. They should also maintain aggressive accounts receivable collection processes to ensure that clients receive invoices quickly, acknowledge receipt of outstanding invoices, and pay within payments terms. Providing invoices and receiving payments electronically is highly recommended. Maintaining a positive relationship with vendors is also critical and ensuring that vendors are paid according to payment terms is key. Matching payment terms with vendors and customers can really help to maintain positive cash flow.

Financing

The manufacturing industry is challenged is several areas. Some participants have Beta’s of 1.25 or more which indicates that they are more volatile than the overall stock market. Industry participants need to continually upgrade their equipment to remain competitive, which drives up capital spending and fixed assets. Many participants are small-businesses that are not well capitalized. When the overall economy slows, many industry participants become unprofitable and find it hard to make their equipment loan payments. All of these characteristics make it challenging to obtain low cost working capital and equipment financing. Business owners should work to position their business over time for traditional bank financing by improving business profitability, liquidity and solvency ratios. They should also consider increasing cash reserves. Improving business efficiency, increasing bottom line profit, strengthening the balance sheet and driving growth will make your business more attractive to traditional lenders. It can also positively position the company to weather any downturn in the economy, cyclicality in the market, and impact from changing: commodity prices, labor rates, tariffs and duties.

Solvency

As previously mentioned, the manufacturing industry is evolving rapidly, technology is changing and this industry is challenged with effectively managing capital equipment. New equipment can also saddle a small manufacturer with a large amount of debt and large debt service payments. This increased debt can have a significant impact on the manufacturer’s solvency ratios such as its Debt-Equity Ratio (long term debt / shareholder’s equity) and its Interest Coverage Ratio (income from continuing operations + interest expense + income tax expense)/interest expense). If these solvency ratios fall below industry averages, the manufacturer can be in default on its loans, making it difficult to maintain its financing or qualify for additional financing. These large debt service payments can have a large impact on a manufacturer’s working capital, making it difficult to meet current liability payments on-time. This can result in damaged vendor relationships making difficult to do business in the future. A solid financial plan can help ensure that the right financing is in place for equipment.  It can also ensure the business owner understands the impact to solvency ratios prior to making any capital equipment purchase.

Conclusion

The manufacturing industry can be significantly impacted by changes in such things as commodity prices, labor rates, technology, tariffs and duties. This industry can present challenges from a financial perspective to its participants. Some of these challenges include management of inventory, capital equipment, profit management, cash flow, financing and solvency. Business owners that are able to effectively manage these challenges can really improve their bottom line and position their company for growth!

If you have any questions regarding the financial issues discussed above or any other financial issues, please give us a call at (480) 980-3977.

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.

The overall market in the commercial printing industry generated a combined revenue of approximately $84 billion in the United States among approximately 25,000 establishments and 447,000 employees. The industry has also been experiencing consolidation, as the larger printers acquire the smaller printers in the market. Of these revenues, approximately $920 million was from Arizona alone among 390 establishments and 4,950 employees. This results in an average revenue per printer of $2.3M.

The commercial print industry is experiencing a reduction in the use of printed material as more and more information is being distributed via electronic means through the internet and email. Consumers are increasingly favoring digital alternatives, such as online media, over printed materials. There has also been a shift towards shorter print runs with less volume and tighter deadlines. Additionally, there has been an increase in demand for paper finishes or laminates such as soft touch on printed material. As a result, commercial printers have been continuing to invest in new technology and equipment to remain competitive.

The industry can be significantly impacted by changes in such things as paper prices, fuel prices, technology. This industry can present challenges from a financial perspective to its participants. Some of these challenges include: profit management, cash flow management, financing, solvency and uncollectible accounts receivable.

Profit Management

The printing industry is very competitive, which puts pressure on product pricing and can result in low bottom-line profit margins. It is critical that businesses in this industry operate as efficiently as possible. This includes effectively managing capital equipment such as printing, cutting and folding equipment, ensuring that you have the right equipment for the job, that the equipment is utilized 95%+ of the time and that they are well maintained. It also includes utilization of subcontract printers for certain types of print work that requires special equipment. Maintaining good controls over indirect spending is also important. These indirect spending areas include: people, utilities, rent, supplies and insurance. Maintaining highly productive employees is key. Taking the time to hire the right people for the right position is critical. Also, ensuring they are well trained, motivated, have clear expectations and that they are delivering the desired results for the company. Reviewing insurance coverages on a regular basis is also important. Making sure you have the right insurance for your business today and into future and working with your insurance carrier to do everything you can to reduce your risk of loss with solid business processes. Many businesses in this industry have significant rent expense for buildings. Business owners need to ensure they are utilizing their building efficiently, that they do not have excessive unused building space. This will help keep rent expense, property taxes, insurance and utility expenses at a minimum. Use of technology in the printing industry is also very important. Businesses should be evaluating the latest technology that can be used to more efficiently produce its printed materials. This could be items such as: new printers that offer higher quality customized printed material in both large and small format. Printers that allow for 1 to 1 marketing. Enhanced computer technology that enables electronic transfer of information with customers and vendors. It could also include the use of alternative sources of energy, such as solar energy, to lower utility costs.

Cash Flow Management

The printing industry has historically been a very high-volume business with very low gross margin and profit margins. This results in large accounts receivable and account payable balances on an ongoing basis. If customers are slow to pay their invoices (i.e. >30 days), this can quickly present challenges from a cash flow perspective. If a print job does not get completed correctly there can be a claim regarding the printed material, and collection can be delayed. Printers should consider taking deposits from customers upfront to cover hard costs such as paper, ink and printing plates. They should also maintain aggressive accounts receivable collection processes to ensure clients receive invoices quickly, clients acknowledge receipt of outstanding invoices, and payments are received within payments terms. Providing invoices and receiving payments electronically is highly recommended. Maintaining a positive relationship with vendors is also critical, ensuring that vendors are paid according to payment terms is key. Matching payment terms with vendors and customers can really help to maintain positive cash flow.

Financing

The industry has an average beta of 1.75 which indicates that it is more volatile than the overall stock market. Industry participants need to continually upgrade their printing equipment to remain competitive, which drives up capital spending and fixed assets. Many participants are small-businesses that are not well capitalized. When the overall economy slows, many industry participants become unprofitable and find it hard to make their equipment loan payments. All of these characteristics make it challenging for industry participants to obtain low cost working capital and equipment financing. Business owners should work to position their business over time for traditional bank financing by improving business profitability, liquidity, solvency ratios. They should also consider increasing cash reserves. Improving business efficiency, increasing bottom line profit, strengthening the balance and driving growth will make your business more attractive to traditional lenders. It can also put the company in a good position to: weather any downturn in the economy, cyclicality in the market, or impact from changing fuel prices.

Solvency

As previously mentioned, the printing industry is evolving rapidly, technology is changing and this industry is challenged with effectively managing capital equipment. Hold printing equipment too long and it becomes obsolete and inefficient. Buy new equipment too early and it can be difficult to install, run, manage and maintain. It can also be under-utilized. New equipment can also saddle a small printer with a large amount of debt and large debt service payments. This increased debt can have a significant impact on the printer’s solvency ratios such as its Debt-Equity Ratio (long term debt / shareholders equity) and its Interest Coverage Ratios (income from continuing operations + interest expense + income taxes)/interest expense. If these solvency ratios fall below industry averages, the printer can be in default on its loans, making it difficult to maintain its financing or qualify for additional financing. These large debt service payments can also have a large impact on the printer’s working capital, making it difficult for a printer to make its current liability payments on-time. This can damage vendor relationships and make it difficult to do business in the future. Printer could benefit tremendously from a well thought out capital purchase / financial plan. This will help ensure they are buying the right equipment at the right time. It will also help to ensure they have the right financing in place for the equipment and that they understand the impact to their solvency ratios.

Uncollectible Accounts Receivable

The printing industry is also characterized by many small and medium sized customers, from individuals to businesses to government entities. The individuals and small businesses can be underfunded. The medium sized businesses and government entities can take 60 – 90 days to pay for their print work. Printing business owners need to recognize this risk and take measures to limit their exposure in this area. Some things that can be done to reduce this risk include regular credit checks on all customers, establishing tight credit limits on all customers, and aggressive collection efforts on all outstanding balances. They should also consider taking security deposits from some or all customers who are new or have a history of poor performance, especially for the larger print jobs. Once the business owner has extended credit to one of these customers, they have put themselves into a challenging position. Collection and legal actions can be expensive and time consuming and even if you are successful in a getting a judgement, it still has to be collected. If the customer does not have the funds to pay or declares bankruptcy, the business owner is still not going to receive payment.

Conclusion
The commercial printing sector is an exciting and fast paced industry. It is a cyclical industry that is capital intensive and contains many large and small industry participants. It is a high-volume business with relatively tight gross margin and profits margins. The industry can be significantly impacted by changes in such things as fuel prices, tariff and duties and changes in US Gross Domestic Product. This industry can present challenges from a financial perspective to its participants. Some of these challenges include: profit management, cash flow management, financing, solvency, uncollectible accounts receivable.  Business owners that are able to effectively manage these challenges can really improve their bottom line!

If you have any questions regarding the financial issues discussed above or any other financial issues, please give us a call at (480) 980-3977.

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.