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U.S. House passes the Build Back Better Act
The U.S. House of Representatives passed a crucial part of President Biden’s agenda by a vote of 220-213 on November 19. The Build Back Better Act (BBBA) includes numerous provisions related to areas ranging from health care, climate change and immigration to education, social programs and, of course, taxes.
Impact on the deficit
The House vote came after the Congressional Budget Office (CBO) released its score on the legislation on Nov. 18. The CBO estimates that the legislation will increase the deficit by $367 billion over a 10-year period.
However, the CBO score doesn’t take into account any additional revenues generated by improved compliance with federal tax laws. The BBBA allocates $80 billion for the IRS to heighten enforcement (which the CBO did include in its calculation), likely to target primarily high-wealth individuals, businesses and overseas transactions. The U.S. Treasury Department “conservatively” estimates increased IRS enforcement will lead to $400 billion in additional revenues over the 10-year period.
Significant tax proposals
Funding for the sweeping package largely comes from tax increases on high-income individuals and businesses, but the law also includes tax breaks for eligible taxpayers. Some of the most notable tax-related provisions include:
State and local taxes (SALT) deduction. The BBBA would amend the Tax Cuts and Jobs Act (TCJA) to raise the cap on the so-called SALT deduction from $10,000 to $80,000 ($40,000 for married taxpayers filing separately) for tax years 2021 through 2031. The limit would return to $10,000 in 2032.
Child tax credit (CTC). The American Rescue Plan Act (ARPA) expanded the CTC from $2,000 per child to $3,000 per child ages six through 17 and $3,600 per child under age six. The BBBA would extend the expansion through 2022.
Premium tax credits (PTCs). The ARPA expanded the availability of PTCs for health insurance purchased through Affordable Care Act exchanges (for example, Healthcare.gov) for 2021 and 2022. The BBBA would extend the expansion through 2025.
High-income surtax. The BBBA would create a 5% surtax on individuals with a modified adjusted gross income (MAGI) that exceeds $10 million ($5 million for married taxpayers filing separately). It adds another 3% surtax on MAGI exceeding $25 million ($12.5 million for married taxpayers filing separately). The surtax would take effect for 2022.
Net investment income tax (NIIT). The BBBA would expand the 3.8% NIIT to apply to the trade or business income of high-income individuals, regardless of whether they’re actively involved in the business. The income thresholds are over $500,000 for joint filers, over $400,000 for single filers and over $250,000 for married couples filing separately. The NIIT currently applies to business income only if the income is passive.
Retirement savings. The BBBA includes several limitations on the ability of high-income taxpayers with large retirement account balances to take advantage of certain tax breaks. For example, beginning in 2029, it would prohibit additional contributions to a Roth IRA or traditional IRA for a tax year if a taxpayer’s income exceeds a certain amount and the contributions would cause the total value of an individual’s IRA and defined contribution accounts as of the end of the prior tax year to exceed $10 million. The bill also would impose new mandatory distribution requirements on such taxpayers. But some retirement-related provisions would go into effect as soon as 2022, such as ones that would restrict and, in some circumstances, eliminate Roth conversions.
Minimum corporate tax rate. The BBBA would impose a 15% minimum tax on the profits of corporations that report more than $1 billion in profits to shareholders (book income vs. tax income), for tax years beginning after 2022.
Excess business losses. The BBBA would make permanent the Tax Cuts and Jobs Act’s limit on the amount of excess business losses that pass-through entities and sole proprietors can use to offset ordinary income. It also would create a new carryforward for unused excess business losses, rather than carrying them forward as net operating losses.
Excise tax on stock buybacks. The BBBA includes a 1% excise tax on the fair market value of stock buybacks by publicly traded U.S. corporations, which would be effective for repurchases after 2021.
Business interest deduction. The BBBA would add a new limit on the amount of net interest expense that certain corporations that are part of an international financial reporting group can deduct, for tax years beginning after 2022.
Moving on to the Senate
Now that the bill has been passed by the House, it still must fight its way through the Senate, where it faces additional debate. A Senate vote isn’t expected to take place until late December. Most likely the Senate will make some changes to the bill, which could include changes to some of the tax provisions. We’ll keep you apprised of the important developments.
© 2021
Businesses must navigate year-end tax planning with new tax laws potentially on the horizon
The end of the tax year is fast approaching for many businesses, but their ability to engage in traditional year-end planning may be hampered by the specter of looming tax legislation. The budget reconciliation bill, dubbed the Build Back Better Act (BBBA), is likely to include provisions affecting the taxation of businesses — although its passage is uncertain at this time.
While it appears that several of the more disadvantageous provisions targeting businesses won’t make it into the final bill, others may. In addition, some temporary provisions are coming to an end, requiring businesses to take action before year end to capitalize on them. As Congress continues to negotiate the final bill, here are some areas where you could act now to reduce your business’s 2021 tax bill.
Research and experimentation
Section 174 research and experimental (R&E) expenditures generally refer to research and development costs in the experimental or laboratory sense. They include costs related to activities intended to uncover information that would eliminate uncertainty about the development or improvement of a product.
Currently, businesses can deduct R&E expenditures in the year they’re incurred or paid. Alternatively, they can capitalize and amortize the costs over at least five years. Software development costs also can be immediately expensed, amortized over five years from the date of completion or amortized over three years from the date the software is placed in service.
However, under the Tax Cuts and Jobs Act (TCJA), that tax treatment is scheduled to expire after 2021. Beginning next year, you can’t deduct R&E costs in the year incurred. Instead, you must amortize such expenses incurred in the United States over five years and expenses incurred outside the country over 15 years. In addition, the TCJA requires that software development costs be treated as Sec. 174 expenses.
The BBBA may include a provision that delays the capitalization and amortization requirements to 2026, but it’s far from a sure thing. You might consider accelerating research expenses into 2021 to maximize your deductions and reduce the amount you may need to begin to capitalize starting next year.
Income and expense timing
Accelerating expenses into the current tax year and deferring income until the next year is a tried-and-true tax reduction strategy for businesses that use cash-basis accounting. These businesses might, for example, delay billing until later in December than they usually do, stock up on supplies and expedite bonus payments.
But the strategy is advised only for businesses that expect to be in the same or a lower tax bracket the following year — and you may expect greater profits in 2022, as the pandemic hopefully winds down. If that’s the case, your deductions could be worth more next year, so you’d want to delay expenses, while accelerating your collection of income. Moreover, under some proposed provisions in the BBBA, certain businesses may find themselves facing higher tax rates in 2022.
For example, the BBBA may expand the net investment income tax (NIIT) to include active business income from pass-through businesses. The owners of pass-through businesses — who report their business income on their individual income tax returns — also could be subject to a new 5% “surtax” on modified adjusted gross income (MAGI) that exceeds $10 million, with an additional 3% on income of more than $25 million.
Capital assets
The traditional approach of making capital purchases before year-end remains effective for reducing taxes in 2021, bearing in mind the timing issues discussed above. Businesses can deduct 100% of the cost of new and used (subject to certain conditions) qualified property in the year the property is placed in service.
You can take advantage of this bonus depreciation by purchasing computer systems, software, vehicles, machinery, equipment and office furniture, among other items. Bonus depreciation also is available for qualified improvement property (generally, interior improvements to nonresidential real property) placed in service this year. Special rules apply to property with a longer production period.
Of course, if you face higher tax rates going forward, depreciation deductions would be worth more in the future. The good news is that you can purchase qualifying property before year-end but wait until your tax filing deadline, including extensions, to determine the optimal approach.
You can also cut your taxes in 2021 with Sec. 179 expensing (deducting the entire cost). It’s available for several types of improvements to nonresidential real property, including roofs, HVAC, fire protection systems, alarm systems and security systems.
The maximum deduction for 2021 is $1.05 million (the maximum deduction also is limited to the amount of income from business activity). The deduction begins phasing out on a dollar-for-dollar basis when qualifying property placed in service this year exceeds $2.62 million. Again, you needn’t decide whether to take the immediate deduction until filing time.
Business meals
Not every tax-cutting tactic has to be dry and dull. One temporary tax provision gives you an incentive to enjoy a little fun.
For 2021 and 2022, businesses can generally deduct 100% (compared with the normal 50%) of qualifying business meals. In addition to meals incurred at and provided by restaurants, qualifying expenses include those for company events, such as holiday parties. As many employees and customers return to the workplace for the first time after extended pandemic-related absences, a company celebration could reap you both a tax break and a valuable chance to reconnect and re-engage.
Stay tuned
The TCJA was signed into law with little more than a week left in 2017. It’s possible the BBBA similarly could come down to the wire, so be prepared to take quick action in the waning days of 2021. Turn to us for the latest information.
© 2021
Engaging in customer-focused strategic planning
When creating or updating your strategic plan, you might be tempted to focus on innovative products or services, new geographic locations, or technological upgrades. But, what about your customers? Particularly if you’re a small to midsize business, focusing your strategic planning efforts on them may be the most direct route to a better bottom line.
Do your ABCs
To get started, pick a period — perhaps one, three or five years — and calculate the profitability contribution level of each major customer or customer unit based on sales numbers and both direct and indirect costs. (We can help you choose the ideal metrics and run the numbers.)
Once you’ve determined the profitability contribution level of each customer or customer unit, divide them into three groups: 1) an A group consisting of highly profitable customers whose business you’d like to expand, 2) a B group comprising customers who aren’t extremely profitable, but still positively contribute to your bottom line, and 3) a C group that includes customers who are dragging down your profitability, perhaps because of constant late payments or unreasonably high-maintenance relationships. These are the ones you can’t afford to keep.
Devise strategies
Your objective with A customers should be to strengthen your rapport with them. Identify what motivates them to buy, so you can continue to meet their needs. Is it something specific about your products or services? Is it your customer service? Developing a good understanding of this group will help you not only build your relationships with these critical customers, but also target sales and marketing efforts to attract other, similar ones.
As mentioned, Category B customers have some profit value. However, just by virtue of sitting in the middle, they can slide either way. There’s a good chance that, with the right mix of sales, marketing and customer service efforts, some of them can be turned into A customers. Determine which ones have the most in common with your best customers, then focus your efforts on them and track the results.
Finally, take a hard look at the C group. You could spend a nominal amount of time determining whether any of them might move up the ladder. It’s likely, though, that most of your C customers simply aren’t a good fit for your company. Fortunately, firing your least desirable customers won’t require much effort. Simply curtail your sales and marketing efforts, or stop them entirely, and most will wander off on their own.
Brighten your future
As the calendar year winds down, examine how your customer base has changed over the past months. Ask questions such as: Have the evolving economic changes triggered (at least in part) by the pandemic affected who buys from us and how much? Then tailor your strategic plan for 2022 accordingly.
Please contact our firm for help reviewing the pertinent data and developing a customer-focused strategic plan that brightens your company’s future.
© 2021
Protect your business with a cybersecurity assessment
Years ago, it may have seemed like only government agencies with top-secret intel or wealthy international banks had to worry about hackers. Nowadays, even the smallest small business could see its reputation ruined by a data breach, while larger companies could have their sensitive data taken hostage in a ransomware attack that costs millions to resolve.
A cybersecurity assessment can help ensure that your business is taking the proper steps to protect itself. It can also give you a competitive edge by demonstrating to customers and prospects that you take data privacy seriously.
More tech, more risk
Many, if not most, of today’s companies are taking advantage of technologies that allow them to gather, track and analyze customer and financial data. This includes software for mission-critical activities such as payroll, accounts receivable and payable, supply chain management, HR and benefits, and on-site security.
These systems are often cloud-based, meaning the information is stored online so users can access it remotely at any time of day or night. The convenience and analytical power are breathtaking, but they also create a tempting target for cybercriminals and raise the stakes of exposure exponentially.
In truth, the risk of a breach goes far beyond disclosure of confidential personal or financial information. It also raises serious concerns about potential personal injuries, property damage and work stoppage. Imagine the harm a hacker could cause by tampering with a building’s security or fire systems, or remotely manipulating vehicles or equipment.
Benefits of an assessment
Conducting a formal cybersecurity assessment helps you:
Take inventory of your hardware and software,
Identify potential vulnerabilities (including access by vendors, partners, and current and former employees), and
Implement internal controls and other protections to reduce risk.
An assessment can also enable you to develop an incident response plan to mitigate the damage in the event of a breach.
There are several recognized cybersecurity standards and frameworks available to guide these efforts, including those developed by the National Institute of Standards and Technology and the International Organization for Standardization. The U.S. Small Business Administration also offers cybersecurity assessment tips and best practices on its website.
If you’re particularly concerned, you might want to shop around for a qualified IT consultant to conduct a customized risk assessment. This may make sense if you’re in an industry subject to specific risks.
Become a hard target
Cybersecurity is important for every size and type of company. It may be comforting to think that the bad guys only go after the big guys, but hackers don’t always go after businesses with deep pockets. Sometimes they attack the softest target. Make sure you’re well-protected.
© 2021
What business owners should know about stop-loss insurance
When choosing health care benefits, many businesses opt for a self-insured (self-funded) plan rather than a fully insured one. Why? Among various reasons, self-insured plans tend to offer greater flexibility and potentially lower fixed costs.
When implementing a self-insured plan, stop-loss insurance is typically recommended. Although buying such a policy isn’t required, many small to midsize companies find it a beneficial risk-management tool.
Purpose of coverage
Specifically, stop-loss insurance protects the business against the risk that health care plan claims greatly exceed the amount budgeted to cover costs. Plan administration costs generally are fixed in advance, and an actuary can estimate claims costs. This information allows a company to budget for the estimated overall plan cost. However, exceptionally large — that is, catastrophic — claims can bust the budget.
To be clear, stop-loss insurance doesn’t pay participants’ health care benefits. Rather, it reimburses the business for certain claims properly paid by the plan above a stated amount. A less common approach for single-employer plans is to buy a stop-loss policy as a plan asset, in which case the coverage reimburses the plan, rather than the employer.
The threshold for stop-loss insurance is referred to as the “stop-loss attachment point.” A policy may have a specific attachment point (which applies to claims for individual participants or beneficiaries), an aggregate attachment point (which applies to total covered claims for participants and beneficiaries) or both.
Aligning plan and coverage terms
If you choose to buy stop-loss insurance, it’s critical to line up the terms of the coverage with the terms of your health care plan. Otherwise, some claims paid by the plan that you might expect to be reimbursed by the insurance might not be — and would instead remain your responsibility.
Properly lining up coverage terms isn’t always straightforward, so consider having legal counsel familiar with the terms of your health care plan review any proposed or existing stop-loss policy. In particular, watch out for discrepancies between the eligibility provisions, definitions, limits and exclusions of your plan and those same elements of the stop-loss policy.
Because stop-loss insurance isn’t health care coverage, insurers may impose limits and exclusions that are impermissible for group health plans. For example, a stop-loss policy can exclude coverage of specified individuals or services. Or it can impose an annual or lifetime dollar limit per individual.
You’ll also need to look carefully at the stop-loss policy’s coverage period. This is the period during which claims must be incurred by individuals or paid by the health care plan to be covered by the insurance. Specifically, determine whether it lines up with your plan year.
Cost-effective coverage
After buying stop-loss insurance, be extra sure to administer your health care plan in accordance with its written plan document. Any departures from the plan document could render the stop-loss coverage inapplicable. We can help you determine whether stop-loss insurance is right for your business or whether your current coverage is cost-effective.
© 2021
Is your business tracking website metrics?
In today’s data-driven world, business owners are constantly urged to track everything. And for good reason — having accurate, timely information displayed in an easy-to-understand format can allow you to spot trends, avoid risk and take advantage of opportunities.
This includes your company’s website. Although social media drives so much of the conversation now when it comes to communicating with customers and prospects, many people still visit websites to gather knowledge, build trust and place orders.
So, how do you know whether your site is doing its job — that is, drawing visitors, holding their attention, and satisfying their curiosities and needs? A variety of metrics hold the answers. Here are a few of the most widely tracked:
Page views. This metric is a good place to start, partly because it’s among the oldest ways to track whether a website is widely viewed or largely ignored. A page view occurs when a visitor loads the HTML file that represents a given page on your website. You want to track:
How many pages each visitor views,
How long each “unique visitor” (see below) remains on the page and your website, and
Whether the visitor does anything other than peruse, such as submit a form or buy something.
Unique visitors. You may have encountered this term before. It’s indeed an important one. The unique visitor metric identifies everyone who comes to your website, counting each visitor only once regardless of how many times someone visits.
Think of it like friendly neighbors stopping by your home. If Artie from next door stops by twice and Betty from down the street drops in three times, that’s two unique visitors and five total visits. Tracking your unique visitors over time is important because it lets you know whether your website’s viewing audience is growing, shrinking or staying the same.
Bounce rate. At one time or another, you may have heard someone say, “All right, I’m going to bounce.” It means the person is going to depart from their current surroundings and go elsewhere. When a visitor quickly decides to bounce from (that is, leave) your website, typically in a matter of seconds and without performing any meaningful action, your bounce rate rises.
This is not a good thing. A high bounce rate could mean your website is too similar in name or URL to another company’s or organization’s. Although this may drive up page views, it will more than likely aggravate the buying public and reflect poorly on your company. An elevated bounce rate could also mean your site’s design is confusing or aesthetically displeasing.
To quantify bounce rate, unique visitors and page views — as well as many other useful metrics — look to your website’s analytics software. Your website provider should be able to help you set up a dashboard of which ones you want to track. Contact our firm for help using these metrics to determine whether your website is contributing to revenue gains and providing a reasonable return on investment.
© 2021
4 ways to refine your cash flow forecasting
Run a business for any length of time and the importance of cash flow becomes abundantly clear. When payroll is due, bills are piling up and funds aren’t available, blood pressure tends to rise. For this reason, being able to accurately forecast cash flow is critical. Here are four ways to refine your approach:
1. Know when you peak. Many businesses are cyclical, and their cash flow needs vary by month or season. Trouble can arise when an annual budget doesn’t reflect, for example, three months of peak production in the summer to fill holiday orders followed by a return to normal production in the fall.
For seasonal operations — such as homebuilders, farms, landscaping companies and recreational facilities — using a one-size-fits-all approach can throw budgets off, sometimes dramatically. To forecast your company’s cash flow needs and plan accordingly, track your peak sales and production times over as long a period as possible.
2. Engage in careful accounting. Effective cash flow management requires anticipating and capturing every expense and incoming payment, as well as — to the extent possible — the exact timing of each payable and receivable. But pinpointing exact costs and expenditures for every day of the week can be challenging.
Businesses can face an array of additional costs, overruns and payment delays. Although inventorying every possible expense can be tedious and time-consuming, doing so can help avoid problems down the road.
3. Keep an eye on additional funding sources. As your business expands or contracts, a dedicated line of credit with a bank can help you meet cash flow needs, including any periodic shortages. Interest rates on these credit lines, however, can be high compared to other types of loans. So, lines of credit typically are used to cover only short-term operational costs, such as payroll and supplies. They also may require significant collateral and personal guarantees from the company’s owners.
Of course, a line of credit isn’t your only outside funding option. Federally funded small business loans have been widely offered during the COVID-19 pandemic and may still be available to you. Look into these and other options suitable to the size and needs of your company.
4. Invoice diligently, run leaner. For many businesses, the biggest cash flow obstacle is slow collections. Be sure you’re invoicing in a timely manner and offering easy, convenient ways for customers to pay (such as online). For new customers, perform a thorough credit check to avoid delayed payments and bad debts.
Another common obstacle is poor resource management. Redundant machinery, misguided investments and oversized offices are just a few examples of poorly managed expenses and overhead that can negatively affect cash flow. For help reducing expenses and more effectively forecasting cash flow, please contact us.
© 2021
Opening a new location calls for careful planning
The U.S. economy has been nothing short of a roller-coaster ride for the past year and a half. Some industries have had to overcome seemingly insurmountable challenges, while others have seen remarkable growth opportunities arise.
If your business is doing well enough for you to consider adding a location, both congratulations and caution are in order. “Fortune favors the bold,” goes the old saying. However, strained cash flow and staffing issues can severely disfavor the underprepared.
Ask the right questions
Among the most fundamental questions to ask is: Will we be able to duplicate the success of our current location? If your first location is doing well, it’s likely because you’ve put in place the people and processes that keep the business running smoothly. It’s also because you’ve developed a culture that resonates with your customers. You need to feel confident you can do the same at subsequent locations.
Another important question is: How might expansion affect business at both locations? Opening a second location prompts a consideration that didn’t exist with your first: how the two establishments will interact. Placing the two operations near each other can make it easier to manage both, but it also can lead to one operation cannibalizing the other. Ideally, the two locations will have strong, independent markets.
Run the numbers
You’ll need to consider the financial aspects carefully. Look at how you’re going to fund the expansion. Ideally, the first location will generate enough revenue so that it can both sustain itself and help fund the second. But you may still need to take on debt, and it’s not uncommon for construction costs and timelines to exceed initial projections.
You might want to include some extra dollars in your budget for delays or surprises. If you must starve your first location of capital to fund the second, you’ll risk the success of both.
Account for the tax ramifications as well. If you own the real estate, property taxes on two locations will affect your cash flow and bottom line. You may be able to cut your tax bill with various tax incentives, such as by locating the second location in an Enterprise Zone. But the location will first and foremost need to make sense from a business perspective. There may be other tax issues as well — particularly if you’re crossing state lines.
Assess the risk
For some businesses, expanding to a new location may be the single most impactful way to drive growth and build the bottom line. However, it’s also among the riskiest endeavors any company can take on. We’d be happy to help you assess the feasibility of opening a new location, including creating financial projections that will provide insights into whether the move is a reasonable risk.
© 2021
Expanding succession planning beyond ownership
Business owners are regularly urged to create and update their succession plans. And rightfully so — in the event of an ownership change, a solid succession plan can help prevent conflicts and preserve the legacy you’ve spent years or decades building.
But if you want to take your succession plan to the next level, consider expanding its scope beyond ownership. Many companies have key employees, perhaps a CFO or an account executive, who play a critical role in the success of the business.
Your succession plan could include any employee who’s considered indispensable and difficult to replace because of experience, industry or technical knowledge, or other characteristics.
Look to the future
The first step is to identify those you consider essential employees. Whose departure would have the most significant consequence for your business and its strategic plan? Then, when you have a list of names, who might succeed them?
Pinpointing successors calls for more than simply reviewing or updating job descriptions. The right candidates must have the capability to carry out your company’s short- and long-term strategic plans and goals, which their job descriptions might not reflect.
Succession planning should take a forward-looking perspective. The current jobholder’s skills, experience and qualifications are only a starting point. What worked for the last 10 or 20 years might not cut it for the next 10 or 20.
Identify your HiPos
When the time comes, many businesses publicize open positions and invite external candidates to apply. However, it’s easier (and often advantageous) to groom internal candidates before the need arises. To do so, you’ll want to identify your “high potential” (HiPo) employees — those with the ambition, motivation and ability to move up substantially in your organization.
Assess your staff using performance evaluations, discussions about career plans and other tools to determine who can assume greater responsibility now, in a year or in several years. And look beyond the executive or management level; you may discover HiPos in lower-ranking positions.
Develop individual action plans
Once you’ve identified potential internal candidates, develop individual plans for each to follow. Consider your business’s needs, as well as each candidate’s personality and learning style.
An action plan should include multiple components. One example is job shadowing. It will give the candidate a good sense of what is involved in the position under consideration. Other components could include leadership roles on special projects, training, and mentoring and coaching.
Share your vision for the person’s future to ensure common goals. You can update action plans as your company’s and employees’ needs evolve.
Account for the job market
Succession planning beyond ownership is more important than ever in a tight job market. Vacancies for key employees are often difficult to fill — especially for demanding, highly skilled and top-tier positions. We’d be happy to help you review your succession plan and identify which positions may have the greatest financial impact on the continued profitability of your business.
© 2021
Think like a lender before applying for a business loan
Commercial loans, particularly small business loans, have been in the news over the past year or so. The federal government’s Paycheck Protection Program has been helpful to many companies, though fraught with administrative challenges.
As your business pushes forward, you may find yourself in need of cash in the months ahead. If so, more traditional commercial loan options are still out there. Before you apply, however, think like a lender to be as prepared as possible and know for sure that the loan is a good idea.
4 basic questions
At the most basic level, a lender has four questions in mind:
How much money do you want?
How do you plan to use it?
When do you need it?
How soon can you repay the loan?
Pose these questions to yourself and your leadership team. Be sure you’re crystal clear on the answers. You’ll need to explain your business objectives in detail and provide a history of previous lender financing as well as other capital contributions.
Lenders will also look at your company’s track record with creditors. This includes business credit reports and your company’s credit score.
Consider the three C’s
Lenders want to minimize risk. So, while you’re role-playing as one, consider the three C’s of your company:
1. Character. The strength of the management team — its skills, reputation, training and experience — is a key indicator of whether a business loan will be repaid. Strive to work through natural biases that can arise when reviewing your own performance. What areas of your business could be viewed as weaknesses, and how can you assure a lender that you’re improving them?
2. Capacity. Lenders want to know how you’ll use the loan proceeds to increase cash flow enough to make payments by the maturity date. Work up reasonable cash flow and profitability projections that demonstrate the feasibility of your strategic objectives. Convince yourself before you try to convince the bank!
3. Collateral. These are the assets pledged if you don’t generate enough incremental cash flow to repay the loan. Collateral is a lender’s backup plan in case your financial projections fall short. Examples include real estate, savings, stock, inventory and equipment.
As part of your effort to think like a lender, use your financial statements to create a thorough inventory of assets that could end up as collateral. Doing so will help you clearly see what’s at stake with the loan. You may need to put personal assets on the line as well.
Gain some insight
Applying for a business loan can be a stressful and even frustrating experience. By taking on the lender’s mindset, you’ll be better prepared for the process. What’s more, you could gain insights into how to better develop strategic initiatives. Contact our firm for help.
© 2021
5 questions to ask about your marketing efforts
For many small to midsize businesses, spending money on marketing calls for a leap of faith that the benefits will outweigh the costs. Much of the planning process tends to focus on the initial expenses incurred rather than how to measure return on investment.
Here are five questions to ask yourself and your leadership team to put a finer point on whether your marketing efforts are likely to pay off:
1. What do we hope to accomplish? Determine as specifically as possible what marketing success looks like. If the goal is to increase sales, what metric(s) are you using to calculate whether you’ve achieved adequate sales growth? Put differently, how will you know that your money was well spent?
2. Where and how often do we plan to spend money? Decide how much of your marketing will be based on recurring activity versus “one off” or ad-hoc initiatives.
For example, do you plan to buy six months of advertising on certain websites, social media platforms, or in a magazine or newspaper? Have you decided to set up a booth at an annual trade show?
Fine tune your efforts going forward by comparing inflows to outflows from various types of marketing spends. Will you be able to create a revenue inflow from sales that at least matches, if not exceeds, the outflow of marketing dollars?
3. Can we track sources of new business, as well as leads and customers? It’s critical to ask new customers how they heard about your company. This one simple question can provide invaluable information about which aspects of your marketing plan are generating the most leads.
Further, once you have discovered a lead or new customer, ensure that you maintain contact with the person or business. Letting leads and customers fall through the cracks will undermine your marketing efforts. If you haven’t already, explore customer relationship management software to help you track and analyze key data points.
4. Are we able to gauge brand awareness? In addition to generating leads, marketing can help improve brand awareness. Although an increase in brand awareness may not immediately translate to increased sales, it tends to do so over time. Identify ways to measure the impact of marketing efforts on brand awareness. Possibilities include customer surveys, website traffic data and social media interaction metrics.
5. Are we prepared for an increase in demand? It may sound like a nice problem to have, but sometimes a company’s marketing efforts are so successful that a sudden upswing in orders occurs. If the business is ill-prepared, cash flow can be strained and customers left disappointed and frustrated.
Make sure you have the staff, technology and inventory in place to meet an increase in demand that effective marketing often produces. We can help you assess the efficacy of your marketing efforts, including calculating informative metrics, and suggest ideas for improvement.
© 2021
IRS additional guidance addresses COBRA assistance under ARPA
In Notice 2021-46, the IRS recently issued additional guidance on the COBRA premium assistance provisions of the American Rescue Plan Act (ARPA).
Under the ARPA, a 100% COBRA premium subsidy and additional COBRA enrollment rights are available to certain assistance eligible individuals (AEIs) during the period beginning on April 1, 2021, and ending on September 30, 2021 (the Subsidy Period).
If your business is required to offer COBRA coverage, it’s important to mind the details of the subsidies and a related tax credit. Here are some highlights of the additional guidance:
Extended coverage periods. An AEI whose original qualifying event was a reduction of hours or involuntary termination is generally eligible for the subsidy to the extent the extended COBRA coverage falls within the Subsidy Period. The AEI must be entitled to the extended coverage because of a:
Disability determination,
Second qualifying event, or
Extension under a state mini-COBRA law.
This is true even if the AEI didn’t notify the plan of the intent to elect extended COBRA coverage before the start of the Subsidy Period — for example, because of the Outbreak Period deadline extensions.
End of Subsidy Period. The subsidy ends when an AEI becomes eligible for coverage under any other disqualifying group health plan coverage or Medicare — even if the other coverage doesn’t include the same benefits provided by the previously elected COBRA coverage.
For example, though Medicare generally doesn’t provide vision or dental coverage, the subsidy for an AEI’s dental-only or vision-only COBRA coverage ends if the AEI becomes eligible for Medicare.
Comparable state continuation coverage. A state program that provides continuation coverage comparable to federal COBRA qualifies AEIs for the subsidy even if the state program covers only a subset of state residents (such as employees of a state or local government unit).
Claiming the credit. Under most circumstances, an AEI’s current or former common-law employer (depending on whether the AEI had a reduction of hours or an involuntary termination) is the entity that’s eligible to claim the tax credit for providing the subsidy. If a plan (other than a multiemployer plan) covers employees of two or more controlled group members, each common-law employer in the group is entitled to claim the credit with respect to its current or former employees.
Guidance on claiming the credit is also provided for Multiple Employer Welfare Arrangements, state employers, entities undergoing business reorganizations, plans that are subject to both federal COBRA and state mini-COBRA, and plans offered through a Small Business Health Options Program.
The ARPA’s COBRA provisions have been in effect for a while now, so your company likely already has procedures in place to provide the subsidy to AEIs and claim the corresponding tax credit. Nevertheless, this guidance offers helpful clarifications. Contact our firm for more information.
© 2021
Is your business underusing its accounting software?
Someone might have once told you that human beings use only 10% of our brains. The implication is that we have vast, untapped stores of cerebral power waiting to be discovered. In truth, this is a myth widely debunked by neurologists.
What you may be underusing, as a business owner, is your accounting software. Much like the operating systems on our smartphones and computers, today’s accounting solutions contain a multitude of functions that are easy to overlook once someone gets used to doing things a certain way.
By taking a closer look at your accounting software, or perhaps upgrading to a new solution, you may be able to improve the efficiency of your accounting function and discover ways to better manage your company’s finances.
Revisit training
The seeds of accounting software underuse are often planted during the training process, assuming there’s any training at all. Sometimes, particularly in a small business, the owner buys accounting software, hands it over to the bookkeeper or office manager, and assumes the problem will take care of itself.
Consider engaging a consultant to review your accounting software’s basic functions with staff and teach them time-saving tricks and advanced features. This is even more important to do if you’re making major upgrades or implementing a new solution.
When accounting personnel are up to speed on the software, they can more easily and readily generate useful reports and provide accurate financial information to you and your management team at any time — not just monthly or quarterly.
Commit to continuous improvement
Accounting solutions that aren’t monitored can gradually become vulnerable to inefficiency and even manipulation. Encourage employees to be on the lookout for labor-intensive steps that could be automated and steps that don’t add value or are redundant. Ask your users to also note any unusual transactions or procedures; you never know how or when you might uncover fraud.
At the same time, ensure managers responsible for your company’s financial oversight are reviewing critical documents for inefficiencies, anomalies and errors. These include monthly bank statements, financial statements and accounting schedules.
The ultimate goal should be continuous improvement to not only your accounting software use, but also your financial reporting.
Don’t wait until it’s too late
Many business owners don’t realize they have accounting issues until they lose a big customer over errant billing or suddenly run into a cash flow crisis. Pay your software the attention it deserves, and it will likely repay you many times over in useful, actionable data. We can help you assess the efficacy of your accounting software use and suggest ideas for improvement.
© 2021
DEI programs are good for business
Many businesses are spending more time and resources on supporting the well-being of their employees. This includes recognizing and addressing issues related to diversity, equity and inclusion (DEI).
A thoughtfully designed DEI program can do more than just head off potential conflicts and disruptions among coworkers; it can help you attract good job candidates, retain your best employees and create a more engaged, productive workforce.
Strategic objectives
Essentially, DEI programs are formal efforts to help employees better understand, accept and appreciate differences among everyone on staff. Differences addressed typically include race, ethnicity, gender identification, age, religion, disabilities and sexual orientation. They may also include education, personality types, skill sets and life experiences. A program can comprise training courses, seminars, guest speakers, group discussions and social events.
Strategic objectives may vary depending on the business. Some companies wish to improve collaboration and productivity within or among teams, departments or business units. Others are looking to attract more diverse job candidates. And still others want to connect with growing multicultural markets that don’t necessarily respond to “traditional” messaging.
Think of implementing a DEI program as an investment. It should include specific goals and achievable, measurable returns.
Key components
Many DEI programs fail because of lack of consensus regarding their value or faulty design. Begin with executive buy-in. Successful programs start with the support of ownership and senior leadership. If they’re not committed to the program, it probably won’t last long (if it gets off the ground at all). Typically, a champion will need to build the case of why a DEI program is needed and explain how it will positively impact the organization.
You’ll also need to assemble the right team. Form a DEI committee to identify objectives and give the program its initial size and shape. If you happen to employ someone who has been involved in launching a DEI program in the past, learn all you can from that employee’s experience. Otherwise, encourage your team to research successful and unsuccessful programs. You might even engage a consultant who specializes in the field.
For clarity and consistency, put your DEI program in writing. The committee needs to develop clear language spelling out each goal. The objectives can then be reviewed, discussed and revised. Ensure the objectives support your strategic plan and that you can accurately measure progress toward each. Don’t launch the program until you’re confident it will improve your organization, not distract it.
How work is done
Events of the last year or so have led most businesses to reconsider the size, composition and operational approach of their workforces. In many industries, DEI awareness and training is playing an important role in this reckoning. We’d be happy to help you assess the costs and feasibility of a program for your business.
© 2021
Get serious about your strategic planning meetings
Most business owners would likely agree that strategic planning is important. Yet many companies rarely engage in active measures to gather and discuss strategy. Sometimes strategic planning is tacked on to a meeting about something else; other times it occurs only at the annual company retreat when employees may feel out of their element and perhaps not be fully focused.
Businesses should take strategic planning seriously. One way to do so is to hold meetings exclusively focused on discussing your company’s direction, establishing goals and identifying the resources you’ll need to achieve them. To get the most from strategy sessions, follow some of the best practices you’d use for any formal business meeting.
Set an agenda
Every strategy session should have an agenda that’s relevant to strategic planning — and only strategic planning. Allocate an appropriate amount of time for each agenda item so that the meeting is neither too long nor too short.
Before the meeting, distribute a document showing who’ll be presenting on each agenda topic. The idea is to create a “no surprises” atmosphere in which attendees know what to expect and can thereby think about the topics in advance and bring their best ideas and feedback.
Lay down rules (if necessary)
Depending on your workplace culture, you may want to state some upfront rules. Address the importance of timely attendance and professional decorum — either in writing or by announcement as the meeting begins.
Every business may not need to do this, but meetings that become hostile or chaotic with personal conflicts or “side chatter” can undermine the purpose of strategic planning. Consider whether to identify conflict resolution methods that participants must agree to follow.
Choose a facilitator
A facilitator should oversee the meeting. He or she is responsible for:
Starting and ending on time,
Transitioning from one agenda item to the next,
Enforcing the rules as necessary,
Motivating participation from everyone, and
Encouraging a positive, productive atmosphere.
If no one at your company feels up to the task, you could engage an outside consultant. Although you’ll need to vet the person carefully and weigh the financial cost, a skilled professional facilitator can make a big difference.
Keep minutes
Recording the minutes of a strategic planning meeting is essential. An official record will document what took place and which decisions (if any) were made. It will also serve as a log of potentially valuable ideas or future agenda items.
In addition, accurate meeting minutes will curtail miscommunications and limit memory lapses of what was said and by whom. If no record is kept, people’s memories may differ about the conclusions reached and disagreements could later arise about where the business is striving to head.
Gather ’round
By gathering your best and brightest to discuss strategic planning, you’ll put your company in a stronger competitive position. Contact our firm for help laying out some of the tax, accounting and financial considerations you’ll need to talk about.
© 2021
Keeping remote sales sharp in the new normal
The COVID-19 pandemic has dramatically affected the way people interact and do business. Even before the crisis, there was a trend toward more digital interactions in sales. Many experts predicted that companies’ experiences during the pandemic would accelerate this trend, and that seems to be coming to pass.
As this transformation continues, your business should review its remote selling processes and regularly consider adjustments to adapt to the “new normal” and stay ahead of the competition.
3 tips to consider
How can you maximize the tough lessons of 2020 and beyond? Here are three tips for keeping your remote sales operations sharp:
1. Stay focused on targeted sales. Remote sales can seemingly make it possible to sell to anyone, anywhere, anytime. Yet trying to do so can be overwhelming and lead you astray. Choose your sales targets carefully. For example, it’s typically far easier to sell to existing customers with whom you have an established relationship or to prospects that you’ve thoroughly researched.
Indeed, in the current environment, it’s even more critical to really know your customers and prospects. Determine whether and how their buying capacity and needs have changed because of the pandemic and resulting economic changes — and adjust your sales strategies accordingly.
2. Leverage technology. For remote selling to be effective, it needs to work seamlessly and intuitively for you and your customers or prospects. You also must recognize technology’s limitations.
Even with the latest solutions, salespeople may be unable to pick up on body language and other visual cues that are more readily apparent in a face-to-face meeting. That’s why you shouldn’t forego in-person sales calls if safe and feasible — particularly when it comes to closing a big deal.
In addition to video, other types of technology can enhance or support the sales process. For instance, software platforms that enable you to create customized, interactive, visually appealing presentations can help your sales staff meet some of the challenges of remote interactions. In addition, salespeople can use brandable “microsites” to:
Share documents and other information with customers and prospects,
Monitor interactions and respond quickly to questions, and
Appropriately tailor their follow-ups.
Also, because different customers have different preferences, it’s a good idea to offer a variety of communication platforms — such as email, messaging apps, videoconferencing and live chat.
3. Create an outstanding digital experience. Customers increasingly prefer the convenience and comfort of self-service and digital interactions. So, businesses need to ensure that customers’ experiences during these interactions are positive. This requires maintaining an attractive, easily navigable website and perhaps even offering a convenient, intuitive mobile app.
An important role
The lasting impact of the pandemic isn’t yet clear, but remote sales will likely continue to play an important role in the revenue-building efforts of many companies. We can help you assess the costs of your technology and determine whether you’re getting a solid return on investment.
© 2021
5 ways to take action on accounts receivable
No matter the size or shape of a business, one really can’t overstate the importance of sound accounts receivable policies and procedures. Without a strong and steady inflow of cash, even the most wildly successful company will likely stumble and could even collapse.
If your collections aren’t as efficient as you’d like, consider these five ways to improve them:
1. Redesign your invoices. It may seem superficial, but the design of invoices really does matter. Customers prefer bills that are aesthetically pleasing and easy to understand. Sloppy or confusing invoices will likely slow down the payment process as customers contact you for clarification rather than simply remit payment. Of course, accuracy is also critical to reducing questions and speeding up payment.
2. Appoint a collections champion. At some companies, there may be several people handling accounts receivable but no one primarily focusing on collections. Giving one employee the ultimate responsibility for resolving past due invoices ensures the “collection buck” stops with someone. If budget allows, you could even hire an accounts receivable specialist to fill this role.
3. Expand your payment options. The more ways customers can pay, the easier it is for them to pay promptly. Although some customers still like traditional payment options such as mailing a check or submitting a credit card number, more and more people now prefer the convenience of mobile payments via a dedicated app or using third-party services such as PayPal, Venmo or Square.
4. Get acquainted (or reacquainted) with your customers. If your business largely engages in B2B transactions, many of your customers may have specific procedures that you must follow to properly format and submit invoices. Review these procedures and be sure your staff is following them carefully to avoid payment delays. Also, consider contacting customers a couple of days before payment is due — especially for large payments — to verify that everything is on track.
5. Generate accounts receivable aging reports. Often, the culprit behind slow collections is a lack of timely, accurate data. Accounts receivable aging reports provide an at-a-glance view of each customer’s current payment status, including their respective outstanding balances. Aging reports typically track the payment status of customers by time periods, such as 0–30 days, 31–60 days, 61–90 days and 91+ days past due.
With easy access to this data, you’ll have a better idea of where to focus your efforts. For example, you can concentrate on collecting the largest receivables that are the furthest past due. Or you can zero in on collecting receivables that are between 31 and 60 days outstanding before they get any further behind.
Need help setting up aging reports or improving the ones you’re currently running? Please let us know — we’d be happy to help with this or any aspect of improving your accounts receivable processes.
© 2021
IRS extends administrative relief for 401(k) plans
As mitigation measures related to COVID-19 ease, it will be interesting to see which practices and regulatory changes taken in response to the pandemic remain in place long-term. One of them might be relief from a sometimes-inconvenient requirement related to the administration of 401(k) plans.
A virtual solution
In IRS Notice 2021-40, the IRS recently announced a 12-month extension of its temporary relief from the requirement that certain signatures be witnessed “in the physical presence” of a 401(k) plan representative or notary public.
The original relief, which appeared in IRS Notice 2020-42, was provided primarily to facilitate plan loans and distributions under the CARES Act. However, the relief could be used during 2020 for any signature that, under regulations, had to be witnessed in the physical presence of a plan representative or notary public. This included required spousal consents. The relief was subsequently extended through June 30, 2021, under IRS Notice 2021-03.
Under the notices, signatures witnessed remotely by a plan representative satisfy the physical presence requirement if the electronic system uses live audio-video technology and meets four requirements established under the original relief:
Live presentation of a photo ID,
Direct interaction,
Same-day transmission, and
Return with the representative’s acknowledgment.
Signatures witnessed by a notary public satisfy the physical presence requirement if the electronic system for remote notarization uses live audio-video technology and is consistent with state-law requirements for a notary public.
Comments requested
As mentioned, IRS Notice 2021-40 further extends the relief — subject to the same conditions — through June 30, 2022. The notice also requests comments regarding whether permanent modifications should be made to the physical presence requirement. Comments are specifically requested regarding:
The costs and other effects of the physical presence requirement and its temporary waiver,
Whether the relief has resulted in fraud, coercion or other abuses,
How the witnessing requirements are expected to be fulfilled as the pandemic abates,
What procedural safeguards should be instituted if the physical presence requirement is permanently modified, and
Whether permanent relief should use different procedures for witnessing by plan representatives or notary publics.
Comments should be submitted by September 30, 2021.
More information
Going forward, the need for a signature may often relate to spousal consents. If your business recently established a 401(k), the plan may be designed to limit or even eliminate the need for spousal consents.
However, plans that offer annuity forms of distribution are still subject to the spousal consent rules. And other 401(k) plans must require spousal consent if a married participant wants to name a non-spouse as primary beneficiary. Feel free to contact our firm for more information on the latest IRS guidance addressing employee benefits.
© 2021
Are your company’s job descriptions pulling their weight?
At many businesses, job descriptions have it easy. They were “hired” (that is, written) many years ago. They haven’t had to change or do anything, really, besides get copied and pasted into a want ad occasionally. They’re not really good at what they do, but they’re used again and again because everyone assumes they’re just fine.
The problem is, they’re not. Outdated, vague or inaccurate job descriptions can lead to longer hiring times, bad hires, workplace conflicts and even legal exposure in employment law actions. So, now the million-dollar question: Are your company’s job descriptions pulling their weight?
Review and revise
There’s only one way to find out: Conduct a thorough review of your job descriptions to determine whether they’re current and comprehensive.
Check to see whether they list outdated procedures or other outmoded elements, such as software you’ve long since phased out. As necessary, carefully revise the wording to describe the duties and responsibilities for a particular position as it exists today.
If you don’t already have formal, written job descriptions for every position, don’t panic. Ask employees in those positions to document their everyday duties and responsibilities. Each worker’s supervisor should then verify and, if necessary, help refine the description.
Put them to work
After you’ve updated or created your job descriptions, you can use them to increase organizational efficiency. Weed out the marginal duties from essential ones. Eliminate superfluous and redundant tasks, focusing each position on activities that generate revenue or eliminate expenses. You may be able to make improvements in other areas, too, such as:
Recruiting. Are you hiring people with the right skills? Up-to-date job descriptions provide a better road map for finding ideal candidates to fill your open positions.
Compensation. A complete and accurate description of the hiring requirements, job duties and responsibilities of a position provide context and rationalization for how that person is compensated.
Workload distribution. Are workloads efficiently distributed among employees? If not, rearrange them. You may find this necessary and beneficial when duties change because of revisions to job descriptions.
Cross-training. Can your employees handle their coworkers’ duties and responsibilities? In both emergencies and non-emergencies (vacations, for instance) — and as a fraud-prevention measure — having workers who are able to cover for each other temporarily is critical.
Performance management. Are employees doing their best? Detailed job descriptions allow supervisors to better determine whether workers are completing their assigned duties, meeting or exceeding expectations and growing with the company.
Stop the slackers
No business should put up with slacker job descriptions that do nothing but hang around the break room exchanging gossip and eating all the donuts. Ensure yours are actively contributing to your company’s success by managing their performance just as you do for real-live humans.
© 2021
Don’t assume your profitable company has strong cash flow
Most of us are taught from a young age never to assume anything. Why? Well, because when you assume, you make an … you probably know how the rest of the expression goes.
A dangerous assumption that many business owners make is that, if their companies are profitable, their cash flow must also be strong. But this isn’t always the case. Taking a closer look at the accounting involved can provide an explanation.
Investing in the business
What are profits, really? In accounting terms, they’re closely related to taxable income. Reported at the bottom of your company’s income statement, profits are essentially the result of revenue less the cost of goods sold and other operating expenses incurred in the accounting period.
Generally Accepted Accounting Principles (GAAP) require companies to “match” costs and expenses to the period in which revenue is recognized. Under accrual-basis accounting, it doesn’t necessarily matter when you receive payments from customers or when you pay expenses.
For example, inventory sitting in a warehouse or retail store can’t be deducted — even though it may have been long paid for (or financed). The expense hits your income statement only when an item is sold or used. Your inventory account contains many cash outflows that are waiting to be expensed.
Other working capital accounts — such as accounts receivable, accrued expenses and trade payables — also represent a difference between the timing of cash flows. As your business grows and strives to increase future sales, you invest more in working capital, which temporarily depletes cash.
However, the reverse also may be true. That is, a mature business may be a “cash cow” that generates ample dollars, despite reporting lackluster profits.
Accounting for expenses
The difference between profits and cash flow doesn’t begin and end with working capital. Your income statement also includes depreciation and amortization, which are noncash expenses. And it excludes changes in fixed assets, bank financing and owners’ capital accounts, which affect cash on hand.
Suppose your company uses tax depreciation schedules for book purposes. Let say, in 2020, you bought new equipment to take advantage of the expanded Section 179 and bonus depreciation allowances. Then you deducted the purchase price of these items from profits in 2020. However, because these purchases were financed with debt, the actual cash outflows from the investments in 2020 were minimal.
In 2021, your business will make loan payments that will reduce the amount of cash in your checking account. But your profits will be hit with only the interest expense (not the amount of principal that’s being repaid). Plus, there will be no “basis” left in the 2020 purchases to depreciate in 2021. These circumstances will artificially boost profits in 2021, without a proportionate increase in cash.
Keeping your eye on the ball
It’s dangerous to assume that, just because you’re turning a profit, your cash position is strong. Cash flow warrants careful monitoring. Our firm can help you generate accurate financial statements and glean the most important insights from them.
© 2021