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Let your financial statements guide you to optimal business decisions
Now that 2022 is up and running, business owners can expect to face a few challenges and tough choices as the year rolls along. No matter how busy things get, don’t forget about an easily accessible and highly informative resource that’s probably just a few clicks away: your financial statements.
Assuming you follow U.S. Generally Accepted Accounting Principles (GAAP) or similar reporting standards, your financial statements will comprise three major components: an income statement, a balance sheet and a statement of cash flows. Each one contains different, but equally important, information about your company’s financial performance. Together, they can help you and your leadership team make optimal business decisions.
Revenue and expenses
The first component of your financial statements is the income statement. It shows revenue and expenses over a given accounting period. A commonly used term when discussing income statements is “net income.” This is the income remaining after you’ve paid all expenses, including taxes.
It’s also important to check out “gross profit.” This is the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of direct labor and materials, as well as any manufacturing overhead costs required to make a product.
The income statement also lists sales, general and administrative (SG&A) expenses. They reflect functions, such as marketing and payroll, that support a company’s production of products or services. Often, SG&A costs are relatively fixed, no matter how well your business is doing. Calculate the ratio of SG&A costs to revenue: If the percentage increases over time, business may be slowing down.
Assets, liabilities and net worth
The second component is the balance sheet. It tallies your assets, liabilities and net worth to create a snapshot of the company’s financial health on the financial statement date. Assets are customarily listed in order of liquidity. Current assets (such as accounts receivable) are expected to be converted into cash within a year. Long-term assets (such as plant and equipment) will be used to generate revenue beyond the next 12 months.
Similarly, liabilities are listed in order of maturity. Current liabilities (such as accounts payable) come due within a year. Long-term liabilities are payment obligations that extend beyond the current year.
True to its name, the balance sheet must balance — that is, assets must equal liabilities plus net worth. So, net worth is the extent to which assets exceed liabilities. It may signal financial distress if your net worth is negative.
Other red flags include current assets that grow faster than sales and a deteriorating ratio of current assets to current liabilities. These trends could indicate that management is managing working capital less efficiently than in previous periods.
Inflows and outflows of cash
The statement of cash flows shows all the cash flowing in and out of your business during the accounting period.
Cash inflows typically come from selling products or services, borrowing and selling stock. Outflows generally result from paying expenses, investing in capital equipment and repaying debt. The statement of cash flows is organized into three sections, cash flows from activities related to:
Operating,
Financing, and
Investing.
Ideally, a company will generate enough cash from operations to cover its expenses. If not, it might need to borrow money or sell stock to survive.
The good and the bad
Sometimes business owners get into the habit of thinking of their financial statements as a regularly occurring formality performed to satisfy outside parties such as investors and lenders. On the contrary, your financial statements contain a wealth of data that can allow you to calculate ratios and identify trends — both good and bad — affecting the business. For help generating accurate financial statements, as well as analyzing the information therein, please contact us.
© 2022
Using B2B Media To Lengthen Your Marketing Reach
Companies that sell products or services primarily to other businesses face a tough challenge when it comes to marketing. Your customers are likely well-versed and experienced in what they do, so you must not only persuade them to buy from you, but also communicate that you’re an expert in your industry or field.
If you can demonstrate that expertise, half the marketing battle is won because your name recognition and reputation alone will likely generate positive interest in your products or services. So, how do you elevate yourself to this vaunted position? One way is to use business-to-business (B2B) media to get your name and know-how out there.
3 common approaches
B2B media, what we used to call “trade publications,” now encompasses a wide variety of content. Print publications still exist, but much of the activity has moved online to websites, blogs, social media platforms and podcasts.
You might be able to name the top B2B media outlets in your industry off the top of your head, or maybe you need to do a little digging. After getting a good sense of your options, consider one or more of the following three approaches:
1. Send out press releases. Launching a new product? Hiring a new executive? Opening a new location? When your company has big news, getting the word out to the B2B media in a press release can raise your profile with customers and prospects.
There are various best practices for sending out a press release. Include the who, what, where, when and why of the topic. Add at least two sentences from you or a company executive that can be used as comments in an article. If appropriate and available, incorporate customer testimonials.
Traditionally, press releases are submitted with a news kit that includes a fact sheet on your business, profiles of key team members, complete contact information, and, in some cases, professional photos.
2. Write bylined articles. If you know of one or more industry publications that would be a good fit for your knowledge and experience, and you’re comfortable with the written word, submit an article idea. Getting published in the right places can position you (or a suitable staff member) as a technical expert in your field.
For example, write an article explaining why the types of products or services that you provide are more important than ever to businesses in today’s difficult environment of pandemic-related changes. But be careful: Publications generally won’t accept content that comes off as free advertising. Write your article as objectively as possible with only subtle mentions of your company’s offerings.
There are other options, too. You could pen an opinion piece on how a legislative proposal is likely to affect your industry. Or you might write a tips-oriented article that lends itself to a publication or website looking for short, easy-to-read content. Insist on attribution for your company if the article is used, of course.
3. Do it yourself. A third approach is to create your own B2B media presence. For years, business owners have been urged to start their own blogs, send out their own tweets and, in general, create a social media identity that will make friends and win over customers.
This has largely become the way of the business world. In fact, there are so many social-media avenues you could travel down to get your message out, you may find the concept overwhelming. There’s also a high risk of burnout. Many people start blogs or open a social media account, post a few things and then disappear into the ether. This is not a good look for business owners trying to establish themselves as industry experts.
To be successful at blogging and social media marketing, set an editorial calendar and stick to it. Get your marketing department involved. Devise a strategy that will push out quality, consistent content regularly on the appropriate channels, whether authored by you or someone else at your company.
Not a replacement, but a booster
Using B2B media won’t completely replace the need for advertising or other marketing initiatives. However, it can boost your profile and credibility as a business owner and, thereby, create opportunities to increase sales and attract strong job candidates.
What’s more, the cost in dollars and cents is typically low — though you’ll need to set aside a certain amount of time in your schedule and you might have to expand the job duties of one or more employees. We can help you assess B2B media initiatives from a cost-benefit perspective.
© 2022
Business owners, do you need to step up your internal communications game?
They say we live in an on-demand world. Right now, many business owners are demanding one thing: more workers. Unfortunately, the labor market is somewhat less than forthcoming.
In the so-called “Great Resignation” of 2021, droves of people voluntarily left their jobs, and many aren’t rushing back to work. Neither are many of those who lost their jobs because of the pandemic. This is putting pressure on companies to do everything in their power to retain current employees and look as appealing as possible to the relatively few job seekers out there.
One element of a business that can make or break its employer brand is communications. When workers feel disconnected from ownership, it’s easy for them to listen to rumors and misinformation — and that can motivate them to walk out the door. Here are some ways you can step up your communications game in 2022.
Just ask
When business owners get caught off guard by workforce issues, the problem often is that they’re doing all the talking and little of the listening. The easiest way to find out what your employees are thinking is to just ask.
Putting a suggestion box in the break room, though it may sound old-fashioned, can pay off. Also consider using an online tool that allows employees to provide feedback anonymously.
Let employees vent their concerns and ask questions. Ownership or executive management could reply to queries with the broadest implications, while managers could handle questions specific to a given department or position. Share answers through companywide emails or make them a feature of an internal newsletter or blog.
At least once a year, hold a town hall with staff members to answer questions and discuss issues face to face. Even if the meeting must be held virtually, let employees see and hear the straight truth from you.
Manage your internal profile
Owners of large companies often engage PR consultants to help them manage not only their public images, but also the personas they convey to employees. If you own a small to midsize business, this expense may be unnecessary, but you should think about your internal profile and manage it like the critical asset that it is.
Be sure photographs and personal information used in internal communications are up to date. A profile pic of you from a decade or two ago says, “I don’t care enough to share who I am today.”
Although you should avoid getting up in employees’ business too often and disrupting operations, don’t let too much time go by between communications. Regularly tour each company department or facility, giving both managers and employees a chance to speak with you candidly. Sit in on meetings periodically; ask and answer questions. Employees will likely get a morale boost from seeing you take an active interest in their corner of the business.
In fact, for a potentially fun and insightful change of pace, set aside a day to learn about a specific company position. Shadow selected employees and let them explain what really goes into their jobs. Pose questions but stay out of the way. Clarify upfront that you’re not playing “gotcha” but trying to better understand how things get done and what improvements, if any, could be made.
Challenges ahead
Business owners face formidable challenges in the year ahead. One could say the power balance has shifted a bit from owners offering jobs to workers offering services. Being a strong, authentic and transparent communicator can give you a competitive advantage.
© 2022
Commission fraud: When salespeople get paid more than they’ve earned
Many employees — from retail workers to sales staffers involved in complex business-to-business transactions — receive part of their compensation from sales-related commissions. To attract and retain top talent, some companies even allow employees to earn unlimited commissions.
Unfortunately, some commission-compensated employees may be tempted to abuse this system by falsifying sales or rates. Fraud methods vary depending on an unethical salesperson’s employer and role. But companies need to be aware of the possibility of commission fraud and take steps to prevent it.
3 forms
Generally, commission fraud takes one of three forms:
Invention of sales. A retail employee enters a fake purchase at the point of sale (POS) to generate a commission. Or an employee involved in selling business services creates a fraudulent sales contract.
Overstatement of sales. Here, a worker alters internal sales reports or invoices or inflates sales captured via the company’s POS.
Inflation of commission rates. An employee changes a company’s commission records to reflect a higher pay rate. Employees who don’t have access to such records might collude with someone who does (such as an accounting staffer) to alter compensation rates.
More sophisticated schemes can involve collusion with customers and other outside parties.
Data-driven approach to detection
Regardless of the method used to commit commission fraud, these schemes create data and a document trail your business can use to detect abuse. For example, to uncover commission fraud in progress, you should regularly analyze commission expenses relative to your company’s sales. After accounting for timing differences, the volume of commission payments should correlate to sales revenue.
Also pay close attention to the total commission paid to each employee. Focus on outliers whose commission levels are significantly higher and analyze sales activity and the associated commission rates to ensure consistency. By creating benchmarks — based on commission sales by employee type, location and seniority — you can more easily detect fraud in subsequent periods. Randomly sampling sales associated with commissions and ensuring relevant documentation exists for each payment can be effective, too. You can contact individual customers to verify sales transactions by disguising your calls as customer satisfaction checks.
Commission schemes sometimes require cooperation with other employees and customers, which usually leaves an email trail. Consistent with your company’s policies and procedures, monitor employee email communications for evidence of wrongdoing.
Prevention processes
There are other processes your business can follow to prevent fraud from occurring in the first place. For example:
Formalize policies prohibiting it. State the consequences (for instance, termination and criminal charges) of committing commission fraud in your employee handbook. Also routinely stress your company’s commitment to detecting commission fraud and explain that management will regularly scrutinize individual payments for signs of malfeasance.
Minimize the potential for record tampering. To help prevent salespeople from accessing accounting records, rotate accounting staff assigned to recording commission payments. Segregation of all accounting duties is important to help prevent other fraud schemes from flourishing in your organization.
Set realistic sales goals. Although some employees commit fraud for personal enrichment, others cheat to meet their employer’s overly aggressive sales targets. Periodically solicit feedback from sales staff about their ability to meet objectives and pay close attention when salespeople complain or leave your company. If you encounter excessive frustration in meeting targets, make them more achievable.
Making manipulation difficult
When structured and managed correctly, a commission program can boost employee compensation and morale — and add to your company’s bottom line. But schemes to manipulate a company’s compensation structure often are all too simple for shady salespeople to commit. To make fraud much harder to perpetrate, you may need to step up data analysis and revamp your internal controls.
Many companies don’t have the internal resources to conduct this type of analysis and don’t know how to fix controls that aren’t working. That’s where a CPA or forensic accounting specialist can help. Contact us.
© 2022
Review your strategic plan … and look ahead
Business owners, year end is officially here. It may even be over by the time you read this. (If so, Happy New Year!) In any case, the end of one year and the beginning of another is always an optimal time to look back on the preceding 12 calendar months and ask a deceptively simple question: How’d we do?
Large companies tend to have thoroughly documented strategic plans in place, some stretching years into the future, that include various metrics for measuring whether they’ve achieved the growth intended. For them, reviewing a calendar year’s success in terms of strategic planning is relatively easy. They mostly just crunch the numbers.
For small to midsize businesses, the strategic planning process may be a little more informal and less precise. Yet even if your strategic plan isn’t a detailed document replete with spreadsheets and pie charts, you can still review actual performance against it and use this assessment to look ahead to 2022.
Areas that inform
Generally, there are three areas of most businesses that inform the success of a strategic plan. They are:
HR. Your people are your most valuable asset. So, how does your employee turnover rate for 2021 compare with previous years? High employee turnover could be a sign of underlying problems, such as poor training, lax management or low employee morale.
Much has been written this year about “the Great Resignation,” the trend of employees leaving their jobs for various reasons. How has it affected your company? Has it stymied your efforts to meet strategic goals? You may need to make hiring and retention efforts a focal point of your 2022 strategic plan.
Sales and marketing. Did you meet your monthly goals for new sales, in terms of both revenue and number of new customers? Did you generate an adequate return on investment (ROI) for your marketing dollars?
If you can’t clearly answer the latter question, enhance your tracking of existing marketing efforts so you can better gauge ROI going forward. And set reasonable but growth-oriented sales goals for 2022 that will make or keep your business a competitive force to be reckoned with.
Production. If you manufacture products, what was your unit reject rate over the past year? Or, if yours is a service business, how satisfied were your customers with the level of service provided?
Again, if you’re not sure, you may need to establish or enhance your methods of tracking product quality or measuring customer satisfaction to meet this year’s strategic goals. Many companies now use customer satisfaction scores or a customer satisfaction index to establish objectives and benchmark their success.
Flexibility and the right adjustments
By now, you should probably have at least the framework of a 2022 strategic plan in place. However, if you’re not that far along, don’t worry. Strategic plans are best when they’re flexible and open to adjustment as economic conditions and buying trends change.
This is particularly true when the year ahead looks as uncertain as this one, given the continuing impact of the pandemic. We can help you review your 2021 financials and use the right metrics to develop a cohesive, realistic strategic plan for the next 12 months.
© 2021
Looking for a 2022 safety net for your business? Act on EIDL funding before year end
As the new year approaches, the future of the Build Back Better Act (BBBA) — and the strength of the economic recovery — remains uncertain. One thing that’s not uncertain when it comes to your business is the impending deadline to apply for COVID-19 Economic Injury Disaster Loan (EIDL) funding, some of which needn’t be repaid.
The U.S. Small Business Administration (SBA) expanded eligibility in September 2021. While you may not have qualified or considered EIDL funding necessary previously, you might want to reconsider in light of yet another wave of COVID infections. But you’ll have to do so quickly, as the application deadline is December 31, 2021.
Shaky economic ground ahead?
Sen. Joe Manchin (D-WV) released a statement on December 19 announcing that he “cannot vote to move forward” on the BBBA. The $2.1 billion bill that passed in the U.S. House of Representatives includes numerous provisions related to healthcare, energy initiatives, immigration, education, social programs and taxes.
The Democrats lack the votes to pass the proposed legislation in the Senate without Manchin’s support. Yet Senate Majority Leader Chuck Schumer (D-NY) indicated on December 20 that he nonetheless intends to hold a vote on the bill in early 2022. Schumer’s announcement came hours after Goldman Sachs reduced its predictions for U.S. economic growth in 2022 based on Manchin’s statement.
Types of EIDL relief available
The COVID-19 EIDL program was created to make low-interest fixed-rate long-term loans to provide small businesses (including sole proprietorships and independent contractors) the working capital they need to withstand the effects of the pandemic. Three types of funding are available:
Loans. This funding type features a 30-year term and fixed interest rate of 3.75%. The proceeds can be used for any normal operating expense, including payroll, rent or mortgage, utilities, and other ordinary businesses expenses. Since the recent program expansion (see below), funds also can be used to pay or pre-pay business debt incurred at any time, including after submitting the application, and regularly scheduled payments of federal debt.
Targeted advances. Businesses located in low-income communities, have no more than 300 employees and have suffered more than a 30% reduction in revenue may qualify for a targeted advance up to $10,000. These advances don’t have to be repaid.
Supplemental targeted advances. Businesses in low-income communities that have no more than 10 employees and saw revenue declines of more than 50% may be eligible for an additional $5,000. Supplemental advances also don’t require repayment.
The recent expansion
The SBA has implemented several changes to make it easier for small businesses to access the COVID-19 EIDL loans. Among other things, the SBA:
Expanded eligibility from organizations with no more than 500 employees (including affiliates) to encompass businesses in the hardest hit industries with no more than 500 employees per physical location, as long as the business (with affiliates) has no more than 20 locations,
Increased the maximum loan amount from $500,000 to $2 million,
Extended the payment deferment period to two years after the loan origination date for all loans (interest will accrue during that period, and principal and interest payments must be made over the remaining 28 years of the loan term), and
Simplified the affiliation requirements.
The SBA has also limited entities that are part of a single corporate group to a combined total of no more than $10 million in COVID-19 EIDL loans.
Additional eligibility requirements
Applicants must be physically located in the United States or a designated territory and have suffered working capital losses due to the COVID-19 pandemic. In addition, the businesses must have been in operation on or before January 31, 2020.
Businesses (other than sole proprietorships) must have a valid tax identification number. Each owner, member, partner or shareholder of 20% or more must be a U.S. citizen, non-citizen national or qualified alien with a valid Social Security number.
For loans of $500,000 or less, you must have a credit score of at least 570. For larger loans, the credit score must be at least 625. Personal guaranty and collateral requirements may apply, too, depending on the amount of the loan.
The looming deadline
The SBA will accept applications for loans and targeted advances until December 31, 2021. It will continue to process applications after that date, until the funds are exhausted. While the SBA earlier advised businesses seeking supplemental targeted advances to submit applications by December 10, 2021, it later announced it will accept applications until year end. It can’t process applications after the deadline, though, so applications submitted near the deadline might not be processed.
Note that borrowers can request increases, up to their maximum loan eligibility amount, for up to two years after loan origination or until the program funds are exhausted. In addition, the SBA will accept reconsideration and appeal requests received before December 31, 2021, if received on a timely basis. For reconsiderations, that means within six months from the date the application was declined. Appeals must be received within 30 days from the date the reconsideration was declined.
Don’t dawdle
You can apply online for COVID-19 EIDL relief, but the clock is ticking. We can help you determine if you should go this route and help you collect the necessary documentation.
© 2021
Could an FLP fit into your succession plan?
Among the biggest long-term concerns of many business owners is succession planning — how to smoothly and safely transfer ownership and control of the company to the next generation.
From a tax perspective, the optimal time to start this process is long before the owner is ready to give up control. A family limited partnership (FLP) can help you enjoy the tax benefits of gradually transferring ownership while you continue to run the business.
How it works
To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children or other beneficiaries.
You retain the general partnership interest, which may be as little as 1% of the assets. However, as general partner, you still run day-to-day operations and make business decisions.
Tax benefits
As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.
Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.
The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, let’s say the discount is 25%. That means, in 2022, you could gift an FLP interest equal to as much as $21,333 (on a controlling basis) tax-free because the discounted value wouldn’t exceed the $16,000 annual gift tax exclusion.
There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.
Some risks
Perhaps the biggest downside is that the IRS tends to scrutinize how FLPs are structured. If it determines that discounts are excessive or that your FLP has no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.
The IRS also pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for instance, can indicate that an FLP was set up solely as a tax-avoidance strategy.
Not for everyone
An FLP can be an effective succession and estate planning tool but, as noted, it’s far from risk free. We can help you determine whether one is right for you and advise you on other ways to develop a sound succession plan.
© 2021
Use change management to brighten your company’s future
Businesses have had to grapple with unprecedented changes over the last couple years. Think of all the steps you’ve had to take to safeguard your employees from COVID-19, comply with government mandates and adjust to the economic impact of the pandemic. Now look ahead to the future — what further changes lie in store in 2022 and beyond?
One hopes the transformations your company undergoes in the months ahead are positive and proactive, rather than reactive. Regardless, the process probably won’t be easy. This is where change management comes in. It involves creating a customized plan for ensuring that you communicate effectively and provide employees with the leadership, training and coaching needed to change successfully.
Prepare for resistance
Employees resist change in the workplace for many reasons. Some may see it as a disruption that will lead to loss of job security or status (whether real or perceived). Other staff members, particularly long-tenured ones, can have a hard time breaking out of the mindset that “the old way is better.”
Still others, in perhaps the most dangerous of perspectives, distrust their employer’s motives for change. They may be listening to — or spreading — gossip or misinformation about the state or strategic direction of the company.
It doesn’t help the situation when certain initial changes appear to make employees’ jobs more difficult. For example, moving to a new location might enhance the image of the business or provide more productive facilities. But a move also may increase some employees’ commuting times or put them in a drastically different working environment. When their daily lives are affected in such ways, employees tend to question the decision and experience high levels of anxiety.
Make your case
Often, when employees resist change, a company’s leadership can’t understand how ideas they’ve spent weeks, months or years carefully deliberating could be so quickly rejected. They overlook the fact that employees haven’t had this time to contemplate and get used to the new concepts and processes. Instead of helping to ease employee fears, leadership may double down on the change, more strictly enforcing new rules and showing little patience for disagreements or concerns.
It’s here that the implementation effort can break down and start costing the business real dollars and cents. Employees resist change in many counterproductive ways, from intentionally lengthening learning curves to calling in sick when they aren’t to filing formal complaints or lawsuits. Some might even quit — an increasingly common occurrence as of late.
By engaging in change management, you may be able to lessen the negative impact on productivity, morale and employee retention.
Craft your future
The content of a change-management plan will, of course, depend on the nature of the change in question as well as the size and mission of your company. For major changes, you may want to invest in a business consultant who can help you craft and execute the plan. Getting the details right matters — the future of your business may depend on it.
© 2021
Don’t forget to factor 2022 cost-of-living adjustments into your year-end tax planning
The IRS recently issued its 2022 cost-of-living adjustments for more than 60 tax provisions. With inflation up significantly this year, mainly due to the COVID-19 pandemic, many amounts increased considerably over 2021 amounts. As you implement 2021 year-end tax planning strategies, be sure to take these 2022 adjustments into account.
Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopts the C-CPI-U on a permanent basis.
Individual income taxes
Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $325 to $650, depending on filing status, but the top of the 35% bracket increases by $16,300 to $19,550, again depending on filing status.
The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2022, the standard deduction is $25,900 (married couples filing jointly), $19,400 (heads of households), and $12,950 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law unless Congress extends the current rules or revises them.
Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who typically used to itemize deductions.
2022 ordinary-income tax brackets
Tax rate
Single
Head of household
Married filing jointly or surviving spouse
Married filing separately
10%
$ 0 - $ 10,275
$ 0 - $ 14,650
$ 0 - $ 20,550
$ 0 - $ 10,275
12%
$ 10,276 - $ 41,775
$ 14,651 - $ 55,900
$ 20,501 - $ 83,550
$ 10,276 - $ 41,775
22%
$ 41,776 - $ 89,075
$ 55,901 - $ 89,050
$ 83,551 - $178,150
$ 41,776 - $ 89,075
24%
$ 89,076 - $170,050
$ 89,051 - $170,050
$178,151 - $340,100
$ 89,076 - $170,050
32%
$170,051 - $215,950
$170,051 - $215,950
$340,101 - $431,900
$170,051 - $215,950
35%
$215,951 - $539,900
$215,951 - $539,900
$431,901 - $647,850
$215,951 - $323,925
37%
Over $539,900
Over $539,900
Over $647,850
Over $323,925
AMT
The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.
Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2022, the threshold for the 28% bracket increased by $6,200 for all filing statuses except married filing separately, which increased by half that amount.
2022 AMT brackets
Tax rate
Single
Head of household
Married filing jointly or surviving spouse
Married filing separately
26%
$0 - $206,100
$0 - $206,100
$0 - $206,100
$0 - $103,050
28%
Over $206,100
Over $206,100
Over $206,100
Over $103,050
The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2022 are $75,900 for singles and heads of households and $118,100 for joint filers, increasing by $2,300 and $3,500, respectively, over 2021 amounts. The inflation-adjusted phaseout ranges for 2022 are $539,900–$843,500 (singles and heads of households) and $1,079,800–$1,552,200 (joint filers). Amounts for separate filers are half of those for joint filers.
Education and child-related breaks
The maximum benefits of certain education and child-related breaks generally remain the same for 2022. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.
The MAGI phaseout ranges generally remain the same or increase modestly for 2022, depending on the break. For example:
The American Opportunity credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the American Opportunity credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit per eligible student is $2,500.
The Lifetime Learning credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the Lifetime Learning credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit is $2,000 per tax return.
The adoption credit. The phaseout ranges for eligible taxpayers adopting a child will also increase for 2022 — by $6,750 to $223,410–$263,410 for joint, head-of-household and single filers. The maximum credit increases by $450, to $14,890 for 2022.
(Note: Married couples filing separately generally aren’t eligible for these credits.)
These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.
Gift and estate taxes
The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2022, the amount is $12.060 million (up from $11.70 million for 2021).
The annual gift tax exclusion increases by $1,000 to $16,000 for 2022.
Retirement plans
Not all of the retirement-plan-related limits increase for 2022. Thus, depending on the type of plan you have, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:
Type of limitation
2021 limit
2022 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans
$ 19,500
$ 20,500
Annual benefit limit for defined benefit plans
$230,000
$245,000
Contributions to defined contribution plans
$ 58,000
$ 61,000
Contributions to SIMPLEs
$ 13,500
$ 14,000
Contributions to IRAs
$ 6,000
$ 6,000
“Catch-up” contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans for those age 50 and older
$ 6,500
$ 6,500
Catch-up contributions to SIMPLEs
$ 3,000
$ 3,000
Catch-up contributions to IRAs
$ 1,000
$ 1,000
Compensation for benefit purposes for qualified plans and SEPs
$290,000
$305,000
Minimum compensation for SEP coverage
$ 650
$ 650
Highly compensated employee threshold
$130,000
$135,000
Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2022:
Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:
For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
For a spouse who participates, the 2022 phaseout range limits increase by $4,000, to $109,000–$129,000.
For a spouse who doesn’t participate, the 2022 phaseout range limits increase by $6,000, to $204,000–$214,000.
For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2022 phaseout range limits increase by $2,000, to $68,000–$78,000.
Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.
But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.
Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:
For married taxpayers filing jointly, the 2022 phaseout range limits increase by $6,000, to $204,000–$214,000.
For single and head-of-household taxpayers, the 2022 phaseout range limits increase by $4,000, to $129,000–$144,000.
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)
2022 cost-of-living adjustments and tax planning
With many of the 2022 cost-of-living adjustment amounts trending higher, you have an opportunity to realize some tax relief next year. In addition, with certain retirement-plan-related limits also increasing, you have the chance to boost your retirement savings. If you have questions on the best tax-saving strategies to implement based on the 2022 numbers, please give us a call. We’d be happy to help.
© 2021
4 red flags of an unreliable budget
Every business should prepare an annual budget. Creating a comprehensive, realistic spending plan allows you to identify potential shortages of cash, possible constraints on your capacity to fulfill strategic objectives, and other threats.
Whether you’ve already put together a 2022 budget or still need to get on that before year end, here are four red flags to watch out for:
1. It’s based on last year’s results. Too often, companies create a budget by applying an across-the-board percentage increase to the previous year’s actual results. Clearly the pandemic showed us how an unexpected event can wreak havoc on a budget. However, even without such an event, this approach may be too simplistic in today’s complex business environment.
Historical results are a good starting point, but not all costs are fixed. Some are quite variable based on various factors, such as the supply-chain disruptions we’ve seen in 2020 and 2021. And certain assets — such as equipment and people — have capacity limitations to consider. Prepare accurate forecasts of revenue and expenses on a department-by-department basis using up-to-date technology to capture timely data.
2. It lacks companywide consensus. Your finance or accounting department shouldn’t complete the budget alone. Seek input from key employees in every department and at various levels of management.
For example, your sales department may be in the best position to estimate future revenue. A production or service manager may offer insight into unanticipated expenses or necessary investments in equipment upgrades. And the product development team can help forecast revenue and expenses related to new products and enhancements to existing products.
In addition, soliciting broad participation gives employees a sense of ownership in the budgeting process. This can help enhance employee engagement and improve your odds of achieving budgeted results.
3. It’s unrealistic. Good budgets encourage hard work to grow revenue and cut costs. But the targets must be attainable, based on your company’s history as well as economic and industry trends.
Employees will likely become discouraged if they view the budget as unachievable or out of touch with what’s actually happening on the ground. If budgets repeatedly fail, employees may start ignoring them altogether. Tying annual bonuses to the achievement of specific targets can help encourage budget buy-in.
4. It ignores or underestimates cash flow. Even if expected revenue is forecast to cover expenses for the year, production and cost fluctuations, as well as slow-paying customers and uncollectible accounts, can lead to temporary cash shortages. Of course, more significant events can have an even bigger impact.
An unexpected shortfall can seriously derail your budget. So, look beyond the income statement and balance sheet. Forecast cash flow on a weekly or monthly basis. Then create a plan for managing any anticipated shortfalls.
For example, you might need to contribute extra capital from cash reserves. Or you might need to apply for a line of credit at the bank. Alternatively, you might consider buying materials on consignment, revising payment terms with customers or delaying payments to suppliers (if a penalty won’t apply).
As you’ve no doubt experienced in 2020 and 2021, the environment in which your business operates is constantly evolving, so budgeting needs to be an ongoing process. We can help you develop a reasonable annual budget and monitor actual results throughout the year.
© 2021
IRS announces adjustments to key retirement plan limits
In Notice 2021-61, the IRS recently announced 2022 cost-of-living adjustments to dollar limits and thresholds for qualified retirement plans. Here are some highlights:
Elective deferrals. The annual limit on elective deferrals (employee contributions) will increase from $19,500 to $20,500 for 401(k), 403(b) and 457 plans, as well as for Salary Reduction Simplified Employee Pensions (SARSEPs). The annual limit will rise to $14,000, up from $13,500, for Savings Incentive Match Plans for Employees (SIMPLEs) and SIMPLE IRAs.
Catch-up contributions. The annual limit on catch-up contributions for individuals age 50 and over remains at $6,500 for 401(k), 403(b) and 457 plans, as well as for SARSEPs. It also stays at $3,000 for SIMPLEs and SIMPLE IRAs.
Annual additions. The limit on annual additions — that is, employer contributions plus employee contributions — to 401(k)s and other defined contribution plans will increase from $58,000 to $61,000.
Compensation. The annual limit on compensation that can be taken into account for contributions and deductions will increase from $290,000 to $305,000 for 401(k)s and other qualified plans. This includes Simplified Employee Pensions (SEPs) and SARSEPs.
Highly compensated employees (HCEs). The threshold for determining who is an HCE will increase from $130,000 to $135,000.
Key employees. The threshold for determining whether an officer is a “key employee” under the top-heavy rules, as well as the cafeteria plan nondiscrimination rules, will increase from $185,000 to $200,000.
Participation in a SEP or SARSEP. The threshold for determining participation in either type of plan will remain $650.
Business owners, along with their HR and benefits staff or providers, should carefully note when the new limits and thresholds apply. Sometimes the answer isn’t obvious. For example, the 2022 compensation threshold used to identify HCEs will be generally used by 401(k) plans for 2023 nondiscrimination testing, not 2022.
Review your employee communications, plan procedures and administrative forms, updating them as necessary to reflect these changes. Whether your company offers a 401(k) or another type of defined contribution plan, we can provide further information on the applicable tax rules.
© 2021
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.
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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.
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