Be vigilant about your business credit score
As an individual, you’ve no doubt been urged to regularly check your credit score. Most people nowadays know that, with a subpar personal credit score, they’ll have trouble buying a home or car, or just getting a reasonable-rate credit card.
But how about your business credit score? It’s important for much the same reason — you’ll have difficulty obtaining financing or procuring the assets you need to operate competitively without a solid score. So, you’ve got to be vigilant about it.
Algorithms and data
Business credit scores come from various reporting agencies, such as Experian, Equifax and Dun & Bradstreet. Each agency has its own algorithm for calculating credit scores. Like personal credit scores, higher business credit scores equate with lower risk (and vice versa).
Credit agencies track your business by its employer identification number (EIN). They compile data from your EIN, including the company’s address, phone number, owners’ names and industry classification code. Agencies may also search the Internet and public records for bankruptcies, judgments and tax liens. Suppliers, landlords, leasing companies and other creditors may also report payment experiences with the company to credit agencies.
Important factors
Timely bill payment is the biggest factor affecting your business credit score. But other important ones include:
Level of success. Higher net worth or annual revenues generally increase your credit score.
Structure. Corporations and limited liability companies tend to receive higher scores than sole proprietorships and partnerships because these entities’ financial identities are separate from those of their owners.
Industry. Some agencies keep track of the percentage of companies under the company’s industry classification code that have filed for bankruptcy. Participation in high-risk industries tends to lower a business credit score.
Track record. Credit agencies also look at the length and frequency of your company’s credit history. Once you establish credit, your business should periodically borrow additional money and then repay it on time to avoid the risk of being downgraded.
Best practices
Business credit scores help lenders decide whether to approve your loan request, as well as the loan’s interest rate, duration and other terms. Unfortunately, some small businesses and start-ups may have little to no credit history.
Build your company’s credit history by applying for a company credit card and paying the balance off each month. Also put utilities and leases in your company’s name, so the business is on the radar of the credit reporting agencies.
Sometimes, credit agencies base their ratings on incomplete, false or outdated information. Monitor your credit score regularly and note any downgrades. In some cases, the agency may be willing to change your score if you contact them and successfully prove that a rating is inaccurate.
Central role
Maintaining a healthy business credit score should play a central role in how you manage your company’s finances. Contact us for help in using credit to help maintain your cash flow and build the bottom line.
© 2019
An implementation plan is key to making strategic goals a reality
In the broadest sense, strategic planning comprises two primary tasks: establishing goals and achieving them. Many business owners would probably say the first part, coming up with objectives, is relatively easy. It’s that second part — accomplishing those goals — that can really challenge a company. The key to turning your strategic objectives into a reality is a solid implementation plan.
Start with people
After clearly identifying short- and long-range goals under a viable strategic planning process, you need to establish a formal plan for carrying it out. The most important aspect of this plan is getting the right people involved.
First, appoint an implementation leader and give him or her the authority, responsibility and accountability to communicate and champion your stated objectives. (If yours is a smaller business, you could oversee implementation yourself.)
Next, establish teams of carefully selected employees with specific duties and timelines under which to complete goal-related projects. Choose employees with the experience, will and energy to implement the plan. These teams should deliver regular progress reports to you and the implementation leader.
Watch out for roadblocks
On the surface, these steps may seem logical and foolproof. But let’s delve into what could go wrong with such a clearly defined process.
One typical problem arises when an implementation team is composed of employees wholly or largely from one department. Often, they’ll (inadvertently or intentionally) execute an objective in such a way that mostly benefits their department but ultimately hinders the company from meeting the intended goal.
To avoid this, create teams with a diversity of employees from across various departments. For example, an objective related to expanding your company’s customer base will naturally need to include members of the sales and marketing departments. But also invite administrative, production and IT staff to ensure the team’s actions are operationally practical and sustainable.
Another common roadblock is running into money problems. Ensure your implementation plan is feasible based on your company’s budget, revenue projections, and local and national economic forecasts. Ask teams to include expense reports and financial projections in their regular reports. If you determine that you can’t (or shouldn’t) implement the plan as written, don’t hesitate to revise or eliminate some goals.
Succeed at the important part
Strategic planning may seem to be “all about the ideas,” but implementing the specific goals related to your strategic plan is really the most important part of the process. Of course, it’s also the most difficult and most affected by outside forces. We can help you assess the financial feasibility of your objectives and design an implementation plan with the highest odds of success.
© 2019
Using knowledge management to develop your succession plan
As the old saying goes, “Knowledge is power.” This certainly rings true in business, as those who best understand their industries and markets tend to have a knack for staying on top. If that person is a company’s owner, however, great knowledge can turn into a vulnerability when he or she decides to retire or otherwise leave the business.
As you develop your succession plan, consider how to mitigate the loss of pure know-how that will occur when you step down. One way to tackle this risk is to implement a knowledge management strategy.
Two types of knowledge
Knowledge management is a formal process of recognizing and treating knowledge as an asset that your company can identify, maintain and share. Generally, a business can subdivide knowledge into two types:
1. Explicit knowledge. This exists in the tangible world and typically includes company reports, financial statements and databases. These items are usually easy to access, extrapolate from and append. For your succession plan, however, you may need to dig deeper into your own confidential files, memos or emails.
2. Tacit knowledge. This is information that resides solely between the ears of a business’s leadership, employees and perhaps even service providers. As such, it’s not easily retrievable. In terms of succession planning, this may be the stuff that you haven’t written down or even talked about much.
Typical categories
Typical knowledge management categories include:
• Taxes and accounting,
• Financial management,
• Strategic planning,
• HR, payroll and employment practices,
• Sales and marketing,
• Customers,
• Production, and
• Technology.
In addition, knowledge management should account for your company’s intellectual property — trade secrets, for example. Many business owners keep such details close to their vests and even managers may not know the full value of the company’s intellectual property. This could put your business at risk following your departure.
A comprehensive knowledge management effort related to your succession plan will call on you to undertake a full inventory of every category listed above and perhaps others. Gathering your explicit knowledge may entail compiling years’, even decades’, worth of documents, files and writings. This may not be an easy task, but it’s still a matter of straight research.
You’ll likely find capturing your tacit knowledge somewhat more challenging. One idea is to ask a suitable employee or engage an outside consultant to interview you regarding all the pertinent categories. Many business owners find these conversations arduous at first but eventually enlightening and enjoyable.
A legacy preserved
A solid succession plan is imperative to maintaining the future stability and success of your company. Knowledge management can strengthen that plan and help preserve the legacy you’ve worked so hard to build. Contact us for further information and for help identifying knowledge related to your tax filings, accounting methods and other financial matters.
© 2019
Best practices when filing a business interruption claim
Many companies, especially those that operate in areas prone to natural disasters, should consider business interruption insurance. Unlike a commercial property policy, which may cover certain repairs of damaged property, this coverage generally provides the cash flow to cover revenues lost and expenses incurred while normal operations are suspended because of an applicable event.
But be warned: Business interruption insurance is arguably among the most complicated types of coverage on the market today. Submitting a claim can be time-consuming and requires careful preparation. Here are some best practices to keep in mind:
Notify your insurer immediately. Contact your insurance rep by phone as soon as possible to describe the damage. If your policy has been water-damaged or destroyed, ask him or her to send you a copy.
Review your policy. Read your policy in its entirety to determine how to best present your claim. It’s important to understand the policy’s limits and deductibles before spending time documenting losses that may not be covered.
Practice careful recordkeeping. Maintain accurate records to support your claim. Reorganize your bookkeeping to segregate costs related to the business interruption and keep supporting invoices. Among the necessary documents are:
• Predisaster financial statements and income tax returns,
• Postdisaster business records,
• Copies of current utility bills, employee wage and benefit statements, and other records showing continuing operating expenses,
• Receipts for building materials, a portable generator and other supplies needed for immediate repairs,
• Paid invoices from contractors, security personnel, media outlets and other service providers, and
• Receipts for rental payments, if you move your business to a temporary location.
The calculation of losses is one of the most important, complex and potentially contentious issues involved in making a business interruption insurance claim. Depending on the scope of your loss, your insurer may enlist its own specialists to audit your claim. Contact us for help quantifying your business interruption losses and anticipating questions or challenges from your insurer. And if you haven’t yet purchased this type of coverage, we can help you assess whether it’s a worthy investment.
© 2019
Financial statements tell your business’s story, inside and out
Ask many entrepreneurs and small business owners to show you their financial statements and they’ll likely open a laptop and show you their bookkeeping software. Although tracking financial transactions is critical, spreadsheets aren’t financial statements.
In short, financial statements are detailed and carefully organized reports about the financial activities and overall position of a business. As any company evolves, it will likely encounter an increasing need to properly generate these reports to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions.
These are the typical components of financial statements:
Income statement. Also known as a profit and loss statement, the income statement shows revenues and expenses for a specified period. To help show which parts of the business are profitable (or not), it should carefully match revenues and expenses.
Balance sheet. This provides a snapshot of a company’s assets and liabilities. Assets are items of value, such as cash, accounts receivable, equipment and intellectual property. Liabilities are debts, such as accounts payable, payroll and lines of credit. The balance sheet also states the company’s net worth, which is calculated by subtracting total liabilities from total assets.
Cash flow statement. This shows how much cash a company generates for a particular period, which is a good indicator of how easily it can pay its bills. The statement details the net increase or decrease in cash as a result of operations, investment activities (such as property or equipment sales or purchases) and financing activities (such as taking out or repaying a loan).
Retained earnings/equity statement. Not always included, this statement shows how much a company’s net worth grew during a specified period. If the business is a corporation, the statement details what percentage of profits for that period the company distributed as dividends to its shareholders and what percentage it retained internally.
Notes to financial statements. Many if not most financial statements contain a supplementary report to provide additional details about the other sections. Some of these notes may take the form of disclosures that are required under Generally Accepted Accounting Principles — the most widely used set of accounting rules and standards. Others might include supporting calculations or written clarifications.
Financial statements tell the ongoing narrative of your company’s finances and profitability. Without them, you really can’t tell anyone — including yourself — precisely how well you’re doing. We can help you generate these reports to the highest standards and then use them to your best advantage.
© 2019
Refine your strategic plan with SWOT
With the year underway, your business probably has a strategic plan in place for the months ahead. Or maybe you’ve created a general outline but haven’t quite put the finishing touches on it yet. In either case, there’s a time-tested approach to refining your strategic plan that you should consider: a SWOT analysis. Let’s take a closer look at what each of the letters in that abbreviation stands for:
Strengths. A SWOT analysis starts by identifying your company’s core competencies and competitive advantages. These are how you can boost revenues and build value. Examples may include an easily identifiable brand, a loyal customer base or exceptional customer service.
Unearth the source of each strength. A loyal customer base, for instance, may be tied to a star employee or executive — say a CEO with a high regional profile and multitude of community contacts. In such a case, it’s important to consider what you’d do if that person suddenly left the business.
Weaknesses. Next the analysis looks at the opposite of strengths: potential risks to profitability and long-term viability. These might include high employee turnover, weak internal controls, unreliable quality or a location that’s no longer advantageous.
You can evaluate weaknesses relative to your competitors as well. Let’s say metrics indicate customer recognition of your brand is increasing, but you’re still up against a name-brand competitor. Is that a battle you can win? Every business has its Achilles’ heel — some have several. Identify yours so you can correct them.
Opportunities. From here, a SWOT analysis looks externally at what’s happening in your industry, local economy or regulatory environment. Opportunities are favorable external conditions that could allow you to build your bottom line if your company acts on them before competitors do.
For example, imagine a transportation service that notices a growing demand for food deliveries in its operational area. The company could allocate vehicles and hire drivers to deliver food, thereby gaining an entirely new revenue stream.
Threats. The last step in the analysis is spotting unfavorable conditions that might prevent your business from achieving its goals. Threats might come from a decline in the economy, adverse technological changes, increased competition or tougher regulation.
Going back to our previous example, that transportation service would have to consider whether its technological infrastructure could support the rigorous demands of the app-based food-delivery industry. It would also need to assess the risk of regulatory challenges of engaging independent contractors to serve as drivers.
Typically presented as a matrix (see accompanying image), a SWOT analysis provides a logical framework for better understanding how your business runs and for improving (or formulating) a strategic plan for the year ahead. Our firm can help you gather and assess the financial data associated with the analysis.
© 2019
Is your business stuck in the mud with its marketing plan?
A good marketing plan should be like a network of well-paved, clearly marked roads shooting out into the world and leading back to your company. But, all too easily, a business can get stuck in the mud while trying to build these thoroughfares, leaving its marketing message ineffective and, well, muddled. Here are a few indications that you might be spinning your wheels.
Still the same
If you’ve been using the same marketing materials for years, it’s probably time for an update. Customers’ demographics, perspectives and expectations change over time. If your materials appear old and outdated, your products or services may seem that way too.
Check out the marketing and advertising of competitors, as well as perhaps a few companies that you admire. What about their efforts grabs you? Discuss it with your team and come up with a strategy for refreshing your look. You might need to do something as drastic as a total rebranding, or a few relatively minor tweaks might be sufficient.
Overreliance on one approach
While a marketing plan should take many avenues, sometimes when a business finds success via a certain route, it gets overly reliant on that one approach. Think of a company that has advertised in its local phonebook for years and doesn’t notice when a competitor starts pulling in customers via social media.
This is where data becomes key. Use metrics to track response rates to your various initiatives and regularly reassess the balance of your marketing approach. Unlike the business in our example, many companies today become too focused on social media and ignore other options. So, watch out for that.
Inconsistent message
Ask yourself whether your various marketing efforts complement — or conflict with — one another. For example, is it obvious that an online ad and a print brochure came from the same business? Are you communicating a consistent, easy-to-remember message to customers and prospects throughout your messaging?
In addition, be careful about tone and taking unnecessary risks — particularly when using social media. It’s a difficult challenge: You want to get noticed, and sometimes that means pushing the envelope, but you don’t want to end up being offensive. Generally, you shouldn’t run the risk of alienating customers with controversial material. If you do come up with an edgy idea that you believe will likely pay off, gather plenty of feedback from objective parties before launching.
Reconstruction work
A marketing plan going nowhere will likely leave your sales team lost and your bottom line suffering. Maybe it’s time to do some reconstruction work on yours. Contact us for more information and further suggestions.
© 2019
What’s better than giving? Giving and tax breaks combined! Charitable deductions for appreciated stock.
Planning on making a substantial contribution to a charity or college before 2018 ends?
You should consider donating appreciated stock from your investment portfolio instead of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock.
This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is “gain” property, the donor does not have to recognize the gain on the donated property. These rules allow for the “doubling up,” so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.
Example: Taxpayer A and Taxpayer B are twins, each of whom attended a University. Each plans to donate $10,000 to the school. Each also owns $10,000 worth of stock in ABC, Inc. which he or she bought for just $2,000 several years ago.
Taxpayer A sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock.
Taxpayer B donates the stock directly to the school. She gets the same $10,000 charitable deduction and avoids any tax on the capital gain. The school is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case.
Caution: While this plan works for B in the above example, it will not work if the stock has not been held for more than a year. It would be treated as “ordinary income property” for these purposes and the charitable deduction would be limited to the stock's $2,000 cost.
If the property is other ordinary income property, e.g., inventory, similar limitations apply. Limitations may also apply to donations of long-term capital gain property that is tangible (not stock), and personal (not realty).
If you hold appreciated company stock from prior stock options or stock grants, this may be a strategy to offset the gain built into that stock while also achieving your charitable giving goals. The goal is to gift the property that has the highest objective dollar value of built in gain and work your way backwards from there. Remember however, if you are in a position to realize 0% capital gains in any year then this strategy would be a waste. Use this strategy in high-bracket years to balance gains and reduce your overall tax liability. Charitable giving is one of the few remaining itemized deductions under current law and can be used to great effect!
For personalized plans and gifting strategies, please contact our office to setup a consultation.
Is the Qualified Business Income Deduction (20% QBI) 199A deduction right for you?
The IRS now offers a 20% deduction for all “pass-through businesses” – great news! However, modifications and restrictions apply…..
For tax years that begin after Dec. 31, 2017:
- pass-through businesses, e.g.,
- sole proprietorships,
- partnerships,
- limited liability companies and
- S corporations,
may be able to take a deduction of up to 20% of their business income from a qualified trade or business (qualified business income (QBI) deduction). (Code Sec. 199A) The deduction can't exceed 20% of the excess of the taxpayer's taxable income over his net capital gain for the tax year.
Here are some planning ideas for taxpayers who may be able to qualify for the deduction:
Specified service trades or businesses
Specified service trades or businesses (SSTBs), e.g., businesses that involve performance of services in the fields of health, law, consulting, athletics, financial services and brokerage services, don't fully qualify unless the taxpayer's taxable income is equal to or below the threshold amount—$157,500 ($315,000 for married individuals filing jointly), indexed for inflation for tax years that begin after 2018—and don't qualify at all if the taxpayer's taxable income is above $207,500 ($415,000 for married individuals filing jointly), indexed for inflation after 2018.
- As a result, taxpayers who are in those businesses need to make estimates of their 2018 taxable income and 2019 taxable income, and consider shifts of taxable income if those estimates indicate that either year's taxable income is likely to be near the $157,500 - $207,500 ($315,000 - $415,000 for married filing jointly) range. For example, a single self-employed lawyer who anticipates that he will have taxable income of $125,000 for 2018 and $200,000 for 2019 will be able to increase his 2019 QBI deduction if he can shift taxable income from 2019 to 2018 and/or shift deductible expenses from 2018 to 2019.
- Taxpayers in SSTBs whose taxable income is too high to qualify for the new deduction should consider incorporating and/or changing/expanding their business model so that they are not SSTBs.
- And, in certain cases, married couples may benefit from filing separately to avoid the SSTB limit.
Beware of “Cracking”
The IRS is making a special attack on businesses that provide services or property to businesses that are otherwise SSTBs. Recently released regulations state that an SSTB includes any trade or business that provides 80% or more of its property or services to an SSTB if there is 50% or more common ownership of the trades or businesses. If a trade or business provides less than 80% of its property or services to an SSTB and there is 50% or more common ownership of the trades or businesses, that portion of the trade or business of providing property or services to the 50% or more commonly-owned SSTB would be treated as a part of the SSTB under the proposed regulations.
This regulation was proposed in response to reports that some taxpayers have contemplated a strategy to separate out parts of what otherwise would be an integrated SSTB, such as the administrative functions, in an attempt to qualify those separated parts for the pass-through deduction. IRS calls this “cracking” and believes this strategy is inconsistent with the purpose of Code Sec. 199A. Why, IRS, why???
IRS Provided Example: Law Firm is a partnership that provides legal services to clients, owns its own office building and employs its own administrative staff. Law Firm divides into three partnerships. Partnership 1 performs legal services to clients. Partnership 2 owns the office building and rents the entire building to Partnership 1. Partnership 3 employs the administrative staff and through a contract with Partnership 1 provides administrative services to Partnership 1 in exchange for fees. All three of the partnerships are owned by the same people (the original owners of Law Firm).
Because there is 50% or more common ownership of each of the three partnerships, Partnership 2 provides substantially all of its property to Partnership 1, and Partnership 3 provides substantially all of its services to Partnership 1, Partnerships 1, 2, and 3 would be treated as one SSTB under the proposed reliance regs.
Taxpayers who are subject to the W-2 wages limitation.
Except as provided below, the QBI deduction cannot exceed the greater of:
- 50% of the W-2 wages with respect to the qualified trade or business (W-2 wage limit), or
- the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” Qualified property is certain tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year.
The above limit does not apply for taxpayers with taxable income below the threshold amount (—$157,500 ($315,000 for married individuals filing jointly). The application of the limit is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly ($50,000 for other individuals).
The trade or business of the performance of employment services is not a qualified trade or business for purposes of the QBI deduction. As a result, an S corporation owner who qualifies for the QBI deduction, and for whom the W-2 wages limitation does not limit his deduction, will increase his QBI deduction by minimizing the amount of wages the S corporation pays him. However, where the W-2 wages limitation does limit his deduction, he may be able to increase his QBI deduction by increasing the amount of wages the S corporation pays him.
And, as indirectly illustrated by the above illustration, partnerships and sole proprietorships can benefit by converting to S corporation status. That is, a partnership or sole proprietorship cannot pay its owner(s) a salary and thus cannot take advantage of the technique of being able to take the deduction while in excess of the applicable threshold ($157K/315K). Converting the partnership or sole proprietorship to an S corporation opens up this planning technique.
Businesses that are subject to the W-2 wage limitation can also benefit by hiring employees instead of independent contractors.
EXAMPLE A sole proprietor who is not an SSTB earns $500,000 of QBI. Her business has no W-2 employees and no qualified assets; her QBI is determined after paying $100,000 to several independent contractors. She is over the phase-out limit, so her Code Sec. 199A deduction is zero because of the 50% W-2 wage limit. If, however, she hired employees to replace the independent contractors, her deduction would be $50,000 (50% of $100,000). (Note that, as a result of making this change, she would have additional payroll costs, and it might not sit well with the independent contractors if she wanted to hire the same people as employees—any of those people who themselves took QBI deductions will lose those deductions to the extent that their income converts to employment income.)
For more information, please Contact Us today!
How to reduce the tax risk of using independent contractors
Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation and other employee benefits. It also frees the business from responsibility for withholding income taxes and the worker’s share of payroll taxes.
For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor unfavorably. If the IRS reclassifies a worker as an employee, your business could be hit with back taxes, interest and penalties.