At the very least, update the financials in your business plan
Every new company should launch with a business plan and keep it updated. Generally, such a plan will comprise six sections: executive summary, business description, industry and marketing analysis, management team description, implementation plan, and financials.
Now, ideally, you would comprehensively update each section every year. But if the size, shape and objectives of your company haven’t changed all that much, you may not need to make major revisions to the entire plan. However, at the very least, you should always review and revise your financials.
Explain your route
Lenders, investors and other interested parties understand that descriptions of a business or industry analysis may be subject to interpretation. But financials are a different matter — they need to add up (literally and figuratively) and contain realistic projections in today’s dollars.
For example, suppose a company with $10 million in sales in 2019 expects to double that figure over a three-year period. How will you get from Point A ($10 million in 2019) to Point B ($20 million in 2023)? Many roads may lead to the desired destination; your business plan must explain its route.
Let’s say your management team decides to double sales by hiring four new salespeople and acquiring the assets of a bankrupt competitor. These assumptions will drive the projected income statement, balance sheet and cash flow statement referenced in your business plan.
Justify assumptions
When projecting the income statement, you’ll need to make assumptions about variable and fixed costs. Direct materials are generally considered variable. Salaries and rent are usually fixed. But many fixed costs can be variable over the long term. Consider rent: Once a lease expires, you could relocate to a different facility to accommodate changes in size.
Balance sheet items — receivables, inventory, payables and so on — are generally expected to grow in tandem with revenues. The financials in your business plan must accurately and reasonably justify the assumptions you’re making about your minimum cash balance, as well as debt increases or decreases to keep the balance sheet balanced. And these amounts must be current.
From a lending perspective, your bank will be expected to fund any cash shortfalls that take place as the company grows. So, realistic cash flow projections in your business plan are particularly critical. The financials section should outline how much financing you’ll need, how you intend to use those funds and when you expect to repay the loan(s).
Keep it fresh
Your business plan needs to tell an accurate, objective story of your company — where it’s been, where it is right now and where it’s heading. Keep the whole thing as fresh as possible but pay special attention to the numbers. We can help you review your financials, arrive at reasonable assumptions, and express your objectives and projections clearly.
© 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
Devote some time to internal leadership development
Many factors go into the success of a company. You’ve got to offer high-quality products or services, provide outstanding customer service, and manage your inventory or supply chain. But there’s at least one other success factor that many business owners often overlook: internal leadership training and development.
Even if all your executive and management positions are filled with seasoned leaders right now, there’s still a major benefit to continually training, coaching and mentoring employees for leadership responsibilities. After all, even someone who doesn’t work in management can champion a given initiative or project that brings in revenue or elevates the company’s public image.
Ideas to consider
Internal leadership development is practiced when owners and executives devote time to helping current managers as well as employees who might one day be promoted to positions of leadership.
To do this, shift your mindset from being only “the boss” to being someone who holds an important responsibility to share leadership knowledge with others. Here are a few tips to consider:
Contribute to performance development. Most employees’ performance reviews will reveal both strengths and weaknesses. Sit down with current and potential leaders and generously share your knowledge and experience to bolster strong points and shore up shortcomings.
Invite current and potential leaders to meetings. Give them the opportunity to participate in important meetings they might not otherwise attend, and solicit their input during these gatherings. This includes both internal meetings and interactions with external vendors, customers and prospects. Again, look to reinforce positive behaviors and offer guidance on areas of growth.
Introduce them to the wider community. Get current and potential leaders involved with an industry trade association or a local chamber of commerce. By meeting and networking with others in your industry, these individuals can get a broader perspective on the challenges that your company faces — as well as its opportunities.
Give them real decision-making authority. Probably not right away but, at some point, put a new leader to the test. Give them control of a project and then step back and observe the results. Don’t be afraid to let them fail if their decisions don’t pan out. This can help your most promising employees learn real-world lessons now that can prove invaluable in the future.
Benefits beyond
Dedicating some time and energy to internal leadership development can pay off in ways beyond having well-trained managers. You’ll likely boost retention by strengthening relationships with your best employees. Furthermore, you may discover potential problems and avail yourself of new ideas that, otherwise, may have never reached you. Our firm can provide further information and other ideas.
© 2018
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!
Now’s the time to review your business expenses
As we approach the end of the year, it’s a good idea to review your business’s expenses for deductibility. At the same time, consider whether your business would benefit from accelerating certain expenses into this year.
Be sure to evaluate the impact of the Tax Cuts and Jobs Act (TCJA), which reduces or eliminates many deductions. In some cases, it may be necessary or desirable to change your expense and reimbursement policies.
What’s deductible, anyway?
There’s no master list of deductible business expenses in the Internal Revenue Code (IRC). Although some deductions are expressly authorized or excluded, most are governed by the general rule of IRC Sec. 162, which permits businesses to deduct their “ordinary and necessary” expenses.
An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. (It need not be indispensable.) Even if an expense is ordinary and necessary, it may not be deductible if the IRS considers it lavish or extravagant.
What did the TCJA change?
The TCJA contains many provisions that affect the deductibility of business expenses. Significant changes include these deductions:
Meals and entertainment. The act eliminates most deductions for entertainment expenses, but retains the 50% deduction for business meals. What about business meals provided in connection with nondeductible entertainment? In a recent notice, the IRS clarified that such meals continue to be 50% deductible, provided they’re purchased separately from the entertainment or their cost is separately stated on invoices or receipts.
Transportation. The act eliminates most deductions for qualified transportation fringe benefits, such as parking, vanpooling and transit passes. This change may lead some employers to discontinue these benefits, although others will continue to provide them because 1) they’re a valuable employee benefit (they’re still tax-free to employees) or 2) they’re required by local law.
Employee expenses. The act suspends employee deductions for unreimbursed job expenses — previously treated as miscellaneous itemized deductions — through 2025. Some businesses may want to implement a reimbursement plan for these expenses. So long as the plan meets IRS requirements, reimbursements are deductible by the business and tax-free to employees.
Need help?
The deductibility of certain expenses, such as employee wages or office supplies, is obvious. In other cases, it may be necessary to consult IRS rulings or court cases for guidance. For assistance, please contact us.
© 2018
Could a long-term deal ease your succession planning woes?
Some business owners — particularly those who founded their companies — may find it hard to give up control to a successor. Maybe you just can’t identify the right person internally to fill your shoes. While retirement isn’t in your immediate future, you know you must eventually step down.
One potential solution is to find an outside buyer for your company and undertake a long-term deal to gradually cede control to them. Going this route can enable a transition to proceed at a more manageable pace.
Putting your child on your business’s payroll for the summer may make more tax sense than ever
If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring your child may make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).
7 ways to prepare your business for sale
For some business owners, succession planning is a complex and delicate matter involving family members and a long, gradual transition out of the company. Others simply sell the business and move on. There are many variations in between, of course, but if you’re leaning toward a business sale, here are seven ways to prepare:
1. Develop or renew your business plan. Identify the challenges and opportunities of your company and explain how and why it’s ready for a sale. Address what distinguishes your business from the competition, and include a viable strategy that speaks to sustainable growth.
2. Ensure you have a solid management team. You should have a management team in place that’s, essentially, a redundancy of you. Your leaders should have the vision and know-how to keep the company moving forward without disruption during and after a sale.
3. Upgrade your technology. Buyers will look much more favorably on a business with up-to-date, reliable and cost-effective IT systems. This may mean investing in upgrades that make your company a “plug and play” proposition for a new owner.
4. Estimate the true value of your business. Obtaining a realistic, carefully calculated business appraisal will lessen the likelihood that you’ll leave money on the table. A professional valuator can calculate a defensible, marketable value estimate.
5. Optimize balance sheet structure. Value can be added by removing nonoperating assets that aren’t part of normal operations, minimizing inventory levels, and evaluating the condition of capital equipment and debt-financing levels.
6. Minimize tax liability. Seek tax advice early in the sale process — before you make any major changes or investments. Recent tax law changes may significantly affect a business owner’s tax position.
7. Assemble all applicable paperwork. Gather and update all account statements and agreements such as contracts, leases, insurance policies, customer/supplier lists and tax filings. Prospective buyers will request these documents as part of their due diligence.
Succession planning should play a role in every business owner’s long-term goals. Selling the business may be the simplest option, though there are many other ways to transition ownership. Please contact our firm for further ideas and information.
© 2018
Use benchmarking to swim with the big fish
You may keep a wary eye on your competitors, but sometimes it helps to look just a little bit deeper. Even if you’re a big fish in your pond, someone a little bigger may be swimming up just beneath you. Being successful means not just being aware of these competitors, but also knowing their approaches and results.
And that’s where benchmarking comes in. By comparing your company with the leading competition, you can identify weaknesses in your business processes, set goals to correct these problems and keep a constant eye on how your company is doing. In short, benchmarking can help your company grow more successful.
Business interruption insurance can help some companies
Natural disasters and other calamities can affect any company at any time. Depending on the type of business and its financial stability, a few weeks or months of lost income can leave it struggling to turn a profit indefinitely — or force ownership to sell or close. One way to guard against this predicament is through the purchase of business interruption insurance.