Use pro formas to plot your route to success

Running a business is like going on a road trip — and a detailed business plan that includes a set of pro forma financials can serve as a road map or GPS app that improves your odds of arriving on time and on budget. If your plan doesn’t cover the prospective quantitative details in pro formas, expect to hit some bumps along the road to achieving your strategic goals.

What to include

Investors and lenders may require business plans from companies that are starting up, seeking additional funding, or restructuring to avoid bankruptcy. Beyond all of the verbiage in the executive summary, business description and market analysis, comprehensive business plans include at least three years of pro forma:

  • Balance sheets (projecting assets, liabilities and equity),
  • Income statements (projecting expected revenue, expenses, gains, losses and net profits), and
  • Cash flow statements (highlighting sources and uses of cash from operating, financing and investing activities).

Pro forma financial statements are the quantitative details that back up the qualitative portions of your business plan. Pro formas tell stakeholders that management is aware of when cash flow and capacity shortages are likely to occur and how sensitive the results are to changes in the underlying assumptions.

How to crunch the numbers

Unless you’re launching a start-up, historical financial statements are the usual starting point for pro forma financials. Historical statements tell where the company is now. The next step is to ask, “Where do we want to be in three, five or 10 years?” Long-term goals fuel the assumptions that, in turn, drive the pro formas.

For example, suppose a company with $5 million in sales wants that figure to double over a three-year period. How will it get from Point A ($5 million in 2016) to Point B ($10 million in 2019)? Many roads lead to the desired destination.

Management could, for example, hire new salespeople, acquire the assets of a bankrupt competitor, build a new plant or launch a new product line. Attach a “statement of assumptions” to your pro forma financials, which shows how you plan to achieve your goals and how the changes will flow through the financial statements.

Need help?

Running a company following a business plan that doesn’t include pro forma financials is like going on a road trip with an unreliable GPS app or a bad map: Pro formas help you monitor where you are, what alternate routes or side trips exist along the way, and how close you are to the final destination. We can help you prepare pro forma financial statements, compare expected to actual results and adjust your assumptions as needed.

© 2017


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Don’t make hunches — crunch the numbers

Some business owners make major decisions by relying on gut instinct. But investments made on a “hunch” often fall short of management’s expectations.

In the broadest sense, you’re really trying to answer a simple question: If my company buys a given asset, will the asset’s benefits be greater than its cost? The good news is that there are ways — using financial metrics — to obtain an answer.

Accounting payback

Perhaps the most common and basic way to evaluate investment decisions is with a calculation called “accounting payback.” For example, a piece of equipment that costs $100,000 and generates an additional gross margin of $25,000 per year has an accounting payback period of four years ($100,000 divided by $25,000).

But this oversimplified metric ignores a key ingredient in the decision-making process: the time value of money. And accounting payback can be harder to calculate when cash flows vary over time.

Better metrics

Discounted cash flow metrics solve these shortcomings. These are often applied by business appraisers. But they can help you evaluate investment decisions as well. Examples include:

Net present value (NPV). This measures how much value a capital investment adds to the business. To estimate NPV, a financial expert forecasts how much cash inflow and outflow an asset will generate over time. Then he or she discounts each period’s expected net cash flows to its current market value, using the company’s cost of capital or a rate commensurate with the asset’s risk. In general, assets that generate an NPV greater than zero are worth pursuing.

Internal rate of return (IRR). Here an expert estimates a single rate of return that summarizes the investment opportunity. Most companies have a predetermined “hurdle rate” that an investment must exceed to justify pursuing it. Often the hurdle rate equals the company’s overall cost of capital — but not always.

A mathematical approach

Like most companies, yours probably has limited funds and can’t pursue every investment opportunity that comes along. Using metrics improves the chances that you’ll not only make the right decisions, but that other stakeholders will buy into the move. Please contact our firm for help crunching the numbers and managing the decision-making process.

© 2017


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Consider key person insurance as a succession plan safeguard

In business, and in life, among the most important ways to manage risk is through insurance. For certain types of companies — particularly start-ups and small businesses — one major threat is the sudden loss of an owner or hard-to-replace employee. To safeguard against this risk, insurers offer key person insurance.

Under a key person policy, a business buys life insurance covering the owner or employee, pays the premiums and names itself beneficiary. Should the key person die while the policy is in effect, the business receives the payout. As you formulate and adjust your succession plan, one of these policies can serve as a critical safeguard.

Costs and coverage

Key person insurance can take a variety of forms. Term policies last for a specified number of years, typically five to 20. Whole life (or permanent) policies, which are generally more expensive, provide coverage as long as premiums are paid, and they gradually build up cash surrender value. This value appears on a business’s balance sheet and may be drawn on, if the business needs working capital.

The cost of key person insurance also depends on the covered individual’s health, age and medical history, as well as the desired death benefit. When budgeting for premiums, bear in mind that premiums generally aren’t tax deductible. On the flip side, death benefits typically aren’t included in the business’s taxable income when received.

In terms of coverage limits, insurers may quote a rule of thumb of eight to 10 times the key person’s annual salary. But every business will have different cash flow needs when a key person unexpectedly dies. A more accurate estimate typically comes from evaluating lost income (or value), as well as the costs of finding and training a suitable replacement.

An important decision

If you’ve already chosen a successor, you can buy a policy that covers both of you. And if you haven’t, it may be even more critical to buy coverage on your life to protect the solvency of your business. Please contact our firm for help deciding whether key person insurance is for you.

© 2017


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An EAP can keep your top players on the floor

A good basketball team is at its best when its top players are on the floor. Similarly, a company is the most productive, efficient and innovative when its best employees are in the right positions, doing great work.

Unfortunately, it’s not uncommon for good employees to battle personal problems, such as substance dependence, financial and legal woes, or mental health issues. These struggles can negatively affect their productivity and the working environment around them. One way employers can help is by offering a benefit called an employee assistance program (EAP).

A benefit with benefits

An EAP helps identify at-risk employees and assist them in finding the professional help they need. An employee who enrolls in the EAP may, for example, immediately be put in touch with a counselor or social worker.

According to the U.S. Department of Labor’s Office of Disability Employment Policy, EAPs have been shown to contribute to:

• Decreased absenteeism,
• Reduced accidents and fewer workers’ compensation claims,
• Greater employee retention,
• Fewer labor disputes, and
• Significantly reduced medical costs arising from early identification and treatment of individual mental health and substance abuse issues.

An EAP is, of course, not a substitute for health care insurance.

Vendors available

Employers don’t have to create and administer EAPs on their own. A wide variety of vendors are available. But, as is the case with any benefit, it’s important to choose a vendor carefully and make sure you get good value for your investment. Please contact our firm for assistance in assessing the costs and specific features of an EAP.

© 2017


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Want to help your child (or grandchild) buy a home? Don’t wait!





Want to help your child (or grandchild) buy a home? Don’t wait! Mortgage interest rates are still quite low, but they likely will increase as the Fed continues to raise rates. If the child is eligible for the 0% long-term capital gains rate, here’s a tax-smart strategy: Instead of giving cash to help fund a down payment, give long-term appreciated assets such as stock or mutual fund shares. The child can sell the assets tax-free, and you can save the taxes you’d owe if you sold the assets yourself. Contact us for other tax-smart ways to help a child buy a home.


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Individual tax calendar: Key deadlines for the remainder of 2017





Here are a few key tax-related deadlines for individuals through the rest of 2017. JUNE 15: Pay second installment of 2017 estimated taxes, if applicable. SEPT. 15: Pay third installment of 2017 estimated taxes, if applicable. OCT. 16: File a 2016 income tax return and pay any tax, interest and penalties due, if an automatic six-month extension was filed. DEC. 31: Incur various expenses that potentially can be deducted on your 2017 tax return. Contact us for more information about the filing requirements and to ensure you’re meeting all applicable deadlines.


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Real estate investor vs. professional: Why it matters





Income and losses from investment real estate or rental property are passive by definition, unless you’re a real estate professional. Why does this matter? Passive income may be subject to the 3.8% net investment income tax, and passive losses generally are deductible only against passive income, with the excess carried forward. To qualify as a pro, you must annually perform: 1) more than 50% of your personal services in real property trades or businesses in which you materially participate, and 2) more than 750 hours in these businesses. Contact us for details.


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3 hot spots to look for your successor

Picking someone to lead your company after you step down is probably among the hardest aspects of retiring (or otherwise moving on). Sure, there are some business owners who have a ready-made successor waiting in the wings at a moment’s notice. But many have a few viable candidates to consider — others have too few.

When looking for a successor, for best results, keep an open mind. Don’t assume you have to pick any one person — look everywhere. Here are three hot spots to consider.

1. Your family. If yours is a family-owned business, this is a natural place to first look for a successor. Yet, because of the relationships and emotions involved, finding a successor in the family can be particularly complex. Make absolutely sure a son, daughter or other family member really wants to succeed you. But also keep in mind that desire isn’t enough. The loved one must also have the proper qualifications, as well as experience inside and, ideally, outside the company.

2. Nonfamily employees. Keep an eye out for company “stars” who are still early in their careers, regardless of their functional or geographic area. Start developing their leadership skills as early as possible and put them to the test regularly. For example, as time goes on, continually create new projects or positions that give them responsibility for increasingly larger and more complex profit centers to see how they’ll measure up.

3. The wide, wide world. If a family member or current employee just isn’t feasible, you can always look externally. A good way to start is simply by networking with people in your industry, former employees and professional advisors. You can also try placing an ad in a newspaper or trade publication, or on an Internet job site. Don’t forget executive search firms either; they’ll help screen candidates and conduct interviews.

At the end of the day, any successor — whether family member, employee or external candidate — must have the right stuff. Please contact our firm for help setting up an effective succession plan.

© 2017


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Turning next year’s tax refund into cash in your pocket now


Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.

Fortunately, there is a way to begin collecting your 2017 refund now: You can review the amounts you’re having withheld and/or what estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year.

Reasons to modify amounts

It’s particularly important to check your withholding and/or estimated tax payments if:

  • You received an especially large 2016 refund,
  • You’ve gotten married or divorced or added a dependent,
  • You’ve purchased a home,
  • You’ve started or lost a job, or
  • Your investment income has changed significantly.

Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments.

Making a change

You can modify your withholding at any time during the year, or even several times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due.

While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax during the year, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the April 2018 deadline.

If you’d like help determining what your withholding or estimated tax payments should be for the rest of the year, please contact us.

© 2017


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Choosing between a calendar tax year and a fiscal tax year





For some businesses, a fiscal tax year can make more sense than a calendar one. You must use the same year for financial reporting. For seasonal businesses, a fiscal year can present a more accurate picture of performance and make benchmarking against other companies easier. Fiscal year businesses generally must file their tax return by the 15th day of the third month following the fiscal year close (fourth month for C corporations).We can help determine whether a fiscal year makes sense for your business and file the necessary IRS forms if you decide to change. 


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