Archive for the ‘Budgets’ Category

Protection, Benefits & Accountability: Smart Planning for Start Ups and Small Business

Monday, August 6th, 2012


Protection, Benefits & Accountability may not be at the forefront of new and small business owners’ minds, but they should be.

 

Often ignored and/or glossed over by startups, these components are an essential part of basic business planning and can make the difference between success growth and failure.

 

You know the old adage: No one plans to fail, they just fail to plan. Use this overview to kick start your protection, benefit and accountability planning:

 

Equity Protection

 

New businesses often start with no consideration for the “What Ifs”.  What if my partner wants/needs to quit the business unexpectedly? What if my partner becomes incapacitated? What if my partner suddenly dies? A lack of planning for unforeseen circumstances such as these can literally ruin a business overnight.

 

In the case of unexpected death, when one partner passes away within a 50/50 ownership agreement, the deceased partner’s heirs would then become entitled to the deceased’s 50% share. Would this be an acceptable arrangement to you as a surviving partner? Typically, this would not be an acceptable arrangement. The last thing a start up business should have to bear is paying out to someone who is not contributing to the business, in this case, heir(s).

 

This is why smart planning also includes Buy Sell Agreements. Buy/Sells are like prenups for business – legal documents which site a buyout price for remaining partner(s) in the event of a departure/disability/death of another partner. They are typically funded by purchasing life and/or disability insurance to cover the predetermined agreed to buyout amounts.

 

►Examine all potential exit reasons thoroughly and be prepared for them.

 

Property and Liability Protection

 

Equally important to insuring buildings, equipment, and product lines, new businesses should make sure they properly protect themselves from lawsuits. People generally embrace adequate property protection but they rarely lend the same credence to liability protection – this goes for individuals too.

 

Unfortunately, in our litigious society, liability protection is something that must not be ignored because situations like these can arise quickly without warning and ultimately have a tremendous impact on your business.

 

A simple example of this type of situation could happen if an employee gets into an accident during working hours. Your company could be found liable – though the accident is no fault of your company – simply because of the employee’s affiliation with your company.

 

Industry statistics provide that businesses will bear the most financial burdens from liability issues versus the costs of property replacement.

 

►Seek the right amount of liability protection needed to fully protect your business.

 

Retirement Planning

 

Most people have heard of the terms: 401(k), IRA, SIMPLE, SEP, and Profit Sharing. For new business start ups, the real question is which one is best for your business?

 

Many plans are specifically designed to appeal to certain demographics. A SIMPLE Plan, for example, is by design targeted to small businesses interested in offering a plan but without the IRS compliance headaches of a 401(k).

 

Depending on the wants and needs of the owners and employees, each plan has a specific list of attributes and drawbacks. It is also tough to think about retirement when you’re just starting a business, but that is exactly when retirement planning should be done.

 

Engage in retirement planning at the onset of your journey.

 

Health Coverage

 

As a new business owner, you now have health insurance considerations to keep in mind. Some new businesses opt to not provide coverage for the employees. However, highly qualified employees often require this benefit in order to consider working for an employer – do not overlook the possibility.

 

Cash Options – Employers can opt to give a cash stipend to employees in lieu of health insurance to be used as they see fit. While this is often a great option for young and healthy employees, it can prove problematic for a potential employee who may not be able to qualify for individually underwritten plans.

 

Group Health Plans – Starting a group health insurance program is the other alternative: group health plans guarantee coverage for all in the group regardless of underlying health conditions. However, it is equally important to understand that insurers can rate the entire group above the standard cost range depending on the underlying conditions of members within the group. Group coverage also requires a certain percentage of eligible employees participate in order for the group to be issued and operated.

 

If you choose to go the group health plan route, the different types of coverage should then be explored: HMO, PPO, Point of Service, Indemnity. Considerations for, optional dental, long-term disability, short-term disability and long-term care should also be made.

 

Select a health plan which best serves your company objectives first.

 

Books, Banking, Tax & Law

 

Technology makes accounting, banking and tax transactions easier to record, budget and track today. Knowing what to look out for and ask about on the other hand, can easily remain under the radar.

 

If you opt for using accounting and payroll services, consistent examination of your records is still a necessity. Regardless of who does your books; your business will bear the liability of errors in reporting, depletion of funds, penalties, etc.

 

Choosing an accommodating bank is imperative: Will they process credit cards for you? Provide a line of credit when you need it? Are they fee crazy? Are they the type of bank known for working with new and small businesses?

 

Pending the legal structure and nature of your business, all potential tax liabilities should be examined at the state, local, and federal levels before you open your doors.

 

Always be aware of how your company records are being booked and tracked.

 

New business owners that can check off these considerations in confidence are heading in the right direction. For those who cannot, do not back burner them – timing can be the difference between success and failure. Seek the professional help you need and build a solid foundation.

 

Additional Reading:

 

Start Up 101 Article Index Inc.com

 

Get a Buy Sell Agreement! Forbes.com

 

5 Tips for Buying Business Insurance Small Business Administration

 

Small Business Healthcare Tax Credit  IRS Newsroom

 

Basic Business Structures Entrepreneur.com

 

Small Business Accounting Library Business Week

 

2012 Business Software Reviews Top Ten Reviews.com

 

Kurt Rusch CLU, ChFC

Questions always welcome!

 

 

 

Disability Insurance Isn’t Sexy!

Friday, May 18th, 2012

 

 

We are constantly bombarded with stats about dwindling Social Security funds; especially as they relate to retirement – but what about disability? Every bit as important, disability funding is more relevant for working people because it is a benefit that may help you now.

 

According to statistics sited in National Underwriter Magazine, the year end Federal Disability Trust Fund balance for 2011 was $154 billion in assets, down 15% from last year. Funded by a 1.51% payroll tax, the total amount generated in 2011 was $109 billion, which was down 19% from 2010.

 

These numbers suggest the fund may be depleted as early as 2016, two years earlier than previously projected. Adequate funding is anything but reliable in the long term.

 

More Hurdles to Consider

 

Funding issues aside, if you avoid insuring your family’s income because you can file for and receive benefits, think again.

 

Social Security Disability Insurance is a dicey issue at best. Only 35% of SSDI applicants are approved for benefits on their initial application and an additional 10% are approved after appeal. Translation: over half of all SSDI applicants are denied coverage.

 

Part of the reason for such a high denial rate is the SSDI definition of disability is often more stringent than that of a commercial insurance company. SSDI defines disability as the inability to perform a job due to a medical condition. Conversely, many commercial insurance contracts define disability as the inability to perform the job for which you have been trained or educated to perform.

 

Think about that a moment…

 

Take for example an electrician that is trained to work on business and/or residential electrical systems. If said electrician has a back injury that renders him incapable of physically demanding work that would be required of an electrician, he would most likely qualify for benefits under a commercial disability. That same electrician will most likely not qualify under SSDI if he would still be able to perform another type of work, such as answering telephones.

 

These defining terms can often be the difference between receiving benefits and not receiving them. Bearing this information in mind, it is scary to think of the ramifications attached to the dismissal of addressing these issues. Why then, do so many of us neglect to protect our family?

 

The Cost of Complacency

 

The lack of appropriate planning usually stems from several things. Exasperation at the thought of having to deal with yet another thing definitely plays into it. All we want to do when we get home from work is tune out and relax, right? The last thing on our minds is contemplating the pros and cons of disability insurance. Cost, like with anything else, plays a big role too. Yet cost, in this case, has to do with your family’s security.

 

The cost of protection may be more than you want to spend on the surface, but the cost of complacency in the event the unthinkable becomes reality, can be devastating. We all think it won’t happen to us, but the statistics tell a completely different story.

 

Here are some eye opening stats related to disability and the workforce:

 

1. A 35 year old has a 50% chance of a disability lasting 90 days or longer before turning 65.

 

2. Most people in the US are better prepared for death than a disability even though chances are 3 to 5 times greater that a disability will occur (based on age).

 

3. About 1 in 7 people between ages 35 and 65 can expect to be disabled for 5 years or longer.

 

4. About 110 million people have NO long term disability insurance.

 

5. Benefits from disability insurance from an employer sponsored plan are usually taxable while benefits from a privately purchased plan are tax free.

 

Take Away

 

What we spend our money on is a direct reflection of how we choose to allocate it. Cost, in reality, is truly not the deciding factor. Who isn’t a master at finding ways to buy things when you’ve got a big hankering for something?

 

Disability insurance isn’t sexy; it’s not something you’ll ever have a ‘hankering’ for, nor is it mandatory, like auto insurance. When it comes to spending money on things we can’t see, touch or feel immediately, our normal inclination is to back burner it.

 

When you move protecting your ability to earn income to the front burner, the good news is, cost is a very flexible thing. Personally tailored planning will provide you with protection conformed to budget.

 

Kurt Rusch CLU, ChFC

Follow Your Money For Answers

Monday, February 27th, 2012

 

 

According to the Bureau of Labor Statistics, more than half of the money we spend goes to housing and transportation. Reading about the breakdown of consumer spending, started me wondering…

 

1)      Why do we naturally bristle at the thought of saving money?

2)      Why does the discipline of wise money management overwhelm us?

3)      Why are we so great at finagling funds for fun, funky and frivolous stuff?

 

If you can relate (and honestly, who can’t?), you might be interested in knowing there is quite a plethora of documented theory that speaks to these questions and more published under “Behavioral Economics” and “Behavioral Finance”.  In simple terms, these theories address how social, cognitive and emotional factors affect our economic decisions. If you care to read historical timelines and academy, find them here: Wikipedia, AOBF and Neuroeconomics – yes, there is such a thing as Neuroeconomics – it is a focus for explaining “human decision making”.

 

 

Mental Accounting

 

Investopedia.com offers insights as to why we do and don’t spend certain resources under the auspice of, “Mental Accounting”. This concept suggests that much can be learned from the way we separate and allocate our money.

 

Mental Accounting is a subjective view of money. For example, when we earmark paychecks for monthly living expenses but think of “found” or unexpected money, such as tax refunds and lottery winnings, as money that can be freely spent, it is a subjective allocation.

 

Conversely, unemotional and logical money management does not recognize a difference between a $2,000 paycheck and a $2,000 winning lottery ticket – $2,000 dollars is $2,000 dollars regardless of source. (See the full tutorial here.)

 

Follow the Money

 

How can we nip Mental Accounting in the bud? Try following your money around for the next month in words – literally. If you’ve ever dieted, you know how helpful keeping a food diary is. No one likes doing them, but it is the most telling tool you can give yourself. Write down what you spend, allocate, and save every day – what, where, and why you spent it too. This includes the checks you write on your monthly bills.

 

At the end of the month you will be able to detect the way you think about money and possibly find some red flags you hadn’t seen (or thought of as such) before. For example, are you holding onto low interest bearing accounts and making high interest rate credit card payments? Could you pay off a small debt right away by using some of your ‘fun’ money? Are you keeping spare change in a can or buying dollar scratch offs?

 

Brace yourself, all those trips to Starbucks, Subway and Super K may just rise up and slap you silly across the face. Good luck.

 

Kurt Rusch  CLU,ChFC