Does Your Business Have the Right Insurance?
Apr 10, 2014
Business owners need to be prepared for unexpected events that could potentially threaten their ability to operate. Fire, floods, lawsuits, or the sudden death of a key employee are just some of the potential hazards they may face. Having the right insurance coverage can help minimize the impact of such events. The following is a brief overview of various types of insurance that every business owner should consider.
Property Insurance
This basic insurance financially protects the physical assets of your business, such as land, buildings, inventory, furniture, documents, machinery, and similar items. Coverage can vary widely, so be sure you know what is — and what is not — covered by your policy. Also, make certain that your coverage is for replacement cost rather than original cost.
General Liability Insurance
General liability insurance is a must in today’s lawsuit-happy society. It protects your business assets in case of a lawsuit for something your business did (or didn’t do) that caused injury or property damage. Liability insurance covers such claims as bodily injury, property damage, personal injury, and damage from slander or false advertising.
Umbrella Insurance
Umbrella insurance is intended to protect a business from a major catastrophe or lawsuit. Typically, umbrella insurance steps in and provides the difference between your underlying general liability coverage and the actual cost of damages resulting from a lawsuit or disaster.
Business Interruption Insurance
This type of insurance reimburses you for the loss of income resulting from an insured catastrophic event, such as a fire. The policy covers the profits you would have earned if no interruption had occurred. And it pays for expenses that you continue to incur even though your business is not operating normally, such as debt payments, taxes, and salaries.
Key Person Insurance
You’ll need key person life insurance to protect your business in case you, a partner, or other key employee dies. If you operate your business with multiple partners, you should consider using life insurance to fund a buy-sell agreement. Disability insurance is also a must for you and your key people.
Errors and Omissions (Professional Liability) Insurance
If you are in the business of giving advice, making educated recommendations, designing solutions, or representing the needs of others, you may want to consider errors and omissions insurance. This type of coverage protects you against claims that something you did on a client’s behalf was incomplete or inadequate, cost your client money, or caused harm in some way.
Errors and omission insurance may be appropriate if you run a consulting business, design software or websites, sell real estate or insurance, operate a career placement business, etc.
The bottom line is that no business can afford to operate without adequate insurance coverage in this day and age. For assistance in reviewing your present coverage, please contact us.
Categories: Uncategorized
How Does Your Investment Garden Grow?
Apr 08, 2014
Getting ready to plant your garden now that the weather is warmer? Before you start, you’ll have to choose the kinds of plants you want and where they will go in your yard. You can’t just throw all the seeds on the ground and hope for the best.
Choosing what portion of your total portfolio to invest in different asset classes — a process called asset allocation1 — is a lot like planning a garden. Each major asset class — stocks, bonds, and cash — has different risk characteristics. Selecting the right mix of investments to fit your objectives, time frame, and risk tolerance can have a big impact on whether or not you reach your financial goals.
Plant for Growth
If you’re investing for the long term and have several years until you’ll need your money, you may want to devote a large percentage of your portfolio to equity investments. In fact, you should consider putting some money in stocks even if you’ll need your money sooner. Although stocks are volatile, they offer the greatest potential for inflation-beating returns and, historically, have generally outperformed other investment types over the long term. Selecting a variety of stock types, such as foreign and large-, mid-, and small-cap stocks, from several different sectors of the economy will help diversify1 your portfolio.
Add Some Contrast
To help manage risk, consider diversifying beyond stocks. Fixed income2 investment values often move in the opposite direction of stock values and may help cushion your portfolio against major losses when stocks are not performing well.
Cash for Color
Cash investments,3 such as Treasury bills, help you invest for short-term goals and can easily be converted to cash in an emergency. But keep in mind that rates of return on cash investments are typically low and may not keep pace with inflation.
1 Asset allocation and diversification do not guarantee a profit or protect against losses.
2 Prices of fixed income securities may fluctuate due to interest-rate changes. Investors may lose money if bonds are sold before maturity.
3 Cash alternative investments may not be federally guaranteed or insured and it is possible to lose money by investing in cash alternatives.
Categories: Uncategorized
Management Accountants: Thinking Outside the Box!
Apr 07, 2014
I have been working in a public accounting firm for 21 years. Although I am a CPA, I am also a CMA. When I give my 30 second “about myself spiel”, those who have already heard, know that I never really cared for preparing financial statements or tax returns. Not really the best asset for a CPA firm, right?
Well the rest of my spiel is that, shortly after earning my CPA and my MBA, I earned my CMA. Eighteen years ago that was almost unheard of for practicing CPA’s and many did not even know what it meant. Now the designation is more common, generally with accountants in industry, not public accounting firms. Every single consulting job that I perform that falls under this umbrella of “Management Accounting” is unique and intriguing to me. Whether it’s data analysis, forecasting, product costing, or simply assisting management with financial oversight, it is always new and thought provoking. One of my very first blogs was about “playing by the rules”. Over three years later, I believe it to be true more than ever. To be a true management accountant, you must be very good at working without rules, without structure, without a framework, you must be able to think out of the box!
In the past few years, many governing bodies have tried to put a “framework” around the practice of management accounting. From my perspective, this is nearly impossible. When I try to apply rules to the engagements that I perform, it does not work well. According to Wikipedia,a “simple” definition of management accounting is: the provision of financial and non-financial decision-making information to managers. That is about as vague and broad as you could possibly get.
According to the Institute of Management Accountants (IMA): Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy.
Very well thought out definition that applies many of the thought concepts that I deal with daily.
The American Institute of Certified Public Accountants (AICPA) has its own definition, as does the ICMA (Institute of Certified Management accountants) and the list goes on. I am going to go out on a limb here and say that NONE of these definitions has it right on the money and I don’t believe the process can ever truly be defined in just a few sentences. They all address characteristics of a successful management accountant. I believe each of these bodies can continually draft their version of a definition for a management accountant or for “management accounting” as a profession, but it will never be precise; it will never be entirely accurate.
A true management accountant can AND should analyze EVERYTHING in so many different dimensions. This includes historical information: company, financial, industry, geographic and projected trends in the future related to the same dimensions. They analyze financial data and non-financial data. They know operations and try to quantify impacts of everything from non-value added activities to purely developmental to the operations themselves. They act as interpreters for those who don’t understand numbers and how they impact operations. They act as the liaison between the financial accountants and operations and operations and management. They are databases of information for the design engineers and the salespeople. They are the report designers, generators AND translators for the flavor of the day. They ARE the strategic business partners; and EVERY situation they face is unique, sometimes intimidating, always challenging, and provides an opportunity to think out of the box, and help the organization grow and succeed to achieve its overall vision.
Categories: Cost Accounting
Employee or Independent Contractor?
Apr 03, 2014
The question is an important one. Failure to properly classify your workers may subject your business to large financial penalties. Under the “common law” rules developed by the courts, a worker generally is an employee for federal tax purposes if the employer has the right to control and direct the worker regarding the job he is to do and how he is to do it.
Tax Implications
Employees and independent contractors are treated differently for income-tax withholding and employment-tax purposes. With an employee, the business generally must withhold income taxes from the employee’s pay and remit those taxes to the federal (and state, if applicable) government. The business and the employee share the responsibility for Social Security and Medicare (FICA) taxes on the employee’s earnings. The business also must pay unemployment taxes for the worker. With an independent contractor, income-tax withholding is not required and the contractor is fully liable for his or her own self-employment taxes. FICA taxes and unemployment taxes do not apply.
Stiff Penalties
The IRS penalty for the unintentional failure to withhold federal income tax is 1.5% of the wages paid. Also, if IRS Form 1099-MISC (an “information return”) is not filed, the penalty is doubled to 3% of wages paid. As for Social Security and Medicare taxes, an employer’s unintentional failure to withhold the employee’s share of the tax results in a 20% IRS penalty. That assessment is doubled to 40% for an employer’s failure to also file an information return for the worker.
An intentional misclassification of the worker by the employer results in an income-tax liability equal to the amount that should have been withheld and 100% of the employee’s and employer’sshare of the Social Security and Medicare taxes.
Making the Call
If there is a question about whether a particular worker is an employee or an independent contractor, a company should analyze its entire relationship with the worker. The primary focus should be the degree of direction and control the company exercises over the worker. The IRS has a number of specific factors that come into play, but, in general, the more direction and control, the more likely it is that a worker is an employee.
Categories: Uncategorized
Costing for Inventory Valuation Only
Apr 03, 2014
As a costing consultant I am constantly looking for new and better ways to help people identify and measure their costs related to their products or operations. In virtually every case, I’m seeking to offer the best solution, one with multiple functions and that provides maximum usefulness to the management team. Costing systems can be complex and expensive, or they can be simple and inexpensive. The goal, however, is always to provide the most versatility and the highest functionality in the most cost-effective way.
What if all your business really needs is the ability to quickly and reliably value your inventory at the end of every month or year. Many of our past cost forum attendees came from businesses that the primary function of the costing system was to accurately value inventory. In many cases, the inventory valuation method was primarily focused on passing the year-end audit testing with far less consideration to management reporting. Accordingly, all the bells and whistles available in a comprehensive cost system were of little interest to the cost managers that were directed to provide the best inventory valuation method they could.
This is not to say that just any method is acceptable for valuation of inventory. In fact a properly constructed inventory evaluation method provides alternatives for valuing inventory under Generally Accepted Accounting Principles (GAAP), as well as, the alternative for valuing inventory under today’s federal income tax rules. The computation of variances or other management information is not necessary for a system that is designed to do just inventory valuation.
It has been my experience that poorly constructed cost systems can be one of the root causes of radical fluctuations in inventory. I can cite numerous examples in my personal experience where overly simplified inventory valuation methods or perhaps improperly constructed valuations systems have led to multiple problems in determining month-to-month profitability of an operating company with little obvious indication as to what really was causing the problem.
If your goal as part of your cost management responsibilities is to simply value inventory, then I would first look to GAAP to provide guidance relative to what must be capitalized as inventory costs and what must be expensed, as well as how to deal with material differences between what was planned to be recovered in the costing process and was actually recovered. Further, I would look to income tax code section 471 and 263A to determine what must be capitalized for tax purposes. There, of course, are differences, and if you are aware of those differences at the outset of the design of the system, then you can design your costing model with both alternatives. This allows for your year-end inventory to be computed first for GAAP purposes and a second time for tax purposes. However, do not lose sight of making sure that you are meeting the management accounting goals as well.
Categories: Cost Accounting