The Advantages of Saving Sooner

Read on below for a tale of two saving strategies and their radically different outcomes.

Most people have good intentions about saving for retirement. But according to recent studies, only a small percentage of them put those good intentions into practice.

For many people, saving for retirement takes a back seat to keeping up with the day-to-day cost of living. Retirement, especially if it’s “out there” 20 years from now, becomes something we promise ourselves we’ll deal with down the road when we have more time and money. But is that really a good idea?

Let’s look at two physicians, Drs. Smith and Jones. They are equal partners in a medical practice. Both are 45 years old and both plan to retire at age 65. Their financial advisor has suggested that they increase the amount of money they are saving each month if they want to be able to maintain their lifestyle during retirement.

Both agree with this recommendation and agree to begin saving more, but each takes a different approach. Dr. Smith begins saving $275 a month immediately and she does so for a 10-year period. Dr. Jones, on the other hand, waits 10 years before starting to save, at which time he, too, saves $275 a month for 10 years. For the purposes of this discussion we’ll assume that both doctors earn a flat 8% rate of interest on their savings.

It is now 20 years later. Both doctors are 65 and both have put away a total of $33,000. Dr. Jones, the procrastinator, has earned $14,804 in interest for a total of $47,805 in savings. Dr. Smith, the early starter, has earned over $70,000 in interest for a total of $103,208—more than twice what Dr. Jones has accumulated with the same initial investment.

(Note: this example does not consider inflation and does not represent any particular savings vehicle. It is not representative of past or future performance.)

So what does this tell us? Not only is it wise to set money aside for the future, but those who start saving sooner can take advantage of the power of compounding, giving their money more time to accumulate interest. (They may also be able to retire sooner.)

If you have trouble setting money aside on a regular basis, there are a number of strategies you can try that may help make it easier. One strategy is whole life insurance, which, in addition to providing valuable survivorship protection for your family or practice, builds cash values that grow income tax-deferred. If you die prematurely, the life insurance is self-completing. If you live to retirement, you can access cash values to supplement retirement income.

(Note: Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, may reduce benefits, and will result in a reduction of policy values and the death benefit.)

Other strategies include taking advantage of employer-sponsored retirement plans such as 401(k) or Simplified Employee Pension Plans (SEPs), as well as using payroll deductions or automatic bank drafts to funnel money into the savings vehicle of your choice. Setting money aside in this manner is both steady and convenient, and it essentially allows you to pay yourself before you pay your creditors.

If you’ve been putting off saving for retirement until “sometime down the road,” do yourself and your loved ones a favor: Take the time today. When the time comes for retirement, you’ll be very glad you did.

Joseph Pilla is V.P. Advanced Strategies & Business Advisory Services for XXI 21st Century Financial 216-545-1781. Custom designed strategies for both individual & businesses through uses of; Business Valuations, Premium Financing, Business Succession/ Asset Protection/ Insurance/ Wealth Transfer/ Investment/ & Retirement Planning.

This material has been prepared by The Penn Mutual Life Insurance Company and should not be considered specific financial, tax or legal advice. Life insurance policies are subject to eligibility requirements and restrictions, and may not be right for everyone. Please consult a qualified advisor regarding your individual circumstances.

©2018 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172

2221548PH_Oct20


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  • Next up: The Magic of SBU Analysis: The Traditional P&L Statement
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  • The Magic of SBU Analysis: The Traditional P&L Statement

    Does your Profit and Loss Statement look like this?

    Does your Profit and Loss Statement look like this?

     

    This year

    This year

    Last year

    Last year

     

    $

    %

    $

    %

    Sales revenue

    900,000

    100.0

    1,000,000

    100.0

    Cost of goods

    252,000

    28.0

    271,000

    27.1

    Cost of labor

    230,000

    26.0

    215,000

    21.5

    Overhead

    71,000

    8.0

    74,000

    7.4

    Cost of sales

    553,000

    61.0

    560,000

    56.0

    Gross margin

    347,000

    39.0

    440,000

    44.0

    SG&A*

    410,000

    46.0

    379,000

    37.9

    Pre tax profit

    (63,000)

    (7.0)

    61,000

    6.3

    Tax

    (12,600)

    (1.4)

    12,200

    1.2

    Profit after tax

    (50,400)

    (5.6)

    48,800

    4.9

    *If this statement were generated from your accounting system, the Selling, General and Administrative expenses (such as management salaries, rent, sales compensation, advertising/promotion, utilities, etc.) would be presented to you in detail.  For purposes of this article, detail of those items have been suppressed.

    What does the above P&L tell you?

    Sales have decreased while labor costs have increased as a percentage of sales from 21.5% to 26%. Cost of goods have moderately increased year to year. The SG&A expenses have exploded; a detailed look at the individual components of the SG&A will determine the culprits there. The company has experienced almost a $100,000 decrease in bottom line performance year to year.

    Some more analysis is in order. Why, for example, have the sales decreased while the cost of goods and cost of labor increased (both of the latter as a percentage of the sales)? Did new competition come into your market? Is your product not as competitive as it once was? Did you have to cut your price? Did you lose a customer(s)? Were there supplier price increases that were not passed along to customers? Did scrap/rework increase during the year? Did the staffing in production not get adjusted to the sales environment? Did employees get pay raises even though it was a down year? That does not even address the rapid rise in the SG&A portion of the P&L.

    IF this company is selling one product/service at the same price and cost to everyone through the same market channels and distribution logistics, this level of analysis gives a good overall snapshot of the venture's dynamics. The absence of profit—or very little profit—might even be acceptable if ownership is paying itself 8% to 10% of the revenue. This kind of firm is often referred to as a "lifestyle business".

    The Magic of the SBU

    The example above is what we call a "simple" business, or a "single Strategic Business Unit (SBU) business.” The single SBU business is one which has only one group of customers who buy in a similar manner products and/or services in a  fairly narrow price/cost range. An example of a simple, single SBU business might be a tax preparation service catering only to individual federal, state and local tax returns.

    In most cases, what is described above does not resemble fiscal reality and does not reflect how the business actually is constructed. Even if the products/services are sold at the same price to everyone, this level of analysis does not permit inspection of the real costs of the sale. If, for example, some sales are made via an Internet store, chances are that those sales carry lower overall selling and transaction costs than bricks and mortar sales do. It is also likely that deals are routinely struck to give price or terms breaks to larger transactions and/or key customers, and sales margins per unit are not all alike. 

    The SBU concept has been in place for several decades. General Electric under Jack Welsh, for example, treated each of its businesses as SBUs and evaluated performance and investment decisions by viewing each business as a group of SBUs within those businesses. If it worked for GE, might it not be worth considering in your business?

    Takeaways

    1. Accounting systems that lump all sales into one summary line miss the boat in helping to try to figure out how you make money and where you are making money. Similarly, that same bundling of labor and/or materials costs does the same disservice in your quest to determine the real costs and benefits of a given product/service. 

    2. Because most businesses aren't really simple (and that includes those which appear on the surface to be simple), SBU structure and analysis is the best way to account for differences and similarities in key components of the firm—especially groups of products/services offered to different groups of customers. 

    3. SBU structure helps to figure out the real areas where you make money. Different matches of products/services, priced incorrectly, for example, lead to underperformance of the firm.

    Because most businesses in reality are not simple single business businesses, the next article in this series will help explore different ways to help create SBU structure for making better, more informed decisions to improve performance and for establishing criteria for making decisions to move the company forward into the future. 

    Jeffrey C. Susbauer, Ph.D. is Associate Professor Emeritus at the Monte Ahuja College of Business, Cleveland State University where he has taught strategic management and entrepreneurship courses since 1970.  A long-time consultant to scores of businesses, a member of the boards of advisors to over 60 companies, he co-founded and serves as the principal instructor for the COSE Strategic Planning/CEO Development Course for the past 36 years. The course is concerned with providing entrepreneurs with education to guide their vision, strategic thinking and execution in their businesses.

    Want to learn more about the Strategic Planning/CEO Development course? Click here for additional information or contact Jeff via email.

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  • Next up: The Financial Stages of Life
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  • The Financial Stages of Life

    Many people put off financial planning, especially during uncertain economic times, because they either don’t know where to begin, or they think they don’t have enough money to make it worthwhile. The truth is: there is never an ideal time or place to begin and there is no specific level of income or assets one needs to have to make planning for the future “worthwhile.” You can (and should!) begin planning for the future regardless of which life stage you are in and regardless of how much money you have.

    To begin the planning process, you first need to identify your present and future financial goals. If you’re like most people, your goals will include protecting your family in the event you die prematurely or become disabled; managing your expenses while paying down debt; buying your first home or helping your children pay for college; saving for retirement; and distributing your assets to your heirs—privately, equitably, and tax-efficiently—following your death. Fortunately, there are steps you can take during each of your life stages that will help you build, and then maintain, your personal financial security. Let’s take a look at them:

    The Foundation Years

    If you’re in your foundation years, you are probably facing the most difficult times you will ever have financially. You may be newly married or just out of school; you may be taking on debt in order to acquire—and maintain—your family’s lifestyle; and you are probably starting a new job or career. While you may be earning enough money to live on, it could easily be taking all you have just to meet your monthly expenses (e.g. student loans, rent or mortgage payments, car loans, utilities and regular household costs). Steps you can begin taking now to plan for the future include managing your cash flow without going further into debt, establishing an emergency fund of three to six months income; and protecting your loved ones. To help accomplish these goals, you should consider buying a combination of term and permanent life insurance. Term insurance is an inexpensive way to obtain the amount of protection your family needs, while permanent allows you to begin building cash values that accumulate income tax-deferred. If your finances permit, this is also a good time to purchase disability insurance, as you will be in a better position to lock in a lower rate based on your age and health.

    The Accumulation Years

    Once you’ve covered the basics—protecting your family and income, establishing yourself in a job or career and perhaps buying your first home—it won’t be long before you’ll want to start setting aside a portion of your earnings in tax favored accumulation vehicles such as IRAs and employer-sponsored 401(k) plans—especially if your company offers employer “match” dollars. Contributions to these plans can be made on a tax-deductible basis and plan assets grow income tax-deferred. During these years, money you were formerly paying in rent may now be going towards your mortgage, the interest on which may be income tax-deductible to you. At the same time, you may also be building equity in your house. If you have children, you may want to think about setting money aside in a college savings program, and you may want to begin expanding your investment horizon. While investments such as stocks or bonds carry a greater amount of risk, they also come with the potential for greater reward. Your accumulation years are also a good time to review your life insurance protection to ensure it is still sufficient to meet your family’s growing needs. You may also want to consider adding special riders, which may be available at additional cost, to your policy that extend protection to family members.

    The Preservation Years

    Once you’ve reached the preservation years, you will probably have accomplished many of your early financial goals. What’s more, you may finally have the financial freedom to accomplish a few of the special things you may always have wanted to do such as purchase a vacation home, help your children or grandchildren get established financially, or perhaps even retire early. But your planning isn’t over yet. There are still steps you will want to take to help ensure that your future financial security won’t be compromised by a long-term illness or unnecessary taxes and penalties. Looking into your long term care and retirement distribution options, including how, when, and how much you should begin drawing from your savings, could save you a significant amount of money and make the difference between a comfortable or merely “safe” retirement.

    The Golden Years

    When you do finally retire, you will enter what many people refer to as their “golden years”. During your golden years you can finally begin enjoying the fruits of all your hard work and planning. In this stage your debts are probably paid off; your finances are probably in order; and you likely have some discretionary funds that allow you to travel or enjoy a few favorite activities. If you’ve planned carefully, your golden years can be a time for doing what you want, when you want. During this stage, you may not only want to plan how you will pass your assets on to your heirs, but also how you might benefit a favorite charity. To accomplish these goals, you will want to consult with a financial advisor about trusts, power or attorney, and charitable giving strategies. If your income exceeds your expenses, you may also want to consider using distributions from your retirement plans to pay premiums on a life insurance policy. By doing so, you can increase the value of what you leave to your heirs plus help make sure there are adequate funds available to pay taxes, final expenses, and other estate settlement costs.

    Building personal financial security is not something you accomplish just once, nor is it something you begin once you’ve accumulated a specific amount of assets. It is something you start doing as soon as you can and keep doing throughout the various stages of your life. To that end, if you’re among the millions of working men and women who dream of one day being financially secure, I encourage you to take a few minutes—right now, right where you are—to consider your financial goals and the various life stages through which you’ll pass. Knowing which stage you are in—and the challenges and opportunities you will face during those stages—can help you make the right decisions.

    Withdrawals from retirement accounts may be subject to income taxes and when taken prior to age 59 ½ may be subject to an additional 10 percent federal penalty tax. Life insurance policies are subject to eligibility requirements and restrictions and may not be right for everyone. One should always consult with a qualified professional regarding their individual circumstances.

    Joseph Pilla is V.P. Advanced Strategies & Business Advisory Services for XXI 21st Century Financial 216-545-1781. Custom designed strategies for both individual & businesses through uses of; Business Valuations, Premium Financing, Business Succession/ Asset Protection/ Insurance/ Wealth Transfer/ Investment/ & Retirement Planning.

    Content prepared by Penn Mutual.

    ©2018 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172

    2260372PH_Oct20

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  • Next up: Protecting and Preserving Your Business for the Future: The Importance of Business Succession Planning
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  • Protecting and Preserving Your Business for the Future: The Importance of Business Succession Planning

    Building a successful business takes commitment, dedication, and a lot of hard work. And like anything of value, it must be protected – but not only against current risks such as fire or theft, but also against less tangible hazards such as the loss of an owner or key employee. Let’s face it, at some point in the life cycle of every successful business, one or more of three things will happen: an owner or key employee will die, become disabled, or simply decide to retire. Unfortunately, many business owners don’t take the time to plan for how their business will be run—or liquidated—following such an event. But without this kind of planning—generally known as business succession planning—even successful companies face the threat of failure. 

    Planning for the sale or transfer of a business or business interest should begin as soon as possible - while the business is successful and while the owners are healthy. In many cases, the foundation of effective succession planning is a buy-sell agreement, which should address:

    • How the buy/sell agreement will be funded. Will the money come from the owners themselves, or will the business fund the arrangement?
    • What kind of event will trigger the sale—death, disability, retirement? Maybe all three?
    • Who will actually buy the business interest—the remaining owners, a key employee or the business itself?

    A properly structured—and funded—buy/sell agreement can help answer these questions.

    What is a buy/sell agreement?
    A buy/sell agreement spells out the process by which a business or business interest are transferred following a “trigger” event—usually the death, disability, or retirement of one of the owners.

    Most buy/sell agreements take one of two forms—either they are “entity plans,” where the business agrees to purchase an owner’s interest in the business, or they are “cross-purchase plans,” where the business interest is purchased by the other owners. But while there are advantages and disadvantages to each type of plan, in many cases, neither arrangement fully meets the owners’ expectations or objectives. Tax issues, administration headaches, funding inequities, multiple insurance policies—just to name a few—can take much of the luster out of both types of buy/sell agreements. That’s where a Partnership Administration Success Strategy (PASS) can help. Under a PASS Plan, the benefits of both entity and cross-purchase plans can be made available, but without the drawbacks associated with either method.

    How can a PASS plan assist in buy/sell planning?
    The business owners enter into a cross-purchase buy-sell agreement, and the owners form a general partnership with all owners as general partners.  Each partner acquires a life insurance policy on himself and transfers it to the partnership as a capital contribution – the partnership becomes the owner and beneficiary of the policies. Policy premiums can be paid by the business by paying additional salary or bonus to the insured. The insured, in turn, transfers the cash to the partnership as a capital contribution, or the business itself may become a partner in the partnership and pay premiums directly to the partnership as a capital contribution.  The general partnership structure allows the partners the flexibility to allocate items of income, profit, gain and loss between themselves in a manner that meets their business objectives. This allows the partners to equalize cost and fairly distribute life insurance proceeds.

    Following the death of a partner, the life insurance proceeds from the policy covering that partner would flow into the partnership and be allocated to the surviving partners.The partnership would use a portion of the proceeds to purchase the deceased partner’s interest in the partnership. The balance of the proceeds would be distributed to the remaining partners. The remaining partners would then use those proceeds to purchase the deceased partner’s interest in the primary business.

    Using a general partnership to manage a buy/sell agreement can also be advantageous following the retirement or disability of an owner. In such a case, the partnership can distribute the disabled or retired owner’s life insurance policy to him or her in exchange for his or her interest in the partnership. The departing owner would assume ownership of his or her own policy income tax-fee. Over-funding of the life insurance policy(s)—a common strategy—would allow the remaining owners to access cash values in their policies as a resource to help them fulfill their obligation to purchase the departing owner’s interest in the business.

    Could a PASS plan be right for you?
    The benefits of using a buy/sell agreement to transfer a deceased, disabled, or retiring partner’s share of a business to the remaining owners are many. Unfortunately, the traditional methods don’t always work in the best interests of the business or business owner. Utilizing a general partnership to manage your buy/sell planning, however, could help mitigate the disadvantages presented by entity and cross purchase plans. The general partnership approach:

    • Requires only one life insurance policy per owner;
    • avoids the corporate Alternative Minimum Tax;
    • minimizes, through special allocations, inequities among partners in the cost of insurance coverage;
    • provides a full basis increase to the surviving partners after a partner’s death;
    • allows the surviving partners to distribute the insurance proceeds to themselves,
    • generally free of income taxes, in order to accomplish the business buy-out and;
    • permits the transfer of the policy insuring a departing partner to that partner income tax-free.

    As a planning vehicle, PASS combines the benefits of both entity and cross purchase plans – as well as additional benefits not present in either – while avoiding the disadvantages inherent in both. For all of these reasons, a Partnership Administration Success Strategy could be just what you, your partners, and your business needs to accomplish your goals and objectives.

    This content was prepared by The Penn Mutual Life Insurance Company and is intended to offer a general understanding of a Partnership Administration Success Strategy.  Any reference to the taxation of insurance products is based on Penn Mutual’s understanding of current tax laws; this information should not be construed as financial, legal or tax advice applicable to your situation.  Clients should consult a qualified advisor regarding their personal situation.

    Joseph Pilla is V.P. Advanced Strategies & Business Advisory Services for XXI 21st Century Financial 216-545-1781. Custom designed strategies for both individual & businesses through uses of; Business Valuations, Premium Financing, Business Succession/ Asset Protection/ Insurance/ Wealth Transfer/ Investment/ & Retirement Planning.

    © 2018 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172

    2221548PH_Oct20

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  • Next up: Tips for Your Business: Keep the Cash Flowing
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  • Tips for Your Business: Keep the Cash Flowing

    Cash flow management is crucial in effectively managing your business finances. Having a positive cash flow shows lenders, investors and vendors that your business is in good financial health; a negative cash flow puts your business in serious financial risk. The difference between positive and negative cash flow can mean the difference between a successful year and bankruptcy.

    Cash flow management is crucial in effectively managing your business finances. Having a positive cash flow shows lenders, investors and vendors that your business is in good financial health; a negative cash flow puts your business in serious financial risk. The difference between positive and negative cash flow can mean the difference between a successful year and bankruptcy.

    Creating prolonged periods of positive cash flow goes much deeper than just reviewing your monthly bank statements. True cash flow management is a delicate balance, stemming from your ability to hold onto your cash for as long as possible while keeping a steady stream of money coming in. “What often happens is that a small business owner will focus too much on their checkbook balance and not on who owes them money or who they may owe,” says Rion Safier of Rion Safier Accounting. “It’s important to pay better attention to the whole process of billing, collecting and payments.”

    Most businesses at some point will experience negative cash flow, but that is not necessarily a sign of failure. Accounts receivables are almost always to blame – nearly 70 percent of businesses have accounts that are greater than 60 days past due. Other contributing factors include normal cyclicity or seasonality in business operations. If you can anticipate that someday down the road you may fall short on cash, arrange for a line of credit to cover operating expenses for when things get tight. If you wait until that day arrives, chances are you won’t get approved

    Want more expert advice? Check out COSE Expert Network, an online forum connecting business owners with creative solutions to the tough questions they face every day.

    This article originally appeared in the June 8, 2015, edition of Small Business Matters.

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  • Next up: Top SBA lenders in Northeast Ohio
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  • Top SBA lenders in Northeast Ohio

    Small business owners in Northeast Ohio have plenty of options when it comes to obtaining SBA loans. This list shows the top SBA lenders in the region during the past fiscal year.

    Small business owners in Northeast Ohio have plenty of options when it comes to obtaining SBA loans. This list shows the top SBA lenders in the region during the past fiscal year.

    This list of SBA 7a and SBA 504 Loan approvals is for the period Oct. 1, 2014 through Sept. 30, 2015.  Third  party lender loans associated with the SBA 504 projects are not included, and SBA 504 loans are associated with the corresponding Certified Development Company, not the participating bank. The cities shown on the list correspond with the bank headquarters, not the location of approvals. The approvals are for the geographic area of the 28 northern Ohio counties administered to by the Cleveland District Office of the U.S. Small Business Administration. These counties stretch across the northern third of the state, including Toledo, so this list is not solely northeast Ohio.

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