New Year Planning For Business Owners

By Glenn Curtis

Every new year, business owners should take the time to sit down and do a little planning, just to make sure that they'll be able to keep their company afloat and on the right track. To check that the business will have the necessary tools to ensure it's financial and operational goals will be met, and that the firm's employees will be happy with their working environment. Read on for some tips to help make the planning process run smoothly for you and your business.

Vendors

It should go without saying that every business owner should periodically review vendors and suppliers to make certain that they are giving competitive prices and delivering quality service. The beginning of the year may be the best time of year to review vendors.

In many cases, suppliers may have just completed their budgets for the current fiscal year, and they are looking to pin down business and cut deals to ensure that they achieve their annual financial objectives.

With that in mind, owners should ask themselves the following questions:

• Are current vendors charging competitive rates?
• Are current vendors providing good service and adapting to the business's changing needs?
• Are there any new vendors or suppliers who deserve a chance or from whom the business might obtain a quote?
• Does it make sense to try out a new vendor, even if it means giving him or her a small order?
• Might trying out a new vendor provide the business with leverage over an existing vendor?

Again, business owners will need to answer these questions in order to know whether they are getting good deals. Getting the best deals enables the business to keep its costs low, which improves the bottom line. Again, the first few months of the year are an opportune time to do this.

Equipment

Manufacturing companies and many service-related businesses depend on machinery, supplies and a variety of other equipment (from vehicles to assembly devices) to operate. However, many business owners are so caught up in the day-to-day activities that go along with running the business that they sometimes forget to do periodic equipment checks and make sure that they have what they need to grow the enterprise.

The first quarter is a good time to evaluate a company's equipment needs and to determine whether any capital investments need to be made. That's because identifying the business's equipment needs early on in the year can help the enterprise make its annual numbers. It can also help the business owner plan for future cash needs.

The following are questions that all business owners should ask themselves regarding equipment needs:

• Does the business have the equipment necessary to succeed and profit over the long haul?
• If not, can the equipment last another year, and can the business sustain itself using the existing equipment?
• What will new equipment cost, and where can quotes for the equipment be obtained?
• Does the company have the cash on hand or the ability to finance such purchases, or will the money need to come from future operational cash flow?
• Are there any expenses that could be cut in order to offset and help justify such expenditures?

Employees

Staffing needs should also be considered. It's good to recognize any deficiencies early on in the fiscal year so that appropriate adjustments can be made. Also, keep in mind that finding, hiring and training the "right person" can take a lot of time, so it's a good idea good to get on the ball as early as possible.

Furthermore, it's important to realize that many workers tend to ponder their own futures at the end of a year. They start thinking about whether they intend on sticking with the company or moving on.

Insurance

While the old adage says that the best defense is a good offense, sometimes the best offense is a good defense, and insurance coverage is a business necessity.

At the beginning of the year, new rates for health insurance, business liability insurance, automobile insurance, umbrella policies and other insurances tend to come into effect and it's a great time to go quote shopping.

All business owners should ask themselves the following questions regarding insurance:

• Is the company adequately covered in terms of liability and/or does it have adequate fire and health insurance?
• Are insurance companies running multi-policy deals at the beginning of the year in order to garner your business?
• Are there any new insurance carriers that might be able to provide a competitive quote?
• Has the company taken on any new assets or business interests that haven't been accounted for and protected by existing policies?

Retirement Plans

Businesses looking to set up 401(k), simplified employee pension (SEP) or other retirement plans should do so as early as possible during the year. Setting up a plan early on can permit employees to take full advantage of their annual allowed pretax contributions. Theoretically, the more time the money is growing on a tax-deferred basis, the larger the nest egg they may accumulate.

Reviewing the plans, selecting an investment firm, and actually setting up a plan doesn't happen overnight. Again, getting an early jump on these efforts makes sense.

Questions business owners should ask when setting up retirement plans:

• What will the cost be to administer the plan?
• How many employees might benefit and want to take advantage of the plan?
• How much will the company need to contribute to the plan?
• Are there any advantages to setting up one type of plan over another based on costs, the firm's size and employees' retirement needs?

The Bottom Line

By definition, business owners should continually evaluate their businesses and make adjustments accordingly. However, from a number of perspectives - such as insurance, retirement planning, staffing, vendor and equipment needs - the New Year is a particularly opportune time to sit down and plan.

Financial Steps to Take for a Prosperous New Year

James Di Virgilio, CIMA®, CFP® 

Hoping to enjoy a prosperous New Year? Before you splurge on the champagne, or even if you've already done so, follow these six steps.

1. Save at least 10% of your gross income in retirement accounts

This is a simple rule, with one caveat: if you are retired, spend no more than 4% of your total portfolio value.

2. Utilize the proper retirement accounts given your situation

This will give you the best tax and investment advantage. Generally speaking, if you make more than $35,000 but less than $500,000, choose to invest in the Traditional 401(k) or IRA; otherwise, choose a Roth IRA. If you are an employee of a private company that offers a 401(k), save in your company plan. If you work for a public entity, save in a 403(b), but also check to see if you can contribute to a 457, which will allow you to contribute an additional $18,000 in 2017. If you are an independent contractor or 1099 employee, you have several options––generally, an Individual 401(k) will be best. In all of the above cases, if you are over 50 years of age, you can contribute an additional $6,000 in 2017, giving you a max of $24,000. 

If you are retired, spend from the correct retirement accounts. How you are taxed on your retirement income will make a significant difference during your lifetime. Generally speaking, take income from your Roth accounts first, then your taxable accounts, and finally your IRAs. (For related reading, see: Is the 401(k) the Right Retirement Plan to Use?)

3. View all of your assets as one portfolio, and invest them in multiple asset classes

This rule applies whether you are retired or still working. Modern Portfolio Theory, first created at the University of Chicago and extensively refined over the past 60 years, provides the fundamental basis for creating a sound portfolio––and a sound portfolio will maximize your wealth. Diversify globally and have a variety of asset classes, including real estate and natural resources. *This advice does not apply to short-term investing goals. (Less than 5 years.)

4. Be careful purchasing a home

Homes are not good long-term investments. As a whole, residential real estate has averaged a 0.4% return per year over the past 100 years when you account for inflation. Generally speaking, the less house you the buy, the more money you have to invest in assets that produce a better long-term return. If you are retired, downsizing is an excellent way to increase your liquid portfolio value, thus increasing the amount you can safely withdraw each year. (For related reading, see: REITS: An Alternative to Investing in Real Estate.)

5. Create a will and a living will 

If you already have one, make sure it’s been updated recently. Also, update the beneficiaries on all of your accounts.

6. Stay away from whole life insurance and variable annuities

Unless you have more than the estate tax exclusion amount––$5.49 million per person, or $10.98 million per couple––whole life insurance is generally not worth the money. Insurance and investments are best kept separately, so use term insurance to cover any gaps that you might have, and then use the premium savings to invest in your portfolio. If you are retired and you have whole life insurance or variable annuities, carefully analyze them to ensure that they will provide what you need, without carrying a high annual cost. (For related reading, see: How to Keep Life Insurance Costs Down.)

Six Important Insurance Decisions You Should Take in 2017

Adhil Shetty

CEO at BankBazaar.com

Insurance has come such a long way in India. Earlier, insurance seekers were also investors who would be awarded with a risk cover along with a saving and investment avenue. Now, insurance and investment products have evolved with time to fit in with the economic environment. However we Indians are wary of market risks and are still tempted to invest in traditional insurance plans. Stated below are six important insurance decisions that you should take in 2017.

1.        Separate your insurance from investment:

The simple way to imply this is to detach your investment goals from your insurance goals. Let us take a simple example of a man, aged 35 having 2 children and a dependent spouse. His investment goals would be to provide for his children’s higher education and marriage, purchase a housing property for his family, and plan his retirement. This is different from his insurance goals which would be to protect his family, his home, his vehicle etc. from any emergencies. If you purchase a single financial product to achieve both your insurance and investment goals, then there is high probability that either one of them is not achieved.

To ease inflation pressure and to boost economic growth, the RBI over the last couple of years has cut the benchmark interest rates by 175 basis points (1.75%). This has reduced the returns from fixed income investments. Insurance companies, by offering guaranteed return products, lure the conservative investors. The investors don’t often realize that their return on investment for such products barely match the inflation rate. Investors purchasing such products would neither be able to meet his investment goals nor his insurance goals.

2.        When buying life insurance, pick a term plan:

There are 3 basic ways to calculate your insurance requirement:

a)        Income replacement method – In this technique one assumes that his / her present gross annual income for the no. of years left for retirement would be enough to meet ones family requirement in case of his / her sudden death

Income replacement method = Gross annual income * No. of years left for retirement

b)       Human Life Value method - In this approach, one’s insurance needs will be met by the present value of all future income that the insured is expected to earn for his families benefit.

c)        Need Analysis – As the name suggest it is the present value of all future financial goals that you except to achieve for your family example children’s education and marriage, providing for your dependent family members, repayment of outstanding loan amount etc.

However be the method with today’s rate of inflation, lifestyle etc. one’s dependents may easily need a minimum risk cover of Rs. 1 crore to take care of long-term financial needs. To achieve this cover through traditional, endowment plans, you would have to pay a very high premium. So the best and the cheapest way to choose is by comparing online term plans. A 30-year-old earning Rs. 500,000 can buy a basic 30-year term insurance with annual premiums ranging between Rs. 7000 and Rs. 11,000.

3.        Do not go without health insurance:

Average hospitalisation costs grew around 10% year-on-year between 2004 and 2014 in India – at a rate much higher than the average cost inflation of 7% per annum. A single visit to the hospital has the capability to erode all your savings in one go.

If you are salaried, there is a high probability that you would be covered by your employer under the group insurance policy. However, with this spiraling rate of healthcare inflation and no job security, one has to have a top-up plan in place. A top-up plan provides additional coverage once you exhaust your existing cover. As these plans cushion your existing cover, they are cheaper in contrast to regular plans.

If you are a self employed professional or a businessman, then it’s absolutely important that you have health insurance for your whole family, either through individual policies or under a family floater plan to cover the whole family. Please note that a floater plan takes the age of the eldest member of the family to calculate the premium. Therefore it is advisable to take a separate plan for your elderly parents.

4.        Consider buying critical illnesses insurance

Thanks to high stress lifestyles, exposure to pollution, rich diets, and lack of exercise, critical illnesses are becoming prevalent. The long-term treatment of any critical illness can take several months or years, and this has the potential to drain any family’s savings. To protect your family against such risks, consider having a critical illness insurance plan that will provide you a lump sum upon the diagnosis of listed illness such as kidney failure, cancer, paralysis, coma, sclerosis, cancer etc. A separate plan can be taken for critical illness or it could be a rider on either a general health insurance cover or a life cover. This cover can give you a financial cushion making it easy for you to manage funds while dealing with a possibly difficult hospitalisation and treatment. 

5.        Always have comprehensive insurance for your vehicle

Third party or liability insurance is compulsory on your vehicles. It covers the legal liability for the damage caused to a third party only; this would include bodily injury, death or incapacitation of the aggrieved. A third party would be anyone who is not the insurer or the insured. It could be a pedestrian, a passenger in your vehicle, or the driver of another vehicle. However, such an insurance plan will not cover damages caused to you. Hence it is important to have a comprehensive insurance plan where you get protection for your vehicle, self, and also against accidental fires, theft, or natural calamities. 

6.        Protect your home:

Natural calamities like earthquakes, cyclones and floods are on the rise, guided by the hand of human activity. A home insurance product can cover you from such threats. A typical home insurance plan covers damages by fire, and natural calamities, or man-made damages such as riots, terror attacks, strikes, etc. You also have the option of insuring the contents of your home by having a home contents cover.

BankBazaar is your one-stop shop for your personal finance needs! Visit our website to search, compare and apply for financial products in your city. 

(This article originally appeared in the Financial Express.)