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6 Basic Insurance Policies Every Small Business Should Consider

Insurance policies

When you open a business, you expose yourself to legal liability and risk. One of the most overlooked parts of opening a business is purchasing the correct insurance to cover and protect it. While there are many great insurance options for small businesses, it can be daunting to figure out which you actually need for your business. Here are six common small business policies worth considering:

General Liability coverage

General liability insurance (GL) provides essential protection for your business. Sometimes referred to as small business or commercial liability insurance, it protects against bodily injury claims, damage to the property, and personal injury.

Who should purchase? Those who interact with clients in person, use advertising, utilize third-party locations for business, or are required to have this coverage for a project.

What’s the cost? Pricing is a factor of industry, location, business size, and the degree of coverage you need; Hiscox reports that an IT consultant who makes $100,000 annually might pay $350.

An important note: for small business owners who have hired staff, GL usually will not cover worker’s compensation (if an employee injures themselves on the job), nor will it cover Personally Identifiable Information (PII); so additional insurance should be considered for employees.

Worker’s Compensation

If you’re even considering hiring employees, you should get quotes for Worker’s Compensation insurance (which typically can be appended directly to an existing policy). This will cover your business if one of your employees is injured or dies on the job/as a result of their work.

Who should purchase? Those with part-time and/or full-time employees.  Even employees who are a “low risk” for work-related injuries could slip and fall or develop carpal tunnel syndrome. While these seem minor, they can be costly to a business; you could even be liable to cover lost wages. The National Safety Council reports that the average cost of a worker’s comp claim is $40,000.

What’s the cost? The degree of risk must be considered for a quote from an insurance provider; Insureon reports that a low/medium risk business might pay $47 monthly.

Business Owners Policy

A business owners policy (BOP) is usually added to GL insurance to ensure the business equipment and property are covered as well. This can often be customized to include vehicle liability insurance, office insurance (for fire or business interruption), and/or electronic data loss.

Who should purchase? Those who own a piece of property or valuable business equipment required for work.

What’s the cost? It varies widely based on industry, location, and business size; Hiscox quotes a Business Consultant in MA at approximately $760 annually.

Professional Liability Insurance

With more people consulting now than ever before, professional liability insurance has become increasingly popular. Sometimes referred to as Errors and Omissions Insurance (E & O), it protects against the risk of professional services. In other words, it shields the business if you’re sued by a client for making a mistake, and will cover costs to defend yourself or reach a settlement.

Who should purchase? Those who act as consultants, advisors, etc.; anyone who provides professional advice or service to clients.

What’s the cost? It varies based on industry, location, company size, and the amount of coverage you need. An IT consultant in California, for example, is projected to pay $441 annually for professional liability insurance.

Property Insurance

Property insurance, sometimes called commercial property insurance, simply covers a business’ real estate assets and its contents.

Who should purchase? Those with a physical location for their business (whether leased or owned), or who have products, inventory, or valuable business assets that are crucial to running the business.

What’s the cost? Coverage is expansive, ranging from small standard policies targeting specific risks/locations to much larger plans that include natural disaster coverage.

Cyber Security Insurance

Cybersecurity is a rapidly evolving field, as serious breaches have reached an all-time high. Cyber attacks could drain all valuable data, leaving one unable to perform operations or access any systems. They may also be liable for any personal health or identifying information stolen by hackers. Cybersecurity insurance protects businesses against these computer-related crimes, losses, or simply if a laptop containing important data goes missing.

Who should purchase? Those who maintain any sensitive and/or personal information and those who accept credit cards or other forms of digital payments.

If you have any questions or need assistance with small business insurance, please contact LRZ Consulting.

5 Business Risks Your Company Should Plan For

It’s no surprise that COVID-19 has severely affected the business community among many others. While there have been major recessions (e.g. the financial crisis of 2007-2008), this pandemic has been the most crippling to date. The impact has been wide-ranging; some companies were more prepared for drastic changes like indefinite remote work, while others have worked hard to adapt. Many have also experienced decreased revenue, or even been forced to close their doors permanently.

While it’s difficult to completely prepare for an event of this magnitude, it’s essential to assess and plan for potential risk factors. For publicly traded companies, these are listed in their annual 10-K report, as required by the U.S. Securities and Exchange Commission (SEC). This form gives a clearer picture of everything a company does, as well as any risks it faces. While your business may not require as detailed of a report, it’s encouraged to establish a list of the most relevant risk factors. Let’s explore five risks to prepare your company against:

Concentration Risk

This “concentration” may be in revenue, customer, vendor, material, or supply-chain; all pose a significant risk if something adverse happened within that concentration. While revenue and customer concentrations are the most commonly discussed, that of a vendor or supply-chain could pose just as large of a problem. A recent example of this would be the tariffs imposed on Chinese goods, which disrupted a number of supply chains and impeded companies from offering competitive prices while still earning a reasonable margin.

Financial Condition

In many cases, a company’s financial status would be the most urgent risk factor to address. Liquidity and debt service are critical factors to consider, as issues in these areas could derail future business plans and put the entire company in jeopardy. Some business owners tend to focus solely on cash flow, but this metric alone doesn’t guarantee that a company has sufficient liquidity or a long-term path to profitability.

Competition

Competition typically falls into two buckets – that within an industry, or 1:1 competition with another company. For the former, this may mean you experience many competitors when acquiring a new customer or contract, which can affect price or a number of other factors. A well-known example of the latter is the expansion of Walmart and Amazon; countless businesses thrived in their local markets, but took a huge hit when a Walmart or Amazon entered their industry or geographical market.

When evaluating this risk factor, consider potential future competition as well as present, since changes to the industry or economy often alter a competitive landscape. Take Zagg Inc., for example. It’s a publicly-traded company that primarily sells phone accessories (e.g. screen protectors, charging stations, and wireless headphones). While they have a significant market share in the screen protector industry, some of their other product lines have decreased significantly over the past few years due to Apple’s expanding market share. Zagg must now decide whether to diversify their offerings to reduce dependency on screen protectors sales, or to focus on retaining their existing market share.

Products & Services

The above example with Zagg Inc. highlights another significant risk factor: the breadth of products and/or services a company offers. It’s essential to consider if your product or services could be overshadowed by a bigger player, or become obsolete altogether (e.g. if a technological advancement disrupts your industry or offering). Obviously no one has a crystal ball to know what the next radical change to an industry will be, but with a potential Uber, Amazon, or Tesla always looming it important to be future-focused.

Key Personnel

The final risk factor we’ll touch on is when a company is heavily reliant on key personnel. This could be anyone from the CEO to an engineer, but for most small businesses it’s typically one of the company’s owners. This is even more common when a business is owned by one individual who also serves as the CEO or President, performs multiple key functions (e.g. generates most of the sales or has the most industry expertise), and may also handle many administrative tasks.

Turning data into information you can use

By Andrea Dunathan of Dunathan Consulting

In a recent conversation with a fellow consultant (Cathy Bamji of https://www.liferoading.com/), Cathy used a phrase that stuck with me: turning data into information.

It’s surprisingly easy for businesses to accumulate data of all sorts:

  • customer contact data
  • website analytics data
  • financial data
  • employee engagement data
  • and so on

What’s challenging is to put that data to use to make well-informed decisions.

Raw data can be overwhelming

The temptation for many business owners is to make decisions on gut feelings, instincts, and guesstimates. That may be easier than analyzing the data to turn it into meaningful information, but it also means you could be running your business on faulty assumptions. You don’t want to discover, too late, that things are not going as well as you thought.

So how can a busy business owner make better use of all that data, without hours of painful number-crunching? One possible solution is to look at how the data is currently presented.

Data may not be the problem

The problem is often not in the data itself, but in how it’s entered into the system, and the design of the reports that summarize and present it to the user.  Small changes in format can make a big difference.

For example, I was reviewing some financials with a restaurant owner who was struggling to earn a reasonable profit. We got into a discussion of which of his operational areas (table service, deli counter, bakery), and which product lines within those areas (such as deli meat vs. fish vs. cheese), were most profitable.

Unfortunately, his accounting system was not tracking sales by operational area or product line.  So when we looked at his profit and loss statement, we couldn’t tell how much of his gross profit came from which areas or product lines.

His cash register did track sales by those categories, so we asked the accountant to start entering costs and revenue by category, instead of at the summary level.  This change will provide the owner with a simple financial report that will show gross profit for each product line, with totals by operational area, so he can monitor profitability much more effectively, with no extra number-crunching required.

Taking the time to figure out what kind of informational report will be useful to you, can guide you on figuring out what type of data you’ll need. This type of planning allows your system to do the work for you, with no number-crunching required on your part.

Tip: if you are working with an accountant, make sure to discuss your goals, and the information you need to make decisions, so that the data can be tracked and reported appropriately.

Data does require proper planning

Although this example uses financials, this same process can be used in any system that supports any area of operations.  A little planning can help you make much better use of your:

  • marketing data
  • human resources data
  • customer data
  • and so forth

The key is to think about the information you need to help you make better decisions. Once you’ve identified the questions you have, you can design your data capture and systems reports to give you those answers easily.

If you love the idea of doing this in your business, but aren’t sure where to start, contact Dunathan Consulting to get some ideas for turning your data into useful information.

Dunathan Consulting helps rapidly growing businesses make the best use of their people, processes, and technology to support the business’s growth and increase its future sale value.

Paying Your Tax Bill Online

Paying Your Tax Bill Online

Most taxpayers are probably used to receiving their tax bill and cutting a check to the IRS and state taxing authorities. For those that don’t know, there are now many ways to pay your individual taxes online. This includes estimated tax payments throughout the year, your balance due at filing, and a variety of other taxes. There are multiple options for payment that are easy to use, and some are completely free of charge.

For making payments for federal personal income taxes, there are two main options:

  1. IRS Direct Pay: This is the IRS’ secure payment method where you can make a payment directly from your bank account. There are no fees for this service and the IRS does not keep your bank account information on record. We have used this method and have found it to be very easy to use.
  2. Third Party Payment Processers: There are a variety of third-party payment processors through which you can pay by credit or debit card. Make sure you go to the IRS website below to make sure you are using a payment processor that is approved by the IRS. The biggest downside to this payment method is that there are fees involved. The credit card fees are typically around 2%, so you will want to avoid this method if possible, although in some situations it could be warranted.

(https://www.irs.gov/payments/pay-taxes-by-credit-or-debit-card)

Most state tax authorities also now have portals or online payment options. For example, if you pay taxes in Maryland, you can make both estimated payments and your year-end tax balance payment electronically directly to the Comptroller of Maryland. To make a payment electronically through their system, you will just need to provide some basic personal information and verify your adjusted gross income from your most recent tax return.

While this may not be a deciding factor for whether to make your payment online or not, there is some societal value from individuals making their tax payments online as well. With the IRS continuing to face budget issues and low staffing, making payments online will ultimately help the agency. It’s easier for them to handle an electronic payment that is linked to your tax account then it is to take a manual check and form and process it.

Of course, there is nothing wrong with the traditional route of paying by check. But many taxpayers may find it far more convenient to pay electronically through one of the different methods discussed above. If you need additional information on paying taxes online, your best resources will be the IRS websites, state taxing authority websites, and your tax preparer.

Business Tax Law Changes

With the new tax law comes many changes that will impact businesses in 2018 and beyond. The following is far from a comprehensive list of changes. But it may help to identify some changes that you may need to look further into and consult your tax adviser on:

  • C Corporation Tax Rate: Beginning in 2018, the C Corporation tax rate is changed to 20%. Previously the top tax rate was 39%. This is of course great news for companies already organized as C Corporations, as they will be subject to a lower tax rate going forward. Going forward, for both existing companies and new businesses, this change will have a significant impact on entity choice. Previously, with the higher tax rate, in general C Corporation status was not advantageous for a lot of small businesses. Many businesses were better off organizing as partnerships or electing S Corporation status and having income flow through to the individual level. The lower tax rate now makes C Corporation status a lot more advantageous from a tax perspective. Businesses and business owners will need to consider a variety of factors when deciding on the type of entity to select, including the owner’s personal income tax situation, whether the business will qualify for the 20% Qualified Business Income Deduction (discussed further below), what the exit strategy is, and how much profit is expected to be generated and left inside the company. The analysis may prove to be quite complex and could of course change if the existing laws are replaced during the lifetime of the business.
  • Qualified Business Income Deduction: We will only scratch the surface of this deduction here, but for owners of business other than C Corporations, there is a new deduction that can be taken against flow-through income. The deduction involves some tricky calculations, but in general the deduction will be limited to 20% of the individual’s income tax. However there in many situations where it will be lower than that. There will be two key determinations when evaluating the deduction. The first will be whether the taxpayer falls above or below the income level where the deduction begins to phase out for certain types of businesses. If you fall below this level, then you won’t need to evaluate whether your business falls under the definition of a service corporation as defined in the new regulations. If you do fall above this level, then you will need to determine whether your business qualifies for the deduction or is partially or fully excluded. The regulations state that businesses involving the performance of services in the fields of law, accounting, financial services, and consulting, to name a few examples, do not receive the deduction if their income falls above certain thresholds stated in the regulations.
  • Meals & Entertainment: Under the new regulations, entertainment expenses are no longer deductible. Meals will still be 50% deductible, depending on the nature of the meal. This makes expenditures like sports tickets and other entertainment less favorable from a tax perspective compared to other forms of expenses, and therefore many companies may want to evaluate their marketing and other budgets moving forward.
  • Net Operating Loss (NOL) Carrybacks and Carryforwards: The NOL carryback is eliminated starting in 2018, while the NOL Carryforward can now be carried forward indefinitely. The carryforward however can only be applied against 80% of taxable income, whereas it could previously be applied against 100% of taxable income. While income and losses may be out of the owner’s control in some situations, tax planning should factor in these changes where possible. Let’s take an example of a business that has income in both 2018 and 2019. Midway through 2020, the business is operating at a loss, but has some tax planning options to either push the loss further or move to a break-even position. Under the old regulations, there would be tax advantages to increasing the loss in 2020, because the loss could be carried back and applied against income from 2018 and 2019. Under the new regulations, the loss can only be carried forward, so there may be less incentive to move to a larger loss position, especially in cases where the business may have operating or funding reasons for not wanting to show a large loss on their tax return.
  • Section 179 Expansion and Bonus Depreciation: The new law increased the amount you can deduct under Section 179 from $500,000 to $1M. The phase-out level also increased from $2.0M to $2.5M. Meanwhile, the bonus depreciation deduction increased from 50% to 100% of the cost of property purchased and was also expanded to include certain used property. Previously, the property had to be new to qualify for bonus depreciation. These provisions were already very favorable for taxpayers and become increasingly so with the new changes. Businesses considering large purchases will want to consider if the purchases will qualify for the deduction and how it will impact their overall tax situation. It could significantly reduce taxes if companies make purchases before the end of the tax year, assuming there is cash or financing available to make the purchase.
  • Research & Development (R&D) Expenses: Beginning in 2021, R&D expenses must be capitalized and amortized over a period of five years. Businesses will no longer be able to deduct the expenses when incurred. This is unfavorable for businesses that have a profit but are incurring substantial R&D expenses.
  • Business Interest Deduction: This change only applies to companies with average gross receipts greater than $25 million, but the new regulations limit the amount of interest a business can deduct. This may require some debt-heavy companies to reconsider their capital structure, as companies with high debt levels could see their current structure become less tax advantageous due to the new limitations.

Please consult a tax advisor with any questions and remember that there are a lot of other changes with the new tax bill that need to be considered.

Individual Tax Law Changes

With the new tax law comes many changes that will impact individuals in 2018 and beyond. The following is far from a comprehensive list of changes. But as we head into the end of the year and the first filing season under the new laws, the following list will help to identify some changes that you may need to look further into and consult your tax adviser on:

  • Standard Deduction: The standard deduction is almost doubled starting in 2018, with increases to $24,000 for married filing jointly and $12,000 for single filers. Many individuals with modest mortgages who previously itemized their deductions may no longer itemize their deductions as a result of the increase. This will have a lot of implications for many families and individuals. In certain cases, it makes home ownership less desirable due to a lack of tax advantages. If you have a $200,000 mortgage, you may have previously exceeded the standard deduction due to the mortgage interest expense deduction. But with the increase in the standard deduction, that same taxpayer may now utilize the standard deduction regardless of whether they have mortgage interest or not. It also makes bunching deductions a more important strategy for many taxpayers. Bunching deductions could refer to making your charitable contributions that you would typically make over the span of years in one single tax year. This could potentially push the taxpayer into itemizing deductions for the year that they bunched their deductions, whereas they may just use the standard deduction in both years had they not bunched their deductions.
  • Alimony: For any divorce agreements after 2018, alimony will now be nondeductible to the payer and nontaxable to the recipient. This could have significant impacts for negotiations during divorces or separations, and both parties should factor in these tax ramifications during negotiations.
  • Moving Expenses: Previously, there was a deduction for moving expenses if certain criteria were met. The new tax law eliminates deductions for moving expenses, except for active duty military in certain circumstances. This isn’t going to impact anyone’s decision to move or not, but you may want to be more cost-effective with moving expenses now that there is no tax deduction.
  • Medical Expenses: The floor for deducting medical expenses will be lowered back to 7½ percent for 2018 from 10 percent. If there is a change you will approach that floor, be sure to keep track of all your expenses and keep your receipts. And make sure to review a list of all expenses that qualify for the deduction. There are plenty of expenses outside of just payments to doctors that can qualify for the deduction, such as transportation costs to doctor visits and dental care.
  • Limitation of Property Tax and State Tax Deduction: The deduction for personal taxes will be limited to $10,000 beginning in 2018 for married filing jointly. This will have some similar implications as the items discussed in #1 above. This will decrease deductions for many taxpayers and may result in those taxpayers simply utilizing the standard deduction instead of itemizing deductions. With the various changes related to the standard and itemized deduction, there could be a decrease in the complexity of tax preparation for many taxpayers. If a taxpayer does not have to itemize their deductions and go through the related calculations, the burden for preparing and calculating their taxes will be significantly reduced.
  • Casualty & Theft: The deduction is eliminated unless the loss is in a disaster area, so if that is not the case then there is no need to track expenses or save receipts for tax purposes.
  • Personal Exemptions: Personal exemptions are eliminated beginning in 2018. There is an increased child tax credit, but depending on your specific situation, you may either benefit or be hurt by these specific changes.
  • Obamacare Individual Mandate: This is eliminated beginning in 2019. This would only impact those considering going without health insurance, but it will reduce some complexity in tax reporting for those who were either without insurance during part of the year or qualified for credits related to health insurance coverage.

Please consult a tax adviser with any questions!

Attracting the New Generation of Workers – Fun & Flexibility is No Longer Enough

If you read business magazines or newsletters, you probably can’t go a week without seeing an article on how to attract and retain Millennials and Generation Z. Most of these articles have a list something along the lines of the following:

  • Offer flexibility for how and when people work (telecommuting, increased paid time off)
  • Relaxed dress codes
  • Fun in the office (ping pong tables, catered lunches, happy hours)
  • Giving back to the community (one day a year where all employees get a day off for community service)
  • Strong mentorships and training

If this were five years ago and you implemented all the above, you were differentiated from your competitors. Your company could go to a recruiting event or give an interviewee a tour of your office and be at a competitive advantage. While there are still plenty of traditional workplaces that have not changed with the times, many companies have quickly adapted to new workplace preferences, to the point where companies are no longer differentiated through these changes. In today’s environment, a company has to do more, and here’s the real dilemma. Take as an example a young accountant working at a forward-thinking CPA firm, which has put in place the changes in the list above. This accountant gets to show up to their office at 10:30am and leave at 3:30pm, and finish their work at home at their convenience. When they are in the office, they get to wear jeans and can take a break whenever they want to play shuffleboard and eat free snacks from the granola bar in the company’s kitchen. They get four weeks of paid-time off, and two days a year where they can take off to serve their community alongside their friendly coworkers.

Sounds great, right? The problem is that despite these perks, this accountant still spends the majority of their day sitting at a desk doing work. What happens when this accountant does not enjoy or have a passion for the work they are doing? They go on Facebook or LinkedIn and see peers that are developing new technology, traveling the country making sales to C-Suite executives, teaching children, designing a social media campaign, planning a conference, or working on a social program to provide access to clean water to people in third-world countries. Some young accountants may absolutely love what they are doing, but there are plenty of workers that will not get enough joy out of what they are doing on a daily basis, and they may not feel that their work has enough purpose or meaning. And the accountant is just an example; this dilemma can apply to any professional occupation.

So, what is this unsatisfied accountant to do? They just spent four of five years getting an education in accounting, and a year studying for their CPA exam. They have a specialized skill and are working in an in-demand field. Leaving their current field would be a very difficult, and potentially costly, choice. Addressing this exact situation is where employers are failing, and it presents a huge opportunity for those that can solve this problem. Earlier in my career, I was working with a prestigious graduate business school and was listening to their struggles in attracting and retaining qualified, skilled accountants below the Controller and CFO. The school was located in a small town where there was very little outside of the campus life. There was also somewhat limited upward mobility; while it was a large, prestigious school, it simply doesn’t compare to the opportunities within a Fortune 500 company or a national CPA firm. There was no strong appeal for younger accountants. In my mind, the organization had an opportunity to differentiate themselves to attract top talent. They were in a perfect opportunity to address the dilemma of the unsatisfied accountant we just discussed. They needed to realize that they can’t attract talent from the new generation through jeans days, free lunches, increased PTO, and telecommuting options. Those could help put them on par with some other employers, but it wouldn’t differentiate them and make up for the limited upward mobility and lack of appeal in the location. They needed to offer something unique, something that would excite candidates about coming to work for them.

This business school had a very large, world-class executive education program. They attracted top business executives from all over the country to attend their seminars and programs every year. This could have been their secret weapon. The school had to hire employees to design, organize, and execute these executive education programs. They hired employees to design social media campaigns to attract people to the programs. And they hired employees to generate sales for the programs. When they were trying to hire accountants, they could have designed the position so that it resembled more of a rotation, or a position where they would cross over to different departments within the organization. Then they could say to accountants, “don’t go to CPA Firm A where they will put you at a desk working on accounting 8 hours a day, 5 days a week. Come work with us, and you will spend half your time on accounting and the other half on marketing, business development, sales, and event planning”. This gives the candidate a unique opportunity, a chance to work in some more “exciting” areas of the business world instead of being in a position with a lot of daily and weekly repetition. If you want to attract the new generation of workers, innovative workplace ideas like these will go a lot farther than relaxed dress-codes and catered lunches. What is your company doing to attract top talent?

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