Business Finance: Are You Covered?
Calamities ranging from fire to product liability lawsuits can bring your company to its knees. Even if you have insurance against common risks, they may not provide the breadth of coverage you need. The only way to know for sure is to review your coverage every year with an agent or insurance broker.
Look for a professional who works with an underwriter like AIG (www.aigsmallbusiness.com), CNA (www.cna.com), or Zurich (www.zurichna.com). These companies are well capitalized, and have a wide range of property-casualty and liability policies. Another big commercial insurer, The Hartford (www.sb.thehartford.com), specializes in writing policies for small-to-midsize companies and recently said it had created "Select Customer Xpand" underwriting teams to assist agents in signing up companies with annual revenues or property in the $5 million to $15 million range. "Our goal is to underwrite new business 'upfront' by providing our agents with the tools and local contacts they need to receive quick turnaround on risk acceptability," according to Judy Blades, senior executive vice president of The Hartford's property-casualty operations.
What kind of coverage does your company need? At the very least you'll want a Commercial General Liability Policy, or CGL. It will cover lawsuits or threatened lawsuits arising out of bodily injury or property damage caused by you, your employees, or by subcontractors or suppliers working on your behalf. This includes accidents that you don't think are your fault but that you'll probably have to pay for anyway. A policy with a face value of $2 million to $3 million is probably sufficient for the average growing company. If you're in the market for both liability and property insurance, you may qualify for a Business Owner's Policy, or BOP, that combines the two types, often for less than two separate policies.
Be aware that off-the-shelf business liability policies, including BOPs, exclude many hazards. For instance, if you hold yourself out as an expert in a field-- medicine, law, accounting, engineering, consulting, or another profession--you'll also need a professional liability or "errors and omissions" policy if you want protection against malpractice or negligence claims.
Keep in mind, too, that while General Business Insurance, or GBI, will cover out-of-pocket expenses, it usually doesn't replace lost income. For that you'll need Business Interruption Insurance. These policies will keep money flowing while you repair or rebuild. You can also buy endorsements that will reimburse you for related costs, such as moving, installing phone lines at a temporary or new location, or reconfiguring your replacement computers.
TIP: Save money by combining liability and property insurance in a single policy.
Do You Need A Wealth Manager?
Turning your finances over to a professional can free you to run your business. And you don't need an eight-figure net worth.
If your business leaves you little time to manage your personal finances -- or if you simply don't want to deal with them -- a wealth manager may be just the ticket. A growing number of banks, brokerage, and insurance firms will gladly run your entire financial life.
These kinds of services have long been available to the mega-rich. The new competition is for the neo-rich, or high net worth individuals, which can mean those with investment portfolios as small as $100,000.
Although the cynic in you may wonder if wealth management is just a glorified term for financial planner or investment counselor, these professionals differentiate themselves by providing a much broader range of personalized services. They also take a long-term, or "multigenerational," view of your finances, with an emphasis on preserving wealth for future generations. In general, they focus on five areas:
Investments--Developing objectives, designing strategies, and fine-tuning asset allocation
Liabilities--Managing debts and structuring payments, in some cases even paying your bills
Taxes--Devising estate, retirement, and tax strategies, and creating business succession plans
Insurance--Identifying risks that could significantly diminish your net worth, and creating insurance plans
Philanthropy--Creating charitable giving plans that take into account tax implications and your philanthropic priorities
ON THE RADAR: A coming boom in long-term care
The United States is preparing to see a huge group of people join the ranks of the retired, creating a potentially dramatic increase in the need for long-term care services in coming decades, says New York Life. It notes that by 2030, when the last of the baby boomers reach age 65, the number of severely impaired elders at risk of institutional long-term care could almost double to 6 million.
They'll Thank You Later
Providing your employees with a 401(k) retirement plan isn't good enough. You also need to make sure they're using it.
Your company's obligation to employee retirement doesn't end with setting up a 401(k). You need to teach them how to use it. Fewer than half of all workers plan properly, according to Kathryn Hopkins, executive vice president, Fidelity Institutional Retirement Services Company (www.fidelity.com), which recently completed a study on the subject. "We believe they can be more effective when they take a total approach to retirement planning by factoring in their pension plans and other personal savings," she says.
Fidelity Investments says you should encourage your employees to: Conduct an annual checkup--Investors should take an inventory of all of their investments--such as a 401(k) plan, pension, IRA, and brokerage account--and evaluate whether their assets are working together to meet their financial goals. Looking at the big picture will help them determine an appropriate asset-allocation mix across all accounts to ensure their portfolio is properly diversified.
Calculate future medical expenses--It is essential for employee investors to plan now for retirement-related out-of-pocket health care costs by determining whether they will have access to employer-sponsored retiree health care and by identifying gaps where other insurance, such as Medicare, falls short. Using tools like the Health Care Cost Calculator, available from Fidelity through its NetBenefits website, workers can estimate the premiums and out-of-pocket expenses they can expect to pay during retirement.
Maximize workplace benefits--Workers should make the most of their company workplace retirement plan--participate in company match programs, contribute the maximum allowed to a 401(k), and, for those over age 50, take advantage of additional catch-up contributions. Eligible investors who participate in their company's stock option or employee stock purchase plan should remember to consider these investments as part of their overall financial plan.
Remember your partner--Less than 44% of survey respondents review their respective 401(k) plan together with their spouse. For a complete view of their overall financial picture, couples should look at their workplace retirement plans together to make the best investment decisions to meet long-term goals.
Diversify and rebalance assets--Make sure assets are across all investment vehicles--and in all plans--to increase savings potential. Use planning tools, such as Portfolio Analysis, available on NetBenefits, www.fidelity.com to review and manage all assets together.
Four Simple Steps To Financial Security
Creating wealth isn't difficult. But it does require the same kind of discipline and hard work that built your company. Get out your pencils.
A good financial plan is a detailed roadmap to your future, as unique as your personality. It starts with an understanding of your long-term objectives and a clear analysis of your current situation. With that knowledge, you can create a strategy and execute it with confidence that you will reach your destination.
Set your goals. What are your aspirations, hopes, dreams, and motivations? Which ones are your top priorities? What's your time frame for achieving them? Your answers will lay the groundwork for your plans and strategies.
Size up your situation. Before you can decide on a course of action, you need a realistic assessment on where you are now. Create a detailed financial profile that takes into account your net worth, income, lifestyle, expenses, liabilities, and risk tolerance.
Create a plan. This is the series of strategies and steps you'll take to achieve your goals. It will coordinate your projected earnings, household budgeting, company benefits, retirement accounts, investments, insurance, college savings, and insurance coverage. A well-crafted plan will present these elements in an organized and succinct document that will guide your future decisions.
Implement it. This is where you begin to execute the strategies you have created. It may start with paying off debts, reducing your spending, and increasing your investments. Subsequent steps will probably involve redeploying investments, changing insurance policies, and executing wills and other estate planning documents.
Hint: Don't get hung up on minor details. You can, and should, adapt your plan as your circumstances evolve. That's what erasers are for.
The Price Of Advice
Choosing among full-service and discount stockbrokers involves some big tradeoffs -- or does it? As the securities industry evolves, differences among firms are getting cloudier.
Unfortunately, the decision isn't getting any easier, as brokerage firms continually tinker with their prices and services searching for the most profitable mix. Here's what you can expect to get -- or not -- for your money: Full-service brokers will create a portfolio to help you achieve your investment goals and identify particular investments that fit your asset-allocation profile and estate and tax-planning needs. They'll generate investment ideas, give you stock quotes, manage your account, provide research, and help you with tax information. And, yes, you'll pay. The average stock trade runs about $150 -- five to 10 times what discounters charge -- though your actual outlay will depend on how much you keep in your account and how frequently you trade.
Full-service brokers include:
A.G. Edwards (www.agedwards.com)
Merrill Lynch (www.ml.com)
Morgan Stanley (www.morganstanley.com)
Smith Barney (www.smithbarney.com)
UBS (www.ubs.com)
Premium discount brokers give you lots of independence, but are standing by to offer advice, for a fee, when you need help achieving a particular investment goal or developing a long-range plan. For basic trades expect to pay $15 to $35 per trade, and most require opening balances of $2,000 to $10,000. Premium discount brokers include:
Charles Schwab (www.schwab.com)
Fidelity (www.fidelity.com)
Quick & Reilly (www.quickandreilly.com)
T. Rowe Price (www.troweprice.com)
Vanguard (www.vanguard.com)
JB Oxford (www.jboxford.com)
Basic discount brokers. These firms do not provide broker assistance, but offer even cheaper trades -- $7 to $30 -- and may not have minimum opening balances. Basic discount brokers include:
Ameritrade (www.ameritrade.com)
Bidwell (www.bidwell.com)
E*Trade (www.us.etrade.com)
Muriel Siebert (www.siebertnet.com)
Scottrade (www.scottrade.com)
TD Waterhouse (www.tdwaterhouse.com)
Expect the lines to blur further. Some full-service brokers are redirecting calls from low-balance customers from stockbrokers to central call centers. Premium discounters like Schwab are providing more investment advice and polishing their customer service. Meanwhile, basic discounters like TD Waterhouse www.tdwaterhouse.com are going after both with improved research tools, rollover services, and advice (at a price).
"Investors continue to question the value they receive from full-commission firms," says Janet Hawkins, executive vice president and chief marketing officer for TD Waterhouse's U.S. operations. "We're confident that positioning ourselves as 'the alternative to higher-priced brokers like Merrill Lynch and Schwab' will attract even more of these customers to TD Waterhouse."
Cash On Demand
Working capital is the precious lifeblood of every business -- sometimes a little too precious.
To a young company, success means having the resources to pay the bills and invest in the future. Here are the best ways to get the money you need.
Play your cards. Look in your wallet. Fully one-fifth of new entrepreneurs initially use credit cards as their main source of capital. It's expensive, but easy to get, and unlike most other business borrowing, the loans are unsecured.
Find an angel. Private investors are dream sources of capital because they tend to have long-term perspectives and eschew red tape. How do you find them? Personal referrals -- friends of friends of friends -- are the usual method. But consultants will do the introductions for a percentage.
Get help from the Feds. Established businesses worth less than $6 million may get below-market U.S. Small Business Administration 504 Loans of 10 to 20 years for equipment and real estate. A private lender typically provides up to 50% of the funding, the SBA 40%, and the business 10%.
Court your vendors. If you pay your bills on time, a trade creditor may extend terms -- say, from 30 to 60 days -- to let you fill a big order. That will give you time to ship, bill, and collect, assuming your customer is reasonably prompt.
Leverage your bills. Borrow against receivables or sell them outright. Some companies will lend you up to 80% of nondelinquent accounts. Factoring companies will buy them at a discount, depending on their size and age.
Entrepreneurs Retire Too
Fortunately, as a business owner, you have more options than most people to sock away money tax free. A company 401(k) plan, for example, lets everyone on staff, including you, defer taxes on up to $13,000 of earnings in 2004.
Congress has seen fit to create several other tax-advantaged programs specifically for small business. Among them:
Keoghs are qualified retirement plans designed especially for the self-employed, including sole proprietorships and partnerships. They can be set up as defined contribution or defined benefit plans. If the former, your business can contribute the lesser of $41,000 or 25% of your own and other employees' 2004 compensation. If the latter, it can put in the lesser of $165,000 or 100% of an individual's average compensation over a consecutive three-year period.
Simplified Employer Pensions-IRAs (SEP-IRAs) are basically individual retirement accounts that a business (but not an employee) can put money into. Contribution limits are much higher than for 401(k)s: 25% of pay, up to $40,000 a year.
Savings Incentive Match Plans for Employees-IRAs (SIMPLE-IRAs) let an employee --including you --defer up to 100% of compensation, up to $9,000 in 2004. The company can kick in up to 3% more.
The Trouble With Heirs
Family business transfers require careful balancing of financial decisions with the sensitive issues of personal dynamics. Envision that joyous day when you are able to successfully pass your business on to your heirs? Don't get your hopes up. Less than one-third of entrepreneurs manage to do so successfully, notes the Wall Street firm Neuberger Berman, which advises many entrepreneurs on tax planning and wealth management.
Why so few? The problem is rarely financial; only 10% of transfers fail because of estate planning issues. Most stumble over family conflicts or a lack of preparation of the next generation. Seth Finkel, a Neuberger Berman managing director, notes that successfully transferring a family business to the next generation requires a balance of "hard" issues such as business valuations, stock distributions, and trust and estate planning, and "soft" issues," from parent-child relations to sibling rivalries.
When dividing interests in the company among family members, he warns, a business owner will be confronting both financial and emotional issues that can be extremely sensitive. Should different family members' interests be equal? Should family members not active in the business receive nonbusiness assets or life insurance benefits instead of an interest in the business? "Emotions can flare up," says Finkel. "Too often, families with wealth feel that 'dollars equal love.' When those dollars are seen to be unequal, emotional frictions can grow."
There are no simple solutions to this problem. One option is to create an ownership structure that allows your entire family to benefit from the growth of the value of the company. There are pros and cons to these kinds of arrangements; however, a business owner needs to explore alternatives thoroughly with professional advisers.
Give Your Kid The Old College Try
No matter how successful your business, today's tuition bills will make you gulp. Luckily, Uncle Sam gives you a great savings tool called the 529. Four years at a typical private college or university currently can easily run $100,000. Double that if you're going Ivy. Then multiply that by three or four kids and you're talking serious money.
That's why 529 Savings Accounts are increasingly popular among parents at all income levels. Earnings on such accounts are exempt from federal (and in many cases state) taxes, as long as the money is used for educational expenses, including tuition, room, board, fees, and books. What's more, individuals can set aside up to $270,000 per child. You'd have to be crazy not to at least check them out. As Rande Spiegelman, Vice President of the Schwab Center for Investment Research, puts it: "The real key to success in education planning is to start investing as early as possible, and take full advantage of any tax breaks available under the law."
So why doesn't everyone with a few dollars in the bank and a pre-college kid have a 529? Confusion and misinformation, mainly. Because the plans are sponsored by state governments, many parents think the money must be used at a local public college or university, and they don't want to lock themselves in. Others think they'll be locked into low-yielding investments that they can beat elsewhere. Neither assumption is true.
There are no limits on your maximum annual contributions, just a lifetime cap that can be as high as $282,000 per child, depending on the state. And you can easily (and legally) circumvent those limits by opening additional accounts in other states.
Money in the accounts compounds tax free, as in a 401(k). But they're better than retirement accounts since investment earnings are not taxed when you cash out as long as the funds go toward bona fide higher education expenses. Withdrawals are also exempt from many state and local income taxes. And some states give you an immediate tax deduction on your contributions, even those you make just before your kid heads off to college.
For more information visit: www.savingsforcollege.com
www.collegesavings.com
www.529.com
Medic Alert!
You may not have heard of employer administered medical savings accounts, but you will. And you'd be advised to pay attention.
"The burden on future retirees to pay their own medical costs is increasing dramatically and far too few employees are prepared."-- Sylvester Schieber, VP and Director of Research, Watson Wyatt Worldwide
Will your company get stuck with the health care expenses of retired employees?
Employees may expect you to pay once they see the tab for services that aren't covered by Medicare. A 65-year-old couple retiring today, with no access to an employer-sponsored health care plan, will pay $175,000 to fund out-of-pocket medical expenses, according to Brad Kimler, senior vice president of Fidelity Health and Welfare Consulting, a unit of Fidelity Investments. "Few pre-retirees are prepared to meet medical costs in retirement and most have given little thought to the possibility that they could face paying for future health care expenses," he says.
One solution: A Retiree Medical Benefits Account (RMBA) that functions much like a 401(k) for health care. At the moment, there is no legal authority for companies to create accounts that combine the tax benefits, funding flexibility, portability, and investment options that most human resources experts consider necessary to work effectively. However, Fidelity is in the process of developing a proposal for such an account, and legislation has been introduced in Congress to allow them. Says Kimler: "It is our hope that future regulatory changes will encourage the evolution of accounts, leading to a workable solution: an account that involves employees in benefits decisions, promotes health care consumerism, allows for measured employer contributions, and complements the balance of an employer's retirement benefit offering."
You may not welcome the thought of yet another benefit to administer, but don't reject the idea out of hand. Helping employees help themselves is a lot cheaper than writing a check for medical premiums.
