October 17, 2011Welcome
Welcome to The Shaw Atlas, the monthly newsletter from Shaw & Associates, CPAs & Financial Advisors. We look forward to keeping you abreast of ever-changing tax codes, providing you with money saving accounting tips and illustrating proactive strategies to help you achieve the financial life you envision.Newsletter contents:
Money Saving Tax Planning Tips
A Healthy Balance Sheet – Beyond the Profit & Loss
October 31, 2011
3rd Quarter Payroll Tax Returns
November 15, 2011
Non-Profit 2010 Extended Tax Returns
A Penny Saved is A Penny Earned – Money Saving Tax Planning Tips
Kevin Shaw, CPA, PFS, CEO
It’s October and Fall is in the air. Football games, Halloween parties and tax planning! Yes, I said tax planning. This is a perfect time to look at how your year has developed and to identify ways to save on taxes before the year is over. Remember, for most tax savings ideas to bear fruit and impact your 2011 taxes, you need to implement them before the end of the year. Consider these tax-saving year end tips.
These are just a few of the many potential tax saving ideas that can help reduce your taxes. If you would like to explore these or any other ideas, please contact our office to set up an appointment.
A Healthy Balance Sheet – Beyond the Profit & Loss
Marcy Palm, Accounting Manager
“I feel like my business is actually making some money this year, does that mean it is healthy and sustainable?” If you’re like many business owners, you may not feel particularly adept at understanding your financial statements and using them to make intelligent business decisions. The answer to this question is not a simple one, nor contained in one financial statement.
Start with your year-to-date Profit and Loss statement (P&L). Do you have a profit this year? Is it as high as you would like? What about your profit margin (net profit/sales)? This will tell you how well you are controlling your costs and/or pricing your work. Are you working yourself ragged for a very small bottom line net profit? Is it reasonable for your particular industry? Even if your profits are where you want them, you still may not know whether your business is healthy or sustainable long-term. That is because the answer to these questions really lies on your Balance Sheet.
The Balance Sheet is an extremely crucial financial statement that many business owners overlook because they really don’t understand its importance or know how to read it. You should be taking a close look at the following number on your balance sheet:
- Assets vs. Liabilities – Your Balance Sheet will tell you if your business has a positive net worth: are your assets (what you own) greater than your liabilities (what you owe)? You may feel cash-rich because you just collected on a large receivable balance, but if you have not yet paid the bills you incurred to perform that job, you shouldn’t go on vacation just yet. Without analyzing your Balance Sheet, you will have no idea.
- Retained Earnings – Contained in the equity section of your balance sheet are your Retained Earnings. Retained Earnings are the accumulation over the life of your business of annual profits, plus owner contributions, minus annual losses and owner distributions. What does this mean? If your current-year P&L shows a nice profit, but your Retained Earnings balance is either low or even negative, that means this one year is not indicative of how the rest of the years of your business have gone. Is this year a fluke (maybe you had one large revenue-generating project this year that is not expected to repeat), or are your current profits a good indicator of what to expect in future years?
- Current ratio (Current Assets-Current Liabilities) – Are your cash and receivable balances enough to pay your current bills, or are all your assets tied up in equipment that would not be easy to liquidate if times became tough?
- Debt to Equity (Total liabilities/Total equity) – How leveraged are you? You may have a nice profit this year, or even nice retained earnings over time, but if you are heavily indebted, can you weather the lean years?
Remember that your current-year net profit does not necessarily indicate the health and sustainability of your business. You need to take into consideration the bigger picture. If this is overwhelming, give us a call. We are always happy to meet with you to discuss your financials in detail.
Next month we will throw another financial statement analysis curveball your way by discussing cash-basis versus accrual-basis financial statement presentation. Stay tuned…
Recent market events have caused Mortgage Interest Rates to drop to historic lows. These low rates may make for a very opportune time to save some money on your mortgage.
Graph from the St Louis Federal Reserve
If you look at the history of mortgage rates for 30-year fixed mortgages you will realize how low these rates currently are. For 30 of the last 40 years rates have been over 7%. For the last 10 years, a mortgage rate between 5 – 6% was a great deal. Last Fall we saw rates in the mid 4% range. I just recently had a client come to me and say they just closed on a 30-year fixed mortgage at 3.875%.* Wow!
It is time to evaluate whether a mortgage refinance is right for your situation.
How would a mortgage refinance impact me?
You potentially have an opportunity to save on your household’s biggest expense. Consider the following example. The Robertson family currently has a $200,000 mortgage at 6% on a property valued at $250,000. The chart below shows their payment and overall savings if they refinanced to 4.5% or if they shortened the life of their loan by 10 years.
|Amount||Interest Rate||Monthly Payment||Length (Years)||Total Payback||Savings over Original Loan|
* Mortgage rates and terms change frequently and are subject to extensive credit, income, equity and other qualification guidelines.
- Monthly Savings In the example above, the Robertsons lowered their rate from 6% to 4.5% and saved $185.73 per month and $66,862.58 over the life of the loan. What would you do with extra money every month?
- Shorter Loan Term The Robertsons could choose to shorten the life of their loan by refinancing to a 20 year fixed mortgage at 4.25%. Their payments only increase by $39.37 per month, but they pay of their loan 10 years sooner and save $134,443.83 over the life of their loan. Would your plans change if you paid off your mortgage ten years early?
- Money for Retirement What if you used the savings from your mortgage refinance to shore up your retirement account? If we use the example above, and $185.73 in monthly savings was invested into an IRA or a retirement plan with a hypothetical return of 6% over 30 years, the IRA or retirement account would grow to $186,776. This is in addition to the $66,862 savings on the cost of your mortgage.
Emelia “Emmy” Frances was born to Marcy (our Accounting Manager) and Dave Palm (our Financial Advisor) on Wednesday, October 12. She weighed 7 lbs, 8 oz. Everyone is doing well. Congratulations Palm Family!