Contingency Fund Example

contingency fund example - change in a jarA contingency fund is cash set aside by a company or an individual to be used in the event of unforeseen need.  Unfortunately, unforeseen needs happen all the time, from the bill that was not expected to the loss of a major client.  A contingency fund example is a savings account with up to six months worth of revenue.

Liquid Money

Set up your contingency fund with liquid, spendable, money.  Cash under a mattress would be a good contingency fund example where the cash is easily spendable.  However, cash under a mattress would be susceptible to theft, fire, or flood; or some other sort of loss.  Cash in an FDIC insured account would be a better idea, as long as the amount of money is below the maximum insurable FDIC amount.

Gold, stocks, bonds, or other investment vehicle would not be liquid money as they must be converted to cash in order to be spendable.  The time involved for conversion may be a factor as the emergency event may be time critical.

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Retirement Age Coming Up?

retirement age - who says you can't stay active?I know my retirement age is coming, that is the age when people traditionally retire.  It is still nearly 15 years out, but I can hear it like the pounding of a drum.  I also see age discrimination.  It is harder and harder to get full time employment because people think you are not as sharp, that your career life is shorter, that you are bound to incur more medical expenses.  Truthfully, I am not sure what form age discrimination actually takes, but I can tell it is there.

Perhaps you want to retire but like most Americans, your savings is not enough, and will not be enough at the right time.  One solution many take is to increase risk.  While the promises of high returns are enticing, the downside could wipe out much of your savings.  Similarly, people take on risky behaviors to fill in the gaps.  The promise to get rich quick is always there, but almost always designed to take your money rather than provide you more.  So what reasonable options do you have to provide enough for you and your family into your golden years?

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Federal Tax Return: The Dread Of Filing My 1120

federal tax return - form 1120If you did not know by now, your United States C corporation 1120 federal tax return is due in April this year (2017) rather than March, assuming your business runs January through December.  Note that I am not a CPA so I am not an expert on all things taxes, I just know that Illinois and the Federal Government made this deadline change in 2017.  This does not mean that I am ready to file or pay, though I always have good intentions.

My main complaint with filing my 1120 is that it is busy work.  While it might be my only federal tax return that I file for the corporation, it is certainly not the only filing I make during the year, or the only paperwork that needs to be done.  I know, I know, the tax man needs his money, but it comes at the expense not only of cash, but of my time to do more financially productive things.  Here is an idea of all the busy work you must do with a corporation:

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Ideas For Success In A Network Marketing Business

ideas for success - Big Texan

The Big Texan

I was thinking of making the title “How To Succeed In Business” because perhaps these tips could be applied to any business and not just in network marketing (or MLM).  Business is business right?  The following are my ideas for success in a network marketing business, that probably could be applied to any business.

Have Your Own Brand

The first step to succeeding in business is to have your own brand.  If you are Joe, the XYZ distributor, you are promoting the XYZ company.  Create your own brand… perhaps Joe Smith, Network Marketing Coach, or Joe Smith Company; something to differentiate yourself from all the other distributors in your company.

Add Value

If you are just “You can buy from me too”, you are adding no value.  You must add some sort of value.  For instance, a while back we made great looking baskets and sold them as a product.  By reorganizing the product the way we did, we added value to the product.

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Stories Only Business People Would Understand

10004245_855682801114846_1636169639_n-300x300You have challenges that most people do not understand. You make an amount of money (revenue) that most people do not understand. They think you must be rich. But when it comes to spendable money, you have less than they do.

In fact, I feel a little poor right now.  I had three months without a project last winter.  I am behind on several things still.  But luckily my revenue, and profit after expenses, are decent enough to catch up at a pretty good clip.  Still, by the time I am done catching up, I may be between projects again.  I may be short on money to pay some bill, credit card, expense, in a manner that the creditor would approve of.

My best advice when it comes to finance is to make sure your margin is something you can live with through the good and the bad.  Your margin is your profit beyond expenses.  Or better put, profit divided by revenue.  Often we underestimate what our expenses are or do not include all expenses in our calculation.  Perhaps you do not include time off.  Or you do not include management expenses but only project expenses.  Best to calculate a margin you can live with and update it often when things become more tight than you expected.

What else?  I talked with my brother-in-law about paying myself once a year via payroll, but found the taxes withheld to be a bit high.  Who gets one paycheck a year?  Sometimes the guy at the top does.  The reason you might want to do this is to conserve cash until the end of the year when you really know what you can get away with paying yourself.

I also have a new appreciation for taxes.  For instance, the more you spend, the more you pay in taxes.  And I am talking about personal income taxes.  The more I spend personally, the more I am taxed.  It is better if my spending can be expensed to the business.  Or if I can save the money in a tax deferred account rather than spend it.  For those of you who receive a regular paycheck, this may be completely foreign to you… but when you have the option to pay yourself less, you really think about the money you spend.  You think that latte at Starbucks costs you $4.75?  Nope.  More like $7.50.  Think your car cost you $20,000?  If you paid in cash it is more like $28,000.  Every thing you spend that is not tax deductible has income taxes (as well as sales taxes) attached.

People sometimes think I am a little crazy to track my expenses like I do.  I am constantly trying to beat what I spent the previous week on travel.  Less on lodging, food, gas, everything.  I tried slowing down one week to improve my gas mileage.  I am usually buying food at the grocery, staying at the cheapest possible place… well I am paying all of my own travel expenses right now.  If I can save $50 a week even, this is a pretty good amount of money.  Think about it… that is $2,400 per year.  Good  business people watch their expenses like a hawk and make sure they keep improving the bottom line.  Why?  Because it is a very short distance between a good year and a bad one.

If you think all of this is mean to scare you non-business people, you would be wrong.  Being in business for yourself is very liberating.  You are the only one you have to answer to.

Handling A Cash Flow Crisis

I have been through cash flow issues over and over, so I thought I would share some of my wisdom.  I mean, where do you get cash when it seems like there are no options?

1. A cash flow issue is a problem

Consider your cash flow issue a problem and work to define what your problem actually is.  For instance, I know that I don’t receive any income until September.  What bills must be paid before then?  Perhaps you receive a variable commission and you think you’re going to be short.  Unless you can work through the numbers and find out when your problem starts and what amount will cure it, you will never be able to find a solution.

2. Planning is never perfect

While you can guess your receipts and when they will come, some may be short, some may be late, some bills may be larger, etc. so you must build in a small margin if possible.

3. Revise your plan as you get actuals

As you get receipts or pay bills, update your plan to reflect any changes.  If you fall more short than expected, you must come up with more of a solution.

4. Paying late is not the end of the world

Almost all bills can be paid a day late.  Some can be paid a month late.  Evaluate what you think you can drag your feet on and adjust your plan accordingly.  Talk with your creditors if you must and let them know what’s going on.  If you are paying significantly late, this would be a great idea.

5. Brainstorm some ideas for improving cash flow

So you’re still short?  What can you do to raise some cash?  Consider all options, even if you really don’t want to use them.  Think of ways to delay payments or quicken receipts.  Ask the bank for money.  Use factoring if possible.  Does somebody owe you money?

6. Implement your top ideas

See if your top ideas are feasible and add them to your plan.  See where you stand now.  Brainstorm again if needed.

7. Work for the long term

Once you have gotten through your crunch period, look for long-term solutions to improve your cash flow permanently.  Is your margin too low?  Are there expenses you should cut?

8. Expect the next time to be even worse

If you get through this cash flow issue and take no permanent corrections, expect next time to be worse.

Let me know if this advise works for you by commenting.

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How Cash Flow Can Get You

What would a successful business look like to you?  Would it be profitable every year, and every month?  What if I told you that you can have a profitable business that is short on cash?  Here is a good example of what it is like to have a cash flow crisis:

You take a job that pays you more than plenty enough to pay your bills, so say you make $20,000 per year and your bills are $10,000.  The only problem is that your employer will only issue you a paycheck when they have enough money to pay you.  So business is slow in January, you don’t get paid.  February is much better so they catch you up.  March is really good and they pay you on time.  April business is down so they delay paying you.  Get the picture?  So when you are caught up you have no problem paying your bills but when your employer is behind in paying you then you have a rough time paying your bills.

This example is exactly what happens during a cash flow crunch.  Generally your accounts receivable balloons and your payables are demanding attention.  If you’re like me, your payables are very small but your receivables are big… and you have to make payroll.  I am profitable each and every single month but if my client starts to slow pay, for whatever reason, then I start to feel the pressure.  The bank account dips to near zero and some important bills are just around the corner.

So why do customers pay better some times than others?  Often they are reacting to their own income and payables situation.  They are short on cash so they slow pay their vendors.  Sometimes it’s a matter of how fast paperwork moves through the organization.  Or sometimes the check is just lost in the mail.  All kinds of things happen.

What can you do to make the situation better?  When your accounts receivable (an asset) balloons, the only thing you can do is to increase your debt, sell more stock (or give yourself more money), float your accounts payable more, don’t issue payroll (owe your employees), or pay your payroll taxes on your credit card.  Perhaps you can come up with other solutions, but generally as assets increase you must increase liabilities to keep things in balance… unless of course you are high on cash.  That, my friends, is a nice problem to have but many businesses manage to retain only a bit of cash every month, much of which is taken by Uncle Sam at the end of the year.

I did apply for a business line of credit today to try to deal with the low cash situations.  Honestly, I thought I had my problem taken care of and then the check that was supposed to come this week didn’t.  It got lost or something.  So I must face reality and take some real action, not just hope for the best.  I have a week until payroll and I’m only a bit down, but then federal payroll taxes come just a bit after that.  I am concerned enough that I’m not going to get paid quick enough (because of lost check) that I had to find cash somewhere.

The worst thing about all of this is trying to explain to my wife the difference between not being profitable and having a cash flow problem.  The business of the business is being managed very well, but um just can’t make payroll, and um I need money to pay personal bills.  Crazy isn’t it?

The IRS Can Be Taxing

I would like to share with you a little experience I just had last night.  I received a notice from the IRS that I had filed my 1120 but they had not received payment, and now they wanted payment plus penalties and interest.  Now I had paid my 1120 payment via EFTPS, because you can’t just send a check with your 1120 form this year, you must pay electronically.  So like a good taxpayer of a corporation, I filed my 1120 with the Department of the Treasury and paid via EFTPS.

The notice had an 800 number on it to call if I felt some mistake had been made, so I called it.  After sitting on hold for 20 minutes, I talked with an agent who told me I had not paid.  Um, yes I did… I see it on my bank statement in front of me.  He said he did see my tax withholding payments from my payroll, but not the payment for the 1120.  Ok, I said, I’ll call EFTPS and see what happened to the payment.

I called EFTPS’s 800 number and was on hold for about 5 minutes.  Then I got an operator who told me I had paid and to disregard the notice.  I told her I didn’t think that was too wise since the Department of the Treasury thinks I haven’t paid.  So we both called the Department of the Treasury again and after 10 minutes the EFTPS lady said that she needed to go but gave me all the information I should need to talk with the IRS about my tax payment.

After 25 more minutes of sitting on hold I finally got through to an IRS agent again.  I went through the verifications and the description of my problem to where she promptly said: there it is.  She found my payment after doing some sort of update to the computer system.  She said the other agent probably did not do this.

So this is our tax dollars at work.  1 hour and 25 minutes of my time and countless resources on the other end to discover that I had actually made my payment.  Believe me though, this is much better than my experience with state government.  I had a situation once with my state sales tax…

Theoretical Implications Of The U.S. National Debt

As we begin flying missions with the UN in Libya this week, I am reminded of our national debt and how it isn’t getting any smaller with each bomb we drop.  And while this could be a very positive development for our security, I don’t see why our country has to bear the burden of policing Libya when we can’t afford it.  We are the spendthrift with the maxed out credit cards with one more emergency so we break open the new credit card.  And I can imagine that we are also going to provide financial help to Japan, and we should.  Yes I said it… we should help out Japan after this massive disaster that continues to unfold to historic proportions.  Well, I guess it was already historic, but this is truly unprecedented.  So we help out Japan and protect the people of Libya, then how about Iran and North Korea?  Where do we draw the line?

What is our national debt?

Let’s start with money.  The country prints a dollar bill, how does it get into circulation?  It either replaces a dollar bill or it is spent.

So let’s say we have a government of 10 people and we print $1000 each to pay them for gold that they dug out of the ground.  Now there are $10000 in IOU’s from the government and the government has $10,000 worth of gold.  The only reason the gold is worth $10,000 is because that is what we paid for it.  Because the government is holding gold to back the currency, we could be said to be on the gold standard or that the currency is backed with gold.  What if we took our printed money and bought food to give away to starving children in Africa (instead of gold)?  We then have currency outstanding with a face value of $10,000 and what is it backed with?  It’s backed with the holder’s confidence in the government.  You could probably understand what happens if the currency holders lose faith in the currency…

The other portion of our national debt is loans to the government, typically bonds and notes.  These are sold in return for currency and the government pays out interest payments to the holders of treasury bonds and notes.  Why does the government sell this debt really?  To take currency out of circulation so that it is worth more.  Government debt has an inherent value because of it’s interest payments, but is also somewhat backed by the holder’s faith in the U.S. government.  Government debt becomes worth much less if people become concerned that the government will default on its debt: when it is unable to pay its interest payments or unable to pay the face value of the debt when it becomes due.

In our example we have $10,000 worth of currency outstanding.  How can the government spend $10,000 more without increasing the amount of currency outstanding?  They issue $10,000 worth of treasury bonds, collecting the $10,000 outstanding, then spend $10,000 more.  They must now fork up $400 per year to their bond holders but there is still only $10,000 worth of currency outstanding.  They can collect taxes to pay the $400 per year to avoid adding currency into circulation.  What if there is a business person looking to borrow $10,000 to start a business?  Well, unless he can guarantee $400 in dividends, he is likely to lose out to the government that is guaranteeing $400 in interest.  That is one potential implication of national debt: that it takes away the incentive to invest in new businesses or in other more risky investments.

The effect on the individual

There are three ways for the government to fund it’s spending: Taxes, currency, and debt.  There may be more than this but for this discussion let’s just assume that these are the only ways.  So what happens when the government does not want to increase the amount of currency in circulation and nobody wants to buy its debt?  That’s right, taxes go up.  And as we know here in Illinois, taxes don’t go up just a bit when things are bad, they go up a lot.  Our state taxes went up by two thirds to cover the shortfall in the state’s budget as the state is trying to avoid new debt.  It hurts but not as much as it would hurt at the federal level.

Let’s say that your federal taxes went up by half.  That would be pretty big.  It would have a significant effect on your lifestyle.  Now extend that to the country.  People would spend much less than they do today, creating severe economic hardship within the economy.  I’m also thinking that would reduce income taxes the government takes in.  A vicious cycle begins.  But what does the government do instead of raising taxes this time?  Printing more money to improve the economy before it sinks into a depression.  This sounds familiar right?  The Federal Reserve buys government debt to put more cash into the system.  Then buys more and more to prevent the double-dip recession.  So life goes back to normal then what?  You have to take cash out of the system before it becomes inflation.

The China factor

China is a little wildcard that makes things interesting.  China holds a ton of our currency and debt.  Many Chinese businesses also hold our currency because the value is greater than their own currency.  That is on purpose.  The Chinese government depresses their own currency against the dollar by stockpiling dollars and U.S. debt.  As more dollars flow to China for the products they produce, the usual thing that should happen is that they should buy U.S. products.  Makes sense right?  You have U.S. dollars, you buy U.S. goods with them.  Or you trade them with other companies.  Or you sell them on the forex market for your own currency.  That would mean that somebody else wants to trade Chinese currency for U.S. currency.  That would be either the Chinese government or a foreign entity with Chinese currency because of something they sold to China.

What if you’re China and you want to grow your domestic businesses but want to keep foreign businesses out?  I know you’re thinking cheap labor, but eventually with enough wealth, local labor prices go up.  Another way to keep the goods flowing out and not flowing in is to keep your currency value low against foreign currencies.  You sell your currency for dollars, propping up the dollar because you are taking dollars out of circulation.  You can also use your dollars to buy U.S. government debt, transferring even more dollars overseas.  Eventually, though, China is going to want to do something with their dollars.  Buy the Euro?  Buy gold?  Spend money on social programs or military?  Regardless of the scenario, dollars come back into circulation.  Or U.S. government debt is sold, decreasing the value of the debt on the open market.  This would increase the interest rates of outstanding debt and of any new debt issued.  It would also rob from business investment because people could get a pretty good interest rate from U.S. Government debt.

I am not sure how much cash and how much debt China holds, but it’s a bunch.  It could easily depreciate our dollar creating inflation or increase interest rates dramatically.  The U.S. might be forced into cutting important programs and dramatically increasing taxes.

Hyperinflation

Hyperinflation is a situation where people lose confidence in the currency so they stop using it.  People with products to sell won’t trade for paper money, they require gold or another good to trade for.  Could hyperinflation happen in the United States?  While certainly possible, it is somewhat unlikely.  It is more likely to see double-digit inflation, but people will continue to have faith in the currency.  We have never experienced the fear and panic of hyperinflation, I am not sure people would really know what to do.  What do you do when money has no value?

What can be done?

With so much debt outstanding, the U.S. government is limiting it’s options.  It’s important for our national security to pay down our debts.  Just as important to our national security as a stable Libya.

Corporate Tax Time Is Here

When you are a C corporation in the U.S. and your fiscal year is the same as the calendar year, March 15 is your deadline to file your 1120.  And here it is the 7th of March, so there is no time like the present to talk about filing your 1120.  Unlike personal taxes, the 1120 is not really all that bad.  You generally copy over your profit and loss statement into the boxes.  Anything that doesn’t have a box, you add up and put in the other deductions field.  Then you do a little arithmetic, or just copy your totals from the P&L, and you have your net income.  You can now include your net loss from prior years against your income, then you have your income for taxes.

The amount of taxes is figured based on a table, or a straight 35% if you are a personal services corporation.  There is a lot of other information on these forms and in the instructions, so make sure to go over them or have an accountant look over your numbers.  Or better yet, have an accountant prepare them.  I am kind of a do-it-yourself’er and I want to know how to file my 1120, so I do it myself.  I spend a lot of time in the instructions and comparing to last year’s forms, so although it’s fairly straight forward, there are also a lot of gotchas to watch out for.

My thing this year is that I have to pay money on profit that is tied up in accounts receivable.  I have to file as a personal services corporation so they take 35% of my net income.  I mean, I am trying to be profitable and build up my cash reserves, then I am punished by having to pay taxes on it.  Having to file by the 15th and pay may be a bit of a challenge this year also as I am waiting on some payments from my client.  I guess we’ll see how it all works out.

I should be ready with my forms for the Federal Government and the state of Illinois by the 15th at least.  I just had to get over my fear of doing these taxes.  Or just the problem with being so busy right now, having just filed my personal returns, and now having to file my corporate returns.  Just one of those things I guess.

Do you fill out an 1120 every year and how do you take care of it?  Do you do it yourself or do you have an accountant do it?  If you have an S corporation, how is it different for taxes?

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