Our plans don’t always survive the first shot of battle, but a little bit of foresight can go a long way toward success. Here are some of the top trends business professionals are watching carefully.
It’s sometimes hard to see the forest for the trees, especially when you’re focused on the day-to-day operations of your business. As we transition into a new year, however, it’s important to evaluate where you’ve been and where you’re headed. Here, our experts in business and financial services comment on the big-picture trends that concern them most.
Challenge No. 1: Slow Investment Growth
Patricia A. Kinnare-Musachio, Kinnare & Associates Financial Consultants LLC, Schaumburg
Area of Expertise: Investment adviser specializing in investment and income portfolios for individuals and businesses. Member of National Association of Health Underwriters, SIPC and FINRA.
It’s been a record-setting year for the stock market, but lingering uncertainties remain in 2014. The Affordable Care Act (ACA) is a leading concern, and its problems and delays are causing a ripple effect throughout the economy.
“There are too many moving parts that will not work, and therefore, they will have to rewrite it,” says Kinnare-Musachio. “Because of that, the market will continue being uncertain because they’re rewriting rules, and you’re already seeing the effects.”
In any environment, health care and taxes adversely impact the bottom line. But with continued confusion about ACA, business owners are struggling to manage their variables, especially as they pertain to their cash strategies.
“If anybody knew when they would get sick, they’d plan for it,” says Kinnare-Musachio. “But we don’t know. The lack of factual information is what’s been holding people back for these past few years now – the constant threat of taxation, the constant threat of changes in health insurance. No one knows what it’s going to cost. If you know the numbers, you can sit and write it down and figure it out. When you don’t know the numbers, you just sit here with your hands up in the air – you don’t know what to do.”
Despite the ACA, Kinnare-Musachio expects to see gradual business growth throughout the coming year. The stock market is recovering, the bond market is slowing and interest rates are likely to begin rising – all good signs for the patient investor.
“Right now, if anything, I tell people that if you have some extra cash, leave it in cash until after the first of the year, because there’s going to be a pullback,” she says. “That’s when I’d buy into the market, not at these high prices.”
For that matter, Kinnare-Musachio expects CDs – certificates of deposit – to begin offering a measurable return, as the Federal Reserve adjusts its monetary policies and interest rates begin rising. It may be a few years before investors receive 2.5 percent interest, but CDs are returning to their role as a viable cash strategy.
“If you have some money you don’t want to tie up for long-term, purchase a CD but keep the savings short-term,” she says. “Put some money in for six months, and some in for a year, and just keep renewing the certificates. Don’t go out further than one year, because this is an interest rate-rising environment and will remain so for many years.”
It doesn’t appear that another recession is on the horizon, Kinnare-Musachio says, but it’s important to remember that this is still an economic recovery.
Things will happen slowly but surely, she says. Wages are likely to increase, but not dramatically. Hiring should pick up, but not a lot. Where possible, squeeze your margins just a little more.
“I would try to stick with small enhancements, like small raises, maybe matching a greater amount to 401(k),” she says. “I’d hold back on these decisions until you see how the health care law is going to affect you, because that may be where the extra dollars go, to still support your employees with health insurance. It could be so much more valuable if you put the dollars into the health insurance benefit for a family.”
For all of the distractions happening this year, it’s important to remain focused on company goals. Plan ahead for what you want to have happen, but don’t forget about contingency plans, in case things don’t play out as expected. Consider your what-ifs and your worst-case scenarios.
“Play out the scenarios to some degree – what’s our weakness, where are we exposed, and if this happens, what can we do?” says Kinnare-Musachio. “If you play out those scenarios, you’ll be prepared, and hopefully nothing will happen that you weren’t hoping for. But if you don’t put effort into that area, you can get blindsided, and guess what? It just threw off your entire year.”
The Takeaway: Health care will affect your bottom line, and will inevitably trickle down to your savings and investment strategies. Offset these changes by thinking lean.
“If people can save just a little more, they’ll find they’re in a much better place than if you continue with whatever your habitual spending and commitments are,” says Kinnare-Musachio. “Everyone has to, whether you’re a household or a business, you just have to find a little bit more to shave off for yourself. It’s going to put you in a more solid position.”
Challenge No. 2: Expiring Tax Credits
Tom Perez, senior tax manager, Sikich, Naperville
Area of Expertise: Accountancy, focusing on tax compliance and consulting for middle-market clients, primarily privately owned businesses, their owners and high net worth individuals.
Changes are coming to your business-related taxes, as two major federal tax deductions lose their potency, says Perez.
The first is the IRS’ Section 179 deduction. A fixed-assets deduction typically used for purchases such as machinery and computer software, this federal credit offers less help in 2014.
“In 2013, those expensing limits were quite favorable,” says Perez. “You could deduct up to $500,000, on up to $2 million of qualifying fixed asset purchases. In 2014, the limits are dropping down to $25,000 on $200,000 of equipment.”
Even as incentives under the Section 179 deduction decrease, the “bonus depreciation” incentive is also set to expire. Bonus depreciation allows a current write-off of 50 percent of the cost of new fixed assets during the year it’s placed in service. It created an incentive for businesses to invest in new equipment and product lines, even when conditions were less than ideal.
“If you’re purchasing $200,000 of equipment with a five-year useful life, you could deduct $100,000 in the first year,” says Perez. “Only the $100,000 of remaining cost will be capitalized and depreciated. And, unlike the Section 179 deduction, which is limited to taxable income, bonus depreciation can create or increase a taxable loss.”
Based on current trends in Congress, Perez says there’s no guarantee of bonus depreciation returning soon, and he doesn’t foresee an increase in Section 179 limits in the near future. The best strategy is to deploy your investments during the 2013 tax year. “It has to be on site, in place, ready to go,” he says. “It doesn’t have to be in use, but it must be ready to use.”
But deductions aren’t the only incentive to watch. Perez is also monitoring the research-and-development tax credit, which expired in 2013. The tax credit generated an incentive for companies that developed better, faster, cheaper or stronger systems, and it applied to most aspects of the production cycle, from manufacturing process to product packaging.
“When people think research and development, they think big businesses that are coming out with major technological breakthroughs,” Perez says. “But many smaller businesses can benefit from it, too. Any time you are developing new products or processes, there is a potential for the tax credit. What you are developing doesn’t have to be new to the world, just new to you.”
Without these deductions, extra cash can be deferred to other sources, Perez says. A few examples might include investing more in retirement accounts and charitable donations, paying down debt, or pursuing business growth that plays to the company’s core competencies.
If business growth is the way to go, Perez says, consider new ways to serve your existing customers. In many cases, that will mean smarter processes and a leaner business structure, and may involve a “reshoring,” or return of operations that are currently performed abroad.
In other cases, the investment plays to your company’s competitive advantage. “Glass manufacturing is a great example,” Perez says. “They seek to have as much inventory on hand as possible, so they are best positioned to turn around an order fast. If you don’t have the right materials on hand when an order comes in, the business will be lost.”
The Takeaway: While there’s not much good news for tax deferments or expanded tax benefits, continue focusing on tax planning. Think ahead by making capital expenditures during the 2013 tax year and by focusing on your business’ competitive advantage.
“You never want to tax the tail to wag the dog,” says Perez. “You don’t want to make a decision strictly because of the tax advantage it will provide. But you also don’t want to miss the opportunity to structure a deal to garner the best tax result. My best advice is to reach out to your tax adviser before you enter a transaction.”
Challenge No. 3: Insurance Rates
Tom Graceffa, COUNTRY Financial, Rolling Meadows
Area of Expertise: Licensed financial representative offering commercial, life, health and auto insurance, and a full range of financial products.
Perhaps the most unavoidable obstacle for small-business owners is health insurance. As the business requirements in ACA take full effect this coming year, uncertainty abounds.
What is certain is that prices will go up for most employees, as risk is spread across a wider pool of individuals, says Graceffa. Expect the basics of your health plans to change, too. ACA requires every insurance plan to carry 10 components, or “essential health benefits,” covering everything from outpatient and emergency room care to maternity, mental health and preventive care.
“That’s new to a lot of people,” says Graceffa. “Before, you could just pay for whatever you had – you paid based on pre-existing conditions, things like that. Now, anything is fair game, and all these plans have to adapt.”
So do employers, many of whom are now required to provide health insurance to full-time employees and their families, or else pay a “shared responsibility” tax. Businesses with fewer than 50 full-time employees are exempt, although many choose to offer a plan anyway. Graceffa finds that many employers are adjusting their provisions accordingly.
“Now, with the cost so high, some businesses just can’t provide insurance,” he says. “So, they’re giving their employees an allowance to put toward their health care. Before, it might have been an internal policy, where your employee would still pay for a little bit of it and you would pay for some yourself. Now, some of them are sending employees out to find their own policy, which is why there’s a lot of confusion.”
It’s distracting and confusing for business owners, but insurance providers like Graceffa are ready to help. Many have taken extensive training in ACA regulation, and COUNTRY has hosted seminars to help small-business owners stay ahead of changes.
“It’s not going away, so don’t avoid it,” says Graceffa. “Face it head-on, talk to many people, talk to the right people, and get some different opinions. Not everyone’s right. Talk to one or two financial advisers, and see what your best options are, and I think that’ll relieve a lot of stress and worry for business owners.”
And, there’s still good news for other aspects of your insurance rates.
“In 2013, we didn’t really have very many big natural disasters in North America, and with that, we didn’t have nearly as many insurance claims,” says Graceffa. “So hopefully, we will see some homeowners’ premiums going down next year.”
Now may also be a good time to update company vehicles. Automobile technology is improving safety, which translates into lower insurance risk.
“Although safety features may increase the price of a new car, the chance of the car saving your life or the life of others is increased,” says Graceffa. “As more and more people begin to purchase safer vehicles, we would hope to see car insurance rates generally decreasing, as a result of the lower projected number of accidents on the road. If you’re looking for a new fleet vehicle, safety is a very important consideration.”
The Takeaway: Expect continuing changes and higher rates for health insurance. However, some cost offsets may occur in 2014, thanks to fewer natural disasters and improving auto technology.
“The reality is that a lot of premiums are going up for health insurance,” Graceffa says. “Not many are going down. Maybe the older generations could see decreases, but only because the risk is spread across so many people. Really, it’s just determining your own financial situation and budgeting for this.”
Challenge No. 4: Government Regulations & Taxes
Jean Gaines, president, Geneva Chamber of Commerce
Area of expertise: Small-business growth, retention and marketing
Geneva’s chamber is all about small businesses. In fact, about 95 percent of the organization’s members have five or fewer employees. As its membership looks toward the coming year, conditions and expectations remain relatively unchanged, says Gaines.
“Our businesses are still competing in a sluggish economy,” she says. “Certainly, our small businesses have a difficult time keeping up with all of the government mandates and changes in regulations.”
For Geneva’s chamber members, it’s not just government interference and uncertainty that’s distracting – it’s also competition with Internet retailers, fluctuating inventory and hesitant consumers, says Gaines.
Geneva businesses aren’t alone in their hesitations. Small businesses across the country say they’re most concerned with government regulation, taxes and poor sales, according to a December trends report by the National Federation for Independent Businesses. The advocacy group’s latest survey showed that more than 20 percent of respondents were most concerned with either taxes or regulation. Another 15 percent were most concerned with poor sales.
Despite the gloom-and-doom feelings, Geneva businesses are finding good news in their town, and they’re expecting incremental growth this coming year. The chamber recently opened a new visitors center for area tourists, and early reports on local Christmas sales appeared to be strong.
“I think the biggest distraction is all of the negative news,” Gaines says. “We need to remind ourselves of how successful we are, how fortunate we’ve been this past year, and stay positive and focused. Quality service is still key to success.” A little planning goes a long way, too. With so many lean business operations, where employees are expected to do more with less, it’s increasingly difficult to look ahead. Try to look ahead anyway, says Gaines.
“We simply do not have enough time to spend planning,” Gaines says. “We are busy implementing current programs, but we would love more down time to invest in future plans.”
It’s also important to consider the role of marketing, especially for business growth. Too often, companies don’t consider the importance of self-promotion.
“They don’t plan to set aside enough money for advertising and marketing,” she says. “The challenge there is that you don’t have enough money to get the word out and tell people that you’re there. It tends to be the last thing you think about.”
The Takeaway: Stay focused on your priorities, and look at the positive side. Be sure to celebrate the areas in which your business and your staff are furthering goals and improving sales.
“Stay true to your plan,” says Gaines. “You need to be sure to follow your plan. Continue to think conservatively.”