Spring is the time of year that calendar-year-end businesses issue financial statements and prepare tax returns. This year, take your financial data beyond compliance. Here’s how financial statements can be used to be proactive, not reactive, to changes in the marketplace.

Perform a benchmarking study

Financial statements can be used to evaluate the company’s current performance vs. past performance or against industry norms. A comprehensive benchmarking study includes the following elements:

Size. This is usually in terms of annual revenue, total assets or market share.

Growth. How much the company’s size has changed from previous periods.

Profitability. This section evaluates whether the business is making money from operations — before considering changes in working capital accounts, investments in capital expenditures and financing activities.

Liquidity. Working capital ratios help assess how easily assets can be converted into cash and whether current assets are sufficient to cover current liabilities.

Asset management. Such ratios as total asset turnover (revenue divided by total assets) or inventory turnover (cost of sales divided by inventory) show how well the company manages its assets.

Leverage. This identifies how the company finances its operations — through debt or equity. There are pros and cons of both.

No universal benchmarks apply to all types of businesses. It’s important to seek data sorted by industry, size and geographic location, if possible.

Forecast the future

Financial statements also may be used to plan for the future. Historical results are often the starting point for forecasted balance sheets, income statements and statements of cash flows.

For example, variable expenses and working capital accounts are often assumed to grow in tandem with revenue. Other items, such as rent and management salaries, are fixed over the short run. These items may need to increase in steps over the long run. For instance, your company may eventually need to expand its factory or purchase equipment to grow if it’s currently at (or near) full capacity.

By tracking sources and uses of cash on the forecasted statement of cash flows, you can identify when cash shortfalls are likely to happen and plan how to make up the difference. For example, you might need to draw on the company’s line of credit, request additional capital contributions, lay off workers, reduce inventory levels or improve collections. In turn, these changes will flow through to the company’s forecasted balance sheet.

We can help

When your year-end financial statements are delivered, consider asking for guidance on how to put them to work for you. A Financial Advisor can help you benchmark your results over time or against industry norms and plan for the future.

Is your business ready to seek funding from outside investors? Perhaps you’re a start-up that needs money to launch as robustly as possible. Or maybe your company has been operating for a while and you want to pivot in a new direction or just take it to the next level.

Whatever the case may be, seeking outside investment isn’t as cut and dried as applying for a commercial loan. You need to wow investors with your vision, financials and business plan.

To do so, many businesses today put together a “pitch deck.” This is a digital presentation that provides a succinct, compelling description of the company, its solution to a market need, and the benefits of the investment opportunity. Here are some useful guidelines:

Keep it brief, between 10 to 12 short slides. You want to make a positive impression and whet investors’ interest without taking up too much of their time. You can follow up with additional details later.

Be concise but comprehensive. State your company’s mission (why it exists), vision (where it wants to go) and value proposition (what your product or service does for customers). Also declare upfront how much money you’d like to raise.

Identify the problem you’re solving. Explain the gap in the market that you’re addressing. Discuss it realistically and with minimal jargon, so investors can quickly grasp the challenge and intuitively agree with you.

Describe your target market. Include the market’s size, composition and forecasted growth. Resist the temptation to define the market as “everyone,” because this tends to come across as unrealistic.

Outline your business plan. That is, how will your business make money? What will you charge customers for your solution? Are you a premium provider or is this a budget-minded product or service?

Summarize your marketing and sales plans. Describe the marketing tactics you’ll employ to garner attention and interact with your customer base. Then identify your optimal sales channels and methods. If you already have a strong social media following, note that as well.

Sell your leadership team. Who are you and your fellow owners/executives? What are your educational and business backgrounds? Perhaps above everything else, investors will demand that a trustworthy crew is steering the ship.

Provide a snapshot of your financials, both past and future. But don’t just copy and paste your financial statements onto a few slides. Use aesthetically pleasing charts, graphs and other visuals to show historical results (if available), as well as forecasted sales and income for the next several years. Your profit projections should realistically flow from historical performance or at least appear feasible given expected economic and market conditions.

Identify your competitors. What other companies are addressing the problem that your product or service solves? Differentiate yourself from those businesses and explain why customers will choose your solution over theirs.

Describe how you’ll use the funds. Show investors how their investment will allow you to fulfill your stated business objectives. Be as specific as possible about where the money will go.

Ask for help. As you undertake the steps above — and before you meet with investors — contact a Financial Advisor. They can help you develop a pitch deck with accurate, pertinent financial data that will capture investors’ interest and help you get the funding your business needs.

If you’re an investor in mutual funds or you’re interested in putting some money into them, you’re not alone. According to the Investment Company Institute, a survey found 58.7 million households owned mutual funds in mid-2020. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

What are the basic tax rules?

Let’s say you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax. However, most taxpayers will pay a tax rate of only 15%.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One challenge is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

When does a sale occur?

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. Although it may not seem like it, each time you write a check on your fund account, you’re making a sale of shares.

How do you determine the basis of shares?

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then, add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis:

• First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
• Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on April 1, 2018.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
• Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.

As you can see, mutual fund investing can result in complex tax situations. Contact a Tax Advisor if you have questions. They can explain in greater detail how the rules apply to you.

I have written a lot about leadership. How to lead, what traits make a good leader, and tips to becoming a better leader. But what really is leadership? It is often described as a lofty ideal or strategic concept that is hard to quantify. Academics and social scientists have debated the idea of leadership for years, but what does leadership look like on a day‐to‐day basis?

President Dwight D. Eisenhower once said that “the job of getting people really wanting to do something is the essence of leadership.” If you talk with a lot of managers, they often distill the concept of leadership into the simple idea of getting employees to do things they would rather not do. Maybe it’s returning to the office two days a week after working remotely for the last two years. Maybe it’s launching a new company platform that will change how your business and employees operate. Maybe it’s something as simple as asking an irritable clerk to greet customers with a smile. If the work of leadership is the

work of change, then overcoming the natural tendency to resist change has to be at the top of every leader’s agenda.

So how do business leaders persuade employees to do things they would rather not do? Social scientists have developed two popular techniques that leaders can consider. Each can work in the right situation, although neither technique translates perfectly from the ivory‐tower world of research into the realities of corporate life. Both techniques are worth considering when leaders seek to commit to the hard work of making a big change.

The “Foot‐in‐the‐Door” Technique

First coined in 1966 by Stanford professors Jonathan Freedman and Scott Fraser, the “Foot‐in‐the‐Door” technique refers to a strategy for encouraging a person to agree to a large change by first asking them to change something small. The idea is that when a person agrees and completes a small request, they are much more likely to agree to a larger request, which they would have otherwise rejected. The theory is that people often develop a sense of commitment and confidence when completing a small request that makes them more enthusiastic about agreeing to the next, more significant request. In other words, the path to big change is paved with lots of small steps.

As an example, charities sometimes use the Foot‐in‐the‐Door technique in fundraising efforts. An organization may ask a person to donate a small amount to a cause. Later, the organization will come back and ask the donor if they would be willing to donate again, but increase their amount this time, or donate on a regular basis.

The “Door‐in‐the‐Face” Technique

The second persuasion technique was coined in 1975 by Arizona State University professor Robert Cialdini who found that when confronted with an extreme first request, which will definitely be rejected, a person is then much more likely to agree to a second, more reasonable request. The aim behind the “Door‐in‐the‐Face” technique is that you would ask someone to do something much bigger than what you actually have in mind, and after they refuse your initial request, your real objective seems tame by comparison.

It is important to realize that the Door‐in‐the‐Face approach should be seen as more of a concept than a routinely viable leadership tactic. Most managers will probably agree that regularly trying to bluff your employees with phony goals as a way to hit the targets you really have in mind, is not good leadership. Instead, try thinking of it as a manager setting aspirational goals, especially in organizations that suffer from inertia, to encourage people to consider innovations they would not have tried otherwise.

The next time you are faced with trying to convince reluctant employees to embrace a significant change, consider the lessons of the Door‐in‐the‐Face technique and the Foot‐in‐the‐Door technique. Determining which one will work for you depends on your leadership style, the situation you face, and your organization’s culture. Interestingly, a 2005 analysis found that there were no significant differences in effectiveness between these two techniques. Remember, there is no “right” way to implement change, but having the right tools and techniques can help.

With the baseball lockout finally at an end, we can actually feel Spring in the air. Aside from being the great American pastime, baseball allows advisors to abuse sports clichés to the fullest. From “make sure all your bases are covered”, to the great, “Singles and doubles as opposed to homers”, and finally, the ultimate, “we’re in the seventh inning of the bull market”, baseball clichés make for useful tools. Using these clichés may help clients stay on track and make sure nothing comes out of left field. They also provide a great lesson, shared by Warren Buffet via Red Sox great Ted Williams.

In his book ‘Science of Hitting’, baseball legend Ted Williams breaks down the strike zone to seventy-seven squares. He explains how his batting average is seriously impacted depending on where the pitch lies within that zone. The position of the pitch inside those seventy-seven squares can range from one that is his sweet spot – where he can hit .400, to a spot far outside his comfort zone, where a bad pitch could drop his batting average down as low as .230.

Standing at bat, Ted didn’t really have a choice about his swing. If he avoided the pitches that would most likely result in a lowered batting average, he would be called out on strikes. Although he would have preferred a “fat pitch”, he didn’t have the luxury of waiting for it.

With his remarkable story-telling ability, Mr. Buffet describes how as investors, we have a decisive advantage over baseball players. When it comes to investing, there are no called strikes. The only way to strike out is by making a bad investment. By ‘avoiding the pitch’ you may miss out on a great investment – but you won’t lose money. And of course, we have the luxury of waiting things out and staying on the lookout for that “fat pitch” of an investment.

Nevertheless, though Buffet’s baseball analogy is cleverly and accurately drawn from the Ted Williams theorem, the reality is that the economy really did throw us a real curveball. Inflation remained very low for many years in the face of various market and the Federal reserve changes. Sitting on one’s cash while waiting for the fat pitch wasn’t the worst choice an investor could make. But now, with inflation rates rising like an Aaron Judge moonshot homer, cash has become trash.

This certainly doesn’t mean that, as investors, we should just go out and swing at balls in the dirt. Rather, the savvy investor needs a proper plan in place so that his money acts as the devoted worker it is meant to be. If an investor wants to make it to the big leagues, he must make sure to craft an investment plan that is resilient and secured against any unexpected changes in the economy.