The ‘Personal’ in Personal Finance
Picture this: Two buddies hiking through the woods, when suddenly, out pops a massive bear. One guy takes off like a rocket – survival instincts kicking in. The other, oddly composed, yells after him, “What’s the point? You can’t outrun a bear!” The sprinting hiker retorts, “I don’t need to outrun the bear, I just need to outrun you!”
Sometimes, competition is the key to success. Beating your colleagues in the company fantasy football league makes you the water cooler hero. Getting in on a high-flying stock will make you a star at wedding conversations. Those feel-good victories definitely have their place, and may save your life in a bear attack.
But here’s the twist: When it comes to your personal financial goals, it’s not about beating anyone. It’s not even about the S&P 500. Imagine someone beating the S&P 500 by 10% a year, but at age 83 they’re sitting on a park bench, struggling to pay their electric bill. What did the outperformance bring them? Bragging rights won’t keep the lights on.
So when it comes to your personal finances, remember:
- Your goals, your rules: Whether it’s buying a house, retiring in comfort, or traveling the world, your financial goals are all about you. What your neighbor or coworker is doing is irrelevant. Focusing on your individual needs and aspirations will help create a personalized investment plan rather than chasing someone else’s dream.
- The risk factor: Remember, not all investments are created equal. Trying to “win” by picking riskier stocks might get you those sweet bragging rights…for a while. But if it jeopardizes your long-term financial stability, is it really worth it? Picking investments based on your risk tolerance keeps you focused on the bigger picture.
- Time is on your side: Investing is a long game. Sure, seeing your portfolio outperform the market feels great, but what if those gains come with a side of heart-palpitating-volatility? A slow and steady strategy tailored to your needs sets you up for sustainable, long-term growth.
So, the next time you start comparing your portfolio to your buddy’s, stop. Remember, it’s not a competition. Focus on building a financial future that secures the life you want to live. After all, what good is bragging about outperforming a bear market if you can’t pay your bills?
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
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Business Succession Planning: Sequence of Control
Whole Foods Market is now famous as the upscale supermarket chain that was acquired by Amazon for close to $14 billion. However, Whole Foods Market began with humble beginnings. In 1978, John Mackey and Renee Lawson borrowed money from friends and family to open a small natural food store in Austin, Texas. As the store expanded to open more locations and Mackey and Lawson admitted two additional partners and designated specific tasks to each partner, such as finance, human resources, and sales. This process continues today where, although Whole Foods Market is a multinational food chain with 500 locations, each regional manager has the autonomy and flexibility to decide on suppliers and pricing.
The proverb “too many cooks spoil the broth” applies to the management of a business. Thus, establishing the sequence of control as part of a succession plan ensures that the company continues to operate effectively and efficiently – especially if the business is bequeathed to children who do not work in the family business.
The sequence of control of a business succession plan outlines the decision-making process of a closely-held, family business once the owner is determined to be incapacitated or deceased. Although this can be emotionally tolling, the sequence of control is essential for the continuity of the business. The following are questions that arise when planning the sequence of control.
What is the definition of incapacitated?
You undoubtedly know of instances in which the patriarch of a family suffered from dementia or a form of memory loss. You are probably familiar with cases in which people took advantage of individuals suffering from Alzheimer’s disease. Such undue influence can arise if a business owner can no longer exercise prudent business reasoning and judgment. Accordingly, the business succession plan should define “capacity” and specify who makes the determination, which can be a physician or a member of the clergy.
Who assumes control?
It may seem irresponsible to vest absolute control to the child or children who work(s) in the business; however, it may be imprudent to allow children who do not work in the company to be involved in the decision-making process of the business. A business administrator who requires approval for the day-to-day operational decisions in the ordinary course of business may be unable to perform basic administrative duties of the company, especially if consent is needed from an adverse party. Nevertheless, a proper business plan may require a vote of all members for significant business decisions, or decisions that may alter the business structure or significantly impact the business.
How can I secure oversight over the business administrator?
Proper internal controls are always recommended to promote accountability and prevent fraud, but it is even more critical when one heir controls the family business. The business succession plan can provide for a salary and fringe benefits or performance-based compensation, methods for removing or replacing the administrator, an arbitrator to adjudicate disagreements or disputes among family members, and an exit strategy or process of dissolving the business or partnership.
How can I provide for myself and my spouse while incapacitated?
If you are considered an owner of the business during your lifetime or so long that your spouse is alive, your succession plan can stipulate that you receive periodic distributions. However, a fixed withdrawal may prove to be insufficient for your medical needs or general cost of living. Conversely, the business may be dependent on its working capital that is now being distributed and accumulated in your personal checking account.
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Is your nonprofit monitoring the measures that matter?
Do you want to control costs and improve delivery of your not-for-profit’s programs and services? It may not be as difficult as you think. First, you need to know how much of your nonprofit’s expenditures go toward programs, as opposed to administrative and fundraising costs. Then you must determine how much you need to fund your budget and weather temporary cash crunches.
4 key numbers
These key ratios can help your organization measure and monitor efficiency:
Percentage spent on program activities. This ratio offers insights into how much of your total budget is used to provide direct services. To calculate this measure, divide your total program service expenses by total expenses. Many watchdog groups are satisfied with 65%.
Percentage spent on fundraising. To calculate this number, divide total fundraising expenses by contributions. The standard benchmark for fundraising and admin expenses is 35%.
Current ratio. This measure represents your nonprofit’s ability to pay its bills. It’s worth monitoring because it provides a snapshot of financial conditions at any given time. To calculate, divide current assets by current liabilities. Generally, this ratio shouldn’t be less than 1:1.
Reserve ratio.Is your organization able to sustain programs and services during temporary revenue and expense fluctuations? The key is having sufficient expendable net assets and related cash or short-term securities.
To calculate the reserve ratio, divide expendable net assets (unrestricted and temporarily restricted net assets less net investment in property and equipment and less any nonexpendable components) by one day’s expenses (total annual expenses divided by 365). For most nonprofits, this number should be between three and six months. Base your target on the nature of your operations, your program commitments and the predictability of funding sources.
Orient toward outcomes
Looking at the right numbers is only the start. To ensure you’re achieving your mission cost-effectively, make sure everyone in your organization is “outcome” focused. This means that you focus on results that relate directly to your mission. Contact us for help calculating financial ratios and using them to evaluate outcomes.
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Does your nonprofit need a CFO?
Your not-for-profit’s ability to pursue its mission depends greatly on its financial health and integrity. If your nonprofit is growing and your executives are struggling to juggle financial responsibilities, it may be time to hire a chief financial officer (CFO).
Core responsibilities
Generally, the nonprofit CFO (also known as the director of finance) is a senior-level position charged with oversight of accounting and finances. He or she works closely with the executive director, finance committee and treasurer and serves as a business partner to your program heads. A CFO reports to the executive director or board of directors on the organization’s finances. He or she analyzes investments and capital, develops budgets and devises financial strategies.
The CFO’s role and responsibilities vary significantly based on the organization’s size, as well as the complexity of its revenue sources. In smaller nonprofits, CFOs often have wide responsibilities — possibly for accounting, human resources, facilities, legal affairs, administration and IT. In larger nonprofits, CFOs usually have a narrower focus. They train their attention on accounting and finance issues, including risk management, investments and financial reporting.
Making the decision
How do you know if you need a CFO? Weigh the following factors:
- Size of your organization,
- Complexity and types of revenue sources,
- Number of programs that require funding, and
- Strategic growth plans.
Static organizations are less likely to need a CFO than not-for-profits with evolving programs and long-term plans that rely on investment growth, financing and major capital expenditures.
The right candidate
At a minimum, you want a CFO with in-depth knowledge of the finance, accounting and tax rules particular to nonprofits. Someone who has worked only in the for-profit sector may find the differences difficult to navigate. Nonprofit CFOs also need a familiarity with funding sources, grant management and, if your nonprofit expends $750,000 or more of federal assistance, single audit requirements. The ideal candidate should have a certified public accountant (CPA) designation and, optimally, an MBA.
In addition, the position requires strong communication skills, strategic thinking, financial reporting expertise and the creativity to deal with resource restraints. Finally, you’d probably like the CFO to have a genuine passion for your mission — nothing motivates employees like a belief in the cause.
Consider outsourcing
If your budget is growing and financial matters are becoming more complicated, you may want to add a CFO to the mix. Otherwise, consider outsourcing CFO responsibilities to a CPA firm. Contact us for more information.
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Don’t let a disaster defeat your nonprofit
Most not-for-profits are intensely focused on present needs, not the possibility that disaster will strike sometime in the distant future. But because a fire, flood or other natural or man-made disaster could strike at any time, the time to plan for it is now.
You likely already have many of the necessary processes in place — such as evacuating your office. A disaster or continuity plan simply organizes and documents your processes.
Identify specific risks
No organization can anticipate or eliminate all possible risks, but you can limit the damage of potential risks specific to your nonprofit. The first step in creating a disaster plan is to identify the specific threats you face when it comes to your people, processes and technology. For example, if you work with vulnerable populations such as children and the disabled, you may need to take extra precautions to protect your clients.
Also assess what the damages would be if your operations were interrupted. For example, if you had an office fire — or even a long-lasting power outage — what would be the possible outcomes regarding property damage and financial losses?
Make your plan
Designate a lead person to oversee the creation and implementation of your continuity plan. Then assemble teams to handle different duties. For example, a communications team could be responsible for contacting and updating staff, volunteers and other stakeholders, and updating your website and social media accounts. Other teams might focus on:
- Safety and evacuation procedures,
- IT issues, including backing up data offsite,
- Insurance and financial needs, and
- Recovery — getting your office and services back up and running.
Planning pays off
All organizations — nonprofit and for-profit alike — need to think about potential disasters. But plans are critical for some nonprofits. If you provide basic human services (such as medical care and food) or are a disaster-related charity, you must be ready to support victims and their families. This could mean mobilizing quickly, perhaps without full staffing, working computers or safe facilities. You don’t want to be caught without a plan. Contact us for more information.
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