The Reality Business

Archive for September, 2010

To explore whether profit-maximization is a good strategy to follow for a tax paying, for-profit credit union (e.g., a Canadian credit union), we’ll set up two hypothetical credit union scenarios.

Credit union 1 is managed to maximize profit so interest margin is maximized, fee revenue is maximized, operating expenses are managed, the credit union pays tax on its profits and then distributes patronage to members based on the final profitability of the credit union for that year (Assume Assets = ,000)

Credit union 2 is managed to sustain a sufficient proportion of capital to assets to support anticipated future growth, interest margin is not maximized, fee revenue is not maximized, operating expenses are managed, the credit union pays tax on its profits (albeit lower profits than the Scenario 1 credit union above) and does not distribute patronage. The view at this credit union is that patronage has already been more efficiently delivered through more favourable interest rates and product pricing to members who use the credit union’s products and services. (Again, adopt Assets = ,000).

To grant us to do some calculations, let’s adopt that the regulator dictates that the credit union must maintain a level of capital of 8% of assets (8% * ,000 = 0). If we adopt that Scenario 1 credit union plans to grow 8% next year, they would need to add another of capital to maintain capital at 8% of assets. If we adopt Scenario 2 credit union will grow 12% because of its favourable product pricing then it will need of additional capital.

Even though these are very simplified and contrived examples, looking at the summary calculations at the bottom of this article, we can see that, all else being equal, Scenario 1 credit union destroys of value through profit maximization and the ensuing excess taxation that results. Maximizing revenues and profit and then returning patronage (dividends) to members after the fact has led to income before tax being higher than necessary and therefore tax is higher than necessary. As well, in Scenario 1, only of Net Income was required to sustain capital so there is of excess profit that the credit union Board must decide what to do with. As explored in a previous post, one wonders if credit union suppliers (e.g., management and employees) would be tempted to claim this excess as some sort of “profit share”?

The Scenario 2 credit union provided better loan interest rates, better deposit rates, and lower fees to its members, paid sustainable amounts to credit union suppliers all the while maintaining a sustainable level of capital and minimizing value destruction through taxation.

The point here is that profit maximization is not the correct strategy for a credit union.

“If you think like your competitor you are not really thinking at all” – John Scully

Credit unions have learned over time to think like banks and other financial institutions. They’ve done this through comparing themselves to banks as competitors but also because they have a regulatory regime that demands it. Measures like ROA, efficiency, ROE, RAROC, etc., and regulatory stakeholders like the deposit guarantee corporations drive credit unions down a path of thinking like banks. These types of measures and regulatory pressures might be relevant to shareholders who wage capital to banks and to the financial analysts that serve those capital providers but, based on the example above, they might take credit union management and directors’ eye off the ball. They can be distractions because they measure aspects that might be irrelevant to credit unions (or at least less relevant than they are for banks).

The correct measures for a credit union might establish to be a flip-flop of traditional bank measures. For example, instead of trying to drive efficiency toward 0, perhaps the benchmark should be something close to 1. Scenario 2 above has the worst efficiency of the two scenarios but we’ve already shown it to be the better outcome in terms of value delivered. And, perhaps ROA should be targeted close to 0 instead of trying to drive it above 1 because that would mean the credit union did not over-extract loan interest from the credit union owners and then have to pay more tax than necessary and wrestle with patronage allocation quandaries (not to mention the credit union wouldn’t have provided the ideal prices doable to its members as customers).

Again, Scenario 2 above has the worst ROA of the two scenarios but we’ve identified it as the more desirable outcome for the credit union’s members. Even if the Scenario 1 credit union pays out some or all of the excess profit as patronage which would reduce its corporate tax bill, the members would then be paying tax on the patronage payment so Scenario 2 is the truly better value generator for the membership.

Think about the perversity of charging “too much” loan interest to a member (interest which is not tax deductible for the member) and then paying back the excess “profit” from that interest to that member as patronage which the member now has to pay tax on. There is no question that value is destroyed for that member. And, if the credit union decides to pay some of that excess to employees as “profit share”, the picture only worsens for the credit unions’ members.

So, how does a credit union determine the “right” amount of profit? The right amount can be estimated as:

? = { [Assetst0] * g * k } / (1 – T)

where:

? = required annual profit to ensure sufficient growth of capital to support expected growth in assets

Assetst0 = credit union assets at time 0

g = expected or desired growth rate in assets for the upcoming year

k = minimum capital stipulations as a percentage of assets

T = the tax rate applicable to the credit union for the level of profits anticipated

The above equation recommends that there is only one right amount for the credit union. Of course, credit unions deal with many uncertainties in a given year so it will be important to use the outcome of the above equation as an estimate. Varying the various aspects of the equation would wage insights into the sensitivity of the outcome to the various inputs. We won’t explore a sensitivity analysis here — we only want to raise the notion of sensitivity analysis being a prudent practice when using the above equation.

Profit-maximization is not the correct strategy for a credit union; value-maximization to the credit unions’ members is the only doable correct strategy.

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Recently one of my clients asked me what I thought about a book on tax lien investing. The book that he asked me about is one that I do advocate on my web site. The study of the book is Profit by Investing in Tax Liens, by Larry Loftis. The problem with books about investing in tax liens and tax deeds is that apiece say is very different and there is no book in print that Iâ??m aware of that does justice to apiece say in the U. S. My goal in this article is to give you a short review of some of the books that Iâ??m familiar with and point out the pros and cons of apiece one.

Letâ??s begin with the book already mentioned, Profit by Investing in Tax Liens by Larry Loftis. Mr. Loftis is an attorney in Florida, and I do find that the ideal books on tax lien investing are written by lawyers that are also tax lien investors. Mr. Loftis has personally bought tax liens in nine says and the District of Columbia. In addition he has also either attended tax income or bid on over-counter liens or deeds in four other states. He or a member of his staff has either interviewed or spoken with tax understanding officials from all 50 states. This is probably the most comprehensive and accurate book on the market that I am aware of. Itâ??s great for anyone that is just getting started in tax lien or tax deed investing and wants to know the basics. The drawback is that for some says there is very tiny information given. As I stated earlier, there is no one book that does justice to apiece state. What I like about this book is that the author didnâ??t just look up the say statutes in apiece say (even though he is a lawyer), but contacted county tax offices in apiece say to find out what actually takes place. I give this one two thumbs up for beginners and one thumb up for experienced investors in tax lien investing.

Another book written by an attorney is The 16% Solution, by Joel S. Moskowitz. Though this book is written by an attorney, it was first published back in 1992, and last copyrighted in 1994, more than 10 years before Profit by Investing in Tax Liens. What I like about this book is that it does not attempt to cover both tax lien and tax deed investing but concentrates on only tax lien investing. As tiny as four years ago, this was the only book that I could find in print on tax lien investing. Even then, though, this book was already outdated. Not only does apiece say have different rules when it comes to tax lien and tax deed investing, but these laws and procedures are constantly changing. This book is still good to read and have in your library, but only as an introduction to tax lien investing. Any say specific information is outdated (it doesnâ??t give too much say specific information anyway), and any contact information is probably no good. I give this book one thumb up for beginners, no thumbs up for experienced investors in tax lien investing.

Iâ??ve heard that the say of New Jersey is the second most favourite say for tax lien investing. I donâ??t know if thatâ??s still true, but I do know that NJ has the most complicated law and procedures for tax lien investing. It is also one of the most profitable and most competitive says to invest in. Until 2005, there was no book in print that discussed tax lien investing in New Jersey accurately. Thatâ??s the year that Tax Liens: The Complete Guide to Investing in New Jersey Tax Liens, by Michael Pellegrino, was published. Mr. Pellgrino isnâ??t just an attorney in New Jersey; heâ??s an attorney that specializes in tax liens. He specializes in tax lien foreclosures and related litigation, so he really knows the ins and outs of tax lien investing in New Jersey. Even though this book doesnâ??t cover everything for the experienced investor, it does cover what you need to know to get started with tax lien investing in New Jersey. What I love about this book is that it concentrates on tax lien investing in one state, thus it covers what happens in that say more thoroughly than any of the other books about tax liens. This is a must have for anyone that is thinking of investing in New Jersey tax liens and a good reference for experienced investors in that state. I give this book two thumbs up, for both beginning and experienced investors in New Jersey.

When I first started investing a few years ago there was only one book in print about tax lien investing. This day there are several. There are more acquirable than were mentioned here in this article. I want to caution you before you purchase other books that are written on this subject. There is only one other author I know of that I would advocate even though I havenâ??t read her books. That author is Lillian Villanova and the reason that I would advocate her books is that I know she is an experienced tax lien investor. In fact, I believe that she makes her living with tax liens; she is experienced in more than one state, and has taught others how to invest in tax liens. This is important because there are a few people out there writing books on tax lien investing that have limited experience. They purchase a couple of tax liens, do a tiny research and then write a book. This is not the kind of advice or knowledge that you need in order to purchase profitable tax liens. You want to learn from a real expert, who knows what the pitfalls are and can steer you away from them. Maybe thatâ??s why all of the books that I advocate on my web site are written by attorneys.

Well, tax season is here and bookkeeping website design might not be rating very high on this month’s to-do list since your calendar is looking somewhat full. How is it you work so hard apiece tax season but your company just doesn’t feel like it’s growing as swiftly or as smoothly as it should?

You already realize what needs to be done. You’ve heard it lots of times from loads of different coaches. You need to market off-season services, but how exactly do you achieve this?

This brings us back to your website. There’s a number of ways your site can help you sell services beyond tax preparation, but there are three features in particular that can help.

I’m sure you already have at least an “Our Services” page, or superior yet; a whole section where apiece service has it’s own page. Personally I like you give apiece service it’s own page, but using a single page is OK as long as you are using bookmark links to make it simple for visitors to find what they’re looking for. Nearly apiece bookkeeping website design does this, of course. The mistake many bookkeeping websites make is one of content rather than design. Many websites go to great length to explain what a service is and how it works, but this is really relatively unimportant. What matters is how that service benefits the client! Long drawn out descriptions will bore the visitor, and if you make them too technical you could even make them feel stupid. All the visitor really cares about is how that service can benefit them, so concentrate on that. Don’t adopt that your prospect is visiting during business hours, and grant for some folks being just plain shy. Add a contact from to the bottom of apiece page to make it simple for people to contact you.

Another great tool for cross selling off season bookkeeping services is your online newsletter. Again, nearly apiece bookkeeping website design already has this feature, but there is another fundamental mistake that most bookkeeping and CPA websites make. Many bookkeeping newsletters spend far too much time speaking about taxes. If you add even a single article or two about your off-season services you’ll find your newsletter becomes a much more useful marketing tool. Use the same principle of accenting benefit over procedure, of course, and don’t give away too much information. All you need to do is present the benefit. This will position you as the expert to turn to when it comes time to actually use the information.

The least obvious cross-season marketing instrument on your website might not be as obvious, but it’s often more effective. Offer a massive library of “free reports” or “financial guides” and write them in a similar style. While these pages won’t generate quite as much traffic as your service pages or newsletter, but the leads they generate will be white hot! Not only are people on these pages displaying a large amount of initiative simply by looking over this information they very likely already use your services to some degree or another, so the bookkeeping professional they turn to will nearly certainly be you!

Make sure this section is neatly organized into categories that grant visitors to oppose their interests without having to muddle through a bunch of information that doesn’t apply to them. Categories should include topics like “Business Owners”, “Individuals”, “Life Events”, and “Investments”. Include a “send this article to a friend” link on apiece report page. You never know when a visitor will refer a guide that applies to one of their friends or relatives, and this can turn into a tremendously strong referral.

Just having Free Reports and Services pages isn’t enough. The design of your bookkeeping website needs to be reinforced by first-class copy. Check your website and make certain you not only have these features but also that the content on them is designed to really sell these services.

Brian O’Connell is the owner and founder of CPA Site Solutions, one of the country’s leading web companies dedicated solely to bookkeeping website design.

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There are often situations when small, medium and even massive companies find themselves in a tough spot as far as revenues are concerned. They are at a loss of funds or finance to undertake a project that is expected to give good results. In such a scenario the option acquirable for financing is accounts receivable financing.
Accounts receivable financing is a secured loan for which accounts receivables are pledged as collateral with financial organizations. For small businesses it acts as a boon to help improve their cash flow. Generally small businesses find it hard to receive finance from a bank as they have less credit rating to show because they are yet in a developing stage. Unless finance is available, it is not doable for business to grow at a good pace. A timely finance from finance companies or even banks proves to be helpful for their growth. They often have customers who do not pay before 30-60 days. In such cases the accounts receivable are given as security to a financial organization and finance is received.
Any company can opt for accounts receivable finance. It is very favourite with transport or trucking companies, construction companies, manufacturing companies, textiles, staffing and engineering and other small businesses. It benefits medium business and any other business that needs finance on a regular basis. These companies would need to have accounts receivable in hand. The companies who can remember for such finances would need to have accounts receivables from credit worthy customers.
Moreover, aging of accounts happen to very massive extent. They might have regular contracts with organizations with good credit history or government organizations. Some financial organizations also think about the period for which the credit is given, which they like should be within 30- 60 days. Companies which are experiencing modest speed of growth and find it hard to keep the cash flow constant find the accounts receivable finance very beneficial.
These finances ensure growth and stability of a company. The process is very swift and you can get the finance in a very short period of time. As finances are acquirable on a timely basis, the companies might be healthy to get some advantage of reduction of overheads. The processing time of this type of financing is very less. Some of the companies also have online submission, and invoice submission systems which are then verified and checked and finance is wage in less than 2 days also which is a very timely help for these companies which need finance to undertake their regular activities. One more benefit that you get from such a finance function is that the accounts of the companies are managed superior as proper records and collection on the due date is very important. For the small companies it is an additional benefit that the business in itself is well organized to make the entire process cost effective.
Accounts receivable financing is acquirable to all those organizations that are in important need of finance or cash and are caught up in tricky situations wherein customers make payments very late. Companies find this financing highly beneficial to keep the growth of their organization on track.

Businesses this day are becoming more and more complex. As a direct result, international firms and enterprises are visaged with a new set of challenges each single day.

To help them remain competitive amid these changes, many firms rely on analysts whose job it is to examine an organizations structure, efficiency, or profits.

In private industry, an international business consulting analyst is simply called a management consultant. Besides examining the problem-ridden organizational structure of a business, the analyst will also propose ways to improve these weak spots.

For instance, your company might be small but it is rapidly growing and you need help improving your methods of managing and controlling inventories as well as expenses. An international business consulting analyst who has expertise in just-in-time inventory management would be the professional to hire.

How about if your company is a massive one and you are in the process of creating a new division? You might still need to hire a business consulting analyst who will help reorganize the corporate structure and eliminate duplicate or nonessential jobs.

An international business analyst might be working independent of any management consulting firm. And even management consulting firms might range in size from single practitioners to massive international organizations that cater to an international market.

Some analysts might specialize in specific fields of industry while others take a more general approach. So you might end up hiring an analyst who will handle health care or telecommunications and a different one who will be responsible for human resources, marketing, logistics, or information systems.

The Work Process

Once an international business consulting analyst is contracted for his or her services, the first thing he or she does is to define first the nature and extent of the problem. This is the initial phase of an international business consulting analyst’s job where they are required to examine relevant data, including annual revenues, employment, or expenditures.

They might also need to interview managers and employees as well as notice the different operations in the specific area of business.

After identifying the problem, the international business consulting analyst will then come up with sound proposals and solutions to address the problem. To prepare these solutions, the international business consulting analyst takes into statement the nature of the organization, its relationship with peers in the industry, and its internal organization and structure. Often, an international business consulting analyst will acquire insight into the problem by building and solving mathematical models.

Afterwards, the analyst will report his or her findings as well as suggestions to the client. Generally, these suggestions are submitted in writing but some international business consulting analysts might make oral presentations, depending on client preference.

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