The Shaw Atlas
September 19, 2011
Welcome
Welcome to The Shaw Atlas, the monthly newsletter from Shaw & Associates, CPAs & Financial Advisors. We look forward to keeping you abreast of ever-changing tax codes, providing you with money saving accounting tips and illustrating proactive strategies to help you achieve the financial life you envision.
Please forward this newsletter to your family, friends and clients. On behalf of the entire Shaw & Associates team, WELCOME!
Newsletter contents:
Upcoming Tax Deadlines
The Super Committee and You – Disappearing Deductions May Lie Ahead
Cash Flow Versus Net Profit – Analyzing Your Financial Statements
The Ups and the Downs – What is Your Strategy to Handle Market Volatility?
Shaw & Associates Supports the Arts
October 17, 2011
Extended 2010 personal tax returns due
November 15, 2011
Extended 2010 tax returns for non-profits due
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The Super Committee and You – Disappearing Deductions May Lie Ahead
Kevin Shaw, CPA, PFS, CEO
How would you feel if you suddenly lost your mortgage interest deduction? What about the charitable contribution deduction or education credits? Sound ludicrous? These and many other deductions will be on the table when the “Super Committee” of 12 congressional leaders, six Democrats and six Republicans, meet in an attempt to resolve the national debt crisis this November. Here are several pieces of information that are important to understand as the plan unfolds.
Many believe that there are significant areas of spending that can be cut to help reduce the deficit and, therefore, lower the national debt. Unfortunately most of the discretionary spending cuts were addressed in the most recent “debt ceiling” negotiations and are only a small part of overall government spending.
This leaves three main areas to achieve deficit and debt reduction: entitlement programs (Social Security, Medicare, Medicaid, etc.), defense spending and additional revenues.
With both Democrats and Republicans in these negotiations, it is likely any compromise will include a balance of entitlement reform (spending cuts), defense spending reduction (also spending cuts), and additional revenues (raising tax rates).
Members of Congress, both Democrats and Republicans, do not want to raise taxes, especially when the economy is doing poorly and an election is right around the corner.
It is important to realize, and Congress does, that raising taxes on the “rich” will not provide the necessary funds. Even if you tax the “rich” 100% of their income, you will still not make a significant dent in the national debt and growing deficit.
Thus, to raise revenue without raising tax rates, the “Super Committee” will most likely concentrate on eliminating tax deductions and credits. It is very likely many of the deductions (mortgage interest, charity, education, etc.) that the middle class have become accustomed to will disappear.
No matter what side of the political spectrum you fall on, these negotiations will have a significant impact on all Americans. Please stay tuned as things progress as we keep you informed about the changes.
Cash Flow Versus Net Profit – Analyzing Your Financial Statements
Marcy Palm, Accounting Manager
“My profit and loss report shows a net profit of $30,000 so far this year. Why do I feel like I’m struggling to pay my bills?” This is one of the most common questions we receive from business owners and is an indicator that many individuals are not comfortable reading and interpreting financial statements. Financial statements can be very confusing, and many business owners have become business owners because they’re good at a particular trade or have a great idea, not because they have been taught how to manage the business side of their operations.
The profit and loss (P&L) is the first, and in many cases the only, place business owners go to assess the health of their business. An accrual-basis P&L is not intended to track cash flow, but rather it is to match revenues with corresponding expenses. Looking at the current-year P&L will not provide the full picture you need to understand your finances.
An accrual-basis P&L is intended to provide a different picture of your business than the balance in your bank account. In fact, many transactions appear in balance sheet accounts that do not affect the P&L at all. Owner distributions or draws are among the largest reasons your cash flow may not agree with your P&L. If you take your compensation as a draw rather than as payroll, your P&L will not be affected, but your bank account will be.
Fixed asset purchases are another great example of an expenditure that will not affect you P&L. If you spend $5,000 on new equipment for your business, your bank account balance is reduced by $5,000. That $5,000 is not recognized as an expense on your P&L at the time of purchase. Instead, depreciation expense is recognized in equal monthly portions over a five-year time period to reflect the useful life of the new equipment. Your cash flow has decreased by $5,000 at the time of purchase, but your P&L has not changed.
If your business invoices clients (rather than a retail operation that receives payment at the time of purchase), you most likely have an accounts receivable balance. Your P&L will show income, but you may not have collected the cash, resulting in a net profit on your P&L and an empty bank account. Debt repayment also will cause a discrepancy on your P&L. The interest portion of debt payments is deducted on your P&L as an expense, but the principal is not.
Confused? This is a very complex topic and we are here to help and educate you. Many clients analyze financial statements on an annual basis, around tax time. I recommend that you look at these reports more frequently. This equips you to make smart decisions, identify trends before they become problematic and manage your business more effectively. We will continue our discussion of financial statements and what they mean for your business in next month’s newsletter. In the meantime, give us a call with any questions you have to better understand this information.
The Ups and the Downs – What is Your Strategy to Handle Market Volatility?
Dave Palm, Financial Advisor
Are you scared to open your mail and look at your investment statements? Do you feel like you have been on a roller coaster ride over the last 10 years only to end up at the same place you started? Has your investment strategy provided the desired results you wanted? At Shaw & Associates, we firmly believe in addressing the volatility with both an offensive strategy to grow your money and a defensive strategy to protect your money.
We find most investors are utilizing only an offensive strategy, based on historical performance of the markets over time. The prevailing logic behind this methodology is that buying a diversified portfolio today will provide returns at some point in the future. This offensive strategy is focused on growing the value of the account.
What happens to your money when markets go down like they have over the last 10 years? You need a defensive plan to protect your investments. Typically, diversification across different market sectors was thought to be your “defense”. When one sector is down, another is probably up. However, how does that protect your money if sectors over the entire market are down?
What if you addressed the ebb and flow of the market by understanding that there will be time periods when the markets go up and can grown your accounts and time periods when they may go down. It makes sense to put your “offensive” team on the field when it is time to grow and then send out the “defensive” team to protect you from losing money or to minimize loss during periods of market instability.
How do you accomplish this? We talk with clients about various strategies available and how that fits with their investment style and goals. Each strategy is going to perform differently in different market environments, but it is important to understand where the growth component comes in and how protection is provided. Ensuring that our clients have both an offensive and defensive strategy is key to providing the foundation of their financial success. Does your strategy include these elements?
Shaw & Associates Supports the Arts
Shaw & Associates is excited for our sixth year of sponsorship with OpenStage Theatre. We are proud to be associated with such a talented and award winning theatre group who provides unparalleled, high quality shows in an intimate theatre setting.
The new season started on September 9, with seven shows planned through June 2012. Learn more at www.openstage.com.