March 2, 2017
Some business owners make major decisions by relying on gut instinct. But investments made on a “hunch” often fall short of management’s expectations.
In the broadest sense, you’re really trying to answer a simple question: If my company buys a given asset, will the asset’s benefits be greater than its cost? The good news is that there are ways — using financial metrics — to obtain an answer.
Perhaps the most common and basic way to evaluate investment decisions is with a calculation called “accounting payback.” For example, a piece of equipment that costs $100,000 and generates an additional gross margin of $25,000 per year has an accounting payback period of four years ($100,000 divided by $25,000).
But this oversimplified metric ignores a key ingredient in the decision-making process: the time value of money. And accounting payback can be harder to calculate when cash flows vary over time.
Discounted cash flow metrics solve these shortcomings. These are often applied by business appraisers. But they can help you evaluate investment decisions as well. Examples include:
A mathematical approach
Like most companies, yours probably has limited funds and can’t pursue every investment opportunity that comes along. Using metrics improves the chances that you’ll not only make the right decisions, but that other stakeholders will buy into the move. Please contact our firm for help crunching the numbers and managing the decision-making process.
The old saying goes, “Nothing is certain except death and taxes.” Sometimes a premature death can actually increase taxes. How? It harms the effectiveness of certain estate planning techniques. A self-canceling installment note (SCIN) can be a solution.
If your business sponsors a 401(k) plan for its employees, it’s important to keep up with tax developments related to such plans. For example, the Tax Cuts and Jobs Act and the Bipartisan Budget Act both included 401(k) plan changes you need to know about.
Trying to decide where to retire? To avoid unpleasant tax surprises, it’s critical to consider state and local income, property, sales and estate taxes.