THE TEN BIGGEST FINANCIAL MISTAKES PEOPLE MAKE

Most financial planners agree about the ten most common financial planning errors people make.  Here’s the list.

  1. Failing to plan retirement financing.
  2. Failing to carry an “umbrella” policy to protect against risks not covered in other policies.
  3. Investing too much in one stock, usually the employer’s stock.
  4. No disability insurance or too little disability insurance.
  5. Holding investments which are not productive.
  6. No will or an outdated will.
  7. Failing to use a short term trust to save taxes.
  8. Investing in unwise or unnecessary tax shelters.
  9. Relying on variable income to meet fixed expenses.
  10. Failing to coordinate estate planning with personal financial planning.

BETER WAYS TO CHECK CREDIT

Today, more than ever, it’s vital not to take unnecessary credit risks.  In addition to Dun & Bradstreet’s credit information services, you can get even more complete information from credit agencies that specialize in certain industries.  Retailing, the garment industry, and automotive parts are some of the businesses with credit agencies that offer reliable information developed by industry experts.

Do Your Own Credit Investigation.

A call to the customer’s bank can be very helpful.  A loan officer will usually give you an idea of the company’s average account balance, the company’s borrowing history, whether loans are secured or unsecured (unsecured loans indicate excellent credit standing), which of the company’s assets have been used as collateral, and whether the bank has liens against key assets such as accounts receivable.

You can also ask the company for a financial statement.  Many companies will not give this information to credit agencies to keep it from their competitors.  However, if a company knows your inquiry is legitimate and its credit is good, it should be willing to supply a financial statement and any other credit information you need.

You can also ask the company for the names of some of its suppliers.  Most suppliers will gladly tell you how much credit they extend the customer and whether the customer pays promptly.

You lawyer can do a lien search of the county clerk’s records for liens that might be placed on a company’s assets because of failure to pay its bills.  IRS liens will also show up in a search.


HOW TO LOSE A CUSTOMER

Don’t contact the customer: When customers don’t hear from you, they don’t think of you.

Change salespeople frequently: It takes time for a salesperson to gain a customer’s confidence.  Frequent sales personnel changes make it difficult to establish a good relationship with a customer.

Resist change: Customer needs change, and if you stick with the same old policies, you won’t be able to satisfy their changing needs.

Ignore financial responsibilities: Some sure ways to lose a customer are slow or arbitrary credit adjustments, budget overruns and incorrect invoicing.


BETTER CASH MANAGEMENT

SPEED UP RECEIPTS

  • Charge interest on late payments
  • Require partial advance payment on large order
  • Speed up order processing and billing procedures

      SLOW DOWN DISBURSEMENTS

  • Renegotiate unit costs and order quantities
  • Eliminate slow-moving inventory

      UTILIZE CASH BETTER

Invest temporary excess cash in a money market account


BUYING INSURANCE? THE EIGHT WORST MISTAKES YOU CAN MAKE

  1. Not updating your insurance needs. Consult with your insurance agent once a year, preferably in January when you begin to assess your tax situation.
  1. Setting your deductible too low. Insurance premiums drop dramatically when you raise the deductible.  Check it out.
  1. Not taking advantage of group plans. Business and professional organizations to which you might belong frequently offer group health or disability coverage at substantially lower premiums than anything that’s available from an agent.
  1. Not shopping for the best cost. You comparison-shop for a car, so why not do it for insurance?  Just because you’ve always dealt with one insurance company doesn’t mean your getting the best deal.
  1. Failure to have disability insurance. It’s three times more likely that you’ll be disabled before age 65 than it is that you’ll die.  Disability insurance is particularly important for professionals and self-employed individuals.
  1. Not considering insurance as part of your personal financial planning. For example, life insurance can be used to generate interest income or to reduce estate taxes.
  1. Doing business with a disinterested insurance company agent. You’re much better off dealing with an independent agent who’ll shop around for the best coverage at the lowest cost.
  1. Buying insurance you don’t really need. Examples: life insurance for children, travel insurance that probably duplicates coverage you already have, collision insurance for an old car, and car rental insurance that might be included in your homeowner’s policy.

HOW TO IMPROVE YOUR CHANCES OF GETTING A BUSINESS LOAN

Regardless of whether interest rates are high or low, the ability to borrow is an important factor in running a successful business.  Whether you need to borrow money now or in the future, it=s good business practice to know what information a banker or other lender will need in order to grant your loan request.

This information falls into two broad categories.  The first is general information about you, your business product or service, and your plans for the business.  While some banks will gather this information from a loan application, it=s wise to prepare a clear, written presentation of the general facts about you and your business.

The second type of information a lender needs is financial information.  This includes several key documents, each of which plays an important role in the lender=s decision.

General information

You=ll probably be asked to supply some of this information on the loan application form, but you can often provide additional facts that will have a favorable impact on a lender.  That=s why it=s good strategy to prepare a written presentation that gives a lender a clear description of you and the business you are in.

Here=s a checklist for the general information you should include in your written presentation:

  • Your management background, abilities, and accomplishments as well as those of your key management personnel.
  • A general description of the nature of the industry or business you are in.
  • The sales potential of your product or service. This should include your short-term and long-term marketing plans and how you intend to handle any problems or opportunities which your business faces.
  • An explanation of exactly how the money you are borrowing will be spent, whether the amount is sufficient for your immediate or long-term purposes, and how the borrowed funds will contribute to your firm=s well being.

In short, your general information presentation should tell the lender who you are, what your business has done and what you expect to do, how you intend to reach your goals, and, of course, how the money you are borrowing will help you achieve those goals.  If you make a logical presentation of this general information, you=ll set the table for a clear understanding of your financial information.

Financial information

It=s critical that you present all financial information in a formal, professional manner.  A sloppy financial presentation is almost certain to result in the rejection of your loan request.  The following financial documents should be prepared by your accountant:

  • A personal financial statement for you and other principals of the business or other guarantors of the loan. Be sure that your personal financial statement includes the amount of money that you yourself have at risk in the business.
  • A balance sheet which shows your company=s assets and liabilities for your most recent accounting period. It=s important that the balance sheet includes the amount of the company=s present indebtedness and the terms of repayment of any outstanding loans.  Copies of recent company tax returns should be attached to the balance sheet as supporting material.
  • An income statement which shows the company=s profit performance over a specific period of time.
  • A cash flow projection which includes the prospective loan funds and other sources of money and shows how the money will be used.
  • A sales forecast which projects and preferably allocates sales by type of customer over a given period of time.
  • A current ratio position which shows the relationship between the company=s current assets and current liabilities.

The role of your accountant

It=s important to involve your accountant in both the preparation of all financial documents and in your meetings with the lender.  Your accountant can supply whatever degree of assurance about the financial information that your lender may require.  The degree of assurance will vary, depending on matters such as the lender=s previous experience with you, the size of the loan you=ve applied for, and how well the bank knows your business.

For example, audited financial statements may be required if you are requesting a large loan and the lender has not had any previous experience with your company.  In other situations, a review of the financial information by your accountant may be sufficient, particularly if the lender has had previous dealings with your company.

It=s generally recognized that banks credit standards vary among banks, some banks have tighter credit standards than others.  But if you=re properly prepared and make a solid presentation, your chances of getting that vital business loan will be greatly improved.


TEN MAJOR PERSONAL MONEY MISTAKES TO AVOID

  1. Paying more taxes than you have to.  Keep good records so you get all the deductions you’re entitled to.  Shift income to a year when you’ll be in a lower tax bracket.  Shift deductions to a year when you’ll be in a higher tax bracket.
  2. Not preparing for the unexpected.  Set aside at least two months income to protect yourself and your family from serious cash flow problems in the event of an emergency.
  3.  Not putting your money to work.  Take all excess funds out of no-interest or low interest checking and savings accounts.  Put the money to work in liquid but higher yielding places such as mutual funds.
  4. Not setting financial goals.  If you don’t have goals, you can’t make a plan to achieve them.  Write down where you want to be and when.  Then start making a plan.
  5. Making investments based on tips.  No matter how well-intended, a tip is the worst reason to make an investment.  Investment decisions made under pressure are also unwise.
  6. Failing to have your will updated.  Your situation changes along with that of your heirs.  Your will should always reflect your present circumstances.
  7. Not establishing credit in the name of each spouse.  No one likes to think about death or divorce, but not having credit can be much more than a minor inconvenience.
  8. Borrowing money when it’s not necessary.  Not all interest is fully deductible.  Interest deductions have been sharply curtailed.  Don’t assume tax benefits when you consider borrowing.
  9. Not keeping organized financial records.  Poor recordkeeping can cost you significant tax savings, cause you to make bad financial decisions, and leave your family with unnecessary problems if you become ill or die.
  10. Failing to put a yearly tax plan to work as early as possible.  Year-end tax planning can be costly.  The sooner you put your tax plan to work the greater your savings.

BETTER MANAGEMENT

Superstars and hotshots aren’t your most valuable employees.   Over the long haul, it’s the reliable workhorses who are your best workers.  Yes, every company needs bright, well-educated people to contribute fresh new ideas and winning innovations.  But these employees often lack the fundamental skills and experience that’s needed to keep a business running smoothly.  Steadiness and reliability may not be flashy, but they’re essential to the health of any successful company.

Studies show that the best way for employees to learn is through collaboration, not competition.  Although high school and college students often learn better because of competition, workers learn better by sharing exercises in training programs.  Retention level in increased for everyone because workers see their fellow employees as helpers not rivals.  The best on-the-job training comes from co-workers rather than managers.


HIGH LABOR TURNOVER MEANS HIGHER TAXES

Most businesses know that high labor turnover is expensive.  Hiring and training employee replacements is costly and time consuming.  Productivity drops because new employees are inefficient until they learn how to do their jobs properly.

However, one cost that employers are often unaware of is increased payroll taxes.  When a new employee is hired, social security and federal and state unemployment taxes are paid on a new wage base ($90,000 FOR 2005), the wage base for federal unemployment taxes is $7,000.

As an example of how these additional payroll taxes can add up.  Assume that you are an employer who pays state unemployment taxes at the usual rate.  At the end of the first six months of the year, you replace a top management employee who earns $180,000 a year.  Despite the fact that you’ve already paid the maximum social security and state unemployment taxes for the original employee, you now have to pay these same taxes for the replacement employee.  The net effect is that you will pay payroll taxes for two employees earning $90,000 for the year rather than the maximum social security and state unemployment tax for the first $90,000 earned by one employee.  Your total payroll taxes will now be a least $13,770 instead of almost half of what you would pay for one employee.

While the additional payroll taxes are not as substantial for lower paid employees, they can still represent a sizable cost increase, particularly if you have a large work force.

In addition, most states determine an employer’s unemployment tax rate by the employer’s labor force turnover record.  High turnover can result in a substantial increase in an employer’s tax rate as well as in worker’s compensation premiums and certain other employee plan payments.

Although the tax cost of high labor turnover often goes unnoticed, it can add up to a substantial sum of money.


BETTER MARKETING

Disciplined direct marketing.

 Many businesses are finding that direct marketing offers a productive alternative to other channels of distribution.  Many of the guidelines for direct marketing are the same as those for any other successful sales effort, but there’s one cardinal rule the direct marketer shouldn’t ignore:  Develop one winning product at a time and focus on it.  The best direct marketing doesn’t confuse the prospect with various alternatives.  It spotlights one product and concentrates on its benefit to the customer.

Don’t restrict your direct marketing efforts to gaining new customers.  In fact, the customers who have already bought your product are your best bet for direct marketing.  You can go back to them again and again.  And when you choose the focus for your initial direct marketing effort, you should be thinking about a followup – additional products that will appeal to those who have already responded to your first offer.

In short, it’s OK to promote a group of related products, but sell them one at a time.

Conduct your own focus group.

Market researches know that one of the best ways to get actionable marketing information is through a focus group – a forum in which a professional researcher poses questions to a group of potential buyers, distributors, or consumers.  The questions asked in a focus group are usually different from those asked in a survey, where “yes/no” or multiple-choice answers are the norm.  In focus groups the questions are open-ended.  The person conducting the research doesn’t look for specific responses, but asks for general opinions.

You don’t need a costly formal focus group facility to do this kind of research.  There’s no reason, for instance, why you can’t gather a group of your customers over lunch or late afternoon wine and cheese.  In this informal setting you can invite, for example, suggestions about improvements or get reactions to ideas for new products.  Your customers will probably be flattered that you’ve asked their opinion and you’ll get a perspective on your business that may surprise you.