Bauerle Blog

Love and marriage may go together like a horse and carriage, but taking a smart approach to money can help make the ride much smoother. Matrimony creates the potential for both great opportunities and difficult problems, depending on the approach taken. Here are three money-management tips that married couples should consider:

1. Balance and clarify your goals. Many couples have a tendency to tiptoe around financial issues because of the great potential for conflict. Yet, if you openly communicate about where you’d like to go, you’re more likely to get there.

Each spouse needs to talk about his or her individual financial goals and financial wishes for the marriage. Where do you share goals? Where do you differ? Ultimately, you want to balance your goals to put your household in the most secure, advantageous position while allowing each spouse a reasonable opportunity to pursue individual objectives.

2. Find ways to save. It’s a familiar refrain: He wants to save, she wants to save, yet, together, they just can’t do it. Granted, saving money isn’t easy — but, in today’s unpredictable economy, a healthy savings account is an absolute necessity to financial security. And, indeed, saving should play a prominent role in your monthly budget (which, in and of itself, is also a financial necessity).

How can you better ensure a percentage of your income gets earmarked “savings,” not “disposable”? Review your expenses regularly and take turns paying bills, so both parties have a clear grasp of how much money is available. In addition, require consensus on big-ticket purchases, such as vehicles and home electronics. Impulse buys can be devastating.

3. Understand the “marriage penalty.” Many people assume that, by getting married, they’ll save on federal income taxes — and sometimes that’s the case. Yet many taxpayers are subjected to the “marriage penalty,” a disparity under which married couples pay more in taxes than single filers.

One place the marriage penalty rears its ugly head is in the tax brackets. When one spouse doesn’t earn significantly more than the other, a married couple may be pushed into a higher tax bracket than if they could file as singles. This is because the thresholds for married filers to become subject to the 28%, 33% and 35% tax rates are less than double those for single filers.

And you can’t avoid the penalty by filing separately — these rates’ thresholds for separate filers are half those of joint filers, and thus also lower than those for single filers. So smart tax planning for married couples is especially important.

Contractors who juggle projects at multiple sites know it can be tricky to accurately track job data and employee activities. The good news is that there are now a wide variety of apps available for smartphones, tablet computers, laptops and construction vehicles that allow you to store and view data regarding labor hours, vehicle and equipment use, and daily job-site production. Here are three ways to get more from mobile technology.

1. Use wireless time cards

To accurately track labor costs, consider wireless time cards. By having employees clock in at job sites with their smartphones and a wireless time card app that verifies they’re on-site, you can avoid the risks of “time rounding” (when workers round their times up or down for their benefit) or outright time theft associated with paper time cards.

In addition, going paperless saves employees trips to the office, so they spend more time working. And in-office staff reduce the time they must spend performing data entry for payroll. Plus, understanding your true labor costs allows you to bid on new projects more accurately.

2. Try geo-fencing software

Contractors can cut back on physical site checks by equipping company vehicles with activity-monitoring software. For example, “geo-fencing” software alerts you or your fleet manager when a vehicle leaves a predefined area or when one is stopped when it shouldn’t be.

Geo-fencing software can also alert you when a vehicle is entering the monitored area so you know, say, when work crews or supplies are arriving. These programs allow you to update owners and other interested parties (architects, subcontractors) on the exact locations and estimated arrival times of pertinent assets, too.

3. Install global positioning systems

Slashing your fuel bill is as easy as installing a global positioning system (GPS) in your construction company’s trucks or on key employees’ smart phones. GPS capabilities allow workers to avoid traveling to the office to print directions and reduce wasted driving — a necessity while fuel prices are sky-high.

There are security benefits to GPS technology as well. Joy-riding employees will have nowhere to hide when you’re tracking a vehicle. And you’ll be able to assist the authorities in tracking down stolen equipment, potentially saving you thousands in losses.

Benefits of a boost

Implementing technology like this requires an investment of time, money and energy. But the benefits can pay off if you’re able to put these tools to good use. Work with your financial advisor to determine whether your construction business could benefit from a mobile boost and if you have the cash flow to make the investment.

Whether you’re starting a new law firm or managing a long-established one, capital — how much you have and how much you need — is a constant consideration. A successful firm requires both working capital to fund daily operations and long-term capital to buy assets and make strategic investments. Unfortunately, determining your firm’s capital needs and meeting them are two of the most difficult tasks you’ll face as an administrator.

One size doesn’t fit all

Conventional wisdom says that law firms need capital to cover at least 12 months of operating expenses. That’s not a bad place to start, but it fails to take into account many factors. For example, as some firms have learned the hard way over the past few years, severe economic downturns can last much longer than anyone expects.

What’s more, every firm’s needs are different. If, for example, you pay substantial out-of-pocket expenses on behalf of clients, your capital requirements will be greater than those of a firm that covers expenses through the use of retainers. Your billing and collections practices also may necessitate a smaller or larger capital cushion, as will your strategic plans. Firms with aggressive growth objectives generally need greater capital resources than those pursuing slow and steady growth.

Crunching the numbers

Established firms can get a rough estimate of their capital needs fairly easily. Just add your one-year operating budget to the cost of any major asset purchases and strategic growth initiatives (for example, making acquisitions or hiring new associates) planned for the coming year. Then make adjustments for unique situations, such as the need to pay out a senior partner who will soon retire.

Capital needs calculations are a little trickier for startup firms; you first must estimate how long it will be before you see positive cash flows. This period could last several months or a couple of years, depending on such factors as:

• Type of practice,
• Overhead costs,
• Billing frequency,
• Collection percentage, and
• Amount of revenue you reinvest in the firm.

Ensure you have the capital to cover all ordinary — and extraordinary — costs during the startup stage or your firm will fail before it ever has a shot at succeeding.

Funding sources

Once you have a ballpark figure of your capital requirements, if you’re short, you’ll need to decide where you’ll get the additional funds. Typically, capital comes from a combination of bank debt, capital leases, undistributed earnings and partner contributions.

Due to the credit crunch, bank debt has become difficult for business borrowers to obtain. However, law firms most commonly borrow in the form of working capital lines of credit secured by accounts receivable and term loans secured by assets being purchased — which can be easier to get than other types of loans. Here, your firm’s financial history, business plan and relationships with bankers will be critical.

Whether you can secure capital through bank borrowing — or through capital leases —will also depend on your firm’s financial philosophy and appetite for risk. For example, are your partners comfortable borrowing against future collections? Do they mind financing office furniture and IT equipment with capital leases?

If not, they’ll likely need to contribute more from their own pockets. Contributed capital includes cash paid in when partners join your firm, as well as additional cash they may be required to contribute periodically. Your partnership agreement may require equal contributions from each partner or allow contributions to be determined based on the amount of income each earned in the previous year. If the current contribution method isn’t covering your firm’s capital needs, you may need to revisit this agreement.

A moving target

Determining your capital needs and funding them is only the start. Firm growth, including adding new partners, practice groups and offices, and operational changes, such as adopting alternative billing arrangements, make it necessary to regularly review your capital target. So incorporate the task into your firm’s annual budgeting process to keep your target current.

Timeliness and preparedness can make a difference

One word that can make taxpayers cringe is “audit.” Even though the IRS audits around 1% or returns, certain triggers can boost the likelihood that your return is among those targeted.

Red flags

There are several red flags that can trigger an audit. Your return may be selected because the IRS received information from a third party — say, the W-2 submitted by your employer — that differs from the information reported on your return.

In addition, the IRS scores all returns through its Discriminant Inventory Function System (DIF). A higher DIF score may increase your audit chances. While the formula for determining a DIF score is a well-guarded IRS secret, it’s generally understood that certain things are more likely to increase the likelihood of an audit, such as a traditionally cash-oriented business, tax shelters or a home office deduction.

Bear in mind, though, that no single item listed will cause an audit. Indeed, a relatively low percentage of returns are examined. One of the biggest factors in determining the likelihood of an audit, in fact, is your income. For instance, according to IRS statistics, if your adjusted gross income topped $1 million, your return had an 8.4% chance of being audited.

Finally, some returns are chosen as part of the IRS’s National Research Program. Through this program, the IRS studies returns to improve and update its audit selection techniques.

The audit process

Should your return be chosen for an audit, it helps to know what to expect and implement a few steps that can smooth the process.

Nearly three-quarters of audits are correspondence audits and are completed via mail. The IRS may ask for documentation on, for instance, your income or your purchase or sale of a piece of real estate. (Be aware that the IRS won’t contact you via e-mail for an initial appointment. Contact related to being selected for an audit will be made via telephone or mail only, according to the IRS.)

In-person audits may take place at an IRS office, your home or place of business, or at the offices of your CPA, attorney or tax preparer. If the proposed time and date are inconvenient, you can ask to reschedule. But the IRS has final say over when, where and how the exam will take place.

If you receive an audit notice, read it carefully. Most will indicate the items to be examined, as well as a deadline for responding. A timely response conveys that you’re organized, and thus less likely to overlook important details. It also indicates that you didn’t need to spend time pulling together a story.

Before responding to the notice, however, confer with your CPA or tax professional. He or she can calm any jitters and help you prepare your response. If the exam will take place in person, he or she can accompany you — or even appear in your place if you provide authorization.

If you’re going to meet in person, ask what documents the auditor is expecting, and what questions will be discussed. Of course, you’ll want to prepare this information and bring copies (not originals) of all that’s requested. You generally don’t want to bring more to an audit than what’s been requested, as it may prompt more questions. If an auditor asks about something that you didn’t prepare for, simply say that you’ll follow up.

Similarly, answer any questions honestly, but don’t volunteer extraneous information that might lead to more inquiries. Talking about a recent, lavish vacation, for example, could suggest that your income is higher than it actually may be. Respond with “yes” or “no,” providing a brief explanation where necessary.

Finally, mind your manners by being polite. While you don’t need to become friends with the auditor, a cordial relationship can help the process go more smoothly.

Ease the process

Being organized, timely and professional can reduce the stress of an audit. In addition, bringing in your CPA can mean spending less in the long run, as he or she can help you navigate the process.

Cash flow is the lifeblood of any business, but it’s particularly critical for construction companies. And, in today’s economy, the construction industry’s typically modest profit margins are even thinner than usual. That’s why it’s essential to lay a solid foundation for healthy cash flow, starting with the contract. In many cases, it’s possible to negotiate contract terms that can accelerate the flow of cash.

Pay attention to payment terms

Payment terms have an enormous impact on cash flow. A contract that calls for payment on completion of specified phases of the project, for example, creates uncertainty, making cash flow forecasting difficult. A contract that requires payment in equal installments over the course of a project provides greater predictability but may not correspond to your expenditures on the job.

It’s not unusual for a construction project to involve significant upfront costs. If possible, negotiate a “front-loaded” billing schedule that reflects your greater cash needs in a project’s early stages. You might also ask for accelerated payment methods, such as wire transfers or electronic checks.

Limit retainage provisions

A 5% or 10% retainage can easily defer your entire gross profit on a job until after construction is completed. To reduce the impact on your cash flow, try to negotiate a lower percentage or ask for retainage to be phased out over the course of the project. For example, the contract might provide for 10% retainage, reduced to 5% when the job is 50% complete and eliminated when it’s 75% complete.

Other options include limiting retainage to certain job costs, such as the labor component, or eliminating it altogether through the use of letters of credit, performance bonds or other security.

Get change order procedures in order

As you know, change orders are an inevitable part of most construction jobs. It’s critical that your contracts establish clear terms and procedures for approving and paying them.

If your contracts don’t have such terms, your payments may be delayed for additional work. Or, even worse, you might lose out on those payments altogether.

Don’t let requisitions wreck you

It’s not unusual for a contract to disallow requisitions for materials until the materials have been installed. To avoid cash flow disasters, try to negotiate requisition terms that allow you to request payment once materials have been delivered to the job site.

Look both ways

Remember that cash flows in two directions, and outflow is just as important as inflow. (See the sidebar “9 cash-flow management tips.”)  Scrutinize your contract terms with vendors, suppliers and subcontractors. You may be able to avoid cash flow problems by negotiating payment terms that, to the extent possible, match your cash outlays with your receipts from the owner or general contractor.

For example, include retainage provisions in your subcontracts that have terms similar to those in your contract with the owner. If you’re a subcontractor and your contract with the general contractor contains a “pay-when-paid” or “pay-if-paid” clause, your contracts with sub-subcontractors should contain parallel provisions. That way, you won’t be forced to pay subs until you collect from the general.

Watch your language

Because contract terms can have a significant financial impact on your bottom line, you must review the language in all your contracts with an eye toward forecasting and managing cash flow. Whenever possible, negotiate terms that will enable your firm to maintain a healthy cash position throughout the life of each job.