On July 14th, 2010, approximately 30 legislative days before the fall elections and less than six months before significant portions of the tax code expire, the Senate Finance Committee held the first substantive hearing on the implications of allowing the Bush tax cuts to expire.
The tone of the majority of the witnesses and comments by the Chairman suggest this hearing was designed to anticipate higher rates next year. Most of the Bush tax cuts enacted in 2001 and 2003 went to middle- and low-income Americans, not the rich. So the pending tax hike is going to impact regular families in a very real and harmful way. With just 30 days of legislative session left before the elections, even a well intentioned effort to extend those tax policies may fall short.
Also, the hearing demonstrated the lack of a plan for what happens beyond 2010. Even if Congress extends some or all of the 2001 and 2003 tax cuts, something more comprehensive is needed.
Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) yesterday evening introduced an amendment to make permanent changes to the estate tax. The estate tax is not in effect in 2010 but unless action is taken will return in 2011 with a top rate of 55 percent and an exclusion of $1 million (in 2009 the exclusion was $3.5 million). We may go from a system that taxed the sale of assets at low capital gains rates or allowed the carryover of basis on inherited assets to one where the capital gains rates will raise, the exclusion be reduced, and the allowance of a carryover basis restricted. Conceivably this could be one of the largest tax consequences in United States history.
The Lincoln-Kyl proposal is designed to mitigate this harm and uncertainty by making permanent a middle ground on taxing estates. Key provisions in the bill include: reducing the top estate tax rate to 35 percent; increasing the exclusion from $1 million to $3.5 million; and allowing the estates of deceased taxpayers to choose between no estate tax and limited carryover basis or the provisions included in this plan for 2010.
Missing from the proposal are any revenue increases or spending cuts to offset the revenue loss of the lower rates and higher exclusion. The selective pay-go rules adopted by Congress earlier this year would have allowed Congress to extend 2009 estate tax without offsets (which was not done), but any reduction in the estate tax beyond that would have to be offset or face a 60-vote Budget Act point of order. This problem appears to be unresolved.
The question now is whether there is enough time in the legislative calendar for this or any other proposal to be adopted. The most likely outcome is that no proposals will pass. The result will be significant tax increases for business owners.
Friday, July 16, 2010
Sunday, April 11, 2010
Do You Care What the Supply Curve is for Your Market?
In the last email we discussed that the supply and demand curves create an equilibrium market price for a product. Understanding the demand curve for the market for your business can be beneficial with respect to making decisions about price, production, and understanding consumer satisfaction. Trying to understand the supply curve helps focus on decisions our market competitors may make.
Unlike the demand curve, which moves inversely to price, the supply curve moves directly with price (as price goes up, the production of the product increases).
This reflects the willingness of producers to produce more products as long as the consumer is willing to buy at a price that is greater than the cost to produce. In a market place where prices is high because consumers cannot find all the product they want, competitors will be attracted to the market to increase the supply.
When we try to construct a supply curve for a market, we are trying to understand what choice is now available to the consumer and what that choice might be in the immediate future. These are important determinations in the strategic planning for a business. Critical to this inquiry are two factors. Is the market one which is difficult to enter? Is our product different from other products, by brand identification or quality, that its utility to consumers cannot be easily duplicated?
In a market with history, we will know what the equilibrium price is – that is the current price. By constructing demand and supply curves on a graph, we attempt to portray with an objective numbering scheme our perceptions and forecasts about the market. Next time we will talk more about this and putting production information into the analysis.
Unlike the demand curve, which moves inversely to price, the supply curve moves directly with price (as price goes up, the production of the product increases).
This reflects the willingness of producers to produce more products as long as the consumer is willing to buy at a price that is greater than the cost to produce. In a market place where prices is high because consumers cannot find all the product they want, competitors will be attracted to the market to increase the supply.
When we try to construct a supply curve for a market, we are trying to understand what choice is now available to the consumer and what that choice might be in the immediate future. These are important determinations in the strategic planning for a business. Critical to this inquiry are two factors. Is the market one which is difficult to enter? Is our product different from other products, by brand identification or quality, that its utility to consumers cannot be easily duplicated?
In a market with history, we will know what the equilibrium price is – that is the current price. By constructing demand and supply curves on a graph, we attempt to portray with an objective numbering scheme our perceptions and forecasts about the market. Next time we will talk more about this and putting production information into the analysis.
Friday, January 29, 2010
Do You Care What the Demand Curve is for Your Market?
Economic theory tells us that supply and demand create an equilibrium market price for a certain product. There is a benefit for an owner-manager of a business to understand the demand curve for the market for that business. Understanding the demand curve can help with price decisions, production decisions, and documenting consumer decisions (enabling effective response to changes in consumer interests).
When we try to construct a demand curve for a market, by necessity we are defining a market and then seeking to understand the value equation of the consumer. These are very worthwhile and rewarding things to do. We are trying to determine at what price the consumer will buy more or less of our product or services. To do this we must obtain from the consumer information about the effect of price on a decision to buy. Generally we know the higher the price, the less likely the purchase of additional units.
If we obtain the consumer information by survey, we may find various responses from consumers which may be listed in spreadsheet columns. The sample responses can be used to derive information about the amount consumers would purchase at certain prices. Usually these responses become columns of information on a spreadsheet (price and quantity) which then can be used to create a graph (price on the y axis and quantity on the x axis). In a market which is highly competitive and the products very similar, the demand curve will tend to be flat (parallel to the x axis) because price will be a determinative factor and production will be increased until the marginal cost of the last unit produced equals the revenue produced by that unit. On the other hand where unit is very differentiated from other units by quality or design, the demand for a particular unit will be much less affected by price and the demand curve will tend to be vertical (parallel to the y axis of the graph). In this type of market, price will be increased until production is at the point where the marginal cost of the last unit produced equals the revenue produced by that unit. The slope of the demand curve generally will indicate whether we sell many units at a lower price (high competition), fewer units at a higher price (differentiated products), or something in between.
Once you have developed a demand curve for the market, there are a number of different ways to use this information and the graphical portrayal of the information to analyze and make critical business decisions. More about that next time.
When we try to construct a demand curve for a market, by necessity we are defining a market and then seeking to understand the value equation of the consumer. These are very worthwhile and rewarding things to do. We are trying to determine at what price the consumer will buy more or less of our product or services. To do this we must obtain from the consumer information about the effect of price on a decision to buy. Generally we know the higher the price, the less likely the purchase of additional units.
If we obtain the consumer information by survey, we may find various responses from consumers which may be listed in spreadsheet columns. The sample responses can be used to derive information about the amount consumers would purchase at certain prices. Usually these responses become columns of information on a spreadsheet (price and quantity) which then can be used to create a graph (price on the y axis and quantity on the x axis). In a market which is highly competitive and the products very similar, the demand curve will tend to be flat (parallel to the x axis) because price will be a determinative factor and production will be increased until the marginal cost of the last unit produced equals the revenue produced by that unit. On the other hand where unit is very differentiated from other units by quality or design, the demand for a particular unit will be much less affected by price and the demand curve will tend to be vertical (parallel to the y axis of the graph). In this type of market, price will be increased until production is at the point where the marginal cost of the last unit produced equals the revenue produced by that unit. The slope of the demand curve generally will indicate whether we sell many units at a lower price (high competition), fewer units at a higher price (differentiated products), or something in between.
Once you have developed a demand curve for the market, there are a number of different ways to use this information and the graphical portrayal of the information to analyze and make critical business decisions. More about that next time.
Wednesday, January 20, 2010
Repeal of the Estate Tax?
In 2001 Congress passed a law that imposed a ten-year schedule. The law gradually reduced the estate tax until 2010, when the estate tax would disappear. But the law then provided that in 2011 the estate tax would be again in place at a very high rate ($1 million exemption and a maximum rate of 55 percent when in 2009 the exemption was $3.5 million and the maximum rate 45 percent). It is safe to say that most people thought Congress would act before now. In fact the prevailing assumption was that Congress would extend the 2009 estate tax into 2010 and enact a long-term approach to estate tax this year.
Most estate planners and most business succession plans have been based on the assumption that there would always be an estate tax. The cardinal rule of business succession has been to not own a business at death. The burdens imposed upon heirs by the process of valuing and paying taxes on a business interest meant that owners have been motivated to sell business interests or engage in gifting programs they might not have otherwise done.
If Congress acts in 2010 and attempts to make the legislation retroactive, it will be challenged but the precedent is there for this type of tax legislation to be retroactive and valid. In U.S. v. Carlton, 512 U.S. 26 (1994) the Supreme Court upheld a retroactive application of tax law. It is unlikely that Congressional action in 2010 reinstating some form of estate tax as of the beginning of the year would be ruled invalid.
In spite of the uncertainty created by the failure of Congress to act, it still is a good idea to assume that the estate tax will be a part of the tax and business succession planning scenario and that dying owning a business interest still will be a very expensive mistake.
Most estate planners and most business succession plans have been based on the assumption that there would always be an estate tax. The cardinal rule of business succession has been to not own a business at death. The burdens imposed upon heirs by the process of valuing and paying taxes on a business interest meant that owners have been motivated to sell business interests or engage in gifting programs they might not have otherwise done.
If Congress acts in 2010 and attempts to make the legislation retroactive, it will be challenged but the precedent is there for this type of tax legislation to be retroactive and valid. In U.S. v. Carlton, 512 U.S. 26 (1994) the Supreme Court upheld a retroactive application of tax law. It is unlikely that Congressional action in 2010 reinstating some form of estate tax as of the beginning of the year would be ruled invalid.
In spite of the uncertainty created by the failure of Congress to act, it still is a good idea to assume that the estate tax will be a part of the tax and business succession planning scenario and that dying owning a business interest still will be a very expensive mistake.
Tuesday, January 12, 2010
Why Do Owner-Managed Businesses Fail to Plan?
Lack of planning causes a variety of problems for owner-managed businesses. Business owners manage from bank account balances and then wonder why they have cash flow problems. Owners jump into a project, forgetting about marketing for the time being, and then wonder what happened to sales when the project completes. Owners initiate the business by wearing all hats, causing the business to succeed with hard work and a variety of talents, do not delegate and train, and then wonder why they have no time and their business has no value without their participation. These are just of few examples of many well-recognized problems resulting from the failure to plan.
The number of owner-managed businesses in this country and the difficulty of these businesses sustaining a long-term existence indicate the need for strategic planning to be utilized by these businesses. Businesses that engage in strategic planning have a much better success rate – both for the current owners and for the heirs of those owners.
So if the need and benefit are so clear, what is it about strategic planning that makes it so difficult for the owner-manager to practice? There are a number of suspects: the failure to prioritize and schedule time for planning, the inability to poll and communicate with the business group (owners, managers, and employees) to produce a wise plan, the fear of losing control (perhaps the most prevalent reason owner-managers do not train and delegate), and the managerial skill to execute the plan through effective monitoring and employee review. These and other critical issues can be addressed to make the valuable strategic planning process accessible and of use to owner-managed businesses.
It happens one owner at a time. You know the owner is getting it when the owner responds to a crisis by saying: “I need to review the plan to see why we did not anticipate this and then revise the plan” instead of saying “I am the only one who can save this situation, and I need to get to work.”
The number of owner-managed businesses in this country and the difficulty of these businesses sustaining a long-term existence indicate the need for strategic planning to be utilized by these businesses. Businesses that engage in strategic planning have a much better success rate – both for the current owners and for the heirs of those owners.
So if the need and benefit are so clear, what is it about strategic planning that makes it so difficult for the owner-manager to practice? There are a number of suspects: the failure to prioritize and schedule time for planning, the inability to poll and communicate with the business group (owners, managers, and employees) to produce a wise plan, the fear of losing control (perhaps the most prevalent reason owner-managers do not train and delegate), and the managerial skill to execute the plan through effective monitoring and employee review. These and other critical issues can be addressed to make the valuable strategic planning process accessible and of use to owner-managed businesses.
It happens one owner at a time. You know the owner is getting it when the owner responds to a crisis by saying: “I need to review the plan to see why we did not anticipate this and then revise the plan” instead of saying “I am the only one who can save this situation, and I need to get to work.”
Wednesday, January 6, 2010
Managing Professionals
In my experience, the question of when a business needs to pay for expert professional advice (accountants, lawyers, and consultants) often is not the subject of structure and policy, but it should be.
Professionals generally get paid by the hour or fix a fee for a project and respond to requests. This places a burden on the client, as the initiating party, to handle the relationship in a thoughtful and efficient way. This, of course relates to the resources available to pay the professional and the nature of the tasks the professional is asked to perform.
There are tasks which require certain professionals to be involved (tax returns and court cases). There are certain issues on which a business needs expert guidance. You may not know what all these tasks and issues are, but you will know most of them. Even if there are times when you will have to receive advice on what requires an expert’s opinion or action, you should control the relationship.
It will be less expensive for you if the professional is familiar with your business and the concerns it generates. Rejoice if a lawyer you are dealing with wants to know more about your business without charging you for that time. Similarly be pleased if your accountant makes suggestions for which payment is not expected. The more you interact with your professional advisors, the less time (fees) you will spend on giving the professional facts about your business, but as with any other cost the doctrine of diminishing marginal utility applies to more and more frequent levels of interaction.
For any given decision involving expert advice, the professional should identify to you the information you need to know to make your business decision according to your values and business acumen. Professionals are paid to advise, but beware of the professional who gives advice broader than their area of expertise. For example, lawyers advising you should not be telling you what decision to make, but informing you of the consequences that will occur depending on your decision. Therefore, it is misleading and unwise to engage a lawyer to provide specific legal advice and then ask for general business advice.
You should have a written fee agreement for all work done by professionals. You should understand the fees and costs associated with what you are asking before the service is performed, and if there is a change the professional should give you notice of that change immediately. You should expect the professional to be accessible by responding to your communications quickly and by having time to discuss important matters with you. You should be billed promptly and accurately for services with no surprises. Such a billing deserves immediate attention and prompt payment.
Create a thoughtful structure for asking for and receiving professional work and advice. Keep track of what you like and do not like about the various relationships. Learn from your experiences and change your structure. It is incumbent upon you to effectively manage your business relationships with professional advisors.
Professionals generally get paid by the hour or fix a fee for a project and respond to requests. This places a burden on the client, as the initiating party, to handle the relationship in a thoughtful and efficient way. This, of course relates to the resources available to pay the professional and the nature of the tasks the professional is asked to perform.
There are tasks which require certain professionals to be involved (tax returns and court cases). There are certain issues on which a business needs expert guidance. You may not know what all these tasks and issues are, but you will know most of them. Even if there are times when you will have to receive advice on what requires an expert’s opinion or action, you should control the relationship.
It will be less expensive for you if the professional is familiar with your business and the concerns it generates. Rejoice if a lawyer you are dealing with wants to know more about your business without charging you for that time. Similarly be pleased if your accountant makes suggestions for which payment is not expected. The more you interact with your professional advisors, the less time (fees) you will spend on giving the professional facts about your business, but as with any other cost the doctrine of diminishing marginal utility applies to more and more frequent levels of interaction.
For any given decision involving expert advice, the professional should identify to you the information you need to know to make your business decision according to your values and business acumen. Professionals are paid to advise, but beware of the professional who gives advice broader than their area of expertise. For example, lawyers advising you should not be telling you what decision to make, but informing you of the consequences that will occur depending on your decision. Therefore, it is misleading and unwise to engage a lawyer to provide specific legal advice and then ask for general business advice.
You should have a written fee agreement for all work done by professionals. You should understand the fees and costs associated with what you are asking before the service is performed, and if there is a change the professional should give you notice of that change immediately. You should expect the professional to be accessible by responding to your communications quickly and by having time to discuss important matters with you. You should be billed promptly and accurately for services with no surprises. Such a billing deserves immediate attention and prompt payment.
Create a thoughtful structure for asking for and receiving professional work and advice. Keep track of what you like and do not like about the various relationships. Learn from your experiences and change your structure. It is incumbent upon you to effectively manage your business relationships with professional advisors.
Wednesday, December 9, 2009
Shared Leadership
Good policy development is based upon wise decisions. Wise decisions evolve from a process which includes polling a group of diversely informed individuals. While the decision must be made by a person with authority, leadership has been historically conceived around an individual decision-maker and that individual’s relationship to subordinates or followers. The leadership field has focused its attention on the behaviors, mindsets, and actions of the leader in a team or organization, which has traditionally been hierarchical.
Shared leadership concepts can enhance and make more effective the process of policy development and the process of making wise decisions. The fastest growing organizational unit is the team, specifically cross-functional teams. What distinguishes these groups from traditional organizational forms is often the absence of hierarchical authority. Leadership is not determined by positions of authority, but rather by an individual’s capacity to influence peers, and by the needs of the team in any given moment. Each member of the team brings unique perspectives, knowledge, and capabilities to the team. For each there are moments when background characteristics provide a platform for leadership and decision-making. Much thought should be given as to how the authority to make a decision can help and not hinder a shared-leadership organization.
For an excellent treatment of this subject see Shared Leadership, Craig L. Pearce and Jay A. Conger, Editors, All those Years Ago: The Historical Underpinnings of Shared Leadership, Craig L. Pearce and Jay A. Conger, Sage Publications, 2003.
Shared leadership concepts can enhance and make more effective the process of policy development and the process of making wise decisions. The fastest growing organizational unit is the team, specifically cross-functional teams. What distinguishes these groups from traditional organizational forms is often the absence of hierarchical authority. Leadership is not determined by positions of authority, but rather by an individual’s capacity to influence peers, and by the needs of the team in any given moment. Each member of the team brings unique perspectives, knowledge, and capabilities to the team. For each there are moments when background characteristics provide a platform for leadership and decision-making. Much thought should be given as to how the authority to make a decision can help and not hinder a shared-leadership organization.
For an excellent treatment of this subject see Shared Leadership, Craig L. Pearce and Jay A. Conger, Editors, All those Years Ago: The Historical Underpinnings of Shared Leadership, Craig L. Pearce and Jay A. Conger, Sage Publications, 2003.
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