Financial Planning - Y&O Inc - Case Study Example

Running Head: Financial planning Financial planning Financial planning Financial plan are used by individuals or businesses progressively and cumulatively to attainment and accomplish a final financial goal or set of circumstances as the case of Veddy and Harry through their elimination of debts, retirement preparedness, investments, estate plan and life insurance. This include a series of steps or goal of saving and spending for the future income and it is often a budget which organizes an individual finances (Mittra, Anadi, Sahu, & Crane, 2008). Future income and expenses allocation plans realized including buying mortgage, education for children, life insurance and put aside savings. . In business financial plan deals with financial statements, income statement, and cash flow statements created within a business plan. Therefore, for both an individual and business entity financial forecast or financial plan is needed for annual projection of income and expenses. Estimation of cash and decision on, how to raise them needed such as borrowing or issuing additional shares or buy out a company (Larimore, Lindauer, Ferri, & Dogu, 2011). An individual needs to be familiar with the steps to financial independence. This follows a financial planning process bring in distinguishes financial planners from the pool of other, some financial advisors have only been trained to focus on one aspect finance. Clients have different needs that other planners may not be able to follow each of these steps. It is noteworthy that Veddy and Harry to review their plans annually and update them if necessary. It is usually necessary to update financial plan when a significant life event like birth of a child. In the case of Veddy’s wife expecting another new born baby and for Harry planning for retirement, previous defined goals. Your need will define your plan. In this study, we will explain issues and concepts related to the overall financial process planning process that are appropriate for both Veddy and Harry; • Agree on how decisions will be made concerning the plans • Problem areas of opportunities identified with their capital needs, risk management and coverage, investments, taxations, retirement planning, employee benefits, estate planning and needs including educations needs and adult dependent needs. • The plans should be worked together to meet Veddy and Harry separate goals and objectives. • Agreeing who will monitor and evaluate whether the plans is helping their progress towards their goals. • A review and evaluation of the impacts of changing tax laws and economic circumstances will also be discussed. • Most notable is to review life circumstances through life event such as birth, illness, marriage, and retirement. After having looked at the area of their capability and weakness in terms of financial issues. My work is to go straight to advising them in the areas they need to take keen interest to assist them become financial independent. The first question for this study to undertake is the formal retirement plans should Y&O adopt and for what reasons. Y&O Inc being a large corporation employing many people need a serious retirement plan to take care of their 50 employees and the two owners. Simplified Employee Pension (SEP) plan will be the best plan being that Veddy is already undertaking a personal retirement plan of $6,000 on average annually into an IRA for each of the past ten years in the local bank paying interest at an average rate of 2% per annum. The SEP plan provides retirement account for themselves and their employees (Larimore, et. al, 2011). This will be the best retirement because, an employer contributes directly to traditional individual retirement account (SEP-IRAs) for all employees including themselves as Veddy has been involved in the IRA. This retirement does not have the start-up and operating cost. The advantage of contributing to SEP is tax deductible to employees which is suitable for financial planning. There will be a decision of how much to contribute to their employees’ SEP-IRAs and free to make a contribution every year enabling them to plan in advance. It is available for sole proprietors, partnership and corporations as Veddy speculate if Harry will ever sell the remaining shares to him. If Harry does not sell them he will still be having the advantage for the partnership as have been, and the shares are sold to him he will still have the advantage for this retirement benefit because it covers both the sole proprietor and corporation and will not have to look for any other retirement plan. The employee and employer are eligible of tax credit of up to $500 per year for each of the 3 years (Larimore, et. al, 2011). The administrative cost is also low they will help the company save cost. This fit well to Veddy and Harry because it allows the minimum age to join their scheme to be above 21 years. They are above those years and has performed services for more than three years required by this retirement plan. It is necessary to choose a financial institution for SEP a momentous decision since it becomes a trustee to the plan. Trustees will work closely with employers and agree to receive and invest contributions and give provide employer contribution every year. Trustee of SEP-IRAs comprise banks, mutual funds and insurance that will issue annuity contracts as both of Veddy and Harry do not have any annuity programs. The best plan for Veddy concerning retirement is the above one and social security payment which has monthly benefit payable to workers retiring at age 66 years. This is because as one plans need to put in mind the average expectancy of 74.7 years for men this will help you when you reach that age. As Veddy plans to retire at age 55 he is to live for 20 years more years. This are issued that Veddy need to address before retire. The kinds of lifestyle he need to live during retirement, current financial situation will this change at the time of retirement, how to control the future to be able retire with resources needed to achieve the desired lifestyle. It is said that no one can predict the future exactly. Veddy has to think about retirement lifestyle and how he will live, valuable things needed, will you have enough money to support the lifestyle you aspire to have and the way your life and expenses change after active employment (Larimore, et. al, 2011). This are the items Venddy will have to look at if he will change the home they are to acquire with the wife or lie in it for life. Even if one maintains residence the cost will change due to old age like heating and light bulb may increase if you will spend more hours in the house and more repairs and maintenance. Transportation issue if same will be use the same car or not cost related to this will also change. Food related issues will be considered at old age eating much and entertaining friends and relatives will be noted. Issues related to clothing and personal care will reduce in cost because work related cloths which cost much will not be used. Health and medical expenses will be budgeted because old age comes with old age illnesses cost of which additional medical cover and joining a health club membership contributions. There will be spending in entertainment such as books, theaters, clubs, movies and shopping. Spending more money on recreations activities such as leisure golfing and fishing and traveling will increase because of abundant time at home this will come with their costs. As it is indicated Venddy save for retirement with a 2% interest rate he needs to factor in the inflation rate at the time of retiring. As it is indicated the inflation rate at the moment is 3% this should be double or factored to calculate how much money should be paid for retirement taking up insurance to caution an individual from inflation. Veddy should consider investing his retirement benefits in the mutual funds, stock market and IRAs. The total expenditure which will be incurred now should be multiplied by 1.03 inflation factors in 10 years this assist Veddy to know what to put as a retirement benefit. In this case Veddy need to add 3% on top of the $6,000 which should be $6,180 including inflation rate at 10 year time Veddy will have a total of $63,654 with an inflationary markup. The pros for Y&O able to convert to an S-Corp will lead to owners’ protection from legal liability. When Y&O will be an S-Corp. having a legal mandate Veddy and Harry will have a limited amount for the corporations’ business activities and debts, because in he eyes of the law the corporations are a separate entity. Y&O will not be charged corporation tax this will be the biggest advantage for the company. The owner’s personal income tax will take over the profits and losses of the business helping them avoid double taxation. There will be taxable gains when selling the business as Harry is planning to sell Y&O later. This can be part of Veddy retirement strategy. The company could have reduced taxable gains when business will be sold. As Veddy plans to acquire Y&O the losses will have to be locked within the company helping him write off start-up losses against his personal income. If they still maintain to stay together there will be write off start-up losses (Larimore, et. al, 2011). The cons for Y&O becoming S-Corp. will lead to the company not issuing the one class of stock he intends to buy. The issuing of different classes of stock leads the Y&O less control over the company and limitation on the stock value. Lead to less attraction to outside investors. Growing the company will require money. Therefore venture capitalists will not want to see the pass through tax setup or a limit of 75 shareholders. The tax filing issue will arise by filling a tax return every year even though the company avoided corporate taxes. Tax planning is a year to year for one to minimize tax for business’s tax bill. This is whether it is finding tax friendly ways to run a business or reduce tax obligations and keeping paying fewer taxes. There should be strategies to tax management for Y&O. There should be tax efficiency financing which entails maximizing tax relief on financing costs through appropriate planning restructuring. Considering the use of a financial or treasury to avoid the 12.5% rate. Review cash management strategies from an overall business and tax efficiency perspective like considering debt factoring pooling opportunities. The other area is tax depreciation strategies which encompass minimizing capital allowance available on plant and equipment at 12.5% per annum. Planning for opportunities to accelerate tax deduction for refurbishment projects. Considering plans opportunities to minimize claw backs of tax relief. Also considering estate freeze so the capital gains on the future growth of the business deferred transferring to the next generation control be with the parents. Considering Y&O to owe life insurance for funding buy-sell agreement, funding tax liabilities, and Veddy and Harry protection (Clifford, 2011). The stock promised by Y&O is a financial guarantee for stocks. This is a future contract between Y&O and Veddy which is a financial transaction at a future date and a fixed price now as in this case. Young & Oldmun, Inc should take up insurance policy for this security. Incase of Veddy’s death and a default of payment the insurance company will compensate Y&O for that business transaction. To liquefy estate involves turning the assets in the business to cash the faster it is turned into cash the more liquid. This will involve an estate liquidator who will turn Y&O Inc into cash when Harry dies. Veddy will appoint a liquidator who will turn the assets into cash. The liquidator will be in charge of execution of all will and handling all distributions of estate (Clifford, 2011). This will take care of the legacy he wanted to leave behind of more of $2 million to his children, and the leaving of the company buy out to Veddy. The liquidator will make a determination of how best to turn the assets of Y&O into cash. The liquidator will choose the best method of turning the asset in to cash by selecting either auction or estate sale. Estate sales will attract customers estate liquidator will tag the assets with prices to make buyer get the sales. The liquidator will be briefed using the books of accounts by Veddy being the chief operating officer. This will give the liquidator a brilliant idea of how much the items are worth, and help to add value to the assets to make them attractive to customers. The agreement formed between co-owners Veddy and Harry to buy out the other’s interest. This involves Veddy and designated successor like a family member of Harry (Larimore, et. al, 2011). Agreeing on the value of stock becomes a difficult issue when there are two partners as the case of Y&O Inc. These should be a theoretical value method of calculation of the company and stock. This will help predict the market price to help profit from price movement. Stocks that are judged undervalued by use of theoretical value are bought, while the overvalued stocks are sold. The view that the undervalued stocks will rise in value and overvalued stocks will fall. Stock valuation based on fundamental analysis gives an estimate of intrinsic value of stock which is supported on prediction of future cash flows and profitability of the business (Mittra, et, al, 2008). The fundamental analysis can be combined together with what will be the market pay for these profits. They can be seen through market supply and demand, supply of stock and market demand derives stock. After the successor was determined next if determine the buy out value. There is some flexibility from small business owners as this case in point in setting the price of a buy-out transaction, the IRS and courts insist on a valuation that represents fair market reality. The methods of valuation commonly used are; • Multiple of revenue of book value of the business is attach to multiple of gross income in a year before the exit of owners. • Discounted cash flow value is base on total cash flow projected for the business. • Comparable transactions based on the terms of sales or mergers involving companies. Estate planning the arrangement for the disposal of an estate. The process tends to eliminate the uncertainties of probate concerning the administration and reducing the taxes and other expenses to maximize the value of the estate. Estate planning involves the will, trusts, beneficiary designations, gifts, and powers of an attorney, specifically financial and tough checkup power of attorney. For Harry he needs an attorney who will deal with the will and trust of the children on the business entity by achieving his projection of leaving $2 million and selling the share to Veddy. Harry also needed an estate plan which covers a living will and the will to bury him or cremating to be documented (Clifford, 2011). The attorney will draw the estate plan to include providing for the support of his wife if he dies first, and the possibility of providing up to $500,000 to his preferred two favorite charities the symphony and Foundations for cats, recognized by IRS. The issue of deferring or decreasing estate taxes is also to be considered for his 90% shares at Y&O Inc. Estate plan of Harry will involve the tax code allowance to set up a charitable remainder trusts. To set up qualified personal residence trusts helping in estate tax while still owns personal residence. Harry needs to involve himself on life insurance trust which would be used to pay estate tax. This is because the tax code does not tax life insurance proceeds as income. Harry having a partner in the business he should consider mediation. This will serve as an alternative to litigation to settle the dispute in case Veddy will change any agreement. This will take care of the transfer of assets to the beneficiary like the charitable, wife and children helping the conflicted family meet their goals as Harry describe his children as financially unsophisticated and frankly a little irresponsible with money. Harry should consider insuring his mortgage which is remaining $228,000 to be cleared (Clifford, 2011). This will help in case of death or disability which can render him unemployable. Protecting Y&O Inc. should be one of Harry’s priorities by considering a succession plan or a buy out an agreement to Veddy. Harry has much financial interest in Y&O the earning of salary and bonus and the 90% he owes in the company. The financial benefit he gets from the company provides a life style with which he and his wife, now “empty nesters”, are quite satisfied. They enjoy traveling, golf and socializing at his Club quite a bit. He expects this level of annual cash compensation to continue into the future, increasing just enough to keep up with inflation. He has an issue going own with the business running and plans to sell it to Veddy because the children have no interest in the company, having pursued decidedly different careers, no succession plan for Y&O. He’s not sure if or how Veddy could afford to buy shares (even though he has floated this idea with Veddy), or even what they’re worth. He wonders about going public or selling the company outright to a competitor to get his money. The possibility of still running the company will make him not retire in a piece because does not see Veddy capable of running the company. Many business owners eventually decide to sell their companies for Handy want to retire and move on to develop interests in horticulture and symphonic music. The income associated with Y&O is a total book value of $1 million, strong customer base of annual sale volumes of $2 million, net profit of $100,000 with a good reputation in the sector. Survivors will have all the wealth of the company. The benefits the successor will have are numerous being the chairman of the company. Cash compensations including salary, bonuses and stock option due to the complex nature of their perk there will be a tax preparation services paid for by the company. There will be security for Veddy as a survivor of the company. The wife will remain with the mortgage and all the wealth that belonged to Harry. Considering the asset location of each of them the investment of stock for Veddy is the most beneficial option to his financial well being. He should look at the growth of funds and investment more on the stock options of Y&O which are promised to be sold to him. Both should consider the investment that include their retirement plans and take up insurance. This will cover for all the investment that they have. They should mix investments to grow their net worth by diversifying risk as they have some option. Harry’s option of getting into what is at his interest is much more fundamental goal. This will make him retire as he wishes. There should be customized savings plans. The overall situation examined leads to the best option of the investment. There must be wide portfolio of investment for both investments they take and include bonds and treasury bills. They should consider the funds categories of growth, growth and income, equity income and bonds this will support their retirement plans (Clifford, 2011). Stock selection criteria are not up to date including systematic picking of the stock. They should consider maximizing the total return on investment this is the appreciation including any dividend for a period of time, trying to limit risk according to individual risk level and portfolio diversification method or selecting investment vehicle (Mittra, et, al, 2008). The education planning is also every principal in this investment strategy. This include education tax exclusion, the saving bond permits a taxpayer to exclude from their gross income. Requirements include qualifying is the same tax year when bond are redeemed one need to qualify higher education expense. When bond for Veddy child education, the bond must be registered in Veddy’s name and his spouse name. This will make the child be registered as a beneficiary. Another education savings option is interest income on bonds purchased in child name with considering beneficiary to be the parent in this case the child will be considered for any federal income tax on the interest. Parents in the case of Veddy may file a federal income tax in favor of the child name and child having the social security number. Both have to make proper investment styles through gaining best understanding of the major investment through making sense by Veddy buying the stock of Y&O and Haddy following his interest of horticulture and music goals. The investment sense will assist them in choosing the best investment in the market nowadays. The capital investment styles can be divided into active vs passive management, growth vs value investing, and small cap vs large cap companies (Mittra, et, al, 2008). One should assess preferences which will give an individual quick idea of what investment style fit their personality. Managed funds have full time financial researchers and portfolio managers who gain larger returns for their investments. They consider using active or passive management investment style. Investing in fast growing firms or underpriced industry leaders the preference of investors when choosing an investment vehicle. There must be analysts who should look at a set of financial merits and use financial judgments to determine which one fit, fast this is growth or valuing investing (Larimore, et. al, 2011). Growth style will look for the firm which has high earning growth rates, high return on equity, high profits and low dividend yield. Investor will consider investing in either small or large companies this is a small cap or large cap company’s investment style. These three dimensions should guide investors when choosing investment style. An investor should choose investment style that suite your investment style holding for long term. An investment vehicle that product on investor use to having a positive return. There are categorized into low risk including certificate of deposit or bonds or ones with greater risk like stocks, options and future. The best investment vehicle for both Veddy and Harry are bonds which have a low risk than stock. Income statement shows the income and expenses for a period of time. The income statement includes salaries, bonuses, investment income and other incomes. The expenses include taxes, financing expenses and fixed obligations. The income statements of both of them will determine the amount of money will be available for savings, investment and expenses during the time period. It is necessary to indicate the period of time that the income statement will cover. The income should indicate all sources of funds including the salary and bonuses. Expenses should begin with tax these are income taxes, social security payments and property taxes. Financial obligations and financing expenses payment for mortgage principal and payment on other debts. Net income is found by subtracting expenses from income. The income assist both of them plan for the future financially (Mittra, et, al, 2008). Cash flow shows the operating activities, investment activities and the financing activities. It helps in identifying liquidity information of both Vaddy and Harry, and to analyze financial statements for making decisions. References Clifford D. (2011). Estate Planning Basics. Chicago, Nolo. Larimore T., Lindauer M., Ferri R. A., Dogu L. F., (2011) The Bogleheads Guide to Retirement Planning. John Wiley and Sons. Mittra S., Anadi P., Sahu, Crane R. (2008). Practicing Financial Planning for Professionals. New York, Rochester Hills Publishing. Read More