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From the Desk of:

John D. Pivirotto
Calif. Insurance License #0699308

Financial Concepts

Burlingame, CA 
(650) 348-1880
(650)348-0255 Fax


Helping Build & Protect Your Future

Investment Advisor Representative
Securities and Advisory Services
offered through
Lincoln Financial Securities Corporation
Member SIPC

Current tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the particular set of facts and circumstances. The information contained in this newsletter is not intended as tax, legal, or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Written and published by Liberty Publishing, Inc. Copyright © 2009 Liberty Publishing, Inc.
Copyright 2009 Liberty Publish- ing, Inc., Beverly, MA. The opinions and recommendations expressed herein are solely those of Liberty Publishing, Inc., and in no way represent advice, opin ions, or recommendations of the Financial Planning Association, its affiliates or members. CFPTM and CERTIFIED FINANCIAL PLANNERTMare federally registered service marks of the Cer- tified Financial PlannerBoard of Standards (CFP Board). This summary does not constitute legal and/or tax advice and should only be relied upon when coordinated with a qualified legal and/or tax advisor. Febuary, 2009.
Disability and the American Business

Most business owners have life insurance to protect their families against the financial impact of their premature deaths. They also have property and casualty insurance to protect their personal belongings against financial loss resulting from damage, fire, or theft. However, many business owners often overlook insuring their most valuable asset—the ability to earn an income. 

That Won’t Happen to Me! 
A lack of awareness about the seriousness of becoming permanently disabled leaves many people vulnerable to potential catastrophe for themselves, their businesses, and their families. As a result, many small businesses may not have disability income insurance plans in place. 

If you were to suffer a sudden disability, how would you pay for all of the expenses related to your lifestyle (e.g., housing, insurance, food, transportation, clothing, etc.)? Would your business be able to continue generating income for you? Do you have money in liquid savings to support yourself and your family during a six-month disability or an extended disability? In addition, if an employee suffered a sudden disability, would you be able to provide an income for that employee out of ongoing cash flow?

 The Cost-Effective Solution 
There is a reasonably simple and cost-effective solution to this problem. Business owners should consider setting up a salary continuation plan for themselves and their employees. Such plans can help ensure that owners and employees will continue to receive salaries despite long-term disability. They carry the following advantages: 

  • If structured properly, the payment of benefits to a disabled employee or owner may qualify as “necessary business expenses” and be tax deductible under Section 162 of the Internal Revenue Code.
  • A salary continuation plan can earn the goodwill of current employees and serve as an inducement for attracting new employees. 

Funding the Plan 
Once the commitment has been made to establish a salary continuation plan, the next step is to decide how to fund the plan. Possible funding alternatives include relying on current revenue and retained earnings or borrowing money when the need arises. These options may bring on financial difficulties, which is why purchasing a disability income insurance policy has some distinct benefits, such as the following:
  • Policies transfer the risk of salary continuation from the employer to the insurance company. In effect, a potentially open-ended drain on cash flow is replaced with a leveraged, fixed business expense.
  • Policies create the presumption of a plan for tax purposes and establish company policy before disability occurs. Without the presumption of a plan, the deductibility of insurance premiums may be challenged. 

Tax Consequences 
If the business pays the premiums for a salary continuation plan, the business can deduct the premium payments as a regular business expense to the extent such contributions are reasonable. Although the premiums are not considered a taxable benefit to the employee, any disability income insurance proceeds received by the employee generally would be taxable income. Disability income benefits received from a plan during the first six months of a disability may be subject to Social Security tax (FICA) and federal unemployment tax (FUTA).

 However, if you are a sole proprietor, a partner in a partnership, or a more than 2% stockholder in a subchapter S corporation, you may not be able to deduct (as a business expense) the cost of disability income insurance for yourself, but you could deduct the cost of such insurance coverage for your employees. 

Customizing a Policy 
One crucial area often overlooked in business disability planning is the completion of retirement funding for a disabled owner. What happens when there are no earnings (because of disability) to continue funding retirement? This problem can be addressed by designing a disability plan that can help fund a shortfall in retirement planning. 

Disability income insurance policies can be tailored to meet specific needs, and cost is generally driven by the type and extent of coverage. For example, “own” occupation coverage (meaning benefits would be paid for a disability that limits one’s ability to work in one’s chosen occupation) is usually more expensive than “any” occupation coverage (generally the ability to perform any gainful work). 

The length of the elimination period (the waiting period that must elapse before benefit payments begin) and the maximum benefit provided (stipulated by dollar amount, length of time, or a combination of both) are other significant variables in plan design and cost. 

Key person disability insurance and disability overhead expense policies are two other important protective options. Key person disability insurance (DI) will pay a monthly benefit as determined by the key employee’s pre-disability earned income. The monthly DI benefit can then be used to provide revenue to hire and train a replacement or to strengthen the company’s cash flow. The second option, a disability overhead expense policy, can help pay for overhead expenses should you become disabled under the terms of the policy. Thus, if you are temporarily unable to generate revenue, you can rest assured the business bills will continue to be paid without interruption.

 The real key to plan design begins with a realistic understanding of the (continued from page two) Disability and the American Business risks involved. The right policy can help provide financial security for you and your business to help mitigate the potentially devastating effects of a major accident or long-term illness. 

Calculating Your Break-Even Point 
Profitability is the goal of every business owner. But before you can turn a profit, you first have to break even. Spending more money than you are taking in to produce a product or provide a service can quickly bleed a company of its capital. Even if your business has a financial cushion large enough to allow it to operate in the red for a period of time, you should at least be aware of the areas in which losses are occurring and have in place a plan for steering your company into the black. 

The break-even point is the number that must be reached before an investment starts to generate a positive return. To run your business successfully, it is crucial that you have identified the point at which revenues cover expenditures on each of the products and services you offer, as well as on your overall operations. Because these break-even points shift as conditions change, break-even analyses should be performed regularly, preferably on a quarterly basis. 

While there are a number of methods for determining a business’ break-even point, one relatively simple approach is to calculate how large the company’s gross profit margin must be to cover its fixed costs. 

To get started, add up all the fixed costs your business has to cover regardless of sales volume, such as rent, payroll (including your own salary), debt payments, insurance, and similar overhead expenses. 

The next step is to calculate the gross profit margin on the products or services you sell. The gross profit margin is a financial metric used to determine the percentage of funds left over from revenues after accounting for the cost of purchasing or producing the goods sold. The gross margin can be calculated on a per-unit basis or by subtracting variable costs from the sales price. The break-even point can then be calculated by dividing your fixed costs by your gross profit margin.

 For a very simple example, imagine you have added up your expenses and determined that your monthly fixed costs amount to $50,000. Then, assume your business consists of purchasing gadgets at $3 per unit and selling them at $10 per unit, giving you a gross profit margin of $7 per unit, or 70%. When your fixed costs of $50,000 are divided by your gross profit margin of 70%, the resulting figure is approximately $71,429. This means you would have to sell 7,143 gadgets in a given month to break even. If sales dip below 7,143 units per month, your business is losing money, while any sales above this threshold represent profit. 

The calculations become more complex, of course, when multiple product lines are involved or when expenses change frequently. There are many other factors that affect the financial health of the business over time, such as projected changes in market conditions. A break-even analysis should, therefore, be seen as a basic tool that can provide a snapshot of where a business stands at a given point in time, but that should be used in conjunction with other financial measures. 

A break-even analysis can, however, provide you with important preliminary information about the status of your business. If the results of the analysis reveal that your sales are not sufficient to cover expenses, or that your profit margin is smaller than you would like it to be, there may be action you can take to lower your break-even point. 

Start by investigating ways to reduce the cost of purchasing or producing the products or services you sell. Is there another supplier who would sell you the same or a similar gadget for $2.75, instead of $3? If you make the product yourself, are there options for manufacturing it less expensively?

 Next, think about whether there are steps you can take to trim overhead expenses without harming your operations. Finally, consider raising prices. Implementing small changes in one or more of these areas could enable you to reset your business’s breakeven point and move your company in the direction of greater profitability. 

Competitive Intelligence: Strategies for Success 
In today’s rapidly evolving marketplace, businesses that once relied upon traditional networks to supply them with clients and customers are now forced to become more aware of the competitive landscape in which they operate. Increasingly, market researchers are seeking out intelligence that can enable them to better understand their external competitive environment, including information about rival firms, industry trends, regulatory changes, and the demands of potential and existing clients. 

Gathering Research 
As practiced by most market researchers, competitive intelligence (CI) gathering is not akin to cloak-and-dagger corporate espionage. Instead, researchers generally adhere to accepted legal and ethical guidelines while trawling publicly available resources for clues about future developments in the industry. The data is then mined and analyzed in an effort to assess the implications of those developments for the individual organization. In the course of collecting CI, a marketer examines published materials available through sources such as the Internet and court records, and he or she may inter view or network with industry experts, clients, and people familiar with competitor firms. 

An obvious place to start when gathering CI is online. Trade journals and industry association websites are sources of potentially useful material, as are business and general newswires. Depending on your business, other sources may include filings with the Securities and Exchange Commission (SEC), public record search services, market research services, government agency websites, and legislative monitoring services.

 Networking is an invaluable source of knowledge about competitors. Gossip overheard at an industry event or conference can provide insight into rival firms that is not available in published form. Meeting with others in the industry, either formally or informally, also allows you to ask questions and probe for information that is of particular use to your firm. It is also possible to network online through blogs, discussion groups, and e-mail. 

Analyzing Data 
Competitive intelligence is about more than simply investigating rivals; the objective is to create a more successful organization relative to competitors. While interesting, the information gathered will only prove valuable if you are able to place it in a context relevant to your own company’s market position. Information must be translated into “actionable” intelligence that can be applied directly to business planning and development. An analysis of the data collected can result in recommendations for new initiatives or changes in strategic direction, such as adjusting pricing structures or enhancing services. 

When a business is able to predict more accurately which practice areas are likely to generate more or less business in the future, its leaders will be able to make more effective decisions about how to allocate resources. CI can also be useful in determining whether offering a particular product or service that appears to be in demand constitutes a sound business decision given market saturation levels.

 While conducting competitive intelligence research requires some investment of resources, gaining a more thorough understanding of the competitive environment can help you avert some costly mistakes and anticipate a market for services that may not yet exist. 
Planning Strategies
*Disclosure – Securities and Advisory services offered through representatives of Lincoln Financial Securities Corporation, member FINRA & SIPC. FINRA Branch Office: 233 Bloomfield Road, Burlingame, CA 94010. 
This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in California, Oregon and Colorado only. Advisory Services are offered to residents of the state of California only. Lincoln Financial Securities Corporation is not affiliated with Financial Concepts. Financial Concepts offer insurance & financial services to residents in California and Oregon. Variable & Group insurance products offered through LFS Marketing and Insurance Sales Corporation; fixed insurance products offered through Financial Concepts Insurance & Financial Services.
John Pivirotto’s California Insurance License #: 0699308
Financial Concepts’ California Insurance License #: 0786047