Category: Blog

Must-Know Backlinks for Boosting Your SEO

What is a Back Link?Backlinks are a crucial part of search engine optimization (SEO) strategies. They act as votes of confidence from one site to another and signal to search engines that the content is credible and valuable. Understanding the various types of backlinks is important for crafting an effective SEO strategy that enhances your website’s visibility and authority.

What Are Backlinks?

Backlinks, also referred to as inbound or incoming links, are hyperlinks from one website to another. They serve as endorsements, indicating that the linked content is worth checking out. Search engines use backlinks to assess a website’s credibility and relevance, impacting its ranking on search engine results pages (SERPs).

Types of Backlinks

  1. Editorial Backlinks
    Editorial backlinks are highly valued in SEO. These links are given freely by other websites when they find your content valuable and relevant. For example, a blog post referencing your blog as a credible source would generate a natural editorial backlink. These highly prized links signify organic recognition of your content’s quality.
  2. Free Tool Backlinks
    Free tool backlinks are a powerful strategy for gaining attention and enhancing SEO. By offering a valuable tool for free, such as a cost calculator relevant to your industry or a free version of a commercial app, you can attract significant and lasting backlinks. To generate backlinks, market the free tool on websites with a similar readership.
  3. Sponsored or Paid Links
    Sponsored or paid links involve paying for backlinks on other websites to boost SEO. While these links can quickly enhance visibility and traffic, they must be handled cautiously due to search engine guidelines. Google, for example, requires sponsored links to be marked with a “sponsored” attribute to prevent manipulation of search rankings. Failing to disclose paid links can lead to penalties. Thus, while effective, it is crucial to adhere to guidelines to avoid negative impacts on SEO.
  4. Nofollow vs. Dofollow Backlinks
    Backlinks can have a “nofollow” or “dofollow” attribute. Dofollow links pass on SEO value, contributing to your site’s authority, while nofollow links do not. Although nofollow links don’t directly boost SEO, they can still drive traffic and increase brand visibility, making them useful in a well-rounded link-building strategy.
  5. Contextual Backlinks
    Contextual backlinks are links placed within the content of a page rather than in footers or sidebars. These links are more valuable because they are surrounded by relevant content, making them more likely to be clicked by users. For instance, a link within an article linked to a detailed guide is highly beneficial.
  6. Guest Posting Backlinks
    Guest posting involves writing articles for other websites in your niche, often in exchange for a backlink. This strategy not only helps in building backlinks but also positions you as an authority in your field. Best practices for guest posting include targeting reputable sites, providing high-quality content, and ensuring the backlink is placed naturally within the article.
  7. Backlinks from High-Authority Sites
    High-authority sites, such as well-known news outlets, academic institutions, or established industry blogs, provide highly valuable backlinks. Earning these backlinks often requires high-quality, unique content or innovative research. Such backlinks significantly enhance your site’s credibility and SEO performance.
  8. Social Media Backlinks
    Social media platforms can be a great source of backlinks. While links from social media are often nofollow, they can drive significant traffic and engagement to your site. Sharing content on platforms like Facebook, Twitter, LinkedIn, and Pinterest can increase visibility and indirectly boost your SEO.
  9. Backlinks from Niche Directories
    Niche directories are specialized directories relevant to a specific industry or field. For example, a directory dedicated to eco-friendly products is ideal for a green business. These backlinks help improve your site’s relevance within its niche, enhancing its SEO effectiveness.
  10. Broken Link Building
    Broken link building is about finding broken links on other websites and suggesting your content as a replacement. This strategy helps the website fix a broken link and earns you a valuable backlink. The process involves using tools to find broken links, reaching out to the site owner and proposing your content as a suitable alternative.

Avoiding Bad Backlinks

Bad backlinks come from spammy sites, link farms, or unrelated content and can harm your SEO efforts. It’s essential to regularly monitor your backlink profile and disavow any harmful links using tools like Google Search Console. Maintaining a clean backlink profile protects your site’s reputation and ranking.

Quality vs. Quantity in Backlinks

In backlinking, quality triumphs over quantity. High-quality backlinks come from reputable, authoritative sites and are contextually relevant to your content. Factors such as domain authority, relevance, and link placement determine its quality. Evaluating backlinks involves using tools like Moz, Ahrefs, or SEMrush to assess these factors.

Monitoring and Analyzing Backlinks

Tracking and analyzing your backlinks is crucial for maintaining an effective SEO strategy. Tools like Google Search Console, Ahrefs, and SEMrush allow you to monitor your backlinks, assess their quality, and understand their impact on your SEO. Regular analysis helps you adapt your strategy and optimize your backlink profile.

Conclusion

Understanding the different types of backlinks and their roles in SEO is vital for building a robust online presence. Focusing on high-quality, relevant backlinks and continuously monitoring your backlink profile will significantly enhance your website’s authority and ranking on search engines. 

Summer Reading List for Personal Finances

Summer Reading List for Personal FinancesSince it’s summer and reading lists are at the top of your mind, now’s the perfect time to expand your knowledge of money management and wealth building. So, whether you’re a retiree, a beginning saver, or even a child, we’ve got a book for you.

The Classics

If you haven’t had a chance to dive into these titles, you might want to grab them, starting with The Millionaire Next Door. Authors Thomas J. Stanley and William D. Danko published this in 1996 and learned something critical: most millionaires were those who don’t blatantly flash their wealth but live below their means and save, save, save. Other great books like The Psychology of Money and Same As Ever, both by Morgan Housel, explore how human emotions trigger spending decisions that aren’t always the best for us. (Not surprising, right?) Finally, The Intelligent Investor by Benjamin Graham advocates a “disciplined approach to investing.” He’s someone who you might want to listen to – he was a mentor to Warren Buffet.

New Books

For those who want to align their personal values with their financial decisions, The Social Justice Investor by Andrea Longton is a good read. Her thesis is simple: she reminds us that no matter how big or small, every investment impacts humanity. Another new book by an author who has a big presence on social media, Kyla Scanlon, is In This Economy? How Money and Markets Really Work. Using the model of short, bite-sized clips made famous by TikTok, she presents macroeconomic concepts like interest rates in digestible chunks. Even if you’re not into the socials, you can glean important fiduciary principles in a short time – especially if you have a busy life.

For Young Folks

Check out this powerful title, Stop Acting Rich…and Start Living like a Real Millionaire, also by Thomas J. Stanley. In a nutshell, this is a cautionary tale that details the pitfalls of overspending on a house or other major purchases while also emphasizing that just because you look rich doesn’t mean you are. Another great pick is Financially Stupid People are Everywhere – Don’t Be One of Them by Jason Kelly. This narrative shines the spotlight on dangers that parents might not discuss with their kids, such as consumer debt and large mortgages. It shares how “not to be a sucker.”

For Students and Kiddos

This is a long one: Debt Free U – How I Paid for an Outstanding College Education Without Loans, Scholarships or Mooching Off My Parents by Zac Bissonnette. According to the reviews, the story is motivating and inspiring for high school students and does an excellent job of paying off the title. For younger children, there is Lily Learns About Wants and Needs by Lisa Bullard, who reads it weekly to her kids. In her story, she focuses on gratitude and succeeds in explaining that “budgeting” isn’t negative but a necessity for success. From the sounds of this narrative, other age groups might benefit from it, as well.

These are just a few books you can pack into your suitcase or beach bag this summer. If you don’t finish them, you can take them with you for the rest of the year. Learning how to be smart about your finances never goes out of season.

Sources

Personal-Finance Books to Put on Your Summer Reading List (msn.com)

Accounting Considerations for Business Insurance Coverages

Business Insurance CoveragesWith more than eight million small businesses in America, and more than $776 billion in net premiums issued by the insurance industry in 2022 for commercial policies (according to the Insurance Information Institute), business insurance is big business. Along with protecting businesses from a myriad of claims, insurance expenses also have to be accounted for correctly.

When it comes to defining prepaid insurance, it’s essentially remittances that businesses (and individuals) make to an insurance company in advance. Normally, the usual time-frame for an insurance policy is 12 months. The time-frame is important when it comes to distinguishing between current and long-term asset classification.

If a prepaid expense, such as an insurance premium payment, is not utilized within 12 months of the remittance, it’s considered a long-term asset. Since it’s very uncommon for it to happen, it’s not seen in many financial statements, but is an important consideration to ensure that prepaid expenses are accounted for correctly.  

Important Accounting Factors

Since the coverage takes place in the future, but the payment is recorded in a preceding period, the prepaid insurance expense is considered a current asset on the balance sheet. Then, when the coverage is effective, the accounting consideration changes to the expense side of the business’ balance sheet.  

Here is an example of how businesses account for insurance expenses.

Company X pays an insurance premium of $3,000 on May 15 for the following 12 months starting June 1. The May 15 payment is recorded on the same date with a debit of $3,000 attributed to prepaid insurance along with a credit of $3,000 to cash. As of May 31, nothing has changed insurance-wise or accounting-wise for this policy, so the full $3,000 will be reported as prepaid insurance. However, once coverage is effective things change.

When June 30 rolls around, an adjusting entry will show a debit insurance expense for $250 (one-twelfth of the annual policy premium), and the same amount will see a credit to prepaid insurance. The June 30 debit balance for prepaid insurance will now be $2,750, leaving the remaining 11 months of insurance coverage that hasn’t yet elapsed – or eleven-twelfths of the $3,000 insurance premium cost.

This process repeats for the remaining 11 months. Depending on the business’ needs, coverage changes, policy changes, etc., the amounts may change but the process will likely remain the same.

Additional Factors

A related term, insurance payable, is another type of debt that is connected with an insurance expense. Listed on a company’s balance sheet, it represents a business’ outstanding premiums. This shows how much a company needs to pay the insurance company, and ideally by the end of the current period to remain current, avoid overdue fees, or have the policy canceled by the insurance carrier.

Along with giving businesses peace of mind, having the right mix of commercial insurance requires the right type of accounting considerations for the business’ internal and external accounting and tax reasons.

Sources

https://www.iii.org/fact-statistic/facts-statistics-commercial-lines

The Differences Between Conclusion of Value and Calculation of Value

The Differences Between Conclusion of Value and Calculation of ValueWhen a business is looking for a valuation, it needs to decide whether to use the calculation of value approach versus the conclusion of value option.

The conclusion of value calculation is a more rigorous and resource-intensive calculation of value. Both approaches are similarly dependable, and despite the calculation of value’s less in-depth approach, business owners can still benefit from this knowledge for their short- and long-term projection needs. However, there are some distinctions between the two approaches. 

Calculation of Value

This method can be conducted annually or once every 24 months. It’s often applied for internal needs, such as the owner looking to retire, selling the business or for critical strategy development. Calculation of value also can be used for planning purposes, such as the settlement stage of a divorce. However, since it’s not an opinion of value, it’s not seen during litigation. 

Calculation of value aims to get the company’s fair market value via comparable companies. It is an approximate value, calculated through either a single figure or a range.

Conclusion of Value

This is more comprehensive and has stricter standards that can meet those required by the IRS, lawsuits, the Department of Labor, potential business buyers, M&A activity, etc. Conclusion of value can take as long as six weeks to complete due to stricter reporting standards.  

It’s up to the discretion of the analyst, and the results can be a single figure or a range. There are three accepted forms of valuation: market, income and asset-based, necessitating additional time. These three approaches are defined further below.

Market-Based Valuation

This looks at charted data of transaction values to calculate a business’ financial worth. This works similar to how those in the real estate industry determine comparable business’ worth, which is based on substantially similar conditions.

Regardless of the type of business, it looks at financial metrics such as the client service model, business location, profitability, percentage of periodic revenue projections, overall revenue, growth rates, mean account sizes, etc.  

Income-Based Valuation

This type of analysis establishes fair value by looking at historical, present and projected future cash flows. It also looks at reasonable projected returns on future investments.  

Valuing investments via the discounted cash flow method (DCF) involves looking at after-tax, discretionary, and/or operating cash flow types. This approach is often utilized with businesses that have no to limited earning growth projections.

The Capitalization of Earnings/Cash Flow Method

This begins with determining the cash flow for a discrete period. Then, the cash flow is divided by the capitalization rate over the same period. The capitalization rate is determined by taking a property’s net operating income and dividing it by the present market value. Looking through a real estate lens, it’s interpreted as the percentage of return an investor is likely to obtain from an investment. It’s often calculated for mature/established businesses that grow at a reasonable/predictable rate.

Excess Earnings Valuation Methodology

This can be defined as looking at how much tangible and intangible assets earn for a company over a discrete period of time. 

Asset-Based Valuation

This values a company by looking at the net value of assets within a company or the post-liability deduction of the fair market value of the company’s total assets. It’s one way to determine how much a company would cost to re-create. 

While each business has its own needs for valuation, be it for internal or external audiences, understanding how to accomplish them and when to use each type is extremely helpful for overall operations.

So, You’ve Been Audited: Should You Go It Alone or Hire a CPA, EA or Tax Professional?

IRS Hire a CPA or Represent yourself?I sincerely hope you have never had to go through an IRS audit – and never have to in the future. But what if that dark day does arrive? Should you go it alone and defend yourself or hire a CPA, EA, or Tax Professional to be on your side?

The temptation to handle this alone is usually prompted by one of two things. First, the notion is that this is not such a big deal. Other times, people think if they handle it themselves, they will save money.

Unfortunately, neither of these are good reasons to defend yourself in a tax audit against the IRS. While the decision to hire a CPA or tax lawyer does depend on the case and the issues at hand, the procedural setting plays an important role as well. The answer is nearly universal that you should hire a CPA, EA, or Tax Professional to defend you – or even a tax lawyer if the situation warrants it (sometimes they are one in the same person).

Why it is a Terrible Idea to Defend Yourself in a Tax Audit

There are several reasons why partnering with a pro is a good idea. Let’s look at each one and why.

  1. Working with your CPA, EA, or Tax Professional, you can go back and forth with your side of the story, dig into the facts, and challenge each other in formulating a response. You essentially have a thinking partner and someone to fact check your side of the situation. Plus, they know how to “handle” the IRS in the messaging of responses.
  2. It is prudent to create some space between you and direct communications with the government. For the same reason, defense attorneys do not want their clients talking directly to the police. It is best if you communicate via your CPA or tax lawyer. Whenever you are in direct communications with the IRS, the chance of making a misstep is greater. Once you have said or written something to the IRS, it is pretty much impossible to backtrack.
  3. CPAs, EAs, or Tax Professionals are experienced in advocating for clients and documentation.
  4. Early representation is a must! One of the biggest mistakes taxpayers subject to an audit make is to start off on their own and then end up in an even worse situation than they started. One of the biggest reasons why an audit can cost a lot is because the taxpayer dug themselves into hole that a CPA, EA, or Tax Professional then later had to get them out of.
  5. Most cases rest on fundamental accounting problems. Someone with expertise and good records can address these problems early and competently. Seeing your own facts and documents through an unbiased and objective lens is not easy for most of us.

Conclusion

Ultimately, the decision to hire a CPA, EA, or Tax Professional to represent you in a tax audit is a personal one. Exactly how necessary this is depends on the facts and circumstances of each individual situation, but it’s almost never a good idea to go it alone. If you ever find yourself in an audit, seriously consider hiring a CPA, EA, or Tax Professional – and do it early in the process.

Funding for Federal Aviation, Reinforcing Supply Chains, and Deterring Iranian Terror Attacks Around the World

HR 3935, HR 4581, HR 6571, HR 3033, HR 6015, HR 5826FAA Reauthorization Act of 2024 (HR 3935) – This bipartisan bill reauthorizes funding and direction for the Federal Aviation Administration (FAA) and the National Transportation Safety Board (NTSBB) for another five years. The legislation is designed to improve air travel safety, provide increased protections for consumers, hire more people to the aviation workforce, and modernize the U.S. national airspace system for the future. It authorizes more than $105 billion for FAA funding through fiscal year 2028. The bill passed in the Senate on May 9, in the House on the next day, and was signed by the president on May 16.

Maternal and Child Health Stillbirth Prevention Act of 2023 (HR 4581) – introduced by Rep. Ashley Hinson (R-IA) on July 12, 2023, this bill funds additional research and activities with the goal of preventing stillbirths. It passed in the House on May 15, 2023, and is currently in the Senate.

Promoting Resilient Supply Chains Act of 2023 (HR 6571) – Introduced on Dec. 4, 2023, by Rep. Larry Bucshon (R-IN), the purpose of this bipartisan bill is to establish supply chain resiliency and a crisis response program within the Department of Commerce. Given the potential threat of pandemics, extreme climate events, and even war with anti-democracy adversaries, this bill would help secure American supply chains, reduce reliance on other countries, and develop our own emerging technology resources. The bill passed in the House on May 15 and currently lies in the Senate.

Solidify Iran Sanctions Act of 2023 (HR 3033) – The purpose of this bill is to enact a permanent requirement for the president to sanction individuals or entities that aid Iran’s ability to acquire or develop certain chemical, biological, or nuclear weapons, among other provisions.

This bipartisan bill was introduced by Rep. Michelle Steel (R-CA) on April 28, 2023. It passed in the House on April 16 of this year and currently lies with the Senate.

Iran Sanctions Accountability Act of 2023 (HR 6015) – This legislation was introduced by Rep. Blaine Luetkemeyer (R-MO) on Oct. 20, 2023. The bill would establish protections to ensure that humanitarian exceptions to Iranian sanctions do not inadvertently facilitate international terrorism or the sale of weapons to terrorists. The bill passed in the House on April 16 and is now in the Senate.

No Paydays for Hostage-Takers Act (HR 5826) – This bill, which was introduced by Sen. Joe Wilson (R-SC) on Sept. 28, 2023, passed in the House on April 16 and is currently in the Senate. It would empower the president to deny a U.N. diplomatic representative entrance to the country if that person is sanctioned due to ties to terrorism and distribution of weapons of mass destruction. The bill also would require the president to issue reports to Congress on matters such as blocked Iranian assets, any U.S. hostages taken by Iran, and if travel to Iran by U.S. citizens would put them in imminent danger.

The Role of Data Analytics and Visualization in Modern Auditing

The Role of Data Analytics and Visualization in Modern AuditingModern businesses have become complex mainly due to the exponential growth of data, and traditional auditing methods can no longer keep pace. To cope with today’s rapidly evolving business landscape, data analytics and visualization have become crucial tools. Leveraging these advanced technologies enhances the efficiency and effectiveness of audits and enables auditors to extract valuable insights previously hidden in the vast sea of data.

Understanding the Change

Before the digital age ushered in a new era of auditing, auditors relied solely on manual sampling techniques and paper-based records. Today, data analytics serves as the cornerstone of audit procedures. By utilizing the power of algorithms and statistical models, auditors can analyze large datasets with speed and accuracy. This involves examining data from financial statements, general ledgers, and transactional data. It helps mitigate the risk of overlooking critical information. Data visualization, on the other hand, uses visual elements like graphs, charts, and dashboards that make it easier to interpret data.

Benefits of Data Analytics and Visualization

  1. Enhanced audit quality – Through sophisticated data mining techniques, auditors can identify anomalies, patterns, and trends. This creates audit trails that can help track changes over time and eventually indicate potential risks or irregularities. By scrutinizing entire datasets rather than relying on sampling, auditors can provide stakeholders with a more comprehensive and reliable assessment of financial statements and internal controls.
  2. Detecting fraud and errors – A rise in financial misconduct across various industries has made fraud detection a top priority for auditors in recent years. With the help of data analytics, it becomes possible to flag suspicious transactions, discrepancies, or outliers that may indicate fraudulent activity. By leveraging predictive modeling and anomaly detection algorithms, auditors can proactively identify red flags and conduct targeted investigations, safeguarding stakeholders’ interests and preserving the integrity of financial reporting.
  3. Driving insights through visualization – While data analytics lays the foundation for effective auditing, visualization helps connect raw data to actionable insights. Through charts, graphs,and dashboards, auditors can transform complex datasets into visual narratives that facilitate decision-making and communication. Visualization makes the interpretation of audit findings easy and enables auditors to identify patterns and relationships that may have gone unnoticed in traditional tabular formats.
  4. Improving risk assessment – Risk assessment is crucial in the auditing process and guides auditors in identifying areas of potential concern. Data analytics empowers auditors to conduct more robust risk assessments by analyzing historical data, industry benchmarks, and key performance indicators. By leveraging predictive analytics, auditors can anticipate emerging risks and tailor audit procedures to address specific areas of concern, thereby enhancing the overall effectiveness of the audit process.

Embracing Technology-Driven Auditing

As technology continues to evolve, auditors must embrace innovation and adapt to the changing auditing landscape. From machine learning algorithms to artificial intelligence-powered tools, the possibilities for enhancing audit effectiveness are limitless. By investing in training and adopting cutting-edge technologies, auditors can stay ahead of the curve and deliver greater value to their clients and stakeholders.

It is worth noting that while the benefits of data analytics and visualization in auditing are undeniable, its implementation does come with some challenges. Data quality, privacy concerns, and regulatory compliance remain key considerations for auditors when leveraging data analytics. Additionally, the shortage of skilled professionals proficient in both auditing and data analytics poses a significant barrier to widespread adoption. However, by addressing these challenges proactively and fostering a culture of continuous learning and innovation, auditors can harness the full potential of data analytics and visualization in modern auditing.

Conclusion

The integration of data analytics and visualization has revolutionized the field of auditing, enabling auditors to conduct more efficient, effective, and insightful audits. By leveraging advanced technologies and analytical techniques, auditors can enhance audit quality, detect fraud and errors, drive actionable insights, improve risk assessment, and embrace a technology-driven approach to auditing. Although there are some challenges, the benefits far outweigh the obstacles, making data analytics and visualization indispensable tools for auditors in the digital age. As businesses continue to generate massive amounts of data, auditors must embrace innovation and harness the power of data analytics and visualization to navigate the complexities of modern auditing successfully.

6 Financial Tips for New Dads

6 Financial Tips for New DadsThere are probably few things as exciting and daunting as becoming a new dad, especially when it comes to finances. But we’ve got you! Here are a few tips to help you turn those challenges into opportunities as you walk this new life path.

Create a Budget

This is probably super obvious, but here’s a way to break it down into sections so you’ll have a roadmap.

  • Look at current finances. This includes income, checking, and savings.
  • Plan for new expenses. Make an exhaustive list of everything you can think of that your baby might need.
  • Prioritize and cut. Identify these areas, then make hard decisions about where you need to change things for your new reality.
  • Launch into the changes. Keep tabs on how you’re doing as your life evolves and adjust as you deem necessary.

Review Your Insurance

First thing, add your baby to your health insurance plan so you’ll be covered for doctor visits, vaccinations, and anything else that comes along. Next up, update your life insurance plan – you’ll likely need to increase your coverage. It’s not just about you anymore. It’s about making sure your family’s financial future is secure. If you don’t have a life insurance policy, it’s time to get one.

Start a Savings Account for Your Child

Opening an account for your baby will help ensure a solid financial future. Look for accounts with good interest rates so you can build a nest egg over time. But wait, there’s more – college! Mind-boggling, yes, but necessary. A 529 plan is a great option because it’s designed specifically for future education and comes with tax advantages. Don’t put this on the back burner!

Set Up an Emergency Fund

Life happens. Unexpected things can pop up at any given moment. A car repair. Your HVAC breaks down. A trip to the ER in the middle of the night. Start small. Set aside a few dollars each month. This way, you won’t have to dip into your savings or use a credit card. Not that this is unwise, of course, but having some non-APR padding in your life provides the peace of mind you’ll undoubtedly need during this amazing, uncertain period of your life.

Plan Your Parental Leave

Make sure you understand all the details about your company’s policies. When you have digested it all, make sure your budget includes resources for your time away. If you’re an entrepreneur, add this to your overall budget. Yes, you’ll have to cut back on spending, but your child’s first few days and months? You can’t put a price on that.

Consult a Professional

If you feel you need extra assistance charting these unknown waters, bring in the pros. Your accountant is a great person to start with. Just talking things out with a human face-to-face might give you the comfort you need to put one foot in front of the other.

Navigating parenthood, specifically as a dad, is one of life’s most important jobs. Make sure you have all the right tools with you as you begin this awesome journey.

Sources

7 Financial Planning Tips for New Dads in 2024: Preparing for Parenthood

How to Develop a Credit Policy

How to Develop a Credit PolicyA credit policy explains how a company will manage lines of credit for client accounts and what procedures to follow for severely outstanding invoices. It helps a business promote a robust foundation for its working capital level.

Defining a Credit Policy

Unlike personal credit scores, business scores range from 0 to 100; the scores from the FICO Small Business Scoring Service range from 0 to 300. According to the U.S. Small Business Administration, a first step to establishing business credit is to sign up for a Dun & Bradstreet (DUNS) number for each business location.

There are three components to a company’s credit policy. First, develop an effective system of following up on past-due invoices. Second, define when, how much, and the terms of credit extended to customers. Third, establish how the business underwrites a client’s creditworthiness and put guidelines in place to determine when to increase or decrease lines of credit for clients.

Memorializing a Company’s Credit Policy for External and Internal Uses

The reason why it’s so important to have a credit policy in writing is because 6 in 10 workers in large American business workplaces have found it challenging to get information from their fellow co-workers, according to a report by YouGov and Panopto. This same report found that processes that are not documented result in employees wasting an average of 5.3 hours/week either looking for the right person or waiting for a response.

Internally, it enables employees to understand the policy inside and out, creating more efficient workers. Externally, it sets clear ground rules and reduces the likelihood of mismatched customer expectations.

Considerations Before Writing Out a Credit Policy

Depending on the interest rate environment, clients may have a hard time obtaining financing. If they are able to obtain financing in a high-interest rate environment, it will come with a higher cost for the customer. The business may need to have more stringent policies.

Terms of Sale May Not be One-Size-Fits-All

It is imperative to explain how payment terms work before the company engages with clients. Be it net 15, 30, or 60 days, etc., consider how payment timeframes may incentivize pre-payment or early payment discounts. From there, determine when and how the company takes action to deem when payment is “delinquent,” and when it’s considered uncollectable and finally written off and sold to a debt collector.

Depending on the size/revenue/etc. of the company writing the policy, it is not ideal to treat smaller companies the same as larger/more established companies. For example, giving a company a net 45 term versus a net 30 or net 15 has two available outcomes.

Larger companies may be able to pay faster, but if they are given more time to pay, it can negatively impact the receiving company’s cash flow. And while giving small companies similar terms can create more goodwill, it also can cause a company to take it for granted. This presents the potential to never receive payment for outstanding invoices if the small business faces bankruptcy. Similarly, depending on the type of business and/or sector it’s in, risk should be rated appropriately.

Determine Roles/Responsibilities

Ensure each department and person within each department has a defined role within the credit approval process. The sales department can help craft payment terms to reduce late payments and maximize sales. The credit department can handle reviewing to extend, lower, and increase credit limits. The accounts receivable (AR) department should follow up on late invoices, collect payments, and record incoming payments.    

While there’s no boilerplate form for a business’ credit policy, having a policy in place will help a business navigate its internal and external needs more effectively.

Sources

eBook: Valuing Workplace Knowledge

https://www.sba.gov/business-guide/plan-your-business/establish-business-credit

Liquidation Value Versus Going-Concern Value

Liquidation Value Versus Going-Concern ValueWhether it’s a company firing on all cylinders or a company on the verge of liquidation, determining correct valuations is not a cut-and-dry process. Understanding the importance of going-concern values and liquidation values is essential when determining a business’ worth.

Quantifying Going-Concern Value

When it comes to defining this type of value, it factors in the likelihood of a business operating indefinitely with continued profitability. With a company’s demonstrated ability to maintain profitability comes inherent value, reducing the likelihood of a business going bankrupt. 

In contrast to a business’ liquidation value basis, which might only be $20 million due to unsold goods, real property and associated physical assets, the going-concern value might be worth $120 million. The difference and increase in value are due to the additional equity embedded in its competitive position in its industry, its projected future cash flows, goodwill, etc. Goodwill consists of the company’s name, its intellectual property (IP) patent, trademarks, customer loyalty, etc.

When one company looks to acquire another, the company bases its valuation on the calculated going-concern value of the acquiree. When formulating its offer to purchase the other, it will factor in its future profitability, intangible assets, customer loyalty, and goodwill.

Liquidation Value Defined

Liquidation value is determined by establishing the net value of a company’s physical or tangible assets if they were to go out of business. It’s important to distinguish that intangible assets (intellectual property, brand significance, and goodwill) are not included in liquidation sales. Assets are often sold at a loss because the seller must turn the assets into cash quickly. Generally, liquidation valuation is higher than salvage value but less than book value. Though, to contrast with a traditional, non-acquisition sale, intangible assets are considered part of the sale/offer price.

One important concept for determining liquidation value is the recovery rate. Cash is naturally the highest level, usually at 100 percent. From there, assets such as accounts receivable (AR), inventory, property, plant, and equipment (PPE) have progressively lower recovery values. Determining these values will accordingly govern the success of a liquidation sale.

Comparing Values: Market vs. Book vs. Liquidation vs. Salvage

It’s important to highlight the hierarchy of values to illustrate why these types of valuations differ so much. Market value is the highest, though market conditions can temporarily lower them below normal valuations. Book value is the second highest, also known as historical, and it is what’s listed on the company’s balance sheet. Book values must be looked at through the lens of history and relative to inflation, etc. Salvage value is the second lowest valuation, which is also referred to as scrap value, or when an item is “at the end of its useful life.” Liquidation is the lowest value because tangible assets must be sold quickly, lessening the chance to find a buyer at a fair price.

How Liquidation Works

Liquidation is the difference between a company’s tangible asset value and liabilities. For example:

  1. Liabilities of a business are $750,000

  2. Balance sheet assets show a book value of $1.5 million

  3. Salvage value of assets is $250,000

  4. Auction sale estimate value is $1.2 million, or 80 percent

Liquidation Value = Auction Value – Liabilities ($1.2 million – $750,000 = $450,000)

Many variables must be studied to effectively determine a company’s value, regardless of what spectrum is being evaluated. Employees and consultants who have a better grasp of these methods will provide everyone involved with a fair assessment.