Cash flow planning for the solo attorney and small law firms remains one of the most critical areas of financial planning to get correct. Below are several ideas to help you finish strong this year and prepare for next year by focusing on cash flow for your family and your business.
Review your receivables
One of the best ways to finish this year strong is to review your current receivables backlog. You should know the average length of time it takes to collect on your hard work. If it is more than 60 days, there may be room for improvement. Is it a staffing issue, or a process issue? Are you still making staff print out bills, mail them, wait for the client to return the invoice with a check, then deposit the checks? This process itself may slow down your receivables by at least two weeks. One suggestion is to invest in an automated billing process like LawPay that will allow clients to pay their invoices online and on time. Increasing the pace of cash flow is critical to the success of your practice.
Fund Your Retirement Accounts
For 2019, the IRS set contribution limits for most investors at $19,000 into a 401(K) retirement account. If your firm utilizes a Simple IRA, your contribution limit is $13,000(if you’re over 50, you may be able to make catch-up contributions of up to $6,000 in a 401(K) and $3,000 in a Simple IRA). If you have not already maximized your contribution for 2019, now is the time to adjust your paycheck to fill up this important bucket of money. Don’t wait until December as you may not have enough paychecks left to fully fund your retirement.
Roth contributions create a bucket of money in the future that is 100% tax-free. If you consider that the current tax rates are historically low and our country is starving for revenue, the chances that tax rates are going up in the future remains high. In order to diversify your tax strategies in the future, it is critical to diversify the taxation of your investments now.
Seriously consider Roth 401(K) contributions. If your plan does not allow for Roth 401(K) contributions it is also important to amend your plan to allow for this important feature and this needs to be done ASAP to be able to allow them for 2020.
Reinvest In Your Firm Technology and Training
If you have fully funded your retirement account, congratulations for paying yourself first. This means that your paycheck may be a little bigger now. You should consider reinvesting in yourself and your firm. It may be time to upgrade your timekeeping system, CRM, or billing system. Invest in additional training for yourself or your staff. The increase in efficiency by learning your systems can make a significant difference in your firm output. Not to mention your staff will appreciate your investment.
Get Ready For an Increase in Health Care Expenses for 2020
According to PWC’s Behind The Numbers study, medical costs are expected to rise by 6% for 2020. Your health care broker will probably deliver the bad news to you soon. Now is the time to consider absorbing the cost or passing it on to your employees. You may need to give them a raise to offset this cost.
You may want to speak with your healthcare broker to determine if switching to a High Deductible Health Plan (HDHP) makes sense for you and your employees. This type of plan combines insurance with a high deductible and the ability to save pre-tax into a health savings account. For 2020 the IRS has announced an increase in deductible contributions to HSA plans to $3,550 for individuals and $7,100 for families.
This is the type of plan I run for my small business. Over the last two years I have deducted off my taxes almost $14,000 and have invested the same amount into an HSA investment account which grows tax-free. I pay no tax ever if I use the money for qualified health expenses now or in the future. No other investment provides this triple-tax advantage.
Estimate your 2019 Tax Bill
The 2018 Tax Cut and Jobs Act made significant changes to our tax code. Now is the time to pull out your 2018 tax return and begin to estimate your 2019 taxes. If you received a refund last year there is a good possibility that you may receive one in 2020. Instead of waiting for the government to return your hard earned money you should consider reducing your 4th quarter estimated tax payment or withholding to more closely match your actually tax amount owed. Envision Wealth Management is gearing up to help our clients estimate their taxes utilizing our cash flow management software that all of our clients have access to on their personalized website.
Buy A New Phone But Skip The Installment Plan
My 11 year old son has informed me that I need a new phone soon (of course, so he can get my old one). He has been researching all the great deals available and noticed that most phone companies will sell you a new phone on a monthly no interest payment plan. However, it may be better to buy the phone outright. I may be able to deduct the purchase price of the phone from my 2019 taxes if I purchase the phone this year. Keep in mind that you should estimate what percentage you use your phone for business vs personal use. A good ratio to use if you do not know is 70% business/30% personal, allowing you to deduct 70% of the total cost.
As a business owner you can deduct most legitimate expenses and any acceleration of those expenses at the end of a tax year can make a significant difference in your 2019 tax bill.
For most of our clients, this has been a great year with increases in cash flow, a better work-life balance, happy clients, and a growing practice, not to mention above average stock market returns.
Envision Wealth Management has room to take on a few more clients before the end of the year. If you think you and your firm may benefit from our valuable work, please reach out to us at 757-777-3121 for your complimentary cash flow and financial plan review. Additional information can be found on our website at www.envisionyourwealth.com
Jonathan Muhlendorf is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Envision Wealth Management is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not provide legal or tax advice. CRN-2738842-092019
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