Emergency savings: How much is enough?

We all need an emergency fund, but what’s considered “an emergency?” Any unexpected hit to your finances, including layoffs, unanticipated illnesses, and natural disasters. Car insurance premiums and regular home maintenance are (or should be) anticipated, so they’re not emergencies. The same is true of credit card bills for vacations and visits to the dentist’s office. An emergency fund is designed to keep your life intact during temporary setbacks and to help you avoid unnecessary debt.

How much emergency savings is enough? In general, your emergency fund should cover three to six months of expenses. How much you’ll need will vary based on your financial situation, including the vulnerability of your income. For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks. So the one-earner family generally should set aside more for emergencies. Or if you don’t have disability insurance, you might consider setting aside a bigger balance in an emergency account. Some companies provide payment for accrued vacation and/or sick leave to laid off employees. If your company provides such benefits and you maintain significant balances in these accounts, you may not need as much in an emergency fund (at least to help you weather an unexpected layoff).

Another factor to consider is your ongoing debt payments. Putting excess cash toward high interest credit card balances might make more sense than funding a savings account that earns four percent interest. Also, in a true emergency some spending can be reduced and postponed, such as retirement plan contributions, vacations, and entertainment. Ask yourself, “How much will I need to cover my minimum monthly expenses without resorting to credit cards or lines of credit?” That’s a good starting point for determining how much to set aside in an emergency fund.

Once you have a savings goal in mind, don’t wait. You can start small and increase contributions as you receive pay increases or windfalls. The money should be liquid – easy to get at – so don’t put it in investments with withdrawal penalties. A savings or money market account is a great place to set aside cash for a rainy day.

Then post a sign on the account: “Use only in case of emergency.”

David Bradsher, CPA

Every small business should establish controls

Every week reporters publish stories about companies that have lost thousands, even millions of dollars because of fraud. They recount the dreadful details of business owners who learned – too late – that a lack of basic controls left their companies vulnerable to pilferage, embezzlement, and other types of misappropriation.

How do these lessons apply to small businesses? After all, small firms generally can’t afford to hire internal auditors or set up separate divisions to break up incompatible duties. While it’s true that a small company can’t always protect itself in ways larger firms might, management can establish controls in certain high-risk areas, such as the following:

Cash disbursements. If at all possible, the owner/manager should sign checks. This control has a dual purpose: management sees how the company is spending its money, and the cash disbursement function is kept separate from bookkeeping or accounting. If the same person signs checks and enters disbursement transactions in the accounting records, embezzlement is harder to prevent. Requiring two signatures on checks above a certain amount also provides greater control.

Customer collections. Consider having the owner/manager open the mail, especially if customer collections are a regular part of your business. Alternatively, you might ask someone separate from the accounting function to open the mail and prepare the deposit slip. Of course, the practice of making daily deposits is also a good control.

Personnel practices. By taking care to perform background checks before hiring key employees, especially those who will be handling cash or other high-risk assets, you can prevent problems later on. Of course, financial pressures, addictions, and other factors can corrupt even good employees. That’s why managers might consider discreetly monitoring employee lifestyles (without invading anyone’s privacy, of course). An observant manager might note that certain lower-level employees are living well beyond their means, or that warehouse staff are carrying off company materials to remodel personal residences.

Perhaps a small business’s greatest control is the “tone at the top.” If management sets a high standard, employees generally follow. However, if a manager is perceived as lax – for example, he or she doesn’t respond quickly when evidence of misappropriation surfaces – employees might conclude that theft isn’t such a big deal.

Remember this: A company that fails to establish minimum controls is providing a golden opportunity for fraud. If you’d like help reviewing your firm’s controls, give us a call.

David Bradsher, CPA

Equipment write-off decreases for 2014

In recent years, businesses could expense up to $500,000 of equipment purchases in the year of purchase, with a $2,000,000 annual purchase limit. In addition, bonus depreciation was allowed for new equipment purchases.

Because Congress did not extend these provisions for 2014, businesses can now only expense $25,000 of new or used equipment purchases. The deduction is reduced dollar-for-dollar when total asset purchases for 2014 exceed $200,000. Also, the 50% bonus depreciation that applied in 2013 is no longer available.

Congress may extend these provisions, or they may not. Check with us for the latest when you’re making equipment purchasing decisions this year.

David Bradsher, CPA

IRS alerts taxpayers to latest tax scam

Watch for these signs that the call is a scam:

Use of fake IRS badge numbers.

Caller knows the last four digits of your social security number.

Caller ID appears as if IRS is calling.

Bogus IRS e-mail is sent as follow-up.

Second call claims to be from police or DMV, again supported by fraudulent caller ID.

Don’t respond in any way to these scams; instead forward the scam e-mail to phishing@irs.gov, or file a complaint at FTC.gov.

David Bradsher, CPA