At first glance, calculating restitution for fraud damages may seem relatively simple. If someone steals $10,000 from a company, that person should repay that amount, perhaps with interest, right? Not quite. Financial experts also consider the profits the business lost because of the fraud — and weigh different methods of computing damages.
The appropriate approach
Experts typically use either the benefit-of-the-bargain or out-of-pocket approach to calculate damages. The appropriate method depends to some degree on the location and nature of the fraud. But in most cases, the benefit-of-the-bargain method results in greater restitution for victims.
Take, for example, a property developer who buys a parcel of land that the seller says is worth $1 million but is offering at $900,000. In truth, the seller is lying about the parcel’s value and has even falsified a valuation report. The land is actually worth about $700,000. Putting aside the developer’s failure to perform proper due diligence, how might fraud damages be assessed?
Under the out-of-pocket rule, the company would be awarded $200,000 in damages, or the difference between the land’s real value and the amount paid for it. Using the benefit-of-the-bargain rule, however, damages would be calculated at $300,000 — the difference between the seller’s misrepresented value and the parcel’s true worth.
3 common alternatives
It’s obvious why plaintiffs typically prefer the benefit-of-the-bargain method. But there are three other methods experts commonly use to calculate lost profits.
First, using the benchmark (or yardstick) method, an expert compares the fraud victim’s corporate profits to those of another, similar company that wasn’t defrauded. This method is particularly appropriate for new businesses or franchises.
The hypothetical (or model) method is also generally appropriate for businesses with little history. It requires the expert to gather marketing evidence that demonstrates potential lost sales. After calculating the total, the costs that would have been associated with the lost sales are subtracted to arrive at lost profits.
Finally, the before-and-after method typically is used for longer-established businesses. Experts look at the company’s profits before and after the fraud compared to profits during the time the fraud was being committed. The difference is the lost profits.
Don’t do it yourself
Defrauded business owners shouldn’t attempt to calculate their own fraud damages — or engage a professional who isn’t qualified to do it. To help ensure you receive the highest restitution amount, contact us or have your attorney get in touch.
© 2021 Covenant CPA
When creating or updating your strategic plan, you might be tempted to focus on innovative products or services, new geographic locations, or technological upgrades. But, what about your customers? Particularly if you’re a small to midsize business, focusing your strategic planning efforts on them may be the most direct route to a better bottom line.
Do your ABCs
To get started, pick a period — perhaps one, three or five years — and calculate the profitability contribution level of each major customer or customer unit based on sales numbers and both direct and indirect costs. (We can help you choose the ideal metrics and run the numbers.)
Once you’ve determined the profitability contribution level of each customer or customer unit, divide them into three groups: 1) an A group consisting of highly profitable customers whose business you’d like to expand, 2) a B group comprising customers who aren’t extremely profitable, but still positively contribute to your bottom line, and 3) a C group that includes customers who are dragging down your profitability, perhaps because of constant late payments or unreasonably high-maintenance relationships. These are the ones you can’t afford to keep.
Your objective with A customers should be to strengthen your rapport with them. Identify what motivates them to buy, so you can continue to meet their needs. Is it something specific about your products or services? Is it your customer service? Developing a good understanding of this group will help you not only build your relationships with these critical customers, but also target sales and marketing efforts to attract other, similar ones.
As mentioned, Category B customers have some profit value. However, just by virtue of sitting in the middle, they can slide either way. There’s a good chance that, with the right mix of sales, marketing and customer service efforts, some of them can be turned into A customers. Determine which ones have the most in common with your best customers, then focus your efforts on them and track the results.
Finally, take a hard look at the C group. You could spend a nominal amount of time determining whether any of them might move up the ladder. It’s likely, though, that most of your C customers simply aren’t a good fit for your company. Fortunately, firing your least desirable customers won’t require much effort. Simply curtail your sales and marketing efforts, or stop them entirely, and most will wander off on their own.
Brighten your future
As the calendar year winds down, examine how your customer base has changed over the past months. Ask questions such as: Have the evolving economic changes triggered (at least in part) by the pandemic affected who buys from us and how much? Then tailor your strategic plan for 2022 accordingly.
Please contact our firm for help reviewing the pertinent data and developing a customer-focused strategic plan that brightens your company’s future.
© 2021 Covenant CPA
Because of the COVID-19 pandemic and the resulting economic turndown in some areas, you may have family members in need of financial support. If you’re interested in lending money to loved ones in need, consider establishing a “family bank.” These entities enhance the benefits of intrafamily loans, while minimizing unintended consequences.
Lending can be an effective way to provide your family with financial assistance without triggering unwanted gift taxes. So long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift. This means, among other things, documenting the loan with a promissory note, charging interest at or above the applicable federal rate, establishing a fixed repayment schedule, and ensuring that the borrower has a reasonable prospect of repaying the loan.
Even if taxes aren’t a concern, intrafamily loans offer important benefits. For example, they allow you to help your family financially without depleting your wealth or creating a sense of entitlement. Done right, these loans can encourage responsible financial behavior, promote accountability and help cultivate the younger generation’s entrepreneurial capabilities by providing financing to start a business.
Too often, however, people lend money to family members with little planning and regard for potential unintended consequences. Rash lending decisions can lead to misunderstandings, hurt feelings, conflicts among family members and false expectations. That’s where the family bank comes into play.
A family bank is a family-owned, family-funded entity designed for the sole purpose of making intrafamily loans. Often, family banks are able to make financing available to family members who might have difficulty obtaining a loan from a bank or other traditional funding sources or to lend at more favorable terms. By “professionalizing” family lending activities, a family bank can preserve the tax-saving power of intrafamily loans while minimizing negative consequences.
Build a strong governance structure
The key to avoiding family conflicts and resentment is to build a strong family governance structure that promotes communication, group decision-making and transparency. It’s important to establish clear guidelines regarding the types of loans the family bank is authorized to make and allow all family members to participate in the decision-making process. This ensures that family members are treated fairly and avoids false expectations.
Ease financial hardships
It’s possible that someone in your extended family has faced difficult financial circumstances recently. Contact us to learn more about intrafamily loans and family banks.
© 2021 Covenant CPA
For many small businesses, the grand reopening is still on hold. The rapid spread of the Delta variant of COVID-19 has mired a variety of companies in diminished revenue and serious staffing shortages. In response, the Small Business Administration (SBA) has retooled its Economic Injury Disaster Loan (EIDL) program to offer targeted relief to eligible employers.
A brief history
The EIDL program was in place well before 2020. However, the federal government has ramped up the initiative’s visibility while trying to help small businesses during the pandemic.
With the entire country essentially declared a disaster area, the CARES Act established an enhanced EIDL program for small businesses affected by COVID-19. It offered lower interest rates, longer repayment terms and a streamlined application process.
The American Rescue Plan Act upped the ante, offering eligible companies targeted EIDL advances that are excluded from the gross income of the person who receives the funds. The law stipulates that no deduction or basis increase will be denied, and no tax attribute will be reduced, because of this gross income exclusion.
The SBA’s most recent enhancements to the EIDL program offer “a lifeline to millions of small businesses who are still being impacted by the pandemic,” according to SBA Administrator Isabella Casillas Guzman. (Eligible employers include not only small businesses, but also qualifying nonprofits and agricultural companies in all U.S. states and territories.)
First and foremost, the loan cap has increased from $500,000 to $2 million. Eligible small businesses can use these funds for almost any operating expense, including payroll and equipment purchases. Funds can also be applied for certain debt payments. Specifically, the SBA has expanded the allowable use of EIDL funds to prepay commercial debt and pay down federal business debt.
In addition, the agency has implemented a new deferred payment period under which borrowers can wait until two years after loan origination to begin repaying their COVID-related EIDLs.
If you believe your small business could qualify and benefit from these newly enhanced EIDLs, first identify how much money you need and how soon you need it. The SBA is offering a 30-day “exclusivity window” to approve and disburse loans of $500,000 or less. Approval and disbursement of loans of more than $500,000 will begin after this 30-day period.
The agency has also rolled out a streamlined application process that establishes “more simplified affiliation requirements” modeled after those of the Restaurant Revitalization Fund. The deadline for applications remains December 31, 2021. As is the case with any government loan, it’s better to apply earlier rather than later in case funds run out.
Help with the process
For further details about the new and improved COVID-related EIDL program, go to sba.gov/eidl. And don’t hesitate to contact us. We can help you determine whether your small business qualifies for one of these loans and, if so, assist with completing the application process.
© 2021 Covenant CPA