financial education

Value Chain Analysis: Advantages and Disadvantages

Reviewed by Somer Anderson
Fact checked by Suzanne Kvilhaug

What Is Value Chain Analysis?

Value chain analysis is an investigation of a business’s value chain, the full range of activities a company conducts to create a product or a service. The purpose of value-chain analysis is to increase production efficiency so that a company can deliver maximum value for the least possible cost.

Key Takeaways

• Companies use value chain analysis to determine the lowest-cost methods for delivering the most value.
• A company can gain a competitive edge and boost profits by analyzing the five primary and four supportive value chain activities and creating efficiencies in them.
• A primary disadvantage to this analysis is that a company’s overall vision and strategy may get lost or muddied when operations are broken down into fine segments.

Primary Value Chain Components

Companies conduct value chain analysis by scrutinizing every production step required to create a product, with the ultimate goal of delivering maximum value for the least possible total cost. There are many advantages of value chain analysis, all of which result in a company’s ability to understand and optimize the activities that lead to its competitive advantage and higher profit levels.

By thoroughly analyzing each of the following primary value chain activities, a company can ensure that the value it’s creating exceeds the cost associated with creating that value:

• Inbound logistics: Functions such as receiving, warehousing, and managing inventory.
• Operations: Procedures for converting raw materials into finished products.
• Outbound logistics: Activities directly involved in distributing the company’s final products to consumers.
• Marketing and sales: Activities aimed at enhancing visibility and targeting appropriate customers, such as advertising, promotion, and pricing campaigns.
• Service: Programs that enhance the consumer experience, such as customer service, maintenance, repair, refund, and exchange functions.

Support Activity Components

The following four support activities help make the primary activities more efficient:

• Procurement: How a company obtains raw materials.
• Technological development: Used at a firm’s research and development stage, entailing practices like developing manufacturing techniques and automating processes.
• Human resources (HR) management: Hiring and retaining employees who carry out the firm’s vision.
• Infrastructure: The composition of a company’s management team across its accounting, finance, and quality control silos.

Important

Support activities are generally denoted as overhead costs on a company’s income statement.

Steps to Value Chain Analysis

• Identify and classify all value chain activities
• Determine the activities’ cost and value drivers
• Learn about, review, and compare the competition’s value chains
• Identify the links between activities
• Determine competitive advantages and identify opportunities for reducing costs

Advantages of Value Chain Analysis

The primary benefit of conducting a value chain analysis is that it helps businesses increase customer value and profit margins. Additionally, the more often a value chain is analyzed, the more familiar management becomes, making it easier to identify improvement opportunities.

Disadvantage of Value Chain Analysis

There is one major potential drawback to value chain analysis: By focusing too granularly on micro details, the broader strategic view can get lost. After all, the primary purpose of value chain analysis is to evaluate company operations, segment by segment, to increase efficiency in each area.

However, value chain analysis does a poor job of linking each activity in the chain together. Consequently, it’s possible to lose sight of how the activities broadly interrelate. If this view is lost, it’s possible that the components will be more efficient on their own, but when combined, they might not be. Therefore, it’s important to exercise caution and not lose sight of how each component contributes to overall efficiency and profitability.

What Are the Benefits of Value Chain Analysis?

Value chain analysis allows businesses to identify opportunities to make their activities more efficient, increase customer value, and increase profitability.

What Is the Importance of Value Chains?

Value chains help businesses organize their activities into primary and secondary activities. Managing these value chain activities is key to increasing customer value and reducing costs.

What Are the Main Goals of Value Chain Analysis?

The goal of value chain analysis is to identify opportunities to reduce costs and increase value, ultimately delivering more value at lower costs for customers.

The Bottom Line

A value chain analysis is an evaluation of a business’s primary and secondary activities. The analysis is conducted to find ways to improve activities within a value chain and reduce costs, which should lead to better customer value at lower costs.

Fact checked by Yarilet Perez
Reviewed by Lea D. Uradu

Buying a home is one of the biggest investments that many Americans make in life. Few can afford a home outright with cash. Realizing the dream of homeownership means finding a mortgage lender who finds an individual worthy enough to advance them a loan.

Mortgages are an important part of the financial system. They can be complex, even more so when lenders don’t have their clients’ best interests at heart. Regulation of the mortgage industry is handled by the federal government through legislation enacted passed over the years.

Key Takeaways

• The federal government regulates the mortgage industry through a number of acts passed by Congress.
• Regulation Z in the Truth in Lending Act arms consumers with the information that they need to make informed decisions about interest rates, fees, and credit terms.
• The Real Estate Settlement Procedures Act (RESPA) prohibits real estate agents from receiving kickbacks and prevents lenders from demanding that borrowers use a preferred title insurer.
• You can report discrimination to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development.
• Consequences for violating regulation range from fines to permanent exclusion from the mortgage lending industry.

The Basics of Mortgage Regulation

Mortgage lenders must follow rules set by the federal government. These rules require lenders to treat borrowers fairly and equitably. Simply put, the federal government regulates the mortgage industry and does this through a variety of agencies and a host of congressional acts.

Both the Truth in Lending Act (TILA) and Regulation Z were designed to help protect consumers in their relationships with lenders. Under the regulations, lenders are required to disclose information about their products in a way that allows consumers to make meaningful comparisons. Prior to the act, consumers faced a barrage of confusing and misleading terms.

Warning

Mortgage lending discrimination is illegal. If you think that you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Another key component to mortgage regulation is the Real Estate Settlement Procedures Act (RESPA). This act was enacted by Congress so that buyers and sellers are given disclosures about the full settlement costs related to home buying.

One of the more significant pieces of regulation is the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010 following the subprime meltdown that contributed to the 2007–2008 financial crisis. Dodd-Frank aimed to deal with some of the problems that led to the subprime crisis such as predatory lending practices and lax mortgage qualifying standards. Congress relaxed provisions under Dodd-Frank in 2018, including easing escrow requirements for depository institutions or credit unions.

The financial crisis also led to government bailouts of Freddie Mac and Fannie Mae, which were put into conservatorship. The Federal Housing Finance Agency (FHFA) oversees both to ensure that the agencies continue to offer support for the mortgage market without the need for further government intervention.

Important

The passing of Dodd-Frank put more protections in place for consumers, but changes in 2018 relaxed some portions of the act.

Regulation Z’s Truth in Lending Act

Implemented by Regulation Z, the Truth in Lending Act was created in 1968 as a way to protect consumers from malicious, shady, or unfair practices by lenders and other creditors. Lenders are required to make full disclosures about interest rates, fees, terms of credit, and other provisions. They must also provide consumers with the steps they need to take to file a complaint, and complaints must be dealt with in a timely manner. Borrowers can also cancel certain kinds of loans within a specified time period. Having all of this information at their disposal gives consumers a way to shop around for the best possible rates and lenders when it comes to borrowing money or getting a credit card.

Real Estate Settlement Procedures Act (RESPA)

This act regulates the relationships between mortgage lenders and other real estate professionals—principally real estate agents—to ensure that no parties receive kickbacks for encouraging consumers to use certain mortgage services. The act also prohibits loan providers from making demands for large escrow accounts, while restricting sellers from mandating title insurance companies.

Who Enforces Mortgage Regulations?

The Consumer Financial Protection Bureau (CFPB), an independent government agency, was created to provide a single point of accountability to enforce financial and consumer protection laws. The Federal Reserve also supervises the banking industry, which extends to mortgage lenders. The U.S. Department of Housing and Urban Development (HUD) oversees Federal Housing Administration (FHA) programs, which have provided $1.3 trillion in mortgage insurance to homebuyers. The FHFA oversees the activities of mortgage market liquidity providers Fannie Mae and Freddie Mac.

Example of Mortgage Regulation

Depending on the violation, consequences of violating mortgage lending regulations vary wildly. For example, if a lender is found to be in willful violation of the TILA, they can actually be imprisoned for up to one year. However, the most common consequences are monetary penalties. TILA violations tend to carry fines up to $5,000. On the other hand, more severe cases may result in permanent exclusion from the mortgage lending industry.

Consider the case of RMK Financial Corporation which did business under the name Majestic Home Loans. RMK was cited as sending advertisements to military families, misleading borrowers to believe the company was affiliated with the U.S. government. In 2015, RMK was issued an agency order to prohibit such activities.

Over the next several years, RMK reportedly continued to deceptively engage with military families including using fake U.S. Department of Veteran Affairs seals, using FHA logos, and using language to imply its corporate structure. These actions were taken to deceive borrowers about interest rates, terms, loan requirements, or projected potential savings when refinancing.

In 2023, the CFPB permanently banned RMK from the mortgage lending industry. The regulatory agency stated their actions were to stop repeat offenders and permanent prevent the company from engaging with such customers. This includes being prohibited from advertising, marketing, promoting, administering, offering, or selling mortgage loans. RMK was also issued a $1 million fine to be paid out to CFPB’s victims relief fund.

Filing a Complaint

Consumers with complaints about mortgage lenders should first reach out to the CFPB via the agency’s website. It provides consumers with numerous tools to address lending complaints. The Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the National Credit Union Administration (NCUA) also invite consumers to contact them about mortgage lender complaints.

Have Mortgage Regulations Changed Because of 2020?

So far, the only mortgage regulations that have changed due to the 2020 financial crisis are related to mortgage servicing and forbearance. While changes still could be put in place to adjust mortgage lending regulations, none are currently on the books.

Why Were Mortgage Regulations Put in Place?

U.S. mortgage regulations are on a perpetual seesaw, with regulations put in place after a crisis and slowly eroded over time until the next crisis. The Financial Services Modernization Act of 1999 in part deregulated the lending industry. This is frequently viewed as a contributing factor to the subprime mortgage crisis. As a result of the financial crisis, many regulations on mortgages were put back in place with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Then, in 2018, reforms were passed in Congress, weakening Dodd-Frank.

What Would Happen If Mortgage Regulations Didn’t Exist?

If no mortgage regulations were in place, history has taught us that we would see a rise in predatory lending practices. These practices would fall hardest on people at a disadvantage in the lending process, such as first-time homebuyers who come from non-property-owning families and cultures. Those who lack the education to understand complex documents and who don’t have people they trust to ask would find themselves signing up for more expensive, more complex loan products than other borrowers who have more savvy and cultural advantages.

How Do Mortgage Regulations Protect Me?

Mortgage regulations protect all buyers, not just those at a disadvantage in the lending process. Every borrower receives detailed closing disclosures that allow for better understanding of mortgage terms and costs and is given set time periods by law to think over and cancel their loans, in addition to numerous other regulations that lead to more transparency and rights for borrowers in the lending process.

The Bottom Line

For borrowers looking to get approved for a loan, mortgage regulations can seem like unnecessary and tedious hoops to jump through. However, these regulations are in place to protect all of us. They protect individual borrowers from buying properties that they can’t afford to stay in and protect the economy as a whole from falling into another housing bubble driven by unscrupulous lending practices. Numerous regulative authorities and checks and balances are currently in place to try to prevent the 2008 crisis from reoccurring.

You have four options: You just have to choose

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

Your Roth 401(k) Options

A Roth 401(k) works like a traditional 401(k) plan in that contributions are made through paycheck deferrals and assets held within the plan are tax-deferred until they are withdrawn in retirement. However, a Roth 401(k) plan is a post-tax option; contributions provide no upfront reduction to taxable income. Instead, Roth 401(k) contributions and earnings are tax-free when taken out after age 59½.

Once you leave your job with an employer offering a Roth 401(k) plan, you potentially have four options about what to do with your plan:

• You can maintain it with the original plan sponsor, depending on plan rules.
• You can transfer it to a new employer plan.
• You can roll it over into an individual Roth IRA.
• You can take a lump-sum cash distribution.

Key Takeaways

• If you leave your job, you may be able tol maintain your Roth 401(k) account with your old employer.
• Under some circumstances, you can transfer your Roth 401(k) to a new one with your new employer. You can also choose to roll over your Roth 401(k) into a Roth IRA.
• You can cash out your Roth 401(k) and take it as a lump-sum payment, but this may have tax implications and penalties.

1. Leave It

The majority of Roth 401(k) plan sponsors allow you to maintain your account with them after leaving your job. However, you no longer have the option to contribute directly to the plan, and you are limited to the investment options the plan provides.

This option is not always available, depending on your plan’s rules. If your Roth 401(k) balance is low (typically under $7,000) your plan administrator may force you out of the plan, and either roll the balance into an IRA or send you the balance as a taxable distribution.

Warning

If the balance of your Roth 401(k) plan is low, your plan administrator may force you to take a distribution. When this happens, you will have 60 days to roll the balance into a new plan or face taxes and penalties.

2. Transfer It

In some cases, you can transfer your Roth 401(k) plan balance to a new employer’s plan. This option is only available if your new employer offers a Roth 401(k) plan that allows transfers. Once a transfer is complete, the previous employer’s Roth 401(k) is closed, and your entire balance is held within the new plan. You will then be limited to the investment options of the new plan.

3. Roll It Over

A rollover is an option for your Roth 401(k) balance, either with the initial plan sponsor or with a new financial institution of your choice. A rollover transitions the Roth 401(k) balance into an individually held Roth IRA through a tax-free transfer. Under this option, you gain more control over your investment selections and have the opportunity to contribute additional funds if your annual income is below the legal threshold.

Important

If you choose to cash out your Roth 401(k), you are reducing the amount of money available to you during your retirement.

4. Cash It Out

You may also take a lump-sum cash distribution from your Roth 401(k) once you leave your job. There are, however, tax implications with distributions if you are under age 59½. You may also face a 10% early withdrawal penalty, except for certain cases—such as medical emergencies, childbirth expenses, or buying a first home. And, of course, if you cash out, you will lose the tax-free money your funds would have continued to earn until withdrawal and no longer have these Roth assets available to you in retirement.

What Is a Force Out Distribution?

A “force out” distribution can occur when an employee continues to hold a 401(k) or Roth 401(k) from an old employer after changing jobs. If the balance is below a certain threshold (typically $7,000), the plan administrator can force you to take a distribution for the entire balance. If that happens, you have 60 days to roll the funds over to a new plan. Otherwise, you may be liable for taxes and a 10% early withdrawal penalty.

What Happens to Your 401(k) When You Change Jobs?

You can normally keep a 401(k) or Roth 401(k) plan, even after you move on to a new job. However, if your balance is less than $7,000, the plan administrator may terminate your plan and send you a check for the balance. This counts as a taxable distribution, so it is your responsibility to roll or transfer the balance to a new plan in order to avoid taxes and penalties.

What Are the Disadvantages of Rolling a 401(k) into an IRA?

An IRA or Roth IRA has a larger universe of investments to choose from than a 401(k), making them an attractive target for rollovers. However, there are some disadvantages: 401(k) plans have greater creditor protections than IRAs, meaning that a lender may be able to pursue your IRA funds during a future bankruptcy. In addition, you may also have stock in your old employer in your 401(k) account, which gets special treatment for net unrealized appreciation. If you roll these shares to an IRA, this benefit disappears.

The Bottom Line

When you leave a job, you have the option of leaving your Roth 401(k) in place, moving to a new Roth 401(k) or Roth IRA, or cashing out the balance. It is important to understand the tax implications before making your choice.

Reviewed by Chip Stapleton
Fact checked by Suzanne Kvilhaug

Joint ventures are advantageous because businesses pool resources and share risk, expertise, and expenses to make a project successful and profitable for all parties involved. It is a common business strategy used among companies seeking to achieve a common goal or reach a specific consumer market.

When a joint venture is successful, participating companies share in the profit as agreed upon in their contract. Likewise, a failure in a joint venture results in all participating companies realizing a portion of the losses.

key takeaways

• A joint venture is a temporary partnership between companies that dissolves at a specific future date or when a project is completed.
• A joint venture affords each party access to the resources of the other participant(s), reducing the possibility of incurring additional expenses.
• Each company can maintain its identity and easily return to normal business operations once the venture is complete.
• Joint ventures also provide the benefit of shared risk.

Joint Ventures Share Resources and Responsibilities

More often than not, a company enters into a joint venture because it lacks the required knowledge, human capital, technology, or access to a specific market that is necessary to be successful in pursuing the project on its own. Coming together with another business affords each party access to the resources of the other participating company without having to spend excessive amounts of capital to obtain it.

For example, let’s say that Company A owns the facilities and manufacturing production technology that Company B needs to create and ultimately distribute a new product. A joint venture between the two companies gives Company B access to the equipment without purchasing or leasing it, while Company A is able to participate in the production of a product it did not incur costs to develop. Each company benefits when the joint venture is successful, and neither is left to complete the project alone.

Joint Ventures Provide Flexibility

Unlike a business merger or an acquisition, a joint venture is a temporary contract between participating companies that dissolves at a specific future date or when the project is completed. The companies entering into a joint venture are not required to create a new business entity under which the project is then completed, providing a degree of flexibility not found in more permanent business strategies. Also, participating companies do not need to give up control of their businesses to another entity, nor do they have to cease ongoing business operations while the joint venture is underway. Each company is able to maintain its own identity and can easily return to normal business operations once the joint venture is complete.

Note

Joint ventures are most commonly used to expand into foreign markets by partnering with local businesses.

Joint Ventures Spread Risk

Joint ventures also provide the benefit of spreading risk among the participating companies. Creating a new product or delivering a new service carries a great deal of risk for a business, and many companies cannot manage that risk alone. Under a joint venture, each company contributes a portion of the resources needed to bring the product or service to market, making the heavy financial burden of research and development less of a challenge. The risk of the project failing and negatively impacting profitability is lower because the costs associated with the project are distributed among each participating company.

What Is the Main Purpose of a Joint Venture?

Joint ventures allow businesses to combine resources, which saves them both time and money.

What Is a Reason a Firm May Decide to Form a Joint Venture?

One reason to form a joint venture is to share resources to accomplish a specific task or goal at a reduced cost for all participants.

What Are the 4 Types of Joint Ventures?

There are several types of joint ventures: horizontal, where competitors join each other; vertical, where businesses involved at different levels of a product or services join forces; project-based, where businesses join for one specific project; and functional, where parties join to improve functions such as marketing or research and development.

The Bottom Line

Joint ventures involve two or more businesses joining forces to bring a product or service to market they each would not be able to launch on their own. These ventures work to the advantage of all entities involved, reducing the costs and risks involved for each participant while providing opportunities for growth.

Reviewed by Margaret James
Fact checked by Vikki Velasquez

Wholesale funding is a viable base for a business model in certain interest rate and credit market environments.

However, it can become risky if the slope of the yield curve changes. And if credit markets seize up, meaning credit becomes less available and borrowing costs rise, problems can also arise for institutions. If both conditions change at the same time, watch out.

This article reviews some basics of wholesale funding, the ideal interest rate and credit markets necessary to use wholesale funding profitably, and the dangers that can result from changes in interest rates and a credit crunch.

Key Takeaways

• Wholesale funding is a financing model that uses a variety of commercial credit markets, including federal funds and brokered deposits by lenders.
• It can expand a bank’s funding sources beyond the use of its core deposits.
• While helpful in many cases, wholesale funding can be more expensive than traditional funding sources and has risks.
• Successful wholesale funding depends on a positive spread between borrowing and lending rates.
• An inverted yield curve can mean trouble for those engaged in wholesale funding.

What Is Wholesale Funding?

Wholesale funding refers to alternate funding sources for institutional borrowers. It is a catch-all term that mainly refers to federal funds, foreign deposits, and brokered deposits. Some people also include borrowings in the public debt market in the wholesale funding definition.

Wholesale funding differs from the customary source of funding that, say, a commercial bank uses. Traditionally, banks use core demand deposits for funds due to their availability and the fact that they are an inexpensive source of financing.

Deposits represent a liability for the banks. Those deposits are lent out and become income-producing assets.

Reasons for Wholesale Funding

Financial institutions may turn to wholesale funding because:

• They need more funding to support their business activities, such as lending.
• They seek to diversify beyond bank deposits to avoid the risks of deposit withdrawals during times of economic volatility or crisis.
• Additional money from wholesale funding can help them manage liquidity risks.
• Quick access to extra funds can help them meet regulatory rules relating to capital reserves.
• Wholesale funding offers flexibility when managing lending risks.

Users of Wholesale Funding

Banks and commercial finance companies are users of wholesale funding.

Such funding can be an alternative source of funds for banks, but commercial finance companies especially rely on this kind of funding. 

Both of these types of financial institutions are regulated differently and sometimes compete for the same business.

Commercial Finance Companies vs. Banks

Commercial finance companies provide only business loans, as opposed to banks which provide both business and consumer loans.

Therefore, their primary customers are small- to medium-sized businesses that borrow to purchase inventory and equipment.

Commercial finance companies also provide value-added services, such as consulting options and sales of receivables.

They are not banks and can be a higher-cost borrowing choice for the small business owner. This is because they are less conservative than traditional banks and more willing to make riskier loans.

And as they are not banks, they are subject to less regulation and can assume more risk, which can be a double-edged sword in times of economic turbulence.

Important

Federal Home Loan Bank (FHLB) advances are a common wholesale funding option. They’re used if a bank is undercapitalized and therefore barred from accepting brokered deposits. In addition, they aren’t regulated and funding can be available immediately.

Forms of Wholesale Funding

If core deposits are such a cheap source of financing, why would anyone use wholesale funding?

As noted above for banks, wholesale funding represents a way to expand or to satisfy funding needs. Furthermore, banks at times may have trouble attracting new deposits due to interest rates that are too low.

Whatever the reason, banks may look to wholesale funding. Such funding can take different forms, but a popular option for banks is brokered deposits.

Brokered Deposits

These deposits are made by a broker who takes their wealthy clients’ money and finds several different banks in which to deposit it. This is usually done so that those clients receive FDIC insurance (and hopefully a more attractive rate of return).

If these wealthy clients deposited all of their money into one bank, it might exceed FDIC insurance limits. So brokers break up their cash holdings among different banks so that all of their deposits are insured against a bank failure.

Public Debt Markets

Commercial finance companies don’t have the depositor base from which to draw funds. Therefore, they need to tap the public debt markets to capitalize themselves. Then, these funds are lent out to small business clients at a higher rate.

Looking at this business model, it becomes apparent that it’s important for a commercial finance company to have the highest credit rating possible, so it can issue debt at the lowest coupon rate possible.

How Wholesale Funding Can Be Profitable

A positive spread between rates for borrowing funds and rates for lending them out is needed in order for wholesale funding to work and be profitable.

A commercial finance company may experience liquidity problems when sources of wholesale funding dry up, or the borrowing terms may become so onerous they are not profitable.

Your cost of funds should be lower than the yield you earn on your assets (loans). Any other scenario is unprofitable and not sustainable.

To achieve a positive spread, it is first necessary to have an upward sloping yield curve, on which yields run from low to high, short-term to long-term.

An inverted yield curve—one on which short-term rates are higher than long-term rates—means a company borrows at a higher rate than it earns. That’s a negative spread. This is not profitable and leads to problems for banks and commercial finance companies.

A flat yield curve is also a problem because, again, it does not allow for the aforementioned positive spread scenario.

As the shape of the yield curve changes during the full business cycle, one can see the tangible impacts on net income for banks and finance companies.

When the yield curve is upward sloping, bank and commercial finance profitability is good. When it is inverted, profitability suffers. When it is in between or flattening, profitability is muted for banks.

For commercial finance companies, a flat yield curve can be unprofitable, because their source of funding is not the low-cost demand deposits that banks have access to, but higher cost sources of borrowed funds such as those from the unsecured debt markets.

How Wholesale Funding Can Go Wrong

Under the right conditions, wholesale funding provides banks and finance companies additional sources of financing for operations and investment opportunities.

Commercial finance companies can be profitable for many years and through several business cycles using wholesale funding.

But what happens when there is a credit crunch, and the debt markets essentially shut-down? Or when short-term borrowing rates (as represented by a benchmark such as the fed funds rate or SOFR) soar due to financial uncertainty?

Each situation is troublesome. Both create a toxic combination that can bring a commercial finance company to the brink of bankruptcy and cause problems for banks.

If an institution’s wholesale funding slows or ends, it could face liquidity problems. Short-term creditors could refuse to extend its debt. It might be forced to liquidate assets.

Depending on how interest rates fluctuate, these borrowers may find themselves paying more for their short-term funding than they earn on their lending.

The funding spigot can turn off quickly if an institution is perceived to be a credit risk. That can be a severe problem when it needs that funding for its ongoing operations and financial management.

Bank regulators can also prohibit brokered deposits if a bank is undercapitalized. A bank in this situation is teetering on the edge.

What Is Wholesale Funding?

It is business funding that comes from large institutions and sometimes well-to-do individual investors. Sources of wholesale funding differ from traditional sources of funding such as a bank’s core deposits and equity.

Is Credit Risk a Greater Factor for Finance Companies Than for Banks?

Credit risk is a factor taken into account for any borrower. However, finance companies don’t have the large depositor base that banks usually have. So, credit risk can play a prominent role in higher borrowing costs.

How Does the Federal Reserve Define Wholesale Funding for Banks?

According to the Fed, wholesale funding is “the sum of brokered deposits under $250,000, federal funds purchased, securities sold under agreement to repurchase, subordinated notes and debentures, and other borrowed money.”

The Bottom Line

Wholesale funding is useful for banks and finance companies that seek sources of funds beyond those they traditionally turn to.

However, wholesale funding has its risks. Banks can face severe liquidity risks if short-term funding dries up. They may be forced to sell assets.

Finance companies seen as deteriorating and risky will have to pay more for funding, and this will squeeze margins.

If an economic tsunami hits and skyrocketing short-term rates and a credit crunch last for an extended period of time, banks and finance companies may suffer greatly and even face the prospect of bankruptcy.

Avoid paying too much in mortgage fees by learning about potential junk fees

Reviewed by Somer Anderson

The homebuying process can be complex with paperwork to sign, industry jargon to decipher, and real estate agents and mortgage brokers to meet. It’s important to take time to understand all the costs, including what may be unnecessary costs.

Many costs associated with a mortgage include closing costs such as loan origination fees and appraisal fees. Knowing these costs before you get to the closing table can help you understand where your money is going and whether you are paying junk fees.

The Consumer Financial Protection Bureau (CFPB) determined that consumers are indeed paying unlawful junk fees related to mortgages in various ways, including through excessive late fees, unnecessary inspection fees, fake mortgage insurance premium charges, and fees paid despite financial loss mitigation options.

Key Takeaways

• The CFPB found consumers can pay illegal fees for unnecessary inspections and mortgage insurance as well as excessively high late fees.
• Some consumers may pay fees that could be waived with financial loss mitigation options.
• Junk fees can include excessively high fees for application, underwriting, mortgage rate lock, loan processing, and broker rebates.
• Recurring closing costs are expenses that you pay at closing and each month thereafter, such as real estate taxes.
• Nonrecurring closing costs are one-time payments, such as points, loan fees, and home inspection fees.

What Are Junk Fees?

Junk fees are unnecessary fees that add costs but little to no value. Consumers are paying billions of dollars in junk fees on various financial products, including with mortgages, according to the CFPB.

Homebuyers may unknowingly pay illegal fees with several costs related to mortgages, They include:

• Excessive late fees: The CFPB found that mortgage servicers may charge the highest level of late fees allowed by law even when the buyer’s mortgages caps it at a lower amount.
• Unnecessary inspections: Buyers are also vulnerable to paying for unnecessary inspections if servicers pay inspectors to go to an incorrect address and then pass the charge on to buyers. The fees can range from $10 to $50.
• Mortgage premiums: The CFPB also found cases where servicers charged private mortgage insurance (PMI) premiums when buyers did not owe them.
• Fees during financial hardship: A servicer may fail to waive fees for buyers who are entering loss mitigation options such as charging late fees while the mortgage was under forbearance under the CARES Act when those fees should have been waived.

Many junk fees related to mortgages are associated with closing costs, which are the fees related to closing on a mortgage. They can include recurring and non-recurring expenses like mortgage insurance, loan origination fees, and appraisal fees.

Recurring Costs

Recurring costs are paid at closing, then monthly thereafter. These include real estate taxes, homeowners insurance, and—if you’re putting down less than 20% of the purchase price—private mortgage insurance (PMI).

These expenses must be funded in advance at the time of purchase, which is done by putting funds into an escrow account to cover the next year’s obligations.

Nonrecurring Costs

Nonrecurring costs are also paid at closing. They may include:

• Points
• An application fee (profit for the lender)
• A series of loan fees (these may include an origination fee, appraisal fee, credit report fee, tax service fee, underwriting fee, document preparation fee, wire transfer fee, office administration fees, et al.)
• A broker’s service fee (if you are working with a mortgage broker)
• Any lender-required home inspections (e.g., pest inspection)
• The cost of a lender-required home appraisal (in which someone is paid to verify that the property is worth at least as much as the selling price)

Other Costs at Closing

Closing costs may also include:

• Federal Housing Administration (FHA) fees
• Veterans Affairs (VA) fees
• Rural Housing Service (RHS) fees associated with mortgages guaranteed by the government
• A flood determination fee, to investigate whether the property is in an area prone to flooding
• A land survey to verify the property’s boundaries
• Title charges (which may include a title settlement fee, title search fee, title examination fee, closing service letter fee, deed preparation fee, notary fees, title insurance fee, and any attorney fees)

Other miscellaneous costs may include a courier/delivery fee, endorsements, recording fee, transfer tax, and an optional home warranty.

How Much Are Closing Costs?

As a general rule, you can expect to spend 3% to 6% of the purchase price in closing costs. Fees vary widely based on the lender, the geographic location of the property, and the price of the home. Consult the CFPB’s Your Home Loan Toolkit, which is a guideline for evaluating fees.

All-In-One Closing Cost Pricing

Consumers who are overwhelmed by fees may want to consider an all-in-one, flat-rate fee that includes all closing costs. Use caution when shopping for these products, making sure that you purchase the one that applies strictly to mortgage closing costs and not to other banking relationships or products.

Reducing Mortgage Costs

If the real estate market in your area is favorable to buyers, then you may be able to negotiate with the seller about paying closing costs.

Comparison shopping is another way to get competitive rates with mortgage costs. Ask several lenders to provide loan estimates, then compare the results. This will help you understand the range of closing fees in your area.

Can I Negotiate Mortgage Fees?

You can negotiate many mortgage fees, including negotiating the closing costs with the seller. Closing costs can include loan origination fees, title search fees, and appraisal fees, among many others.

How Do I Avoid Loan Origination Fees?

Loan origination fees cannot be entirely avoided as either the buyer or seller must pay them. If you are buying a home and want to avoid loan origination fees, you can try to negotiate with the seller regarding who will be responsible for paying loan origination fees. You could potentially ask your lender to lower the amount of their loan origination fee as well.

What Are Points in a Mortgage?

Points in a mortgage are used to reduce the interest rates in a mortgage. They are fees that they buyer pays the lender to lower the interest rate. Mortgage points are also called discount points.

The Bottom Line

The official form that includes a breakdown of all closing costs is called a closing statement or closing disclosure. You have a right to see this document at least three business days in advance of closing. Request it and compare it with the loan estimate. If the numbers aren’t reasonably close, then ask questions.

By comparison shopping and to carefully reviewing all documentation in advance, you can minimize the expense of closing costs.

Reviewed by Lea D. Uradu
Fact checked by Vikki Velasquez

Buying a home is expensive, but purchasing through auctions, government programs, or with rental income can provide a free or almost free option. However, reducing the cost in these ways comes with requirements, risks, and challenges that should be understood before committing to any purchase.

Key Takeaways

• Reliable, long-term tenants can help pay off a mortgage loan.
• The U.S. Department of Housing and Urban Development sponsors homeownership and assistance programs for qualified individuals.
• Foreclosed homes may sell through an absolute auction where the highest bidder wins regardless of the bid amount.

Use Rental Income

Investors commonly obtain a mortgage on a property and then rent it by charging a competitive amount that provides enough money to meet the monthly payments. It is possible that reliable, long-term tenants can pay off the entirety of a mortgage. Be aware, however, that this approach can impact your taxes in multiple ways. Rental income is taxable, and there also is the possibility that the additional income could push you into a higher tax bracket.

You also are likely to face higher property taxes, depending on the state and local municipality where the property is located. It’s a good idea to familiarize yourself with IRS Publication 527, which details residential rental properties, and speak with a financial advisor before becoming a landlord.

Buying properties for use as an Airbnb also is popular. Over the long run, it can provide a steady, passive income. These rentals typically are short-term. According to AirDNA, which analyzes data for the short-term rental industry, the average daily rate for an Airbnb in Los Angeles for the year ending in February 2025 was approximately $274, with units typically occupied 54% of the year.

Making a profit from renting out property is not simple. In addition to taxes, other factors to consider include the neighborhood, schools, and area crime statistics. These factors and more will impact your ability to attract tenants.

Home Ownership Programs

The U.S. Department of Housing and Urban Development sponsors programs for qualified individuals that include:

• Law enforcement officers, teachers, firefighters, and emergency medical technicians may qualify for the Good Neighbor Next Door Sales Program. HUD offers a discount of 50% off the list price if the eligible buyer commits to living in the property for 36 months as their principal residence, among other criteria.
• A local Public Housing Authority (PHA) may offer public housing units to residents and other eligible low-income families in their communities. A PHA can also use Capital Funds for homeownership activities, including financial assistance for closing costs, downpayment, and mortgage loans to public housing residents.
• The Federal Housing Administration (FHA), part of HUD, insures loans so lenders can offer buyers incentives like low down payments and closing costs.

Auctions and Tax Sales

Homes may end up in auction due to a mortgage default or foreclosure, or a homeowner’s failure to pay taxes. Foreclosed properties are seized by a mortgage lender after a borrower fails to make mortgage payments over some time. When an owner doesn’t pay property taxes, the local tax authority may seize the property. Auctions can be conducted in person or online and are deployed in one of three ways:

• Absolute Auction: The highest bidder wins regardless of the amount of the bid.
• Minimum Bid: A minimum dollar value is required to bid for the property
• Reserve Auction: Bids are treated as offers that can be rejected by the seller.

Properties purchased through auctions and tax sales typically are sold as is, meaning the cost for renovations and repairs is unpredictable.

How Do I Contact HUD for Assistance?

HUD.gov offers federal homeownership and home-buying assistance programs. Additionally, there may be programs sponsored by state or local governments.

How Can I Get a House I Can’t Afford?

There are several sources of help available to buy houses. You can apply for homebuyers’ assistance programs, try a rent-to-own option, or look into alternative loans.

Where Can I Find Houses Selling at Auction?

Local realtors and banks may carry listings of foreclosed homes and offer information regarding the date and time of auctions. Auction.com provides subscribers access to daily updates on available homes.

The Bottom Line

Three affordable or low-cost housing options include local auctions, government-sponsored programs, or receiving rental income. Potential homebuyers can visit the U.S. Housing and Urban Development website for assistance or online auction sites for listings.

Fact checked by Vikki Velasquez

What Happens to Your Crypto When You Die?

When you die, your cryptocurrency assets may be lost forever if you haven’t properly planned for their transfer. The key to ensuring your digital assets are inherited by your crypto beneficiaries lies in estate planning.

Without a will or a transfer plan that details clear instructions, your heirs might never gain access to your crypto holdings, as cryptocurrencies are stored in wallets that require private keys or recovery phrases. If these aren’t passed on, your crypto holdings will be inaccessible. By some estimates, about 20% of all Bitcoin tokens are lost and unrecoverable.

To avoid this, it’s crucial to take steps now to guarantee that any of your digital holdings can be safely transferred to your heirs.

Key Takeaways

• Estate planning for cryptocurrency is essential to ensure smooth transfer to your heirs after your death.
• It’s important to make clear in a will who the intended beneficiaries of your crypto holdings are.
• You should provide your beneficiaries with instructions for accessing your crypto holdings, including crypto wallets, custodial services, private keys, and other crucial information.
• While many crypto investors are hesitant about custodial services, they offer strong security and established processes for transferring ownership to beneficiaries.

Cryptocurrency As a Digital Asset

In the U.S., cryptocurrencies are considered by the IRS to be digital assets, and more specifically, convertible virtual currencies—that is, the government treats crypto tokens as property rather than as currency. This has a variety of tax implications and also impacts the way that cryptocurrencies are treated in issues involving inheritance and transfer of ownership.

Given their status as digital assets, the U.S. government views cryptocurrency tokens in a manner more similar to stocks or to tangible property like artworks and jewelry than to cash. This means that crypto holdings are potentially subject to capital gains tax.

Essential to planning the transferral of ownership of crypto holdings is understanding the use of wallets. These applications help secure digital assets and facilitate transactions between crypto investors. They are typically secured using both an address or a public key (a way in which the wallet can be publicly identified so that other wallets can transfer in tokens, for example) and a private key (a secure password usually available only to the holder of the wallet).

In many cases, wallets are provided by crypto custodians, such as digital asset exchanges, and can be accessed through their interfaces. Otherwise, one can access non-custodial wallets using the private key or a mnemonic seed phrase.

Why Crypto Beneficiaries Are Essential

Consider naming a trusted person, such as a family member or lawyer, who is tech-savvy enough to handle digital wallets and crypto transactions.

Without naming crypto beneficiaries or providing them with the necessary information, your digital assets might be lost forever. Since crypto is classified as personal property rather than traditional currency, estate planning and inheritance related to digital tokens can be more complicated.

Crypto may be subject to different estate and transfer taxes. When beneficiaries inherit crypto holdings and use them as a payment method or convert them to fiat currency, it may trigger a tax event that requires calculating capital gains or losses.

Crypto may also be subject to different estate and transfer taxes. When the beneficiaries of your crypto holdings use those tokens as a payment method or go to exchange them for fiat currency, it will likely trigger a tax event, and they will need to calculate capital gains or losses, for example. If you give crypto as a gift, it won’t be recognized as income until it’s sold or exchanged.

Important

When crypto investors die without a will, their investments pass according to their state’s intestacy laws. Depending on location, this likely means ownership of the assets will transfer to a spouse or children, although the exact mechanism for this distribution varies.

Steps to Ensure Your Crypto Is Passed to Your Beneficiaries

While a will and a detailed, written plan for transferral of ownership of digital assets is extremely helpful for your next of kin, it’s crucial to remember that this is not enough. While a will may make it legally clear that, say, your children own your crypto holdings, this is no guarantee in and of itself that they will be able to access and use those holdings.

Chris and Charles Brooks, the CEO and CTO of CryptoAssetRecovery.com, explained that there are several other steps investors should take to facilitate a smooth and complete transfer of cryptocurrency ownership. These steps include:

1. Inform Your Heirs

“Make sure that your loved ones—or at least your lawyers—know that you have crypto.” The father-and-son team that runs the digital asset recovery service suggested that communication is an essential first step, as beneficiaries will be helpless without knowing that you have crypto holdings and in which wallets they are stored.

2. Document (and Secure!) Backup

“Record seed phrases or other forms of backup, store them safely, and share with people you trust.” Documenting the ways to access your wallets is essential as well. However, keep in mind that anyone with this information can access these tokens, so it’s vital to keep the documentation secure.

3. Test Your Recovery Seeds

While you still have access to your digital wallets, test the recovery seeds to ensure that they will work for your next of kin and that they are linked to the appropriate wallet containing the assets you wish to transfer.

4. Build in Redundancy

“Consider upgrading your plans using secret sharing and/or multi-signature techniques to share partial backups with multiple people.” Building redundancy into your cryptocurrency management practices will help to protect them against theft during the process of transfer to a beneficiary.

5. Consider Using a Custodial Service

The Brookses said that, while some crypto investors shy away from custodial services due to the history of hacks targeting these companies, “the benefits are that these custodians have extremely robust security practices and existing systems for transferring assets to your estate after death.” When working with a custodian, the beneficiaries should be prepared to provide documentation including a copy of your will, probate documents, and proof of identification.

6. Don’t Count on Current Technology

The Brookses suggested that crypto investors avoid using mobile phones as a backup method, as the phone you utilize may be dead or the wallet app you use may be non-functional by the time a transfer is needed. Similarly, some of the most popular crypto wallets of today may no longer be supported by the time of your passing.

Estate planning for cryptocurrency investments should also include preparations for someone in a fiduciary or executor role who is appointed to safeguard the control of those tokens for a period. Suzy Walsh, American College of Trust and Estate Council Fellow, explained that crypto investors should be particularly careful when selecting a fiduciary. 

“Fiduciaries are supposed to keep things safe and manage them…they’re not supposed to be holding volatile assets” like crypto tokens, she said. She added that fiduciaries are not equipped to handle and retain cryptocurrency securely.

A fiduciary familiar with cryptocurrency can help you navigate security issues.

On the other hand, investors can make use of the volatility inherent to the crypto market when it comes to taxes. By gifting tokens at a time when values are low, for example, investors can minimize transfer taxes. Ideally, a fiduciary should also be comfortable with this aspect of crypto management.

What Happens to Unclaimed Cryptocurrency?

If your beneficiaries cannot access your crypto holdings, there may be no way to recover them. If you do not have a will and beneficiaries, your digital assets could be disposed of by your estate, potentially triggering a tax event for your estate.

Can You Lose Your Cryptocurrency?

Unfortunately, yes. It’s easy to lose access to cryptocurrencies by losing a wallet, private key, or other critical information. This can result in permanent loss, so secure storage and planning are vital.

Does Crypto Have to Go through Probate?

Yes, cryptocurrencies go through the probate process, similar to real estate or tangible assets, because they are classified as property by the IRS. A properly documented will can help streamline the probate process.

The Bottom Line

The security measures that protect cryptocurrency holdings can make it difficult for your heirs to access your assets after your death. To safeguard your assets and ensure a smooth transfer, it’s important to include your crypto in your will, designate beneficiaries, and clearly communicate how to access your holdings.

Secure your documentation (such as wallet addresses, private keys, and custodial passcodes) and consider using custodial services for added security. Lastly, ensure your fiduciary or executor is equipped to handle your digital assets and understands the volatility of the crypto market.

Fact checked by Vikki Velasquez

What Is a Traditional IRA?

A traditional individual retirement account (IRA) is a retirement savings account that lets you invest pre-tax income to save for retirement. The key feature of this account is its tax advantages: contributions to a traditional IRA are tax-deductible, meaning you don’t pay taxes on the money you contribute in the year you make the deposit. Taxes are paid when you withdraw funds during retirement, ideally when you’re in a lower tax bracket.

You don’t need to be sponsored by an employer to open a traditional IRA. It’s an individual account that you can open with various financial institutions such as Vanguard, Fidelity, or Charles Schwab.

Key Takeaways

• Traditional IRAs allow you to invest pre-tax income toward your retirement.
• Contributions to a traditional IRA may be tax-deductible.
• Taxes are paid upon withdrawal of funds, typically during retirement.
• Early withdrawals may be subject to penalties, with some exceptions.
• Alternatives to traditional IRAs include Roth IRAs, SIMPLE IRAs, and SEP-IRAs.

How Traditional IRAs Work

Traditional IRAs allow you to direct your contributions to a variety of investment options such as stocks, bonds, or mutual funds. These investments grow tax-deferred, meaning you won’t owe any taxes on dividends, interest, or capital gains as long as the funds remain in the account.

Once you reach your retirement age and begin to withdraw funds, they are subject to ordinary income taxes. If you withdraw money before age 59½, you’ll typically incur a 10% early withdrawal penalty, in addition to paying the relevant income taxes on the distribution.

Tax Treatment of Traditional IRAs

Contributions to a traditional IRA are made from pre-tax income. In some cases, contributions may be tax-deductible. Typically, investors without access to employer-sponsored retirement plans are more likely to be able to deduct contributions to a traditional IRA.

Contribution Limits for Traditional IRAs

If you are under age 50, you may contribute a total of $7,000 to traditional and Roth IRAs in 2024 and 2025. If you are age 50 and above, you may contribute an additional $1,000 in catch-up contributions for a total of $8,000 per year. These limits include all contributions, meaning that the total contribution to all IRA accounts cannot exceed $7,000 or $8,000, depending on your age.

Note

In 2024, you may make IRA contributions until April 15, 2025.

Early Withdrawals: Rules, Penalties, and Exceptions

Traditional IRA withdrawals are subject to income tax for the year in which they are disbursed. Additionally, the IRS levies a 10% early withdrawal penalty for investors who take a distribution before age 59½.

There are exceptions for which the 10% penalty tax does not apply. These include but are not limited to:

• Birth or adoption expenses for a new child (up to $5,000)
• Death or disability of the account holder
• Expenses for recovery from a federally recognized disaster (up to $22,000)
• Cases of domestic abuse
• Qualified higher education expenses
• Emergency family expenses (typically up to $1,000 per year)
• First-time homebuying expenses (up to $10,000)
• Unreimbursed medical expenses equal to greater than 7.5% of the taxpayer’s AGI
• Health insurance costs while unemployed

Required Minimum Distributions

The IRS requires investors to take regular distributions from traditional IRAs once they reach a certain age. If you turn 72 before Dec. 31, 2022, you’ll need to take these required minimum distributions (RMDs) by age 72; if you turn 72 after that date, you’ll need to take RMDs by age 73.

Tip

The amount of these minimum withdrawals is calculated based on the account balance at the end of the previous year and your life expectancy.

Having a Traditional IRA and a 401(k)

If you have an employer-sponsored retirement plan like a 401(k), you may also invest in IRAs. However, if you have a 401(k) as well as an IRA, depending on your income, you may be unable to deduct IRA contributions.

Pros and Cons of Contributing to a Traditional IRA

Benefits of a Traditional IRA

• Ability to set up a traditional IRA separate from (and in addition to) employer-sponsored retirement accounts like 401(k)s
• May provide tax advantages at retirement if you expect to be in a lower tax bracket then than you are now
• Contributions may be tax-deductible

Drawbacks of a Traditional IRA

• Lower annual contribution limit compared to 401(k) accounts
• Must pay taxes on distributions in the year they are made
• Early withdrawal penalties in most cases for individuals under 59½ 

Traditional IRAs vs. Other IRAs

Traditional IRA vs. Roth IRA

Traditional and Roth IRAs are very similar, except that Roth IRAs make use of post-tax income for contributions. This means that Roth IRA distributions are generally not taxed. The 10% early withdrawal penalty tax is only levied on distributions of Roth IRA earnings; investors may typically withdraw their contributions without penalty so long as the fund has been active for at least five years.

Traditional IRA vs. SIMPLE IRA

SIMPLE IRAs allow both employees and employers to contribute. These accounts are offered by employers who may be unable to provide other retirement plans.

Traditional IRA vs. SEP-IRA

Simplified Employee Pension Plan IRAs (SEP-IRAs) function similarly to traditional IRAs, except they provide employers a way to contribute toward an employee’s retirement. The contribution limits are higher for a SEP-IRA than a traditional IRA, but typically only employers are allowed to make contributions.

Here’s a comparison of how the four main types of IRAs compare with one another: 

	Traditional IRA	Roth IRA	SIMPLE IRA	SEP-IRA
Account holders are…	Individuals	Individuals	Employees	Employees (or self-employed individuals)
Contributions come from…	Pre-tax income	Post-tax income	Pre-tax income	Pre-tax income
Annual contribution limits (2024 and 2025)	$7,000	$7,000	$16,000 (for 2024) $16,500 (for 2025)	$69,000 or 25% of compensation up to $345,000 (for 2024) $70,000 (or 25% of their compensation up to $350,000 (for 2025)
Income cap	None	2024 phaseout range: single filers, $146,000-$161,000; joint filers, $230,000-$240,000 2025 phaseout range: single filers, $150,000-$165,000; joint filers, $236,000-$246,000	None	None
Who is eligible?	Anyone earning at least the contribution amount	Anyone earning at least the contribution amount	Employers not offering other retirement accounts	Individuals 21+ earning at least $750 annually from a business they’ve worked for during at least 3 of the previous 5 years

How to Open a Traditional IRA

Opening a traditional IRA is a straightforward process:

1. Select an IRA provider. Major providers include TIAA, Vanguard, Fidelity, and more.
2. Apply through the provider. You’ll need to provide personal information and financial details and specify the type of IRA you want to open.
3. Fund the account. Make a contribution from an existing bank account or set up a rollover from a previous retirement account.
4. Select investment options. Specify any investments you would like the account to target. This may mean particular stocks, mutual funds, bonds, and so on, or it may be a broader breakdown of stocks vs. bonds.

Is a Traditional IRA Right for You?

Traditional IRAs are a good option if you’re looking to contribute pre-tax dollars to a retirement account separate from an employer-sponsored plan. They are particularly appropriate if you anticipate being in a lower tax bracket at the time of retirement when you will pay taxes on distributions.

What Happens if I Contribute More Than the Annual Limit to a Traditional IRA?

Over contributing to a traditional IRA incurs a 6% penalty tax. In order to correct the situation, you must withdraw any excess contributions or apply them to the next year’s limit.

How Much Tax Will I Pay on a Traditional IRA?

The amount of tax you pay on a traditional IRA depends on your income tax bracket when you withdraw the funds. Contributions to a traditional IRA are made with pre-tax income, and taxes are deferred until you begin taking distributions. At the time of withdrawal, the amount you take out is taxed as ordinary income. If you withdraw funds before age 59½, you may face a 10% early withdrawal penalty.

At What Age Can You No Longer Open a Traditional IRA?

There is no maximum age for opening a traditional IRA. As long as you have earned income (such as from a job or self-employment), you can contribute to a traditional IRA at any age.

The Bottom Line

Traditional IRAs are individual-directed retirement accounts that use pre-tax dollars for investment. They have lower contribution limits than 401(k)s but do not require employer sponsorship. While investors can direct how their contributions are invested, often the best approach is to determine an appropriate level of risk, target a broad range of assets through a mutual fund or similar option, and hold for the long term.

Reviewed by Thomas Brock
Fact checked by Suzanne Kvilhaug

Revenue is the amount of money a company receives in exchange for its goods and services or, conversely, what a customer pays a company for its goods or services. The revenue received by a company is usually listed on the first line of the income statement as revenue, sales, net sales, or net revenue.

Aside from the bottom line (net income), companies pay more attention to this single line item than any other. It is the greatest factor that determines how their business is doing. It tells a company clearly how much money it is bringing in from the sale of its product.

Changes in revenue can be analyzed to determine if marketing strategies are working, how price changes affect the demand for the product, and a multitude of other insights.

Key Takeaways

• Revenue is another word for the amount of money a company generates from its sales.
• Revenue is most simply calculated as the number of units sold multiplied by the selling price.
• Because revenues do not account for costs or expenses, a company’s profits, or bottom line, will be lower than its revenue.

How To Calculate Revenue

There is a standard way that most companies calculate revenue. Regardless of the method used, companies often report net revenue (which excludes things like discounts and refunds) instead of gross revenue.

For example, a company buys pairs of shoes for $60 and sells each pair for $100. They offer a 2% discount if the customer pays with cash. If the company sells two pairs of shoes to a customer who pays with cash, then the gross revenue reported by the company will be $200 ($100 × 2 pairs). However, the company’s net revenue must account for the discount, so the net revenue reported by the company is $196 ($200 × 98%). This $196 is the amount that would normally be found on the top line of the income statement.

The most simple formula for calculating revenue is:

• Number of units sold × average price

Also:

• Number of customers × average price per unit provided

Expenses and other deductions are subtracted from a company’s revenue to arrive at net income.

Other Revenue

In a financial statement, there might be a line item called “other revenue.” This revenue is money a company earns or receives for activities that are not related to its original business. For example, if a clothing store sells some of its merchandise, that amount is listed under revenue. However, if the store rents a building or leases some machinery, the money received from this business activity is filed under “other revenue.”

Recording Revenue

Revenue is recorded on a company’s financial statements when it is earned, which might not always align with when cash changes hands. For example, some companies allow customers to buy goods and services on credit, which means they will receive the goods or services now but will pay the company at a later date.

In this case, the company will record the revenue on the income statement and create an “accounts receivable” account on the balance sheet. Then, when the customer pays, the accounts receivable account is decreased; revenue is not increased because it was already recorded when it was earned (not when the payment was received).

What Revenue Reporting Is Used for

Revenue is very important when analyzing gross margin (revenue minus cost of goods sold) or financial ratios like gross margin percentage (gross margin divided by revenue). This ratio is used to analyze how much profit a company has made after the cost of the merchandise is removed but before accounting for other expenses.

As you can imagine, companies can become almost artistic with how they handle their top line. For example, if they wanted to lower the cost of their merchandise so that their top-line margins would appear larger, they could lease the merchandise or offer it at a premium. Using such a method would incur a higher net revenue than if they were to simply sell the product or service at its base cost.

What’s the Difference Between Gross Revenue and Net Revenue?

The difference between gross revenue and net revenue is:

• When gross revenue (also known as gross sales) is recorded, all income from a sale is accounted for on the income statement without consideration for any expenditures from any source.
• When net revenue (or net sales) is recorded, any discounts or allowances are subtracted from gross revenue. Net revenue is usually reported when a commission needs to be recognized, when a supplier receives some of the sales revenue, or when one party provides customers for another party.

How Do Businesses Report Revenue on Their Tax Returns?

Businesses report revenue on their tax returns by listing all sources of income—including sales, investments, and other revenue streams—and then subtracting allowable business expenses to arrive at taxable income.

Corporations use Form 1120, including Form 1120 for C corps and Form 1120-S for S corps, to file tax returns. Sole proprietorships and single-member limited liability companies (LLCs) use Schedule C (Form 1040). Partnerships and multiple-member LLCs use Form 1065.

What’s the Largest Company in Terms of Revenue?

The largest company in the world ranked by revenue is Walmart (WMT). The largest non-U.S. company ranked by revenue is Saudi Aramco.

The Bottom Line

The process of calculating a company’s revenue is rather straightforward. However, accountants can adjust the numbers in a legal way that makes it necessary for curious parties to dig deeper into the financial statements to get a better understanding of revenue generation than just looking at a cursory figure. This is especially true for investors, who need to know not just a company’s revenue, but what affects it from quarter to quarter.