Investopedia

It depends on who’s doing the garnishing

Reviewed by Anthony Battle
Fact checked by Vikki Velasquez

Can Social Security benefits be garnished? The answer is a definite no in some situations, but in others, it becomes a distinct possibility. Ultimately, it depends on who’s doing the garnishing. Certain government entities, such as the U.S. Treasury and the Social Security Administration can garnish your wages for unpaid debts, such as child support, federal student loans, and back taxes.

Key Takeaways

• The U.S. Treasury and the Social Security Administration can garnish your Social Security benefits for unpaid debts such as back taxes, child support, or a federal student loan that’s in default.
• If you owe money to the IRS, a court order is not required to garnish your benefits.
• You’ll have to shell out 15% of your Social Security for federal back taxes and as much as 65% for alimony or child support owed. 

What Is Wage Garnishment and How Does It Work?

Here’s how garnishing works. A commercial creditor to whom you are in debt takes you into court and wins a judgment against you. Then the creditor asks the judge for an order to garnish your wages, bank account, and any other assets you may have to satisfy that debt.

The judge approves the garnishment to square the debt. Are all your assets vulnerable, including Social Security and retirement benefits such as a 401(k) or an individual retirement account (IRA)?

When the Creditor Is a Commercial Entity

When it comes to federal benefit payments—Social Security benefits, Veterans Affairs benefits, railroad retirement benefits, federal student aid, and Office of Personnel Management retirement benefits—the answer is no.

A creditor who has issued you a credit card or an auto loan can’t garnish these federal benefits, even if your payment is late. Creditors holding medical bills, along with personal and payday loans, are also prohibited from garnishing these benefits.

401(k)s are generally safe from garnishment by commercial creditors as long as the money stays in the account, thanks to the Employment Retirement Income Security Act of 1974 (ERISA). IRAs are more vulnerable to garnishment.

If you’re not ordered to pay back taxes or child support, then the bank has to review a two-month history of your account(s). If your Social Security or other protected benefits have been directly deposited into your account(s) within that two months—the so-called “look-back period”—the bank must protect the funds.

However, your creditor can still garnish your wages and, depending on the state where you live, other allowable assets you may have, such as a house or car.

When the Creditor Is the Federal Government

Suppose that you owe the federal government back taxes. You’re going to have to hand over 15% of your Social Security benefits. Funds in a 401(K) or an IRA are also vulnerable.

If you owe alimony or child support, the federal government can get involved in that too: You may have to forfeit as much as 65% of your Social Security benefit. And the Internal Revenue Service (IRS) doesn’t need a court order to garnish your benefits.

When your bank receives the garnishment order, it has two business days to conduct a review and identify your accounts. Depending on the order, the bank may freeze those accounts.

You can avoid the garnishment if you arrange with the IRS to pay off back taxes. In that case, it will no longer garnish your Social Security benefits, though it retains the right to do so if you fail to hold up your end of the bargain.

Important

Retirement plans set up under the Employee Retirement Income Security Act (ERISA), such as 401(k)s, are generally protected from judgment creditors.

When the Credit Is a Federal Student Loan

If you become delinquent on a federal student loan, the government can take “the lesser of 15% of the monthly benefit payment, the amount by which the benefit payment exceeds $750 per month, or the outstanding amount of the debt.” This means the government is not entitled to the first $750 of your monthly Social Security and retirement benefits.

For example, if you receive $850 in benefits per month, 15% of that would be $127.50. Because you can’t be given less than $750 per month, the most that can be garnished from your benefits is $100. Note: This rule applies only to federal student loans, not private loans.

Are Pensions and Social Security Protected from Creditors?

Though Social Security benefits are generally exempt from garnishment and levies—as long as the direct deposit is used—the Department of the Treasury can collect the debt; it’s one exception. Up to 15% of your monthly Social Security benefit may be levied to pay overdue federal taxes.

How Much of My Social Security Can Be Garnished?

Up to 65% of your Social Security benefit can be garnished for child support or alimony that is 12 or more weeks late. For court-ordered restitution, it’s up to 25% of your monthly benefit. For delinquent student loans and overdue taxes, it’s up to 15%.

Is Retirement Income Protected From Garnishment?

It depends. Some retirement income, such as Social Security and 401(k)s, is protected from certain creditors, while vulnerable to others. Other retirement income, such as an IRA, is more vulnerable.

The Bottom Line

Only the federal government can garnish your Social Security and other federal retirement benefits. If you are in danger of such a scenario, get legal help. The American Bar Association provides links to free and low-cost lawyers who can advise you.

Reviewed by Andy Smith
Fact checked by Vikki Velasquez

Financial statements provide a snapshot of a corporation’s financial health at a particular point in time, giving insight into its performance, operations, cash flow, and overall conditions. Shareholders need financial statements to make informed decisions about their equity investments, especially when it comes time to vote on corporate matters.

Key Takeaways

• Financial statements provide a snapshot of a corporation’s financial health, giving insight into its performance, operations, and cash flow.
• Financial statements are essential since they provide information about a company’s revenue, expenses, profitability, and debt.
• Financial ratio analysis involves the evaluation of line items in financial statements to compare the results to previous periods and competitors.
• Liquidity and solvency ratios provide information about a company’s ability to repay its debts and obligations.
• Valuation ratios help determine a fair value or price target for a company’s shares.

Understanding Financial Statements

Financial statements are the financial records that show a company’s business activity and financial performance. Companies are required to report their financial statements on a quarterly and annual basis by the U.S. Securities and Exchange Commission (SEC). The SEC monitors the markets and companies to ensure that everyone is playing by the same rules and that markets function efficiently. There are specific guidelines that are required by the SEC when issuing financial reports so that investors can analyze and compare one company with another easily.

Financial statements are important to investors because they can provide information about a company’s revenue, expenses, profitability, debt load, and ability to meet its short-term and long-term financial obligations. There are three major financial statements.

Balance Sheet

The balance sheet shows a company’s assets (what they own), liabilities (what they owe), and stockholders’ equity (or ownership) at a given moment. It represents the financial position of a company at a specific point in time. For instance, you’ll often notice a company issues their balance sheet as of a certain date such as the last day of the calendar year (12/31/20xx). This report shows the exact amount of assets, liabilities, and equity that exist as of that specific day.

Income Statement

The income statement reports the revenue generated from sales, the operating expenses involved in creating that revenue as well as other costs, such as taxes and interest expense on any debt on the balance sheet. The net amount or the bottom line of the income statement is the net income or the profit for the period. Net income is revenue minus all of the costs of doing business.

As opposed to a balance sheet, the income statement represents a period of time. You may also notice a company issues an income statement with a certain date on it, such as “for the period ending 12/31/20xx)”. This means the report shows all of the sales and expenses for a period of time. Most commonly, for companies with a fiscal year that is equal to a calendar year, that period would be the entire calendar year.

Cash Flow Statement

The cash flow statement (CFS) measures the cash generated for a period, including all of the transactions added to or subtracted from cash. Cash flow is important because it shows how much cash is available to meet short-term obligations, invest in the company, or pay dividends to shareholders. Note that the components of the balance sheet and income statement can feed into the cashflow statement. It’s a way to translate operating results into how cash was directly impacted.

In addition to reviewing a company’s financial statements themselves, also pay attention to the information provided in the footnotes to the financial statements.

The Usefulness of Financial Ratios

Financial ratios help investors break down the enormous amount of financial data that are reported by companies. A ratio is merely a metric to help analyze the data and make useful comparisons with other companies and other reporting periods.

Financial ratio analysis analyzes specific financial line-items within a company’s financial statements to provide insight as to how well the company is performing. Ratios determine profitability, a company’s indebtedness, the effectiveness of management, and operational efficiency.

It’s important to consider that the results from financial ratios are often interpreted differently by investors. Although financial ratio analysis provides insight into a company, individual ratios should be used in tandem with other metrics and evaluated against the overall economic backdrop. Below are some of the most common financial ratios that investors use to interpret a company’s financial statements.

Profitability Ratios

Profitability ratios are a group of financial metrics that show how well a company generates earnings compared to its associated expenses. However, investors should take care not to make a general comparison. Instead, they will get a better sense of how well a company is doing by comparing ratios of a similar period. For example, comparing the fourth quarter of this year with the same quarter from last year will net a better result.

Return on Equity

Return on equity, or ROE, is a common profitability ratio used by many investors to calculate a company’s ability to generate income from shareholders’ equity or investments. Companies issue shares of stock to raise capital and use the money to invest in the company. Shareholders’ equity is the amount that would be returned to shareholders if a company’s assets were liquidated, and all debts were paid off. The higher the return or ROE, the better the company’s performance since it generated more money for each dollar of investment in the company.

​Return on Equity=Average Shareholders’ Equity/Net Income

Operating Margin

Operating profit margin evaluates the efficiency of a company’s core financial performance. Operating income is the revenue generated from a company’s core business operations. Although the operating margin is the profit from core operations, it doesn’t include expenses such as taxes and interest on debt.

As a result, operating margin provides insight as to how well a company’s management is running the company since it excludes any earnings due to ancillary or exogenous events. For example, a company might sell an asset or a division and generate revenue, which would inflate earnings. The operating margin would exclude that sale. Ultimately, the operating profit is the portion of revenue that can be used to pay shareholders, creditors, and taxes.

Operating Margin = Operating Earnings / Revenue

Liquidity Ratios

Liquidity ratios help shareholders determine how well a company handles its cash flow and short-term debts without needing to raise any extra capital from external sources, such as a debt offering.

Current Ratio

The most commonly used liquidity ratio is the current ratio, which reflects current assets divided by liabilities, giving shareholders an idea of the company’s efficiency in using short-term assets to cover short-term liabilities. Short-term assets would include cash and accounts receivables which are money owed to the company by customers. Conversely, current liabilities would include inventory and accounts payables, which are short-term debts owed by the company to suppliers.

Higher current ratios are a good indication the company manages its short-term liabilities well and generates enough cash to run its operation smoothly. The current ratio generally measures if a company can pay its debts within 12 months. It can also be useful in providing shareholders with an idea of the ability a company possesses to generate cash when needed.

Current Ratio = Current Assets / Current Liabilities

Note

Other liquidity ratios include the quick ratio (also known as the acid test) and the operating cash flow ratio.

Debt Ratios

Debt ratios indicate a company’s debt situation and whether they can manage their outstanding debt as well as the debt servicing costs, such as interest. Debt includes borrowed funds from banks but also bonds issued by the company.

Bonds are purchased by investors where companies receive the money from the bonds upfront. When the bonds come due–called the maturity date–the company must pay back the amount borrowed. If a company has too many bonds coming due in a specific period or time of the year, there may not be enough cash being generated to pay the investors. In other words, it’s important to know that a company can pay its interest due on its debts, but also it must be able to meet its bond maturity date obligations.

Debt-to-Equity Ratio

The debt-to-equity (D/E) ratio measures how much financial leverage a company has, which is calculated by dividing total liabilities by stockholders’ equity. A high debt-to-equity ratio indicates a company has vigorously funded its growth with debt. However, it’s important to compare the debt-to-equity ratios of companies within the same industry. Some industries are more debt-intensive since they need to buy equipment or expensive assets such as manufacturing companies. On the other hand, other industries might have little debt, such as software or marketing companies.

D/E = Total Liabilities / Total Equity

Interest-Coverage Ratio

The interest coverage ratio measures the ease with which a company handles interest on its outstanding debt. A lower interest coverage ratio is an indication the company is heavily burdened by debt expenses.

Interest Coverage = EBIT / Interest Expense

EBIT stands for earnings before income and taxes, and is also referred to as operating profit.

Efficiency Ratios

Efficiency ratios show how well companies manage assets and liabilities internally. They measure the short-term performance of a company and whether it can generate income using its assets.

Inventory Turnover

The inventory or asset turnover ratio reveals the number of times a company sells and replaces its inventory in a given period. The results from this ratio should be used in comparison to industry averages. Low inventory turnover ratio values indicate low sales and excessive inventory, and therefore, overstocking. High ratio values commonly indicate strong sales and good inventory management.

Inventory Turnover = Cost of Goods Sold / Average Inventories

Valuation Ratios

Price ratios focus specifically on a company’s stock price and its perceived value in the market.

Price-to-Earning (P/E)

The price/earnings (or P/E) ratio is an evaluation metric comparing the current share price of a company’s stock with its per-share earnings. Higher P/E values indicate investors expect continued future growth in earnings. However, a P/E that’s too high could indicate that the stock price is too high relative to the earnings or profit being generated. Investors use the P/E ratio to evaluate whether the stock price is fairly valued, overvalued, or undervalued.

The P/E ratio is most helpful when compared to historical P/Es of the same company and companies within the same industry.

P/E = Stock Price / Earnings per Share

Note

Trailing P/E uses a stock’s historical earnings relative to its market price, while forward P/E uses earnings forecasts.

Dividend Yield

The dividend yield ratio shows the amount of dividends a company pays out yearly in relation to its share price. The dividend yield provides investors with the return on investment from dividends alone. Dividends are important because many investors, including retirees, look for investments that provide steady income. Dividend income can help offset, at least in part, losses that might occur from owning the stock. Essentially, the dividend yield ratio is a measurement of the amount of cash flow received for each dollar invested in equity.

Dividend Yield = Annual Dividends per Share / Share Price

Why Do Shareholders Need Financial Statements?

Shareholders rely on financial statements to make informed investment decisions, assess company performance, and evaluate potential risks. They do so using the financial ratios mentioned above.

One of the primary reasons shareholders need financial statements is to assess a company’s profitability and growth using the profitability ratios. By comparing past and present earnings, shareholders can evaluate whether a company is growing sustainably or facing challenges. Profitability ratios, such as gross margin and return on equity, also help investors gauge how efficiently a company generates returns on its capital. Last, companies need financial statements to generate these metrics to compare a company against its competitors to see which one is doing the best at generating profits.

A strong balance sheet with healthy cash reserves and manageable debt levels indicates a company’s ability to withstand economic downturns or invest in future growth. On the other hand, excessive liabilities or declining assets may signal financial distress. Shareholders need the balance sheet to assess short-term health. Liquidity ratios like the current ratio can indicate whether a company can pay its short-term bills. The balance sheet also helps tell the story on whether certain debt covenants will be met or if the company will soon face regulatory complications.

Shareholders need the statement of cash flow to assess whether a company can pay dividends, reinvest in its operations, or handle unexpected financial challenges. This financial statement communicates what a company has done (and may do in the future) with the money it earns. Shareholders need to care about not only how much money a company earns but what exactly they do with their earnings.

Which Financial Statement Is Most Important to Shareholders?

No single financial statement is most important, since the balance sheet, income statement, and statement of cash flows all contain crucial pieces of information. Moreover, many ratios computed using fundamental analysis will draw pieces of data from places found on different statements. For instance, ROE uses information from both the income statement and balance sheet.

What Do Financial Statements Tell You?

A company’s financial statements provide insights into a company’s financial position, profitability, and growth potential. Taken together, financial statements allow analysts to conduct fundamental analysis to evaluate a stock’s value and growth prospects. Financial statements also can signal red flags about financial instability or accounting improprieties.

Are All Shareholders Entitled to a Company’s Financial Statements?

Publicly traded companies are required by the SEC to release their financial statements for public consumption. Investors and non-investors alike are able to access these documents online and for free, from a company’s own website or through the SEC’s EDGAR database.

The Bottom Line

There is no one indicator that can adequately assess a company’s financial position and potential growth. That is why financial statements are so important for shareholders and market analysts alike. These metrics (along with many others) can be calculated using the figures released by a company on its financial statements.

Reviewed by Thomas J. Catalano
Fact checked by Yarilet Perez

Provident Fund vs. Pension Fund: An Overview

Provident funds and pension funds are two types of retirement plans used around the world, but their specifics differ from region to region. Provident funds, for example, are prominent in Asia, generally operating like Social Security does in the United States.

Pension funds, also known as pension plans or defined-benefit plans, are offered by employers and governments, usually providing a retirement benefit to participants equal to a portion of their working income. There are some differences in how contributions are made and how benefits are accrued. The most significant differences are based on how benefits are paid.

Key Takeaways

• A provident fund is a government-backed retirement fund.
• A pension plan is a retirement plan run by employers and governments.
• Pension funds operate much like annuities.
• Provident funds operate like a mix of Social Security and 401(k)s.

Provident Fund

A provident fund is a retirement fund run by the government. They are generally compulsory, often through taxes, and are funded by both employer and employee contributions. Governments set the rules regarding withdrawals, including minimum age and withdrawal amount. If a participant dies, their surviving spouse and dependents may be able to continue drawing payments. Unlike the U.S. Social Security system, workers in provident funds often only pay into their own retirement account, rather than a group account, so in this sense, a provident fund is similar to a 401(k) account. One key difference, though, is that in a 401(k) account, the account holder makes the investment decisions, while in a provident fund, the government makes the investment decisions.

Members of provident funds are able to take out a portion of their retirement benefits, typically up to one-third, in a lump sum up-front. The remaining benefits are distributed in monthly payouts. The tax treatment of lump-sum withdrawals may vary between regions.

Pension Fund

A pension plan is a retirement plan in which an employer, and often the employees, make contributions into a pool of funds set aside for the workers’ future benefit. The funds are invested on the employees’ behalf, and the earnings on the investments help fund the workers’ lives upon retirement.

Some pension funds may allow individual participants to choose investments and contribution amounts, while most provident funds have compulsory contributions and centrally-run investments. Pension fund payouts are taxed.

Note

If you have questions about the ins and outs of your plan, talk to your plan administrator.

Key Differences

Here’s an overview of the differences between provident funds and pension funds:

Nature of the Benefits

A provident fund provides a lump sum benefit upon retirement, resignation, or termination. The accumulated balance, including both employee and employer contributions along with accrued interest, is paid out as a single lump sum. Meanwhile, a pension fund is designed to provide a steady stream of income post-retirement. Instead of a lump sum, the retiree typically receives periodic annuity payments.

Contribution Structure

In a provident fund, both the employer and the employee contribute a fixed percentage of the employee’s salary. These contributions accumulate over time with interest, forming a growing balance that the employee can withdraw upon retirement. In the case of a pension fund, contributions can be made by the employer, employee, or both. However, a portion of the accumulated funds is typically earmarked for generating annuity payments rather than being fully available for withdrawal.

Flexibility For Withdrawals

A provident fund allows partial or full withdrawal under specific conditions. For example, you can withdraw money from a provident fund for medical emergencies, home purchases, or educational expenses. Some jurisdictions also permit early withdrawals after a minimum number of years of service. In contrast, a pension fund generally restricts early withdrawals. Its purpose is to ensure financial security in old age, meaning its structure is to make sure the funds/benefits are there in the future. Note there may be exemptions, and those early pension withdrawals may come with penalties.

Risk and Investment Strategy

Provident funds generally invest in low-risk assets such as government bonds, fixed deposits, and other stable financial instruments. This is a conservative approach. The goal here is to make sure capital is preserved and consistent returns are generated over time. Pension funds, on the other hand, may adopt a more diversified investment strategy. The goal may be closely aligned with maximizing long-term growth, meaning pension fund administrators may be willing to take on more risk.

Tax Treatment

Tax treatment varies by country, but in many cases, provident fund contributions are tax-exempt up to a certain limit. The accumulated interest may also be tax-free or tax-deferred. Withdrawals from a provident fund may be partially or fully taxable, depending on when and how the funds are accessed.

On the other hand, pension funds often offer tax benefits on contributions, allowing individuals to reduce taxable income while saving for retirement. However, annuity payments received from a pension fund may be subject to income tax. In some jurisdictions, pension funds provide additional tax advantages, such as tax-free payouts after a certain age or preferential tax treatment for retirees. However, there are still some slight tax differences between the two.

Portability

Provident funds are generally portable, meaning employees can transfer their accumulated balance when switching jobs. This ensures continuity in retirement savings. Pension funds, however, may have restrictions on portability. This is especially true if they are tied to a specific employer’s pension scheme. Some pension funds allow for rollovers into other retirement accounts, but transferring benefits from one employer’s pension plan to another is often more complex. Very generally speaking, it’s often a bit hard to port a pension.

Important

Upon retirement, members of a pension fund may be able to take out their benefits in a lump sum, though the more common course is to receive monthly payments.

Key Similarities

Still, there is some overlap between provident funds and pension funds. A quick highlight of those similarities includes:

• Both a provident fund and a pension fund are designed to help individuals accumulate savings for their retirement.
• In many cases, both provident funds and pension funds require contributions from both the employer and the employee.
• Both provident funds and pension funds are regulated by government bodies to ensure compliance, security, and fair management of contributions.
• Both provident funds and pension funds typically discourage premature withdrawals (though there are some differences mentioned in the previous section).
• Many countries offer tax advantages for both provident fund and pension fund contributions.
• Both provident funds and pension funds often include provisions for dependents in case of the contributor’s death. If an employee passes away before retirement, the accumulated balance in a provident fund is typically transferred to the nominee or legal heirs.

What Is the Purpose of a Provident Fund?

A provident fund is designed to create a secure retirement for you. Though some people may not embrace its compulsory requirements, a provident fund’s mandatory contributions take the guesswork out of how much to save.

What Is a Provident Fund in Simple Words?

A provident fund is way to save for retirement. It’s backed by the government. You and your employer put money in so it can grow. Then when you retire, you can take money out, either all at once (up to a point) or month by month.

How Does a Provident Fund Pay Out?

A provident fund may pay out as a monthly payment, similar to an annuity, or as a lump sum. Typically there is a cap on the lump sum payment, such as up to a third of the entire benefit. It depends on the details of the plan.

What Is the Difference Between a Provident Fund and a Retirement Annuity?

Annuities may give you more options for your investments than a provident fund. Also, with a provident fund, contributions are often compulsory. That’s not the case with annuities. And whereas a provident fund is offered through an employer, you can purchase an annuity directly through an insurance company. However, annuities tend to come with higher fees.

The Bottom Line

In a sense, the benefits of a pension fund are more like an annuity, while the benefits of a provident fund are more like Social Security. The other major difference lies in the compulsory nature of provident fund contributions, whereas saving for a pension is not mandatory. Both are low-cost, tax-advantaged accounts.

To overcome these challenges, you’ll have to manage clients, money, and coworkers

Fact checked by Suzanne Kvilhaug
Reviewed by Margaret James

Starting a business is a significant achievement for many entrepreneurs, but maintaining one is the larger challenge. Every business—large or small—faces many challenges. Some common challenges are hiring the right people, building a brand, and developing a customer base. However, there are some unique challenges to operating a small business. Here are the five significant challenges for small businesses.

Key Takeaways

• It’s important that a small business is never dependent on a single client.
• Small businesses can struggle with money management; hiring a professional to help with money management can free up time to focus on operating concerns.
• Overworking is another challenge of operating a small business; it’s essential to find the right balance between working long hours and business success.
• Many small businesses can become dependent on their founder; a small business owner should not create a situation where the business cannot continue in their absence.
• Starting a small business may be different than simply working as a freelancer.

1. Client Dependence

If a single client makes up more than half of your income, you are operating in a way that more closely resembles an independent contractor than a business owner. Diversifying your client base is vital to growing a business, but it can be difficult—especially when the client in question pays well. (Having a client who pays on time for a service is a godsend for many small businesses.)

Unfortunately, client dependence can result in a longer-term handicap; even if you have employees, you may still be technically operating as a subcontractor for another business. This arrangement allows the client to avoid any of the risks of adding payroll to an area of its business operations where work may dry up at any time; as a result, all of that risk is transferred from the larger company to your small business (and your employees). This arrangement is risky, but it can work if your main client has a consistent need for your product or service.

2. Money Management

Having enough cash to cover the bills is necessary for any business, but it is also necessary for your personal finances. Between your business and your personal finances, one of these will likely emerge as a capital drain and put pressure on the other. To avoid this problem, small business owners must be heavily capitalized—or secure extra income to shore up cash reserves when needed. Many small businesses start with the founders working a job and building a business simultaneously. While this split focus can make it challenging to grow a business, running out of cash actually makes growing a business impossible.

Money management becomes even more important when cash is flowing into the business. Although handling business accounting and taxes may be within the purview of most business owners, professional help is usually a good idea. The complexity of a company’s books increases with each client and employee; seeking out assistance on bookkeeping tasks can prevent it from becoming a reason not to expand.

3. Fatigue

The hours, the work, and the constant pressure to perform wear on even the most passionate individuals. Many business owners—even successful ones—get stuck working much longer hours than their employees. Moreover, small business owners may fear their business will stall in their absence and avoid taking any time away from work to recharge.

Fatigue can lead to rash decisions about the business, including the desire to abandon it altogether. Finding a pace that keeps the business humming, without wearing out the owner, is a challenge that can come up early in the evolution of a small business.

Important

It is generally better for a business to have a diversified client base to pick up the slack when any single client quits paying.

4. Founder Dependence

A business that can’t operate without its founder is a business with a deadline. Many businesses suffer from founder dependence; this is often caused by the founder being unable to let go of certain decisions and responsibilities as the business grows.

In theory, meeting this challenge is easy—a business owner needs to give more control to employees or partners. In practice, however, this is a significant stumbling block for founders because it usually involves compromising (at least initially) the quality of work being done.

Growth should never be the enemy of quality. A small business needs both.

5. Balancing Quality and Growth

Even when a business is not founder-dependent, there comes a time when the challenges that arise as a result of the business’s growth are equal to (or even outweigh) the benefits. Whether it’s a service or a product, at some point a business must sacrifice quality to scale up. This may mean not being able to personally manage every client relationship or not inspecting every component of a final product.

Unfortunately, it may be that level of personal engagement and attention to detail that makes a business successful. Therefore, many small business owners find themselves tied to these habits. There is a large middle ground between shoddy work and an unhealthy obsession with quality; it is up to the business owner to navigate its processes toward a compromise that allows growth without hurting the brand.

What Is the Biggest Problem for Small Businesses?

While small business owners face many challenges in growing and scaling their businesses, it is an excellent time to be a small business owner in the U.S. today. Between March 2021 and March 2022, 1.4 million new small businesses opened in the U.S. When opening a small business, many founders struggle with finding qualified, hardworking employees. Another big problem that small businesses face is a lack of funds. If even one client fails to make a payment, it can have huge consequences for the business. Finally, many businesses struggle with balancing growth and quality. Sometimes it may be necessary to sacrifice quality in order to scale in size.

What Is the Biggest Mistake Small Businesses Make?

Starting a small business is undoubtedly challenging, even for the most experienced entrepreneur; the statistics about the high number of businesses that close within a year are a testament to these challenges. However, there are certain mistakes you can avoid in the short term to make success in the long term more likely. One of the most common mistakes that small business owners make is not creating a comprehensive business plan in the beginning. This business plan should include a large amount of research. (Research that should be done before starting the business.) The business plan should include information about how the profit model of the business, market research about the local competition and demand for the product, the operations of the business, an outline of all sales and marketing efforts, investment data, and financial projections.

What Are the Disadvantages Facing Owners of Small Businesses?

There are many advantages to being an entrepreneur. First and foremost, working for yourself can offer a level of freedom you cannot find working in a traditional job, with a boss or manager. However, owners of small businesses face many disadvantages that employees do not face. Top of mind for many people considering opening a small business is the high probability of income instability. There is also a significant amount of financial risk that you incur if you finance your small business with a business loan. You may also work longer hours than a traditional employee. Plus, you’ll lack the guidance or direction of a traditional employee, who has a boss or manager to provide support. In the beginning stages of starting a business, seek out the help of a mentor or a consultant.

The Bottom Line

The problems faced by small businesses are considerable, and one of the worst things a would-be owner can do is go into business without considering the challenges ahead. We’ve looked at ways to help make these challenges more accessible, but there is no avoiding them. On the other hand, a competitive drive is often one of the reasons people start their own businesses, and every challenge represents another opportunity to compete.

Reviewed by David Kindness
Fact checked by Michael Rosenston

Net Income vs. Operating Cash Flow: An Overview

Financial statements provide a wealth of information about a company and its operations. Many investors, analysts, and creditors refer to a firm’s net income and operating cash flows to understand how well a company has performed and used its cash in operations. Net income, also known as the bottom line, is just as its name implies. It is the remaining income—or revenues—after deducting expenses, taxes, and costs of goods sold (COGS). Operating cash flow (OCF) is the amount of cash generated from operations, and is calculated by subtracting operating expenses from revenue.

Key Takeaways

• Net Income is the result of revenues minus the expenses, taxes, and costs of goods sold (COGS).
• Operating cash flow is the cash generated from operations, or revenues, less operating expenses.
• Many investors and analysts prefer using operating cash flow as an indicator of a company’s health.
• Net income is important to investors and analysts but does not necessarily provide a complete picture of a company’s development.

Net Income

Net income is earned revenues minus incurred expenses, including taxes, and costs of goods sold (COGS). It follows gross income and operating income and is the final income number in a monthly, quarterly, or annual report. A net income statement is important for potential investors and creditors, but it does not always show the company’s actual development. For instance, after a high, one-time asset sale, monthly net income may be higher than operating income, followed by a much lower quarterly net income.

Operating Cash Flow

Operating cash flow is calculated by subtracting operating expenses from revenue. The operating cash flow reports inflows and outflows as a result of regular operating activities. It is the cash from revenues generated by business activities, excluding non-operating sources (e.g., investments and interest). The best demonstration of operating cash flow is the cash cycle, which converts accrual accounting-based sales into cash.

Key Differences

Cash flow and net income statements are different in most cases because there is a time gap between documented sales and actual payments. If invoiced customers pay in cash during the next period, the situation is under control. If the payments are postponed further, there is a larger difference between net income and operative cash flow statements. If the trend does not change, the annual report may demonstrate equally low total cash flow and net income.

Usually, rapidly developing companies report low net income as they invest in improvement and expansion. In the long run, high operating cash flow brings a stable net income rise, though some periods may show net income decreasing tendency.

Constant generation of cash inflow is a more important indicator of a company’s viability and strength than net income. Cash flow is a better criterion and barometer of a company’s financial health. Managers and investors can avoid many traps if they pay more attention to operating cash flow analyses.

Reviewed by David Kindness
Fact checked by Ryan Eichler

Gross, Operating, and Net Profit Margin: An Overview

Gross profit margin, operating profit margin, and net profit margin are the three main margin analysis measures that are used to analyze the income statement activities of a firm.

Each margin individually gives a very different perspective on the company’s operational efficiency. Comprehensively the three margins taken together can provide insight into a firm’s operational strengths and weaknesses (SWOT). Margins are also useful in making competitor comparisons and identifying growth and loss trends against past periods.

Key Takeaways

• An income statement is divided by direct, indirect, and interest and tax expenses.
• Gross profit, operating profit, and net profit margins are important measures for analyzing an income statement.
• Each profit margin measure shows the amount of profit per dollar of a company’s revenue.

Important

Overall, margin analysis metrics measure the efficiency of a firm by comparing profits against costs at three different spots on an income statement.

Gross Profit Margin

Gross profit margin analyzes the relationship between gross sales revenue and the direct costs of sales. This comparison forms the first section of the income statement. Companies will have varying types of direct costs depending on their business. Companies that are involved in the production and manufacturing of goods will use the cost of goods sold measure while service companies may have a more generalized notation.

Overall, the gross profit margin seeks to identify how efficiently a company is producing its product. The calculation for gross profit margin is gross profit divided by total revenue. In general, it is better to have a higher gross profit margin number as it represents the total gross profit per dollar of revenue.

Operating Profit Margin

Operating efficiency forms the second section of a company’s income statement and focuses on indirect costs. Companies have a wide range of indirect costs which also influence the bottom line. Some commonly reported indirect costs includes research and development, marketing campaign expenses, general and administrative expenses, and depreciation and amortization.

Operating profit margin examines the effects of these costs. Operating profit is obtained by subtracting operating expenses from gross profit. The operating profit margin is then calculated by dividing the operating profit by total revenue.

Operating profit shows a company’s ability to manage its indirect costs. Therefore, this section of the income statement shows how a company is investing in areas it expects will help to improve its brand and business growth through several channels. A company may have a high gross profit margin but a relatively low operating profit margin if its indirect expenses for things like marketing, or capital investment allocations are high.

Net Profit Margin

Net profit margin is the third and final profit margin metric used in income statement analysis. It is calculated by analyzing the last section of the income statement and the net earnings of a company after accounting for all expenses.

Net profit margin takes into consideration the interest and taxes paid by a company. Net profit is calculated by subtracting interest and taxes from operating profit—also known as earnings before interest and taxes (EBIT). The net profit margin is then calculated by dividing net profit over total revenue.

Net profit spotlights a company’s ability to manage its interest payments and tax payments. Interest payments can take several varieties. Interest includes the interest a company pays stakeholders on debt for capital instruments. It also includes any interest earned from short-term and long-term investments. 

Taxes are charged at a flat rate for corporations. Just like individuals, corporations must also identify and account for corporate tax breaks that come in the form of credits, deductions, exemptions, and more.

Special Considerations

The net profit margin of a company shows how the company is managing all the expenses associated with the business. On the income statement, expenses are typically broken out by direct, indirect, and interest and taxes. Companies seek to manage expenses in each of these three areas individually.

By analyzing how the gross, operating, and net profit margins compare to each other, industry analysts can get a clear picture of a company’s operating strengths and weaknesses.

Market and business factors may affect each of the three margins differently. Systematically if direct sales expenses increase across the market, then a company will have a lower gross profit margin that reflects higher costs of sales.

Companies may go through different cycles of growth that lead to higher operational, and interest expenses. A company may be investing more in marketing campaigns or capital investments that increase operating costs for a period which can decrease operating profit margin. Companies may also raise capital through debt which can decrease their net profit margin when interest payments rise.

Understanding these different variables and their effects on margin analysis can be important for investors when analyzing the worthiness of corporate investment.

Here’s how to navigate the unwritten rules during the holiday season

Reviewed by David Kindness
Fact checked by Yarilet Perez

The holidays are a time for goodwill and expressing appreciation for others, but there is always the chance of an awkward moment when you receive a gift from or give a gift to someone you don’t know that well. Even gift-giving among close friends and family can be awkward at times. To avoid embarrassing moments, read our brief guide to holiday gift-giving.

Key Takeaways

• Everyone has their own rules for giving gifts, but a little common sense goes a long way.
• Every situation is different, so keep in mind what is appropriate for, say, a co-worker at the office, vs. in-laws, vs. a host at a dinner party.
• Try to be culturally aware, as well as aware of the situation, and always show gratitude when receiving a gift.

Should a Gift Given in Exchange Be of Equal Value?

When giving gifts, you should aim to spend an amount that you are comfortable with, not what you assume your recipient is spending.

Some people feel compelled to give a gift equal in value to the gift they receive. However, this isn’t necessary. The value can be difficult to assess, and most people are not concerned with the monetary value of a gift. The thought that goes along with the gift is typically more meaningful.

In addition, spending excessive amounts on a gift may make the receiver feel uncomfortable. Depending on your relationship with the recipient, you may feel inclined to explain that you got a good deal on their gift (perhaps you got a gift card at a discount) to ease their concern.

Similarly, assessing the value of a gift you have received is relegating the act of giving gifts to material gain, which is not what the holidays or gift giving should be about. Instead, if you have given some thought to what type of gift the recipient would like, the price tag is irrelevant.

Important

You may be concerned because you are short of funds this holiday season and unable to buy as many gifts as you would like. If this is the case, explain to friends and family that you will not be able to buy extravagant gifts this year. Those closest to you are bound to understand, and they might even feel relief because the expectations surrounding mutual gift-giving are lowered.

Gifts for All

Another common gift-giving conundrum is whether you have to give a gift to everyone within a particular group or segment of your life if you give a gift to one person within that group. For example, you may give someone you frequently have lunch with at work a gift and wonder whether you should do the same for the whole office.

A general rule is that you don’t have to give a gift to everyone in a group. But you should do so discreetly in order to not make others feel excluded. In the case of the lunch companion, give the gift when the two of you are alone rather than in front of other colleagues.

Show Appreciation

If you receive a gift, even if you don’t give one in return, always show your appreciation, regardless of whether you like the gift or not. If you are presented with the gift in person, smile and thank the gift giver. If you receive a gift by mail, call the gift giver as soon as you can to alert them that the gift has arrived. For certain events, like a wedding, it’s appropriate to send a hand-written thank you note.

Honor Your Host

When invited to someone’s home during the holidays, it is good etiquette to bring a token of appreciation in exchange for the invite. This gift should not be extravagant. A bottle of wine, a box of chocolates, a candle, or flowers will suffice.

Be Culturally Aware

Not all cultures celebrate the holiday season in the same way. Make sure you understand the traditions and norms of anyone you plan to give a gift to so that you do not offend or embarrass them.

For example, it is a cultural norm in North America to publicly unwrap a gift when it is received. However, in many cultures, such as some in Asia, the proper etiquette is for the receiver to wait until they are in private to open a gift.

Workplace Giving

Giving gifts in the workplace can be awkward for many reasons. When giving corporate gifts, be aware that sending out gifts with large corporate logos can appear tacky. 

Additionally, depending upon your workplace, you may receive tax benefits from gift-giving. This can include gifts that come in the form of charitable donations. Many countries, including the U.S., allow some tax write-offs from corporate gifts.

Have you ever given a gift once and felt that the tradition had to continue indefinitely? You may wish to consider this before beginning a new gift-giving tradition. Some traditions, once begun, are hard to end.

What Do People Spend on Holiday Gifts, on Average?

In 2024, consumers said they expected to spend an average of $902 on holiday gifts, according to the National Retail Federation.

How Much Should You Spend on a Wedding Gift?

The average wedding gift is between $100 and $150, according to Brides.com. But if it’s a destination wedding and you’ve invested a significant amount of money to make it there, you may consider a more modest gift—or even allow your presence to be the gift.

How Much Is Appropriate for a Baby Shower Gift?

Baby shower gifts typically cost between $30 and $100.

The Bottom Line

What we give as gifts and how we receive them says a lot about us as individuals. Though awkwardness may arise, it doesn’t need to be inevitable. Bear in mind that many people give gifts to show appreciation, and a simple thank you in return is all that is required.

It depends on an individual’s circumstances

Reviewed by Marguerita Cheng
Fact checked by Pete Rathburn

Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it’s time for a guaranteed stream of income.

Key Takeaways

• Annuities provide a fixed monthly income either for a set period of time or for the rest of your life.
• The amount of monthly lifetime payments is determined by your age at purchase and your life expectancy.
• An annuity should not be your sole source of retirement income, as over the years inflation reduces its value.

A Secure Income Stream

For most retirees, the overriding concern is for a secure income stream for the future. As people live longer and rely more heavily on their own savings, the notion of converting a portion of that capital into a guaranteed income stream has its appeal.

Annuities traditionally had one purpose: to convert a lump sum of capital into a stream of income for life, or for a certain time period. They were designed for people who were retiring or otherwise needed a fixed, guaranteed monthly income. Today, there are various types of annuities that can be used to accumulate capital through investment, in addition to providing a guaranteed income.

When you buy an income annuity—also known as an immediate annuity or an immediate payment annuity—you enter into a contract with a life insurance company in which the insurer agrees to make fixed monthly income payments in exchange for a lump sum of money. This type of annuity starts paying income as soon as the policy has been initiated, in contrast with a deferred annuity, which doesn’t start to pay out until years later.

Note

Income annuity payments are guaranteed for your lifetime or for a specified number of years.

Fixed vs. Variable Annuities

Fixed annuities guarantee a minimum interest rate on money invested in the contract for some period. Then there is a renewal interest rate after that period ends.

The interest on variable annuities, in contrast, can fluctuate because it is based on the performance of the owner’s investment portfolio for the annuity. Thus, fixed annuities have more predictable returns than variable ones.

How an Income Annuity Works

The monthly payout amount of an annuity is based on a number of factors, including your age and gender, interest rates, and the amount of capital invested.

Annuities are designed to pay out the full amount of principal and interest by the end of a certain period. If you want payments made for a 10-year period, for example, the payment amount will be based on the principal and total interest to be earned during that period, divided into 120 monthly payments.

If you want a lifetime income, the payment amount is calculated based on the number of months between your current age and your life expectancy age. If you are 65 and your life expectancy age is 80, the payment amount is based on 180 months. Even if you live beyond your life expectancy, the monthly payments will continue.

How Long Should I Wait to Buy An Annuity?

This depends on how long you expect to live, and what your lifestyle goals are.

In general, a shorter annuity payout period results in a higher monthly payment. If you want to maximize the guaranteed monthly payment, your best option is to wait as long as possible to annuitize your capital. Put another way: the longer you wait to annuitize your capital, the larger your monthly payment will be.

Waiting until a later age, of course, assumes that you’re continuing to work or have other sources of income, such as a 401(k) plan, a pension, and/or Social Security benefits.

Can a 40 Year Old Buy An Annuity?

Any adult can buy an annuity. However, it is relatively uncommon among younger people. Annuities typically come with higher fees than other investment vehicles, and some financial advisors recommend maxing out other options—such as a 401(k)—before turning to annuities. Many younger investors cannot afford to do so, so annuities are typically reserved for older adults.

When Should You Not Buy an Annuity?

It is generally not advisable to tie up all—or even most—of your assets in an income annuity, because it is less liquid than other vehicles. And if you have enough savings in retirement plans, such as a 401(k), an annuity might not be right for you at all. If you’re sure that you won’t outlive your savings, there’s no reason to sign up for an annuity and pay the comparatively high fees.

The Bottom Line

Investing in an income annuity should be considered as part of an overall strategy that includes growth assets that can help offset inflation throughout your lifetime. While a guaranteed income via an annuity may be highly desirable as insurance protection against longevity, it is a fixed income, which means it will lose purchasing power to inflation over time.

The best age to get an annuity depends on a number of factors, including your current circumstances and investments, risk tolerance, longevity prospects, and expected income needs in retirement. Given these factors, the best age to get an annuity is when you are able to optimize its benefits for your individual needs.

Fact checked by Betsy Petrick

If you’re married, there’s a good chance you have joint bank accounts to pay your bills and save money. However, one type of account you can’t hold jointly is a Roth individual retirement account (IRA). These accounts are meant to benefit and be held in one person’s name. As an alternative, you can open a spousal IRA or name your spouse as your beneficiary.

Key Takeaways

• Retirement accounts are tax-advantaged and are meant for individual ownership, which is why they cannot be jointly held, even by spouses.
• You can name your spouse as a beneficiary to inherit your Roth IRA when you die.
• You can open a spousal IRA in your spouse’s name and fund it with your income even if they aren’t working.

What Is a Roth IRA?

A Roth IRA is a type of individual retirement account that allows you to save after-tax dollars for retirement. You can invest in many types of securities in your Roth IRA, including stocks, bonds, exchange-traded funds (ETFs), money market funds, and certificates of deposit (CDs).

Contributions are capped and adjusted annually. The limit for IRA contributions, including to a Roth, is $7,000 in 2025, with an additional $1,000 as a catch-up contribution for those 50 or older.

Your contributions, along with the earnings, grow tax-free in a Roth IRA until you turn 59½, provided you held the account for at least five years. Any money you withdraw from the account (as long as you meet the age and holding requirement) is also tax-free, and there are no penalties.

The Internal Revenue Service (IRS) allows you to continue contributing to a Roth IRA even after you reach 70½ and, unlike other retirement accounts, you can leave money there for as long as you wish. Although these rules give you some leeway to fund and use your Roth IRA, you cannot have a joint Roth IRA with your spouse.

Warning

You can have more than one IRA, such as a traditional IRA and a Roth IRA, but the contribution limits set by the IRS apply to all of your IRA accounts. This means the combined total of the contributions made to all of your IRAs cannot exceed the cap set each year.

Why Opening a Roth IRA With Your Spouse Is Not an Option

Many financial products allow joint ownership, but that doesn’t apply to retirement accounts, including Roth IRAs. The IRS doesn’t allow this because retirement accounts are tax-advantaged.

Due to their nature, these accounts must be held solely in one person’s name. This means you and your spouse must have separate accounts. This same rule applies to anyone in your household, so a parent and child cannot hold a joint Roth IRA.

One thing to remember is that if you file a joint tax return with your spouse, your combined income may preclude you from opening or funding a Roth IRA. Married couples filing jointly with a modified adjusted gross income (MAGI) over $246,000 in 2025 are barred from participating in Roth IRAs.

Important

A Roth IRA is different from a traditional IRA. If you open a traditional IRA, you can save pre-tax dollars that grow on a tax-deferred basis. You are taxed on your distributions when you retire. These withdrawals are taxed as ordinary income.

What Are the Alternatives?

Even though you can’t hold a joint Roth IRA with your spouse, there are ways they can benefit from your retirement savings.

Beneficiary

When you open a Roth IRA, you can name a beneficiary on your account. This guarantees your assets go to someone of your choosing rather than probate. You can add whomever you choose, including your spouse. Keep in mind that if you don’t name one, most states consider your spouse to be your default beneficiary (or your estate if you aren’t married).

In the event of your death, your Roth IRA is passed on to your spouse, who can choose to complete a spousal transfer, open an inherited IRA, or take a lump sum distribution.

Spousal IRA

Another option is to open a spousal IRA as long as you file a joint return. This type of account allows you to open and make contributions toward your spouse’s retirement savings—even if they are unemployed or have very little income. However, the total amount of combined contributions cannot exceed the taxable income reported on your joint return.

Contribution limits remain the same, but if you have an IRA in your name and open one for your spouse, you both can contribute up to the maximum to each. This means $7,000 for you and $7,000 for your spouse, for a total of $14,000 if you are both under 50. You can add $1,000 as a catch-up contribution if one or both of you are 50.

Although you make the contributions, the account and the investments held in it are in their name. This means they have control over the account. But, you stand to benefit because the contributions you make effectively lower your taxable income.

The Bottom Line

Retirement savings vehicles like the Roth IRA are tax-advantaged accounts and are intended for individuals. This is why the IRS doesn’t allow joint ownership of these accounts—even if you’re spouses. Although you and your spouse can’t share a Roth IRA, that doesn’t mean there aren’t other options. You can name them as a beneficiary or you can open a spousal IRA to help them save. If you’re unsure of how to proceed, speak with a financial professional to see what your options are to meet your retirement goals.

Fact checked by Giselle Cancio

The standard tax deduction is a fixed amount that taxpayers can subtract from their income to lower their taxable income. The amount you save will depend on your income and tax bracket. That being said, although the amounts have gone up for 2025, the differences from last year aren’t huge.

Single taxpayers and married individuals filing separately in the 2025 tax year will be eligible to claim $400 more in their standard tax deduction compared to 2024, as the standard deduction for this category of taxpayer has risen to $15,000 from $14,600.

For married couples filing jointly, the standard deduction for 2025 is $30,000, allowing them to claim $800 more as compared to 2024. And for heads of households, the 2025 standard deduction is $22,500, an increase of $600 as compared to the 2024 tax year.

Key Takeaways

• The standard tax deduction is a flat amount of money that taxpayers are eligible to subtract from their annual gross income, lowering their amount of taxable income for the year. 
• The 2025 standard tax deduction will allow single taxpayers to deduct $15,000 ($400 more compared to 2024); heads of households can deduct $22,500 (an increase of $600 compared to 2024).
• If you’re not eligible for the standard deduction, or you expect that your allowable deductions might exceed the standard deduction amount, you can use the itemized deduction method using Schedule A on Form 1040.

What Is a Standard Tax Deduction?

When you file your taxes, you’re eligible to subtract a certain amount of money from your gross income each year. This lowers the amount of money you’re obligated to pay taxes on. The Internal Revenue Service (IRS) releases these numbers as part of its annual inflation adjustments each year; the 2025 figures were announced in October 2024.

Here are the standard deduction amounts for 2024 and 2025 by filing status:

Standard Deduction Amounts for 2024 and 2025
Filing Status	2024	2025
Single taxpayer	$14,600	$15,000
Married couple filing jointly	$29,200	$30,000
Head of household	$21,900	$22,500

Important

If you’re age 65 or older at the end of the tax year, you are allowed an additional standard deduction amount of $1,600 for 2025. Blind taxpayers are also eligible for this deduction amount.

How to Calculate Your Taxable Income Using the Standard Deduction

To calculate your taxable income manually, subtract the standard deduction from your total income for the year. This will give you your taxable income. From there, you can apply the tax rate that corresponds to your income bracket. If you’re using tax software, it will do these calculations for you automatically.

Standard Tax Deduction vs. Itemized Deduction Method

The standard deduction is a fixed amount, but the itemized deduction method allows you to deduct specific expenses if they exceed the standard amount. You might also need to use the itemized method if you’re not eligible for the standard method. Itemized deductions can include amounts paid during the taxable year for:

• State and local income
• Sales taxes
• Real property taxes
• Personal property taxes
• Mortgage interest
• Disaster losses
• Gifts to charities
• Medical and dental expenses 

Note that certain dollar limitations and other limitations apply to the above categories, and that you will need to submit receipts to back up each item included in case you are audited.

The Bottom Line

The IRS adjusts the standard deduction amount each year for inflation, and although it has increased for the 2025 tax year, the amounts aren’t likely to make a huge difference as compared to 2024. Depending on your situation, it may be worth taking the time to track and save receipts for anything that might be claimed under the itemized method if you anticipate that the amount might be higher than the standard deduction amount.