Lump Sum Versus Payments: Which Is Better For Your Business?
One of the biggest decisions that a CPA or financial management firm must make in their career is whether to hire an independent contractor or use the traditional lump sum payment. There are pros and cons to each of these options, and the choice often depends on the individuals’ CPA profile, financial management profile, and the size of the group undertaking the project. As with many CPA firms, a good CPA will work with their clients to develop an appropriate capital structure for the group. By capitalizing on the right financial instruments and structures a CPA can help their clients achieve their business goals, and many CPA firms will work with groups as small as one or two individuals to successfully execute and manage projects. However, in larger groups, using a lump sum payment can be a more appropriate way to fund expenses.
One reason that CPA’s will use lump sum versus payments is that this is typically less expensive in the long term. A CPA firm may have a large overhead cost when hiring and training their own employees, but when they use an independent contractor they will only pay the employee’s labor and payroll taxes. This upfront cost typically makes the independent contractor less expensive than the lump sum payment would be for a single person or firm.
Another advantage to using a lump sum versus payments is that a financial management firm has complete control over the capital structure and management decision for the group project. A CPA will have complete control over the amount of cash flow coming in and going out, the size of the workforce, the terms of the payment structure, and the period over which the money is paid. In large companies this benefit can be extremely important, because cash flow stability is so critical for overall business growth and profit potential. A CPA will have complete insight into the productivity of the team and even have access to performance management data. This type of control and insight is not available to most project managers.
When comparing lump sum versus payments, another thing to consider is whether or not an individual’s future value is being realized. Future value is the value of future streams of income from an investment. For example, if an individual starts a new job and makes a six-figure salary in six months, does that person have six months of salary paid during the first six months of employment? Obviously not. He or she will be working at a lower salary for the first few years, but will eventually be making six figures with more years of service.
When comparing the two methods, it is important to consider the potentiality for future value. lump sum payment programs are usually a short term solution to an ongoing financial problem. However, future value is not realized until the full life cycle of the project is realized. Most companies will experience some problems along the way and at some point all the money will need to be paid back, but how much sooner does this happen? A CPA can help analyze the impact of any problems that may occur as they relate to the anticipated life cycle of the project.
A CPA can recommend strategies that will maximize cash flow and reduce payments over time. A lump sum payment is not ideal for projects lasting several years. While paying the bills may be the goal, future value should be considered as well. By paying interest every month and reinvesting earnings into the business, a business owner can build equity and avoid future value issues. Lump Sum versus Payments may seem like a simple issue, but it is an important one that should not be overlooked when making business decisions.