Daily Archives: May 30, 2010

Don’t Forget to Take Advantage of LKE When Upgrading Supply Chain Assets

A recent article over in Inside Supply Management is shining a new light on asset reinvestment by pointing out that many companies can save as much as 44% of sale proceeds if they use like-kind exchange (LKE) or “1031” exchange to defer capital gains tax on sold assets when the sale is being used to generate cash to buy new, similar, assets to replace deprecated supply chain assets.

If you plan reinvest the the funds from the same of an asset in a similar or like-kind asset within the IRS established timelines to identify and purchase the replacement asset and conduct the transaction through a qualified third-party intermediary, then you defer the capital gains tax. This can save your organization a considerable amount of money over time if you’re selling over a million dollars of depreciated assets each year as you bring new, like, assets into the mix. As per the example in the article, if you sold $2 Million worth of assets each year and replaced them with like assets, after five years, that’s $10 Million worth of assets sold. If you ended up paying the equivalent of 40% in taxes, that’s 4 Million dollars you lost from cash-flow if all of the assets were replaced.

Seems like a no-brainer to me, especially since it will only cost a few thousand a transaction to have a qualified and knowledgeable legal or accounting firm act as the qualified intermediary, which is a fraction of what you’ll save when you’re selling Million dollar assets.

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Is Sustainability the Current Megatrend?

According to a recent article in the Harvard Business Review on The Sustainability Imperative,

over the past 10 years, environmental issues have steadily encroached on businesses’ capacity to create value for customers, shareholders, and other stakeholders. Globalized workforces and supply chains have created environmental pressures and attendant business liabilities. The rise of new world powers, notably China and India, has intensified competition for natural resources (especially oil) and added a geopolitical dimension to sustainability. “Externalities” such as carbon dioxide emissions and water use are fast becoming material – meaning that investors consider them central to a firm’s performance and stakeholders expect companies to share information about them.

Furthermore, these forces are magnified by escalating public and governmental concern about climate change, industrial pollution, food safety, and natural resource depletion, among other issues. Consumers in many countries are seeking out sustainable products and services or leaning on companies to improve the sustainability of traditional ones. Governments are interceding with unprecedented levels of new regulation – from the recent SEC ruling that climate risk is material to investors to the EPA’s mandate that greenhouse gases be regulated as a pollutant.

As a result, managers can no longer afford to ignore sustainability as a central factor in their companies’ long-term competitiveness.

Considering that a megatrend is a great force in societal development that will very likely affect the future in all areas in the next 10-15 years (Gitte Larsen on why megatrends matter), and that sustainability affects each and every one of us, it’s pretty easy to see that if sustainability isn’t the current megatrend, it soon will be. Less than 2.5% of the water on the planet is fresh, and two thirds of this is frozen. In recent years, energy crises have arisen in a number of US states, Central Asia, South Africa, Pakistan, and China and current oil reserves will empty within 50 years. Carbon dioxide levels have increased 36% in the past 180 years and is now about 25% higher than historical highs over the last 400,000 years! And this is just the beginning.

Environmental responsibility has pervaded the consumer mindset across the developed countries and is quickly taking root in the mind of the customer in the emerging market … where consumers are tired of smog filled cities, dirty water, and regular rolling black-outs. Consumers want a product that’s green, made with recyclable material in an environmentally friendly process, and produced in a socially responsible manner. Furthermore, they want a product that is high quality and cost effective — proving that sustainability cuts through the business and consumer worlds.

In short, sustainability is the current megatrend and an imperative. So what does this mean to your organization? That’s the subject of a future post.

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