Why you need to protect your customer’s data

By Cathy A. Garland

As a business owner, there are always competing efforts for your resource focus and dollars. It can be difficult to know what needs prioritization.

In 2010, the PCI Data Standards Council released the first draft of a document securing consumer information.  They created a 36-month cycle during which time merchants accepting credit cards would have an opportunity to comply to the published security standards. The PCI Standards’ Council website is located at: https://www.pcisecuritystandards.org/index.php.

PCI stands for Payment Card Industry and is made up of credit card companies Master Card, Visa, Discover Financial Services, JCB International, and American Express. In 2010, the PCI Data Standards Council released the first draft of a document securing consumer information.  The standard calls for eliminating or limiting the storage of payment card sensitive authentication information including the CVV – the three digit code on the back of the card.

The standards are based on security best practices that have been around for years with updates as technology has evolved. PCI Compliance requirements on the surface can be intimidating if you don’t have a large Tech Support team and a rather large bankroll. There are however ways to insure your environment is compliant without breaking the bank.

KEEP YOUR ENVIRONMENT SIMPLE – the simpler the environment, the easier the Compliance Standards are to meet.

• Purchase authorized PIN and Credit Card devices from your bank. Ensure they are PCI Compliant. This information is available at the PCI-DSS website, https://www.pcisecuritystandards.org/.
• Don’t store customer data in your environment. This doesn’t mean don’t have a marketing mailing list. This means don’t include any customer financial data.
• Use commercial products for your POS system that are certified PCI Compliant.
• Trust your employees, but verify. DO background checks to insure you’re not hiring an individual who shouldn’t be trusted with someone else’s personal information.
• Only allow access to customer data to those employees who have a definite business need.
• Purchase and maintain antivirus and malware software for all pc’s (and servers) in the environment.
• Use Windows Update and apply security fixes. Same for other operating systems. They too get hacked.
• Don’t browse social media sites on your work pc. (This may be considered overkill by some but if you flat don’t allow it in the first place, you don’t have to potentially worry about a Trojan getting through your virus protection).
• Use individual logons for all employees. This makes a trail to troubleshoot potential misuse much easier.
• Find vendors who will partner with you, regardless of your small size, to help you maintain your environment. Insure THEY are security minded and compliant.
• Write some basic policies and procedures and have employees sign-off that they have read them and understand them.  (Core policies and procedures are available that you can fit to your environment).
• Turn on Windows Firewall.
• Purchase a warranty on your hardware. (This goes to recovering from a disaster and environment stability).
• Back up your data. You can purchase an external hard drive from many vendors for under $200 in a lot of cases. Windows has a built-in backup program. You don’t have to purchase additional software.
• Follow basic security rules published by vendors such as Microsoft. They have security baseline documentation that will guide you into creating a more secure environment.
• Fill out your self-attestation paperwork and provide it to your merchant bank.

None of these recommendations are expensive nor should they drive any Mom-and-Pop-sized shop out of business. Best of luck.

Cathy A Garland is president of CGSolutions of Jax. She can reached at 863-370-3542 or through www.cgsolutionsofjax.com. You can also read her blog at http://cgsolutionsofjax.blogspot.com/.

10 tips to preventing employee fraud

By Richard T, Balog, CPA\CFF

Research has shown that small businesses are often more vulnerable to fraud than their larger counterparts because they have fewer employees. Companies with fewer employees tend to have less segregation among duties, fewer internal accounting and auditing controls. Smaller companies develop closer relationships and trust between owners and their employees, which can cause them to be less suspicious and thus more susceptible to employee fraud.

10  fraud guidelines

Small businesses can protect themselves by making employee fraud prevention a priority. The following guidelines are elemental steps in creating a fraud prevention environment in your small business:

1. Implement an accounting solution as part of your fraud prevention. Through certain accounting software solutions, small businesses can mitigate fraud risk through specified user security levels, audit trails as well as through an Internal Accounting Review1 which identifies common transaction mistakes, departures from GAAP (Generally Accepted Accounting Principles) and Red Flag transactions. User security levels are useful in ensuring that employees only have access to the areas of the business within their specified responsibility and that they have less ability to cover up fraud schemes.

2. Understand your company’s specific fraud risks. Conduct a thorough audit of your company’s specific vulnerabilities in order to design and implement internal controls and fraud prevention programs to mitigate this risk.

3. Conduct employee background checks. Verify educational and employment history, as well as references, to ensure there is no previous history with fraud or other illegal activity. For employees that will manage company assets, it is especially important to conduct credit reports (if authorized by the candidate).

4. Control the bank statements. When you open the bank statements, it can help fight check tampering. When dealing with bank statements, you should look out for missing checks, checks issued out of sequence, unknown payees, checks that appear to have been altered, checks not signed by authorized signatories, or any other unusual items. You should also conduct regular bank reconciliations at least once a month. Consider using your bank’s online features more often to streamline the process if your company regularly has large numbers of transactions and/or large dollar volumes.

5. Use only approved vendor listings. This can help with fighting billing schemes and dealing with phony invoices. Management should routinely check the list of approved vendors and look out for unknown vendors, vendors’ names that are similar to other known vendors, vendors with no physical address or phone number or vendors that match an employee’s address.

6. Centralize payroll check distribution. By centralizing the payroll program, you can help eliminate “ghost” employees; which include fictitious persons on the payroll, employees retained on the payroll that no longer work for the company, or friends or relatives of an employee.

7. Create a fraud policy. Design, publish and implement a fraud policy that sets forth what conduct is expected from employees, what actions are prohibited, how fraud can be reported and the punishment for noncompliance.

8. Train your employees in fraud prevention. Employees serve as the eyes and ears of a company and by ensuring that your staff knows at least some basic fraud prevention techniques, you’ll establish a first line of anti-fraud defense.

9. Conduct checks. Conduct routine and unannounced checks on high risk areas of your business, including the financial and inventory departments for vulnerabilities and possible fraudulent activities.

10. Make employees go on vacations. Employees who may be partaking in fraudulent activity may not take time off because they are afraid someone will catch on. Ensure that all employees take vacations so no one in the organization has control each and every day of the year.  Nobody is too busy for a vacation.

Remember, by nature, fraud is hidden. There are no 100% solutions to avoiding fraud. Research has shown one of the most important deterrents to fraud is “tone at the top.” Management’s stance on ethics has a direct effect on employee behavior. The first goal is to prevent fraud and the second is to catch it as quickly as possible

Richard T, Balog, CPA\CFF, is a Managing Partner of Balog + Tamburri, CPAs. He can be reached at 904-945-1220 or Rick@RickBalog.com. 

A plan to getting paid on time in just 31 days

                                                                                                      By Michelle Dunn

The cash-poor business: day 1

Everyone has gone home for the day and here you are scanning the accounts receivables report. You can’t believe what you’re seeing—so many customers are past due. How can you get them back on track to pay on time and in full?

You thought you were limiting your risk by accepting credit cards and only issuing credit to people you know. It looks like your payment terms are “net later.” Sure, it’s a tough economy and it’s going to get tougher if you don’t take action. You hate calling people asking for money, especially since you’ve already earned it.

Maybe you need to just get organized and implement new policies and procedures. Yep, that’s it. Start cracking the whip, dig yourself out of this hole and pull yourself up by the bootstraps! (There, just what you needed—a pep talk.) Ugh. You’d rather be doing anything else than chasing people for money. There’s got to be a smarter way to stabilize cash flow!

Small business debt dilemma

If you can relate to this scenario, you’re not alone. According to a recent online survey of business owners by the web-based legal service Rocket Lawyer, 49% of respondents wrote off bad debt last year. With 43% reporting accounts older than 90 days, these companies were on track to repeat the same performance.

While over half use legal contracts for protection, only 34% and 30% call late paying customers and send formal demand letters, respectively.

“Business owners struggle with the time and skills it takes to effectively manage collection activities. It’s also very personal. How do they get paid when their customers are suffering from job loss, house loss and the rising prices of everything,” said Michelle Dunn, credit and collections expert.

“Something to remember when you are lenient with customers who are past due: If they owe you money, they probably owe others money and whoever takes action first, gets paid first.”

Dunn, who has owned and managed a debt collection agency, teaches others how to collect debt and provides insights for business owners through her websites, speaking engagements, books and webinars (www.MichelleDunn.com or www.Credit-and-Collections.com), says that when it comes to debt collection, “You have to do it! If you don’t want to do it or aren’t confident about how to collect a debt, hire a qualified agency to do it for you.”

Irv Pollan, vice president of Jacksonville-based NCC Business Services of America Inc. (NCC, www. NCCBusiness.com) says, “Before contacting us, past-due accounts must be thoroughly documented to prove the customer actually owes the debt. We then take the appropriate steps to locate and make contact to negotiate a payment.”

“While a demand letter may seem like a simple thing, all debt collection activities must follow the letter of the law, ” he continues. NCC, a third-party debt collection agency founded in 1986, offers small businesses low-cost and time saving demand letter programs in addition to contingent fee-based services.

Being in debt and collecting debt is not easy. “We train our team to work effectively and monitor their performance,” Pollan says. “At the same time, we understand the overwhelming circumstances many people face and are in a unique position to help them get out and stay out of debt.”

What you can do day 2

Try following Dunn’s “it must be done” advice. If not you, then assign these activities to an employee.

•Call anyone with a balance over 60 days. Make sure everything is OK, ask what you can do to help them pay the bills on time and get a payment promise today.

•Send a letter following up on your call — mail it immediately! It can be short and sweet, but must be very specific. Make sure to mention how much will be paid and by what date.

•Follow up! If you get a machine, call again and send a letter.

The next 28 days

Remember that pep talk to get organized with new policies and procedures? Here are some steps to get you started.

1. Print out or buy credit applications. (See www.michelledunn.com/free.html for an example.)
2. Put them on a clipboard at the front desk and on your website.
3. Have every new customer fill one out.
4. Mail one to every existing customer with a stamped, addressed envelope.
5. Check all references on any completed applications.
6. Set firm credit limits.
7. Set terms for every customer and print them on all invoices and statements.
8. Research debt collection laws.

Differentiate differences

Remember that while the economy is struggling, so are your customers—many of whom have never had a problem paying their bills. Differentiate between customers who’ve always paid on time and are now having a problem and those who regularly pay late.

Taking any or all of these steps will only help you to collect money in the short term. Without making changes, such as having a credit policy, conducting credit checks or retaining a debt collection agency, you’ll be right back where you started next month.

You have arrived!

Hooray! You have reached day 31 and now have fewer accounts that are past due and you have the systems and relationships in place to effectively manage your accounts receivables moving forward. Much better.

Michelle Dunn is an award winning author and columnist frequently featured in the Wall Street Journal, CNN and Forbes. Look for her books in paperback, hardcover and now on Kindle! Visit Michelle online at MichelleDunn.com & Credit-and-Collections.com

Michelle’s 17 tips to getting paid

1. Require payment at the time of service.
2. Invoice customers on a regular basis and as soon as the work is completed.
3. Make sure the due date is clearly visible on invoices.
4. Change your payment terms. If your terms are net 60 or net 45, change them to net 30 or net 15.
5. Offer an early payment discount to anyone who pays early, such as 1% or 2% off the bill for payment within 10 days.
6. Act early. When an account reaches 30 days, take action.
7. Call big accounts or accounts with large balances 10 days before the invoice is due to make sure they have the invoice, the correct address to send payment and that the invoice is scheduled to be paid.
8. Be as flexible as you can with payment plans.
9. When setting up payment plans remember that you want as much as you can get as frequently as you can get it.
10. Be picky about new customers.
11. Have a strong contract.
12. Run weekly accounts receivable reports and follow up with any accounts that are past due or becoming past due.
13. Don’t extend credit blindly.
14. If a business owes you money, visit them. If it’s a restaurant, go there for lunch. If it’s a printing company, get something printed or copied. Every time you walk in they will see you and it reminds them that they owe you money.
15. Direct the account’s salesperson to collect the money or withhold their commission until the bill is paid.
16. Reduce minimum orders. You could possibly get more orders for less money paid up front.
17. Use a collection agency.

Tips for securing a business loan in a competitive lending market

By Nathaniel Herring

Nationally, economic indicators across the board suggest a rebound, however gradual, from the recent downturn—and businesses in all industries are taking note. The Jacksonville climate, in particular, continues to slowly brighten: The metro area added 5,500 private sector jobs last year, landing the area in the top 50 U.S. markets for job growth.

As the recovery continues to take hold, many business owners are considering more aggressive expansion strategies—and lending to small and mid-market companies is on the upswing.

Yet while banks are more actively lending, some business owners are hesitant to face credit standards and the underwriting processes. Companies looking to ramp up production, invest in new product development, hire more people, and otherwise march toward greater growth and profitability shouldn’t let this stop them—but they should plan on doing some work before going to a lender.

If you are planning to seek new capital through a business loan, consider the following tips:

Take a team approach

No matter where your company is in its business cycle, it’s crucial to maintain frequent and open communication with a team of professionals: your accountant, investment adviser, banker and other professionals. A balanced dialogue—that includes advisers who are well-informed about the market landscape and your business—is critical to helping you effectively shape the direction your company takes.

Your banker can serve as an insightful business adviser. Maintaining open and ongoing communication will help you take advantage of near- and long-term growth opportunities, as well as effectively weather downturns. When you sit down with your banker, be prepared to discuss not just your borrowing needs, but your overall business situation as well.

Plan ahead

Too many small and mid-sized companies focus on landing a large account without considering the end game: meeting needs, without going under. Put simply, businesses can’t afford to commit to a significant new project without securing the capital necessary to complete the job.

A forward-looking approach is essential in financial planning; if possible, forecast six to 12 months out for anything that can make a material change or put stress on working capital. Don’t wait until you have the purchase order in-hand before getting your bank involved.

Prepare a persuasive presentation

Present a clear view of your financials. To show that your company is financially sound and capable of taking on new endeavors, support your claims with detailed income statements and balance sheets, as well as at least three years of income projections.

In short, “Sales are up!” or “Talk to my accountant,” simply won’t cut it. While enthusiasm and confidence do count, you must articulate the specific value you expect from a new infusion of capital and demonstrate your ability to repay the note.

Another tip: Tell a compelling “story.” Give the financials context and dimension by providing background. What makes your business viable? How are you unique? What obstacles have you overcome? How do you stack up against the competition? If you’re meeting with a bank for the first time, consider rounding out your story with the following details:

•Company history

•Company accreditations, credentials, awards, recognitions

•Management team bios

•Product and services overview

•Marketing analysis and strategy

•Relevant operational and production plans

•Risk evaluations

Avoid common pitfalls

Many mistakes are easy to sidestep. Here are a few tips:

Get current valuations. Many business owners overstate the value of their collateral. Even though the bank will obtain an independent appraisal, it’s important that you have a solid understanding of your assets, including land, buildings and equipment.

Use setbacks to your advantage. Banks recognize that all businesses go through ups and downs, especially in a challenging market. Rather than downplay losses, discuss how you minimized the impact and what strategies you have in place to mitigate future issues.

Time it right. Banks underwrite based on a full year of financial reports, so consider this: Would your case for financing be stronger six months from now?

Be flexible. More stringent risk management policies in banking may mean your entire borrowing needs can’t be met with a single, lump-sum loan. Be open to exploring other options, such as an incremental financing program. Success with smaller infusions of capital over time can help increase your business’s credit-worthiness while assisting with cash flow.

Also, be sure to discuss all available funding options, including government initiatives like Florida’s Economic Gardening Institute—a program to support the growth of second-stage businesses—and SBA (U.S. Small Business Administration) guaranteed loans, with your banker.

Is it time for your business to take advantage of more favorable interest rates and improved lending terms to secure new capital? From gains in national consumer confidence to a two percent drop in Florida’s unemployment rate last year, signs of economic recovery are encouraging companies to explore opportunities for growth.

Before you decide to initiate expansion plans or take on that new, large project, make sure you have a banker on your team and your financing plans secured.

Nathaniel Herring is the city president of Fifth Third Bank (North Florida) and oversees the bank’s operations in the Jacksonville market. He is a Jacksonville native and has more than 19 years’ experience in the banking industry. He can be reached at 904-486-1927 or Nathaniel.Herring@53.com. For more information about Fifth Third Bank offers, visit www.53.com.

How small businesses are finding financing online

Small businesses near and far are thankful that technology is on their side, especially when it comes to financing. Tremendous strides have been made in the banking world in the last few years that makes getting a loan easier than before, but many small businesses are finding that there is none easier than online.

Online financing?

Touting themselves as something of a Match.com for lenders and borrowers, BoeFly (www.boefly.com) is an online loan exchange that efficiently connects small business owners with more than 2,000 business lenders.

“We connect borrowers and lenders by helping borrowers build a better loan package and helping lenders find those borrowers,” says David A. Nayor, co-president and chief operating officer for BoeFly. “Being former lenders ourselves, we noticed inefficiencies in the marketplace—mainly where borrowers were having trouble finding lenders.

“We took a step back and figured there’s got to be a better way,” Nayor continues. “Looking at other industries that use the Internet to connect parties more efficiently, such as eHarmony, Match.com, Cars.com, or eBay, we took that concept and applied it to small business lending with BoeFly.”

How it works

BoeFly is a loan-packaging service with software that helps the borrower gain a thorough understanding of what goes into a small business loan request and how to properly package it. Within that process, the borrower receives feedback from the exchange explaining where the strengths and weaknesses are in the deal and allows adjustments to be made as to what lenders want to see based on the marketplace of lender preferences.

“It’s not incredibly complicated, but it does take work to get a loan—no matter the size,” says Nayor. “There is a certain amount of work that lenders want to see in the loan request and we empower borrowers to be prepared before they connect with lenders. It also helps lenders find deals they wouldn’t have ever been privy to otherwise. Really, the success comes down to us matching borrowers with lenders, and ensuring it’s the right lender.”

Kevin Ellis, vice president of Small Business Lending at Atlantic Coast Bank, is one such lender that uses BoeFly to make connections. “With traditional methods, someone looking for lending would have to send their information, documents, and loan package to me. Then I would have to sort through it and ask for documents that may be missing,” says Ellis.

“With BoeFly, there is very little to sort through as everything is right in front of you to make an informed decision—the business plan, tax returns, estimates for build out costs and equipment costs, data on the franchise and the industry, resumes… the whole spectrum of things we would ask for, which sometimes when dealing with a busy borrower can take a long time to obtain,” says Ellis.

Making a deal

One such informed decision Ellis made after a BoeFly alert came across his desk was with Nick Borst, a Jet’s Pizza franchisee in Destin. Borst, who was looking to get funding to open this franchise, says he saved the online financing option for last not thinking he would find anyone, “but within 24 hours we had Atlantic Coast Bank interested.”

“It is probably the best example of the strength of BoeFly’s platform in matching me with the borrower,” says Ellis. “He’s in Destin and I’m in Jacksonville, and we were still able to make this deal happen in a matter of hours.”

“This project would have been up and running three months earlier if we would’ve started with BoeFly,” says Borst. “We tried several traditional avenues, and while they thought we would be great people to run it, they didn’t have the ability to fund us and we lost a lot of time with their processes. With BoeFly, you know the interest you receive from a lender is from somebody with a serious interest.”

“There is a lot of information you have to put in to the system, but the more you put in the better your chances are and the nice thing is you only have to put it in once,” continues Borst. “In our case, we had a very in-depth, several hundred page—probably too much—business plan and BoeFly helped us determine what was pertinent information and actually needed for the loan. They outlined what they and lenders look for which allowed us put the right information in the right spots.”

Ease of use

“The word that always comes back to us is that it is efficient,” says Nayor. “Efficient from a time perspective as the borrower only has to build a loan package once and efficient from a cost perspective as borrowers and lenders only pay a very small posting or subscription fee to use the platform.  There are no large commissions involved as BoeFly did not want to drive up the cost of the transaction or this interest rate that the borrower ultimately pays. This allows lenders to get more aggressive on their pricing and terms and it allows borrowers to find the best deal for them.”

Ellis adds, “It’s a different financial world these days. This is a great way that allows borrowers, lenders, franchisors—really everyone—to navigate this new environment and reach places and surrounding areas that wouldn’t have been available to them otherwise. It allows me to be mobile without being mobile.”

Learn to effectively manage your patrons, partners, and property

By David P. Grigaltchik

So, you’ve got a plan, a product and a partner, and you’re ready to launch your very own business and take the world markets by storm. In this article, we will explore the different legal issues that prudent business owners should address before going forward with any business venture. Essential to the operation of any successful business is the effective management of the three P’s of business: patrons, partners, and property.

Patrons

The success or failure of your business depends on one thing: your patrons, customers and clients. Having a large pool of clients is always a good thing, but, as with most things in life, quality counts for more than quantity.

Business owners learn early and are reminded frequently that customers may be their best friends or their worst enemies. Billing disputes and frivolous lawsuits regularly cost American businesses millions of dollars.

Since business owners typically lack the ability to pick and choose their patrons, they must learn to protect themselves through other means. Liability or malpractice insurance is something that business owners routinely pay for and hope to never have to use. Liability waivers may allow business owners to resolve adverse litigation quickly or to prevent it altogether, thereby avoiding having to pay larger insurance premiums.

By using waivers, business owners may guarantee certain rights to the patrons of their businesses, accepting liability in specific cases for the patrons’ financial or physical security, but limiting liability in other ways. By signing waivers, business patrons are essentially signing away their rights, and many such rights must be considered when drafting waivers, including rights to privacy.

Since courts are typically hesitant to limit the rights of individuals, waivers containing specific and clear language will have a higher chance of enforcement than waivers containing general and vague language. Waivers are not just for business owners whose businesses involve routine operations that have a high risk of causing financial or physical injury to clients.

As a rule of thumb, if you pay a liability or malpractice insurance premium, you should probably be using waivers. Waivers will not protect business owners who cause harm to their clients wantonly or take unreasonable risks. There is no reason, however, for business owners to live in fear of being held liable for the negligent actions of their employees or for damages caused by unforeseeable environmental factors.

Partners

Your business partner is your wing man. More than just a friend, your business partner is someone you rely on to keep your dreams of operating a successful business alive.

The process of starting a business is exceedingly simple in Florida. In most cases, in order to form a limited liability company, future business owners must simply file the Articles of Organization and pay a small fee. The Articles contain tiny snippets of information concerning your business; typically, the names of the officers and the registered agent, and the address of the company are listed, but little else.

This means that, at the outset, nothing exists delineating the duties, obligations, rights, privileges, or profit allocations among business partners. In other words, at the outset, your relationship with your business partner and, by extension, your business is held together with nothing more than a gentleman’s word.

With a little foresight, this precarious situation may be remedied by way of an operating agreement for your limited liability company. For a limited liability company consisting of two or more business partners, an operating agreement is an absolute must. Not only do operating agreements contain such essential information as the initial capital contributions of each business partner or member, but also provide for the allocation of profits, the timelines of disbursements, and the assignment of other duties.

Operating agreements may contain information specifying the employment of certain professionals, such as lawyers and accountants, and may designate members as specifically responsible for handling tax issues or other specific duties for the benefit of the company.

Consider that most people get married without ever intending to divorce, and yet divorce happens all the time. Similarly, even if the relationship between business partners is stellar, prudent business owners must have the vision and foresight to consider the possibilities of disagreement and dissatisfaction.

Property

Your interest in your business is a property interest. Like most property interests, it is freely alienable, which means that you are free to dispose of it as you like. It may be sold. It may be given away. It may be inherited upon your death. What’s true for you is also true for your business partner.

What happens to your business if your business partner no longer wants to be involved? What happens to your business if your business partner, god forbid, dies an untimely death? The answer is that you may end up having to deal with someone you never wanted to deal with, a business partner you don’t know, like or trust. In many situations, this will effectively bring an end to your business.

Once more, with a little foresight, you may address these issues before they arise by executing a buy-sell agreement with your partners. Buy-sell agreements govern the transfer of a business interest upon a business partner’s unwillingness or inability to continue with the relationship.

Typically, buy-sell agreements grant to the remaining partners the first option to purchase the withdrawing partner’s interest. Such agreements also contain provisions addressing the purchase of a deceased partner’s interest from the estate of the deceased partner. Buy-sell agreements may be tailored in many ways, in some cases making the purchase of the withdrawing partner’s share mandatory.

Regardless of how such agreements are tailored, they allow business owners to protect their interest in the business by giving them the option to continue to operate the business on their own terms following the departure of a business partner.

Gain foresight

In order to be successful in managing the three P’s of business, patrons, partners and property, business owners must have foresight and exercise such foresight by timely executing a series of available legal agreements.

In dealing with patrons, customers or clients, business owners should make use of waivers to limit their liability, thereby protecting themselves from frivolous lawsuits. In dealing with business partners, business owners should make use of operating agreements to ensure that all the rights and duties are clearly delineated at the beginning. In order to manage their property interest in their business, business owners should make use of buy-sell agreements to enable them to continue operating their business on their terms.

Many surprises will greet you in during all phases of business operation, from formation, through expansion, and into dissolution, but with a little foresight, you will be able to nip some of these in the bud.

David P. Grigaltchik is a business law attorney practicing law with his own law firm, David P. Grigaltchik, P.A. His office is located at: 6144 Gazebo Park Place South, Suite 215, Jacksonville, FL 32257. He may be reached at: 904-738-8398 or info@griglaw.com.

Think differently to save cash instead of saving taxes this year

By Greg Crabtree, CPA

Every business owner knows the drill; you made a profit this year so you need to spend your cash to save on taxes. Try to think differently this upcoming year to “save cash” not “save taxes.”

The inherent flaw in spending your cash is that you have to spend a dollar to save 40 cents in tax, which just seems like a bad idea. You come up with excuses to spend money you think you would have spent anyway—you buy new computers, some extra supplies, a new vehicle because you heard you can “write it off.”

The point is that if you did without those costs up to December, maybe you did not need to spend it after all! Most successful entrepreneurs spend a dollar at the last possible moment it is needed.

Build wealth or save taxes?

You can only build wealth from “after tax” income, so every attempt to lower your taxes lowers your ability to create wealth. The number one key performance indicator of wealth creation is “how big of a check did your write to the IRS.”

If you did not write a big check, you either cheated or you did not make any money—both are bad. Do not pay more taxes than you should, but you should be focused on building wealth above savings taxes.

What if I am cash basis?

For those who are a cash-basis businesses, you can easily fall into the trap of draining your cash paying off vendors at year end. While this seems enticing, you eventually take it to the illogical extreme and have such a huge amount pushed forward it causes you to make sloppy decisions at year end.

Here are just a few of the issues that you could encounter:

•Bank financing. Your year-end financials are more important than ever these days. By focusing on taxes instead of good business fundamentals, you distort your balance sheet at year end and spend the next year explaining why your balance sheet looks bad at December so you can get your line of credit or bonding renewed.

•Missed opportunities. Because you dumped all of your cash in December, it takes longer than you think to build it back in January and February. By not having cash available to start new projects, you delay or miss out on new opportunities. To delay acting on an opportunity wastes a day of potential productivity that can never be recovered.

•“Deferring Taxes” versus “Saving Taxes.” Did you really save taxes or did you just defer them? Be honest with your language when you spend your year-end cash. It is not saving taxes unless you are saving at a high rate this year and you pay a lower rate in the future.

Not likely to happen. Most entrepreneurs defer taxes at year end and push their rates down into the lower brackets to end up paying at a much higher rate in the future when they have kicked the can as far down the road as they can.

•Borrowing money to finance that year-end equipment purchase. This is the ultimate tax trap. You borrow $100,000 to buy that new piece of equipment (that could have been delayed) and you end up taking the expensing election on the equipment. Inevitably, this purchase pushes you down into the 20% or lower bracket.

The only way to repay debt is to make after-tax profit. To make enough profit to repay the loan, it pushes you into the higher brackets and you end up paying close to 40% tax to generate enough cash flow to get out of debt (if you are lucky).

A better way to think

You need to approach taxes as the logical outcome of a profitable business that is your primary wealth-building engine. These are the keys to make this happen:

•Owners wages. Set your wages out of the business at a market rate for the job you have in the business. Then live off of that wage. Do not fall into the trap of consuming the profits of the business.

•Get profitable with the business you have. Once you properly set your wage as an owner, your net income gives you a true picture of the profitability of your business. If you are not profitable, the key is to make all labor productive and eliminate any labor that does not add value. You have to get your current business model profitable before you grow.

•Grow your own capital. Once you are profitable, retain after tax business profits until the business is fully capitalized. One definition of being fully capitalized is having two months of operating expenses in cash with nothing drawn on a line of credit. A business that has two months of cash can act on opportunities as they come up and you do not need to “get permission” from your banker.

•Get shareholders healthy. Once the business is fully capitalized, you can then take distributions to get your personal finances healthy. Get out of debt first (yes, that means all debt… including your home!), and then build up your emergency fund.

•Strategically redeploy profits. Once your business and personal finances are stable, then you can make strategic decisions about the after-tax profits of the business and decide if you want to grow the business larger or just continue to harvest the profitability of the business.

•Beware of “consumption cancer.” Everything you buy owns a piece of you and creates a financial drag. If you learn to live off your wages and leave the profits of the business for wealth creation, you have mental clarity of what produces wealth, what is investing and what is consumption. If you set a lifestyle target before you have the income to act on it, you will stand a better chance to control consumption.

It is time for entrepreneurs to get back to fundamentals and build profitable businesses that do useful things and grow your own capital. Stable businesses are the ones that create jobs that last and build a strong economy that can weather the storms of the market.

Greg Crabtree has worked in the financial industry for more than 30 years and founded Crabtree, Rowe & Berger, PC, a CPA firm dedicated to helping entrepreneurs build the economic engine of their business. In addition to serving as the firm’s CEO, Crabtree leads the business consulting team—helping clients align their financial goals with their profit model and their core business values. He is the author of Simple Numbers, Straight Talk, Big Profits! He can be contacted through www.seeingbeyondnumbers.com.

Why you need to think outside the GAAP

By Chris Bryan

Are you struggling to see the benefits of your lean initiatives? If so, you’re not alone. You started your lean journey with the expectation that the benefits would flow to the bottom line. Unfortunately, the early financial numbers may not be what you expected.

Many companies abruptly take an exit from their lean journey when early indications don’t show expected benefits. Implementing the principles of lean is a long-term initiative, however, and will ultimately provide a significant competitive advantage—but it will test your vision and leadership mettle.

Lean principles

The goal of implementing lean principles is to find and eliminate waste along the value stream. Most companies appoint a lean champion. Employees are trained and lean teams are formed to map key production processes. This process is called value stream mapping.

The objective is to identify steps and resources that add no value to the consumer of your product. Once non-value added steps are identified, the value stream map is redesigned and waste in the process is eliminated. Production planning changes dramatically. Manufacture-for-stock is reduced or eliminated in favor of manufacture-to actual-demand. When a lean team has redesigned the process, an implementation event, or kiazen event, is planned to execute the changes.

Kiazen events usually take one to several days of intense work. When the event is complete, production resumes using the new lean production flow. It is common for lean teams to shorten manufacturing times, free floor-space, reduce in-process part movement and shrink (or eliminate) inventories. Compelling evidence shows that firms, large and small, benefit from implementing lean principles.

Nothing rivals the excitement and energy generated during the early stages of a lean journey. You will feel great about gathering your employees for training, forming lean teams and redesigning your value stream maps, and everyone will be eager to participate in the initial kiazen events. The optimism is intoxicating. Soon, however, you will face the task of measuring the progress of your lean initiatives.

Challenges measuring lean initiatives

Looking to your standard financial statements in the first few months of a lean journey is likely to give you a confusing picture. Unfortunately, standard accounting methods don’t reflect the progress made by lean teams in the early stages.

Costs associated with training employees, reconfiguring production space, relocating inventory, and conducting kiazen events all hit the profit and loss statement immediately. Liquidating excess inventory, an important initiative in lean, may hit profit margins and increase trade accounts receivable in the short-term.

Worthwhile lean projects that may not result in significant costs, such as clearing production floor-space and establishing point-of-use inventory locations, may not result in immediate cost decreases (rent or depreciation).

If that isn’t enough, standard production cost accounting methods actually reward operations managers for over-producing. Often, manufacturing overhead allocations are based on direct labor hours and other activity-based metrics.

When lean teams work to reduce excess inventory, production quantities may decline, direct labor hours and other metrics may decline and create unfavorable absorption variances. When new, lean production processes are implemented and production is limited to actual customer demand, unfavorable variances may persist.

The good news is that variable manufacturing costs can be reduced immediately; however, it takes time for you to reduce semi-variable and fixed costs that make up the manufacturing overhead pool.

When your generally accepted accounting principles (GAAP) financial statements and traditional product cost reports don’t represent the early progress being made, it’s easy to be distracted from the ultimate goal. To keep your direction and focus, develop a system of specific measures that will ultimately drive broader measures of performance.

Use specific measures to motivate

It is necessary, especially at the beginning of a lean journey, that you implement a system of measurements that can be communicated back to your lean teams. Specific measures and short-term incentives based on achievement are key tools to motivate your lean teams to exert extra effort, develop creative ideas, and to challenge inefficient but deeply entrenched processes.

These measurements will encourage you and your staff to keep driving the right events even when your financial statements do not yet show the fruits of your labor. The benefits of implementing lean principles will, in time, improve your financial statements and become a testament of your leadership skills.

Considerations in measuring lean

Shareholders, owners, partners and other financial stakeholders all rely on your financial statements to measure the performance of your operation. It’s a great advantage when you can link the benefits of your lean activities directly to improving numbers and trends from your audited or reviewed statements.

This is especially true if your business needs to acquire new, more efficient equipment through financing. Consider preparing a three-tiered reporting pack that links production-floor activities to broader performance measures that drive financial metrics.

The first tier reporting can be used to summarize each kiazen event. The summary should include a brief description of the event and how the changes implemented are expected to benefit either the profit and loss statement or balance sheet. (For example, the event may reduce costs or lower inventory.)

The expected cost and benefit of the event can be estimated with your accountant, but the estimate need not comply with traditional accounting rules. One of the benefits of documenting specific kiazen events is that it allows lean champions to later revisit the event and check if the results are meeting or exceeding the estimate.

The second tier can present monthly lean team metrics that don’t show up on financial statements, but will drive the top-tier metrics directly derived from the financial statements. Examples of middle-tier metrics to support inventory reduction metrics include takt time, consigned inventory value, and JIT supplier performance.

The top tier should contain four to six broad measurements of business performance that can be derived with at least one key piece of information from the financial statements such as sales per employee, inventory turns, return on net assets, return on sales, profit to operating cash conversion ratio, and gross profit margin.

Your vision and focus will become evident over time. One of the most significant and often immeasurable benefits of implementing lean, however, is the ability to take advantage of market opportunities in your industry. Lean initiatives can provide your company with additional capacity to capture new customers and make solid gains in market share.

This reporting pack proposal will help you concentrate on the proper metrics early in your lean journey. If you maintain focus, your business will gain a substantial advantage against your competition through operational excellence and market leadership.

Chris Bryan is a CPA and CFE with Christopher S. Bryan CPA, Inc. offering CFO services and fraud prevention services to local and national clients. He is a six-year veteran of measuring and reporting the lean journey. He can be contacted at 904-437-7022, cbryan@christophersbryancpa.com or through www.christophersbryancpa.com.

How to transition from your business on your terms, for your price

By Lewis Hunter

As a business owner, you are accustomed to, and perhaps even thrive upon, solving today’s pressing problems and pushing on totomorrow. But have you looked beyond this week, this month, or even this year?

The average owner spends 80,000 hours building their company but only six hours planning its transfer. As a result, 80% of business owners fail to get top dollar when they sell. That is like winning a free lottery ticket on a drawing for a $1 million jackpot—you may have won, but you missed out on a much bigger prize.

Just as winning the lottery is not a viable strategy for achieving your dreams, nor is hoping that you will sell your business for enough money to support your future lifestyle.

Use a business transition plan to control your exit and maximize your payout. Plan now when you will exit, how and for how much, rather than leaving it to chance.

Analyze your current situation

As with any journey, you must know where you are before you can determine where you are going. Transition planning involves reviewing your business and personal life.

Review your personal finances; focusing on the wealth gap you must close to support your goals for life after your business. If you want to retire, how much money will you need and what price would you have to sell your business for to net that amount?

For your business, document your vision and strategy for the company. Identify critical success factors and measure performance against them through operational metrics. Undertake legal and taxation reviews to ensure compliance with regulations and to protect against risks.

Identify your objectives

Set clear, measurable, attainable objectives for your life after your business, and your business’s life after you.

Business owners typically start planning transitions for one of three reasons:

•A personal health scare, or death or illness of someone close to them, has reminded the owner of their own mortality. They contemplate what would happen to their business and their loved ones if they suddenly stopped working.

•The owner has tired of their work and wants to do something different, such as go into public service or spend more time with friends and family.

•They desire to leave a legacy, ensuring the company survives them and that their work continues to benefit others.

Don’t wait for one of these to occur. Identify your long-term financial and lifestyle needs, the needs of family and stakeholders, and your desired business legacy.

Select your options

Whether you will transfer your business, continue working or retire, there are many ways to accomplish your objectives. Some options to consider and factors to review:

•Internal transfer—Consider whether the next owner(s) would be capable of running the business. Be impartial, even if they are one or more of your children or a long-time employee. Also, ensure you achieve your personal financial goals without irreparably impairing the company. Use trusts, buy/sell agreements, employee stock ownership plans or management buyouts, for example.

•External transfer—Your influence over your company’s future may wane with an outside buyer. Their plan should align with your vision for the business and the needs of your stakeholders, including employees and customers. Would the buyer be making a strategic acquisition with the intent of operating, and perhaps growing, the business over time? Or would they be a financial purchaser, hoping to squeeze cash and profit from a future sale? Will you solicit bids for the company or negotiate with a single prospective buyer?

Identify the options available to you and evaluate each one based on your objectives. Choose one and put a contingency plan in place so the business can operate and your personal goals can be achieved if you cannot complete the transition as hoped, perhaps due to health or performance issues. Use insurance and legal protections.

Create your plan

When will you transition and for how much? What will the acquirer look like? How will your family’s and stakeholder’s needs be met? Compile the answers in your plan and state how you will attain your objectives. Be specific.

The wealth gap between what your business is worth and what you need to sell it for can provide your timeline. If it is worth $1 million today and you need to sell it for $2 million, will it take three years to close the gap? Five?

Decrease the company’s dependence upon you. Allow time to build business value by grooming leaders, implementing systems, improving processes and increasing revenues and profits.

Your transition should occur when you want and in your accordance with your wishes for the future ownership of the business and at a value that fulfills your wealth objectives. Spell out roles and responsibilities for key individuals, draft the management structure, and detail how you will be paid.

When your transition plan is complete, break it down further into tasks with due dates and responsibilities assigned.

Create your plan, build your business’s value and transition when you are ready—then you won’t need to win the lottery to achieve your dreams.

Lewis Hunter is a Jacksonville-based business transition specialist with ROCG Americas, LLC, an international consulting firm that helps owners of small- and medium-sized companies start, build and exit. He can be reached at 904-400-6610, lewis.hunter@rocg.com, or through http://business-transition.com/.

Get ready

•Set up a team of advisors.

•Draft a letter to your spouse or loved one, stating whom to contact and what to do if you die or are incapacitated before you transition.

•Perform a business valuation.

•Measure the wealth gap between your company’s current value and what you need to sell it for to achieve your personal financial goals.

•Create your transition plan.

•Optimize your business.

•Build business value by eliminating the company’s dependency on you as much as possible.

How to protect your rights when dealing with your insurance company  

By Mark Bajalia, Esq.

As a business owner, you will very likely need to make a claim under one of your insurance policies at some point. If you do, you may receive a “reservation of rights” letter from your insurer.

A reservation of rights letter often leaves insured parties confused and unsure about how to respond; however, you will find information about what a reservation of rights letter is and the various options and opportunities it presents for an insured party follows.

What it is

A reservation of rights letter does not necessarily mean the claim is not covered under the insurance policy. It does mean that the insurer thinks it may have grounds to deny coverage for some part of the claim or the entire claim. For example: Most policies have what is called an “intentional acts” exclusion. If it appears that the damages or injuries were the result of an intentional act on the part of the insured party, then the insurer may send a reservation of rights letter indicating that, under the terms of the policy, it may have grounds to deny coverage.

In some cases there may be claims that are covered and claims that are not and the insurer may send a reservation of rights letter indicating that it is providing coverage for only a portion of the claim.

Why they are sent

Insurers send reservations of rights letters to keep their options open. If the insurer does not reserve its rights and provides a defense to the claim, but later discovers that circumstances exist that trigger an exclusion or otherwise call into question coverage under the policy, then the insurer will be stopped from raising a coverage defense.

Under those circumstances, courts could, and have, said that the acts of the insurer in providing a defense without reserving its rights constitutes a waiver of its right to deny coverage. Thus, rather than deny coverage outright, the insurer will send a reservation of rights letter and keep its options open.

Essentially, the insurer is letting the insured party know there is going to be an investigation but is preserving its right to deny coverage if the investigation shows that it is not a covered loss.

What are your options?

You have several options when you receive a reservation of rights letter:

•Ignore it: The insurer may be correct in reserving its rights as to part of the claim.

•Dispute the reservation: As the insured party, if you disagree with the reservation of rights and your insurer’s interpretation of the policy language, you should go “on record” that you dispute the reservation and set forth the reasons that you dispute it.

You should also send it to the claims representative by certified mail and request a response. This will cause the insurer to reassess its position and even if the insurer’s position does not change, you have created a paper trail, which may be useful if the coverage dispute ends up in court.

•Ask for more information: Some insurers will intentionally keep the reservation of rights letter vague to keep their options open. An insured party should counter by asking for specifics as to the purported basis for the coverage issue and the rationale for it.

•Start the clock: Once an insurer reserves its rights, it must eventually declare whether or not it is going to provide coverage for the loss. If the insurer continues to investigate the claim but never conclusively disclaims or accepts coverage within a reasonable time frame, then the insurer may be stopped from doing so. Keep following up with the insurer and periodically ask the insurer to state its position.

•Explore new opportunities: If an insurer reserves its rights, you may have the right to hire your own lawyer to defend the claim, not one picked by the insurer. The insurer will nevertheless be required to pay for your lawyer of choice.

Courts have said that when an insurer hires a lawyer for the insured party, it creates an inherent conflict of interest, which may allow the insured to retain its own counsel. Thus, when confronted with a reservation of rights, it may create an opportunity for the insured party that didn’t previously exist.

•Seek a declaratory judgment: Despite the reservation of rights, if you or your attorney feels that coverage for the loss does exist, then you can seek to have a court review the policy language and the facts as presented and make a determination as to whether coverage exists.

In essence, you are asking the court to “declare” what the policy language means and whether coverage exists. This forces the insurer to address the coverage issues before proceeding on the merits of the underlying lawsuit or claim. The prospect of spending more on legal fees to defend itself in a declaratory judgment action may also encourage the insurer to go ahead and provide coverage and defend the claim.

If you feel strongly that the insurer is reserving its rights on false grounds, you may want to sue the insurer for breach of contract and bad faith claims handling as well. Ultimately you need to understand your rights and protect your rights when you receive a reservation of rights. When in doubt, consult an attorney with experience dealing with insurance matters.

Mark Bajalia is a partner and a managing member in Brennan, Manna & Diamond’s Jacksonville office. He is an experienced commercial, business and insurance litigator, having prosecuted and defended numerous cases in state and federal courts and in arbitration. He is rated AV Preeminent by Martindale Hubble, has been recognized as one of Florida’s Legal Elite by “Florida Trend” Magazine and has been selected as a Florida Super Lawyer in the field of business and insurance litigation.

Preventive safeguards can protect your small business finances and relieve anxiety

By Cindy Stover

Attention Jacksonville small business owners: What measures are you taking to protect your company from fraud?

According to a 2010 report from the Association of Certified Fraud Examiners (ACFE), incidents of occupational fraud are 31% more likely to occur at small businesses as opposed to larger companies. To add insult to injury, as many as 40% of small business owners are embezzlement victims, and a staggering one-third of all bankruptcies are the direct result of internal theft.

More alarmingly, a recent TD Bank Small Business survey found that although nearly three-quarters of American small businesses polled are incorporating some steps to protect their business, only 1% of respondents cite falling victim to fraud as a top business concern, even as cases of criminal fraud are on the rise.

Five proactive steps

Here are five proactive steps you can take immediately to help prevent fraud. Remember, the best defense is a good offense!

#1. Manage finances using secure online banking. Banks and other financial institutions are at the forefront of developing and using security measures that help ensure financial information remains confidential and safe.

Online banking is a secure and essential tool for any small business owner. The benefits of this useful service include 24/7 access to real-time information, account transfers and payment management. You can easily schedule and manage your payments, submit remittance information, and have an audit trail of all transactions.

It’s important to check your account activity regularly. Having instant access to your history helps you closely monitor your account for any discrepancies. If you see any, contact your financial institution immediately.

Many banks also offer free (and secure) online bill pay—saving you money on postage costs and mitigating the chance of a paper check being lost or stolen in the mail.

#2. Protect computer systems and practice online awareness. Being complacent about cyber protection can lead to the compromise of critical information and detrimental consequences for your business. Every computer at home and in the office should have installed and regularly updated firewalls and anti-virus software.

While conducting business online, be aware of “phishing”—an electronic scam that attempts to obtain confidential personal or financial information from its target. It takes the form of a fake message, usually an email, which appears to be from a financial institution or service provider.

While some emails are easily identified as fraudulent, including some containing enticing headlines, others may appear to come from a legitimate address. Never reply to any email or pop-up message that requests you to update or provide personal information.

Given the influx of new digital technologies and operational tools available for small business owners, it’s increasingly important to learn about the latest trends and techniques used by cyber criminals. If an offer received via email or on a website sounds too good to be true, it probably is!

#3. Safely handle sensitive documents and financial statements. The Web isn’t the only place where thieves can steal valuable information. Some of your own employees and outside parties can steal important mail, credit card information or checks and commit fraud.

Printed financial statements, social security numbers and other sensitive papers should be disposed properly using a shredder or saved in a securely locked device. To avoid the hassle of handling several papers, certain banks allow customers to opt out of paper statements and receive online statements instead.

Technological advances have even put photocopiers at risk. Most photocopiers built since 2002 contain a hard drive that stores every image scanned, copied or emailed. When a business sells or upgrades their copier, the machine is usually cleaned up and reconditioned, but often times the hard drive is left intact and isn’t scrubbed.

Once resold, it’s possible for anyone to simply pop out the hard drive, and access and sell confidential information, such as income tax and bank records, social security numbers, and birth and medical records.

Treat documents in the standard office copier just as they would any printed document, and guard that information accordingly.

#4. Obtain fidelity insurance. Crime and fraud-related losses generally aren’t covered by property insurance policies. As a result, it’s important to protect money losses from workplace fraud.

Fidelity insurance protects your business against criminal acts such as robbery, embezzlement, forgery and credit card fraud. Liabilities secured under this type of insurance usually include money loss coverage (burglary or theft) and employee dishonesty (embezzlement and forgery).

According to the ACFE, 80% of workplace crime and abuse is performed by employees. Tough economic times often result in increased incidents of fraud and embezzlement. Although fidelity insurance means an additional cost for your business, it will save a lot of headaches should your business fall victim to workplace fraud.

Search for low rates and partner with a broker who can help you shop for the best deal.

#5. Incorporate appropriate checks and balances. Every small business owner should perform an internal review and assessment of company finances on a monthly basis. Make sure payment amounts match all invoices and check for any missing documents. Running random audits or having a third-party audit your books once a year will show your employees you are serious about fraud and deter them from committing deceptive acts.

If you think you’re a victim of business fraud, immediately contact the fraud department of any of the three major credit bureaus to place a fraud alert on your credit file. Also, contact your banks, credit card issuers and other creditors where your finances and information are available.

Following these five preventive tips will help protect your finances and allow you to focus on the success of your business!

Cindy Stover is market president of TD Bank’s, America’s Most Convenient Bank, North Florida market and is responsible for the commercial, government and community banking business for Florida’s Northwest, Northeast, North Central and Mid-North regions. Stover has over 27 years in banking experience and is involved in many local community organizations. TD Bank works hard with its customers to prevent fraud and takes several measures to protect their privacy. Visit its online security center for more tips at www.tdbank.com/security.

How you can conduct business internationally

By Keith Johnson

As a small business owner, you probably already know that in this economy, getting any kind of business is hard. In order to be successful, you need to consider expanding the variety of revenue streams—and that includes dealing with businesses that may not be based in the U.S.

Success steps

Going global with your business is not easy. Once you decide to do business with non-U.S. companies, there is a lot of work to be done.

•Understand your industry. Know your industry and how it works in the country(ies) you wish to do business in. You have to know how your product or service will attract and keep buyers in the target markets. You also need to know if your product or service is priced competitively.

The value of what you sell must exceed that of not only your competition in your customer’s home country, but also from other U.S. companies that also want to expand their business by going global.

•Knows the laws of trading. You have to understand the laws of trading with a foreign business. What may be legal in the U.S. may not be outside of it, and vice versa. While bribery is acceptable in many nations, it is highly illegal under U.S. law. Your product may pass safety regulation muster here in the U.S., but maybe not in other countries.

•Be familiar with various currencies. Having a solid knowledge of currencies is necessary to be able to track differences in currency values between the U.S. dollar and a Euro or Dinar or Yen. You may find yourself caught short agreeing to a sale that when currency differences now and during the sale period are taken into account, your expenses will exceed your expected revenues because of the loss of value in the dollar.

•Have an infrastructure. A business owner must­ have the infrastructure in place to facilitate trade between the U.S. and other nations. There are many different companies that specialize in facilitating trade by working with customs, financing, collections, and shipping. Trying to do all of it yourself is at best, very draining on your time and resources, and at worst exposes you to serious problems with your shipments and even legal complications.

•Learn the culture. Last, but not least, a successful business owner needs to learn the culture of the trading partner. Again, what is acceptable here may be highly offensive in say, Brazil. What customs are acceptable in Egypt may be frowned upon here. You need to take the time and do the research on your customer’s country so that an innocent remark may not spark a diplomatic crisis.

Personal experience

While most of my clients are U.S. based, I do have some tax clients that are not. One client supplies materials in support of the U.S. base in Kyrgyzstan. While the owner is American, preparing the tax return is a challenge as I have to understand international taxation and how best to report the foreign business activity—but I do enjoy the opportunity to grow professionally.

Another client is a school supporting a U.S. Air Force base in South Korea. Again, while the owners are American, doing the return requires me to understand some tax regulations governing relations between the U.S. and South Korea. I try to look at each such opportunity as a chance to improve my skills for the next clients.

To be honest, I have only met one of my clients thanks to the power of modern technology. Having an Internet presence and a strong SEO and social media plan allows people from all over the world to find your business easily and get them to consider your business as opposed to your competitors.

Earlier this year, I had the exciting opportunity to go to Cuba for two weeks to prepare tax returns for support personnel at the Guantanamo Bay Naval Air Station. While I worked with U.S. personnel mostly, I was exposed to some Cuban culture and it also allowed development of the government procurement side of my practice.

The right resources

Sounds a little daunting, and it is. However, fear not! There are a lot of resources here in River City that can help get your business prepared for international expansion.

Earlier this year, I earned a certificate in International trading from the UNF Small Business Development Center. It is about 20 hours over six weeks that explains all of the nuts and bolts of international trading. The knowledge, networking, and materials gained from the course have helped me a great deal. The cost is $299, but there are programs from Worksource that can help pay for it.

There is a wonderful resource here in Jacksonville named Jorge Arce. He is a local director for the U.S. Department of Commerce. The Commerce Department is committed to helping small businesses develop and execute a plan to export products and services

Finally, I would be remiss in not mentioning Larry Bernaski and Enterprise Florida. Enterprise Florida is the state agency that is charged with helping Florida businesses take advantage of their favorable geography and help grow an export business. Many of these services are either free or at a nominal cost, but the investment can be well worth it.

Survival box

In order for your business to survive today, you must think out of the box and consider all options in and out of the U.S. You must consider a business owner in the Ukraine for your product just as much as someone from Orange Park. Fortunately, there are a lot of resources at your fingertips to get your through the maze of regulations and cultures to get your goods to market. They have helped me, and now it’s your turn. Good luck!

Keith E. Johnson CPA, is owner of Keith E. Johnson CPA PA in Jacksonville, Fla., a full-service CPA firm providing accounting, auditing, consulting, and tax services to individuals, businesses, and non-profits. He can be contacted at 904-727-0077 or kejcpa@comcast.net.

Why you may be overpaying your federal taxes every year

By Brent Ross

Countless numbers of commercial property owners overpay federal taxes every year and are missing out on allowable depreciation expense deductions. Under existing IRS tax law, accelerated depreciation expense deductions are available to all federal taxpayers; however, without an engineering-based cost segregation analysis, the taxpayer is unable to take full advantage of the tax law and, therefore, surrenders significant cash flow to the IRS.

What is cost segregation?

A typical cost segregation study maximizes the tax benefit of real estate ownership by identifying, segregating and classifying a building’s components to asset categories with the shortest possible life creating significant tax deductions sooner for federal and state income tax purposes.

This is determined though an analysis that reclassifies components of a building from 27.5, 31.5 and 39 year depreciable lives to five, seven and 15 year depreciable lives. The benefit comes from accelerating the depreciation tax deductions, which are more valuable today than 39 years from now.

Nonstructural items like carpet, accent lighting and signage, or exterior items such as paving, sidewalks and landscaping are examples of building components eligible for accelerated depreciation, and are items that can be “broken out” from structural costs and depreciated over a shorter period.

Many property owners can identify nonstructural items that qualify for accelerated depreciation, but the greatest savings come from identifying assets in three broad areas: electrical, mechanical and plumbing.

Let’s say a standard office has three electrical outlets. To effectively operate your computers, printers, projectors, etc. in your office, however, you require six electrical outlets; those “extra” three outlets may qualify as five-year property and accelerated depreciation. The same can be said for specific air conditioners when a certain temperature must be maintained for the safety of the product, such as in grocery/food stores or maintenance facilities so equipment won’t overheat.

Depreciation can increase your ROI

An often overlooked tax-saving opportunity is accelerated depreciation of cost associated with the construction, renovation or purchase of a new building or real estate. Taking advantage of certain techniques can boost your return on investment (ROI), and a cost segregation study can help you improve profitability and increase ROI by maximizing tax benefits on certain projects.

Property owners can substantially reduce taxable income and maximize current depreciation by accelerating deductions, thereby increasing after-tax cash flow. In addition to recently purchased or constructed properties, a cost segregation study can produce substantial tax benefits for properties that have already been depreciated for as many as 10 years or more by catching up on missed depreciation.

Most business owners who own a building understand that they recover their investment through depreciation. What they may not understand is how to look at an entire facility and allocate as much cost as possible to things with the shortest depreciable life thereby recovering the cost of their investment for tax purposes much sooner.

Business owners often overlook the opportunity to allocate costs to land improvements and things that qualify as furnishings that depreciate in five to 15 years as opposed to the building itself, which depreciates over 39 years for commercial property and 27.5 years for residential rental property.

A proven and allowable tax strategy

Cost segregation is by no means an aggressive or risky strategy. For decades, court rulings havesupported the practice of segregating costs for tax depreciation on commercial buildings. In 1997, the U.S. Tax Court ruled that segregating costs for tax purposes was allowable. Subsequently, cost segregation has become an accepted—if somewhat underutilized—tax planning strategy.

Using sources such as revenue rulings, court cases, IRS publications, senate and congressional finance committee reports and IRS regulations, cost segregation experts are able to help companies apply deductions that create tax savings starting in the first year.

Is a cost segregation study for you?

Office, manufacturing, retail, professional, residential rental—it doesn’t really matter which type of real estate you are building or acquiring. If the property can be depreciated, a cost segregation study would be a valuable strategy. The study can help you find hidden deductions and help you realize substantial tax savings. Even if your real estate project has been completed for several years, the IRS allows for a look back of the benefits from previous years through a change in accounting method.

A cost segregation study requires detective work. It might start with an invoice, but it goes into extensive analysis involving the examination of construction documents, blueprints and an inspection of property. This approach analyzes both actual cost records and cost estimates and may take up to a month to complete. Trained engineering and tax specialists will work closely with you and your contractor to identify more assets that qualify for shorter depreciable lives and accelerated depreciation, including all assets that are imbedded in your building’s construction or acquisition costs.

The business owner receives a detailed report including background, the methodology, asset classification summary and support, and the complete allocation of costs—everything they would ever need to know about the process and results.

Reinvest in your company

It’s important for the property owner to have a detailed report from a CPA so they understand exactly what they did. The engagement will pay for itself many times over through the first year’s tax savings. Earning these tax savings now, as opposed to many years from now is valuable. The property owner can take that money and invest it back into their business.

It’s important however, for property owners to work with engineers and tax advisors that are intimately familiar with cost segregation rules and requirements in order to make sure the study is in compliance with the constantly changing regulations regarding how assets may be classified. Any building put into service after 1987 qualifies. Even now, years later, the benefits can be realized.

The money you save from a cost segregation study can help your company in many ways. It could for example be used as additional working capital for operations, or be used toward new investments and ventures or used to pay down debt and reduce interest costs.

Brent Ross, CPA, is president of Brent Ross & Associates, CPAs, LLC. He has worked in the area of federal and state taxation since 1972. Having worked as a practicing CPA since the early 1970s, he has extensive experience dealing with issues related to investment tax credits (ITC) and property qualifying for ITC and component depreciation. This body of experience is the backbone of knowledge necessary to complete quality cost segregation analysis and reports to owners. He can be reached at 904-448-6408, bross@brjaxcpa.com, or through http://brjaxcpa.com/default.aspx.

Who qualifies?

Although any non-residential commercial property may qualify for tax deferral and increased cash flow, here is a sampling of the types of properties with a high probability of benefiting from a cost segregation study:

Corporate office buildings

Warehouses and distribution centers

Hospitals

Medical/dental offices

Nursing homes

Apartment buildings

Restaurants

Hotels and motels

Strip malls and retail stores

Car dealerships

Golf courses and country clubs

Grocery stores

Airport hangers

By Richard Close
With the deadline for filing personal tax returns closing in, you can’t put off

reviewing your 2010 receipts much longer. When it comes to filing taxes for self-employed individuals, you should take advantage of as many allowed deduction as possible. Maximizing these deductions will not only save you money, but will reduce the overall potential for tax liability.

A good rule of thumb is to eliminate any personal purchases, or anything that was used for personal use, from your receipts or logs. The Internal Revenue Service (IRS) code only allows for “ordinary and necessary” expenses in your business. This means if it was not used for specific use by your business, it is not an allowed deduction.

1. Vehicle expenses. As a self-employed individual, you can either deduct vehicle expenses by standard mileage or actual expenses. If you have not been keeping a mileage log, standard mileage may not be the option for you, as the log will be the only proof for this expense.

You can deduct interest paid on a car loan if the car is used for business purposes. If the car is only used for business 60% of the time, you can only deduct 60% of the interest paid that year.

2. Bookkeeping and accounting. Tax Preparation fees can be deducted from your Schedule C. Basically, you can only deduct the fee for preparing your self-employed portion of the return as a business expense. The rest of the tax preparation expense can be deducted from your Schedule A on your personal return. All bookkeeping and/or accounting expenses can be deducted as it pertains to maintaining your business records.

3. Travel, meals, and entertainment. When you’re preparing to deduct expense related to travel, meals, and entertainment, ensure they were for business use only.

Travel expenses are deductible when you are required to be away from your tax home (your primary residence) and are in need of rest or sleep while you are conducting business. This also applies for any meals necessary while you are traveling. More good news: Tips are also allowed as a deduction during travel.

Entertainment expenses are deductible only when you are entertaining a customer, client, or employee. The expense must be common or accepted in your field of business, and be considered helpful for your business. Beware: You can only deduct approximately 50% of your unreimbursed business expenses.

4. Office supplies. Most people make numerous trips to office supply stores for their everyday needs—sometimes more frequently than they would like (with big bills to prove it!).

Paper, ink, postage, computers, printers, and related office supplies are all necessary for you to keep your business running professionally and efficiently and thus are tax deductible. Always keep your receipts, and if you are purchasing business and personal supplies, it’s advisable to get your business purchases on a separate receipt. This can be a small gold mine in deductions, as most people do not realize how this can add up over the course of one tax year.

5. Business use of home. Be cautious when you are claiming portions of your home for business use. This is easily one of the most frequent places that tax payers can make mistakes.

The business portion of your home must be one of the three following:

•Your principal place of business;

•A place where you meet or deal with your patients, clients, and/or customers; or

•A separate structure not attached to your home.

The business portion of your home doesn’t have to be used exclusively for business. Examples include using the space to store products or using the space as a daycare facility.

Many people use portions of their home for business purposes, if not run their business out of their home. You need to know what size the space is in order to have a complete deduction, which can save you money in the long run.

Just the beginning

This is merely scratching at the surface of what items and expenses can be deducted when you file your Schedule C. Review your receipts and records for the 2010 tax year. If you have expenses not listed above, check out IRS Publication 334, available at www.irs.gov, to see if your deduction is an allowed expense.

Preparation of a self-employed tax return is not simple, and can cost you big when prepared incorrectly. If you do not feel comfortable preparing your return on your own or have a large amount of expenses, it is in your best interest to seek a licensed and qualified tax preparer or CPA.

This is a guest post by Richard Close, on behalf of the Tax Defense Network (888-248-9058 or www.taxdefensenetwork.com). As a former IRS Revenue Officer, Richard “stole” $10 Million for the IRS. Now he works to help American taxpayers. Richard writes IRS news and updates daily on his website, The IRS Hitman (www.irs-hitman.blogspot.com). You can find answers to common tax questions in his knowledge vault.

When it comes to your taxes, the IRS may just be human after all

By Keith Johnson

As business owners and individuals, you’ve all had that sinking feeling at one time or another when your tax return is prepared and you get hit with the shocking news. Because of improper planning, unforeseen circumstances, or some other emergency, you find you owe Uncle Sam more than you can afford to pay right then.

This scenario is most likely to occur because of two reasons. First, the IRS requires businesses that have a payroll to file and pay payroll taxes on a Form 941. It is easy for a small business owner to find themselves overwhelmed by the amount of federal payroll taxes they held from their employees as well as the required company match for Social Security and Medicare. The Form 941 is due every quarter and can make any small business owner lose sleep figuring out how to stay current, especially in these hard economic times.

Second, and related to the first, a sole proprietor who may not even have employees may find themselves owing a significant amount of self-employment tax. Self-employment tax is actually the government’s way of ensuring that sole-proprietors pay their fair share of Social Security and Medicare. The tax runs around 15% of net profit, is counted toward your Social Security benefits, and is in addition to the income tax generated by the net profit reported on Schedule C and line 12 of the 1040. Again, this tax adds up quickly and has left many small business owners in despair.

Wishful thinking

If something like that happens to you, you will feel like ignoring it and hope it goes away, or when an IRS letter comes, you’ll want to leave it in the mailbox and hope the mailman takes it back; however, the IRS is similar to a spoiled child in the fact it doesn’t like it when it’s ignored. But instead of pouting or throwing a temper tantrum, the IRS can resort to filing liens and levies, as well as take you to court.

But remember, the IRS actually is staffed by human beings just like you. The IRS will not only work with you to resolve your tax issues, but bend over backward as long as you work with them in good faith. It is a little known fact that the goal of the IRS is taxpayer compliance, not criminal prosecution.

Make no mistake, if you owe the tax, you owe the tax and the IRS can’t help that. But they can make payments much easier if you let them.

What to do if…

You just got a letter from the IRS stating you owe $5,000 in taxes and have $500 in penalties and interest on top of that. The first thing you need to do is not panic. Call your tax advisor immediately and tell him or her what is going on.

Perhaps a mistake was made by either your payroll preparer or you, but only a thorough review of your payroll or financial records will confirm that. Many business owners will get such a letter to find there was a timing or processing error, such as a payment not posted to the account correctly.

•It may be legitimate. If a review of your business records by your tax advisor reveals that the tax may be legit, what’s next? Your advisor should prepare a Form 2848, IRS Power of Attorney for you to sign. It allows the advisor to represent you to the IRS on your behalf.

It allows the advisor to discuss your tax situation over the phone, collect records for your account, and be present at any meetings with IRS agents. It doesn’t allow the advisor to access bank accounts or make business decisions for you. Go ahead and sign as your advisor will not be able to do much without it.

Your tax advisor can then contact the IRS and get in touch with the agents who can best explain your situation and review your options. Before the IRS can help you, you must be up-to-date with your tax filings. The IRS will advise if there are any missing returns. Get them filed immediately. Payment arrangements can be figured out later.

Once your tax advisor has all of the information they need to catch you up-to-date, you may find that you don’t owe anything. This happens more than you may think. There may be penalties and interest for late filing, and if that’s the case, request your advisor to write a letter to the IRS requesting abatement of penalties. If this is your first offense, the IRS will usually grant it. Interest is harder to remove unless it is the result of an IRS error.

•It is valid. Let’s say the tax you owe is legitimate, and you’re in over your head. The IRS will allow you to enter into an installment agreement. You need to file a Form 9465 for this. If the amount is less than $10,000 and you have not had another installment agreement in the last five years, the IRS cannot refuse your request.

Basically, your setting up a loan payment arrangement similar to a car or mortgage. The IRS will ask you for a monthly payment amount which can pay off your tax in four or five years, but it does cost $105 to set up.

Also, if the tax is expected to be paid within 120 days, do not use this option. The IRS collection process is such that taxes owed will not go into active collection status for 120 days. This also appears on the Form 9465. Use this like a same-as-cash alternative.

•It is a financial hardship. Suppose you’re really in trouble. There are other alternatives to asserting financial hardship such as Offer-in-Compromise, which is rarely granted but worth looking at. There is also a Currently Not Collectible (CNC) status, which puts collection activity on hold for up to 10 years.

At this point, you need to organize your financial records as the IRS will require you to complete a 433-A or 433-B collection statement. This lengthy form requires supporting documentation for your assets, liabilities, income, and expenses. This is a pain to put together, but will help the IRS in determining a reasonable payment.

If you can show the IRS that repayment will cause severe financial hardship, they are more likely to work with you. You can also request the services of a Taxpayer Advocate by filing an aptly named Form 911. An advocate will help grease the wheels to resolve your tax problems.

Know your options

Getting in trouble with the IRS is easy to do and happens to many more than you may think. Don’t feel you’re a failure or a bad business owner. Lots of things can happen to put you in hot water. There are also many options the IRS has given you to resolve any problems. Get the help you need immediately. Don’t wait for it to go away.

Keith E. Johnson CPA, is owner of Keith E. Johnson CPA PA in Jacksonville, Fla., a full-service CPA firm providing accounting, auditing, consulting, and tax services to individuals, businesses, and non-profits. He can be contacted at 904-727-0077 or kejcpa@comcast.net.

ON THE WEB For more information on 2011 taxes, visit http://advantagebizmag.com/archives/6113.

Why e-banking is the best thing since sliced bread

By Lori Putnam

Those us who have paid attention over the last 25 years have witnessed the emergence of technology at what can best be described as warp speed. If you really think about it, the technology of today was probably obsolete before you evenpurchased it!

In the world of financial services, the technology boom has created the ability for bank customers to obtain immediate and accurate banking information, real-time and online. As e-banking technology began to emerge and improve, the initial fear that online banking would replace branch banking was quickly replaced with a desire to offer as much information to our customers through online portals as possible.

When you can sit at the computer at midnight in your pajamas and learn about the products and services your bank offers, it’s a better educational experience than sitting at your banker’s desk, trying to decipher “bank-speak” and knowing there are four people behind you waiting to be seen. This doesn’t mean you never need to go into a branch, but many things that used to be done in branches can now be done electronically, which can save you time and money.

Extended services

Most people log onto their bank’s website to balance their checkbook ledgers. They’ll look at their current or recent activity, maybe look at the detail of some checks they forgot to enter into their ledgers, transfer money to or from savings, and originate electronic bill payments through their bank’s online bill payment site. But e-banking is much more robust than just paying and receiving.

Need to stop payment on a check? Chances are you can initiate a stop payment from your bank’s website. Got a kid in college who needs money? You can initiate a payment to them through your bank’s online bill payment system. In fact, most banks’ online bill payment products can not only accommodate payments to credit cards and utilities, they can now accommodate payments originated electronically to individuals, and business owners wishing to make electronic payments can attach invoices and even apply discounts to electronic bill payments.

E-banking also extends to the lending arena, with a variety of information available through not only your bank’s website, but the links they most likely provide. These links can include calculators for loan payments so you can determine how much a payment will be and how long it will take to repay, as well as detailed information on the variety of loan products available to you, whether you are a business or an individual.

Many financial institutions offer online loan and credit card applications, and even current rate information for their most standard loan products. The e-banking application is virtually the same as what you would complete in a branch office; in fact, many banks no longer use paper applications, but instead originate in-branch loan and credit card applications through their internal electronic systems.

What about investing and retirement? Your bank’s website most likely offers a retirement planner so you can determine how much to invest and at the current rate of savings, how much you will have when you retire, and even asset allocation information so you know how to build a more balanced investment portfolio.

Want to keep up with the current news on your bank? Check out the website. News and information about your bank is readily available for your reading pleasure.  Many banks also offer the option to begin the new account opening process through their electronic sites, and some offer “switch kits,” which can help ease the pain of establishing yourself at a new financial institution by making the process a little more manageable.

New services

With the movement toward “paperless” transactions, many banks offer a terrific service, generically referred to as Remote Deposit. Remote Deposit allows business customers the ability to make non-cash deposits through a secure website using a desktop scanner.

Users simply scan their checks to be deposited, correct any errors that may occur during scanning, and then submit the deposit for practically immediate credit to their bank accounts. The images of the items are stored electronically and can be viewed anytime. While most banks do have processing cut-offs for credit for remotely deposited items, the system itself is available 24 hours a day, 7 days a week; deposits can be originated and transmitted to the bank and images of deposited items can be reviewed anytime, day or night.

Along these same lines, electronic bank statements, or e-statements, are gaining popularity as “go green” becomes the rallying cry of reducing paper waste. Statements are delivered through a secure system and retrieved at your convenience. All e-statements include transaction details, and most e-statements include the images of the items transacted on your account.

Wire transfer remains one of the most popular methods of moving funds swiftly between banks, and with the ability to originate wire transfers through electronic banking, customers can save a trip to the bank and even gain a reduction in the cost of wiring funds. Payments initiated or received through the Automated Clearinghouse (ACH) are the preferred method of handling payroll and expense reimbursements. Most banks even offer a “self-service” ACH product, which allows the end user to process ACH payments without the use of an intermediary, such as a payroll company.

Another e-banking service gaining popularity is Positive Pay. Check fraud is one of the most common reports of fraud among businesses. Positive Pay offers one of the most effective methods of deterring check fraud by allowing users to compare the checks they have issued against those being presented for payment on any given day.

Items that do not match the checkbook register raise a red flag and the user must decide if these exceptions represent fraudulent activity. This gives the business owner control over the items being presented for payment against their account, which in turn helps control costs by minimizing the risk of check fraud.

Your e-banking site also offers a wealth of information regarding FDIC insurance, the bank’s officers and directors, identity theft and fraud protection, and more. Many bank sites offer a tool that allows you to pull all financial information into one site for money management purposes. There’s even a good chance that if you visit your bank today, there are e-banking kiosks available for your use, right at the branch site! And we never even discussed the variety of electronic functions that are available now through ATMs and mobile banking. That’s best saved for another article.

It’s probably safe to say that advances in technology have not quite given us the time or cost savings that jet-packing to work or traveling by transporter might have offered us. But taking advantage of the many products and services offered by your financial institution’s e-banking site can certainly make it easy and convenient for you to manage your daily financial needs.

Lori Putnam is vice president, commercial deposit manager, and cash management officer for FirstAtlantic Bank. She can be contacted at 904-446-2567 or lputnam@bankfirstatlantic.com.

Procurement and technology do mix!

By Tony Lego

Lowering supply cost can be a daunting task for organizations even if its operations are lean and mean. The cost of operating a company continues to rise while getting new customers is harder than ever. Add to this the cost of providingemployee benefits, which are also rising, and it is becoming more difficult to operate a financially healthy business.

But you can increase profits by reducing the costs associated with expenses and overhead by cutting supply cost or reducing HR cost. Reducing supply cost can be an arduous and time-consuming assignment. A supply program running at peak efficiency requires time, knowledge, resources, and dedication. However, by focusing on what is most within your control, you can achieve substantial savings.

Reducing through technology

Several ways to use technology to address the issue of supply cost reduction include Internet shopping, inventory control systems, RFQ systems, spend aggregation/management systems, and hiring a purchasing partner.

Internet shopping: The Internet brings the supply industry to the desktop. It can be a great source for product research and pricing, but can become time-consuming if shopping time is not structured. Internet purchasing saves money by eliminating overhead such as warehousing, sales representatives, advertising, etc., and in turn the savings are passed along to the consumer.

In many situations, you deal directly with the manufacturer or an authorized distributor, but use caution when using the Internet as some of those great-looking sites may be out of someone’s garage. Orders should only be placed from trusted sites and never send personal information, such as your Social Security number, bank account numbers, or credit card numbers, over the Internet if you are not absolutely certain the vendor is legitimate or if the website is secure. Many websites display a SSL (secure socket layer) logo at the bottom of the landing page as their assurance you are on a secure site.

Inventory control system: Inventory control systems can be as simple as a pencil and pad of paper, Microsoft Excel worksheet, or more robust systems using software and bar code scanners.

In electronic inventory systems, re-order point inventory levels can be set to trigger re-ordering, and minimum and maximum inventory levels can determine reorder quantities. This reduces necessary stocking levels and minimizes unnecessary ordering of supply items, which translates into a more effective and efficient supply system—giving you greater control over where supply dollars are spent.

Ask your distributor representative if they have such a system available for your use. Some distributors will supply a basic system for little or no cost if you ask.

RFQ system: RFQs (request for quotes) are used to determine the best price for the same or similar item from different manufacturers/suppliers. There are providers that offer the capability to conduct RFQs via the Internet, which saves you time in administering the RFQ process. Some provide ways to rate each suppliers bid on various factors such as capacity, quality, product offering, flexibility, and terms. This helps you quickly hone in on the supplier that will be the best fit.

Before creating the RFQ, you need to know what you want in the product (specifications, tolerances, performance levels) to meet your application of the product. This is very critical to obtaining the right product at the best possible price, and can save a considerable amount of time in product selection.

If you are unsure of the product specification or capability required to perform the intended application, you can invite suppliers to educate you as to why their product/service is best suited for your needs. But beware—getting three bids is not the end of the procurement/strategic sourcing process, it is the beginning. This assumes that you have selected the correct/best suppliers and defined your requirements accurately.

Spend aggregation/management systems: Many businesses that start out small and grow into sizeable organizations with multiple locations usually are missing a way to aggregate their spending across items and services. These companies have hundreds of supply items and overhead items, and the “spends” quickly grow when you look at your spending at a category level.

For example: A telecommunications company with three locations and 20 associates at each with 10 telephone lines and 10 people using the Internet per location. If you look at this at a location level, they are only spending a couple hundred dollars per month. Not a really big dollar cost. But if you aggregate the spending on this across the locations, now you are talking in the $1,000 plus per month. You can see how expense items/services can quickly add up.

There are many systems and solutions in the marketplace to help you accomplish this, such as Google Spend Aggregation. But before you take this route, make sure you are ready to do what is necessary to categorize your purchases into the correct/accurate categories, and keep them maintained as you move forward.

Hiring purchasing partners: Business has become more complex, offering a variety of products/services under one roof, largely in response to customer demands. The result is that direct materials purchasing consumes a vast majority of the purchasing organizations time and effort. This complexity now requires a greater range of skills and knowledge to navigate a sea of suppliers and products/service to get to the best value, and usually comes with a reduced focus on indirect expense items/services, which should not be the focus of limited purchasing resources.

However, the indirect area of purchases can and has produced significant savings for businesses. The issue here is, “Are the savings significant enough to justify hiring a staff of full-time procurement experts?”

In response to this need, several organizations offer purchasing expertise and technologies on an as-needed basis to help businesses maximize value and harvest savings in the indirect expense area. These technologies include price benchmark and supplier databases, which help the partner to quickly identify opportunities in your indirect expenses. They also deploy advanced negotiation techniques using Web-based tools to ensure a competitive environment is created for your purchases.

Take control

Each of the previously mentioned points, when implemented, can help you take control of supply purchasing. Each action by itself will achieve positive results, but each also has a trade-off associated with it: time utilization, use of material resources, human resources that might be better utilized performing increased revenue activities, or importance of saving a few dollars relative to other matters.

Time and other valuable resources expended to save money may eliminate any savings at the expense of something else; in reality, it may actually cost you money. Businesses have always relied on purchasing departments with dedicated men and women who understand sourcing and negotiation practices to conduct product/service research, supply market/supplier research, and presenting RFQs or RFPs (request for proposals and other procurement techniques).

Unlike the person in customer service, sales, production, marketing, accounting, or new product development, the purchasing department is dedicated to knowing how to purchase. Purchasing partners and departments dedicated to a business’ bottom line provide a service that can yield significant savings with improved business efficiency.

Tony Lego is an entrepreneur and franchise owner of Expense Reduction Consulting (ERC). He can be contacted at 904-401-1235, TLego@ERCsaves.com, or through www.ERCsaves.com/TLego.

Accomplish success by understanding your profit and loss statement

By Keith Johnson, CPA

The ability to read and understand financial statements is critical to a business owner’s ability to effectively run an organization, and, in many cases, the difference between a profitable, thriving business and one that will shut its doors.

Financial statements such as the balance sheet and profit and loss (P&L), or income statement, give the practiced reader many clues as to a business’s viability and performance.

Of the two most major financial statements, the easiest for most small business owners to read and understand is the P&L. In its most basic form, the P&L provides a summary of an organization’s activities during a given period of time. Although one year is the most common time period a P&L is prepared for, it can be prepared for a six-month period, quarterly, monthly, weekly, or daily.

The P&L theory

The theory behind a P&L is actually very simple. Essentially, you take all of your income and billings and put it in a big pot. You then subtract what you spent and the result is your net income (hopefully, you will not have a net loss). Your net profit is what the business and owners are taxed on. If you can understand that, you have won half the battle.

Record your income

The first step in reading a P&L is to record all of your income from your business activities, usually your sales. They can be broken out by the different products or services you sell. For instance, a CPA’s P&L could show income from tax preparation, audits, and business consulting.

If you have more than one product or service, the income from each activity should be recorded. The income from the different products or services is summed up to produce gross income. Gross income is all revenues realized by the business.

Subtract your expenses

There are two basic types of expenses which are subtracted from income to get to net income. The first is cost of goods sold. Cost of goods sold are expenses that go directly into your product or service. They include raw materials, labor that went into the product, and other items that are actually in the product.

If an expense is not traceable to the product, do not include it here. Cost of goods sold is subtracted from gross income to produce your gross margin or gross profit. This is an important number as it shows how much money you have left after making your product.

A healthy gross margin may vary by industry, but as a general rule, you want a margin of at least 50% to 60%, if not more. If your gross margin is too small, you will be caught short on paying your operating expenses. You will need to raise your prices or you will have liquidity problems.

The other type of expense is called operating expenses. These expenses are paid, but do not go directly into the product. These expenses may include rent, utilities, phone, insurance, Internet, uniforms, auto expenses, travel, and continuing education. These expenses are just as crucial, but are not reflected into the final product or service.

You need to sum up each expense by account to get total operating expenses. Operating expenses are subtracted from gross profit to get operating profit. Many small businesses will stop here, but there may be small adjustments for nonoperating income and expense, as well as income tax.

Look for oddities

The best way to interpret your P&L is to first look for any expense that sticks out. Are your advertising expenses out of line with your dues and subscriptions? Do you have large bank service expenses? You may need to switch banks. Do you have large travel expenses? You may need to find more effective means of meeting, such as through webinars or conference calls, which may save you money. If one expense dominates your P&L, you will want to do additional research to understand why.

Schedule regularly and keep current

Second, you want to commit to producing P&Ls on a regular basis. Many CPAs will sit down with their clients quarterly to review their financials. By preparing regular and consistent P&Ls over time, you will be able to detect trends and act upon them.

For instance, you may have declining sales. Is it seasonal, or is it something else? Are your payroll expenses out of line? Payroll expenses may be the biggest expense you have. By trending payroll expenses, you will be able to make better hiring decisions. Are your bad debts going up? If so, you may want to implement tighter credit policies. Are your costs of goods going up? You may want to switch vendors or change buying habits. Current P&Ls give a business owner the “eyes” to see their business and project future performance.

In addition to having a firm grip on the pulse of the business, a business owner will find that updated P&Ls will be requested by many different stakeholders in a variety of situations:

•Current P&Ls are used by accountants to prepare the business tax returns;

•They will be required from bankers in credit and lending decisions;

•Vendors may request them to extend credit;

•Government and major purchasers may request them as part of a bidding process; and

•If a business decides to go public and issue stock, P&Ls will be required by regulatory agencies and investors.

Get with a program

The good news is that with a little investment in time and money, you can produce financial statements quickly and easily. Using a small business software program such as QuickBooks, any business owner can prepare P&Ls for any time period desired.

You can also prepare comparative P&Ls to see how your current activity matches up with past performance. The program is relatively inexpensive (about $200 plus tax), easy to learn, almost universally used by accountants, and very forgiving in errors, which you will certainly have while learning the program.

The key is that you must reconcile all of you bank and credit accounts each month. By reconciling all of your accounts, you will ensure all of your income and expenses are recorded and you have all of your information current. Your accountant can help you with this, or various local resources, such as the Chamber of Commerce’s Small Business Center, University of North Florida’s Small Business Development Center, and the Beaver Street Enterprise Center, often have reasonably priced classes to learn how to enter transactions and reconcile.

Having the ability to understand a current P&L means you have the information you need to make timely and critical decisions for your business to not only survive, but thrive.

You will be able to take advantage of opportunities and stay ahead of your competition. Make a commitment to understand your financial statements as a New Year’s resolution and you will likely find 2011 to be a very happy and profitable year.

Keith E. Johnson CPA, is owner of Keith E. Johnson CPA PA in Jacksonville, Fla., a full-service CPA firm providing accounting, auditing, consulting, and tax services to individuals, businesses, and non-profits. He can be contacted at 904-727-0077 or kejcpa@comcast.net.

What entrepreneurs need to know about intellectual property issues    

By Thomas C. Saitta

Among the many concerns facing entrepreneurs, protection of intellectual property (IP) and IP issues in general are often overlooked—especially during the start-up phase.

While some trademark, copyright, and patent issues may be addressed down the road, an early awareness of IP issues can be beneficial to all entrepreneurs.

Trademarks

After weeks of brainstorming, you have decided on the perfect name for your new business or product. The good news is that you are not required to get any sort of government permission to use your mark—you can spend thousands of dollars on new signs, brochures, menus, packaging for the product, etc. and spread the word far and wide.

The bad news is that if you have not performed a trademark search, you may shortly receive a demand letter from the owner of an identical or similar mark insisting that you stop using the mark. You are now faced with the choice of fighting for the mark in court or rebranding your service or product—both of which will likely entail significant costs.

Additionally, while you receive certain limited common-law protections merely by use of your chosen mark, you should also explore the benefits of registering your mark either within the state or federally. Registration of a trademark puts others on constructive notice of your rights, and a federal registration in the U.S. Patent and Trademark Office can extend your rights throughout the country and enable you to secure international protection.

Copyrights

If you create an original work in a fixed expression (write a song, book, or manual, or create a website, for example), you should determine whether registering the work with the Copyright Office would be useful. The process is relatively straightforward, and registration can be valuable in certain instances.

Another copyright issue that often arises is the question of ownership of software and website content when the software or website is developed by an independent contractor. As strange as it may seem, you do not automatically own the software or website copyright even though you have paid a third party to produce it for you.

Still another concern with websites is the issue of unauthorized use of photographs taken from other sources. It is a common occurrence for website developers to use copyrighted photographs without obtaining permission from the copyright owner, and it is the owner of the website that usually ends up paying for this infringement.

Patents

If your new venture includes an invention, then you must pursue patent protection for your product. A patent gives the inventor the right to stop others from making, using, or selling the invention, which gives value to the invention by precluding competition or by allowing the rights to be licensed or assigned to third parties.

In a business enterprise, the issue of employee inventions made on the job should be addressed in an employment contract to avoid ownership disputes.

Words of wisdom

A final word of advice: The old saying that it’s better to spend a little money now rather than a lot of money later applies in the IP world. Seeking advice from an experienced IP attorney before problems arise will almost always be money well spent.

Thomas C. Saitta is a registered patent attorney and board certified in intellectual property law. He is head of the intellectual property department at Rogers Towers P.A. in Jacksonville, Fla., and can be reached at 904-346-5518, TSaitta@rtlaw.com, or through www.rtlaw.com.

By Bert Livingston    

Most small business owners and professionals are familiar with group term life insurance programs—particularly those that offer up to $50,000 of term life insurance to employees.

These programs, sanctioned by Section 79 of the Internal Revenue Code, also permit employers to provide additional amounts of term life insurance in excess of $50,000 to employees. To the extent that they do so, the employer must report the value of the excess coverage in the employee’s W-2 as additional compensation.

The value of this coverage for tax reporting purposes is determined under Table I of the Treasury Regulations, in the form of uniform premiums computed on the basis of five-year age brackets. So long as the employer is not directly or indirectly a beneficiary of the insurance, all employer contributions to the plan are currently deductible and the employee not taxable on the first $50,000 of coverage.

Permanent benefits

What is less commonly known is the same Section 79 permits a group term insurance plan to provide permanent benefits. The regulations define a “permanent benefit” as “an economic value extending beyond one policy year (for example, a paid-up or cash surrender value) that is provided under a life insurance policy.”

When a Section 79 plan containing permanent benefits is adopted by an employer, there are several significant advantages:

•All contributions to the plan are currently deductible to the business;

•Only a portion of these amounts are includible in the participant’s income;

•Plan assets (in the form of life insurance policy cash values) accumulate tax-deferred;

•In the event of the participant’s death, an income tax-free survivor benefit is provided;

•Benefits can be structured to avoid estate taxes; and

•Once the plan is terminated, the participant has the option of receiving a tax-free income stream from the insurance policy to the extent of the policy’s cash value.

Determining eligibility

Section 79(d) does contain nondiscrimination rules as to eligibility and benefits. Certain types of employees can be excluded from consideration, such as employees who are covered by a collective bargaining agreement, employees who have not completed three years of service, and part-time (not more than 20 hours per week) or seasonal (not more than five months per calendar year) employees.

A plan is nondiscriminatory as to benefits if “the type and amount of benefits available under the plan do not discriminate in favor of participants who are key employees.” A well-designed plan requires that all eligible participants be offered the option to elect the same type of benefits offered to key employees (e.g., permanent benefits).

Such a plan will also require that all employees be offered a nondiscriminatory amount of benefits, by mandating that ALL participants shall be offered a life insurance in an amount that represents a uniform percentage or multiple of W-2 compensation.

Know the options

Because the options available to eligible employees that involve coverage in excess of $50,000 of term insurance will result in an increase in the employee’s gross income—and generally an increase in the employee’s income tax liability—employees are permitted to decline coverage in excess of $50,000.

Most employees accept the free (to them) $50,000 of group term life insurance and waive their right to higher amounts of insurance or permanent benefits.

Employees who do not elect to receive permanent benefits must include the value of the permanent benefits in their gross income, reduced by any amounts they contribute from their own funds for the permanent benefits.

The actuarial formula for calculating the value of permanent benefits is set forth in the Treasury Regulation under Section 79 of the Internal Revenue Code, and is based on such factors as the age of the employee and the type of insurance contract used. Only specially designed life insurance contracts will produce favorable tax results under this formula.

Is it for your business?

Section 79 plans are not for every business and your insurance professional will help you determine eligibility. But for those closely held businesses and professional practices where there is a fit, these plans provide an exciting, tax-advantaged opportunity for both owners and employees.

Bert Livingston is a financial advisor at National Financial Services Group with 30 years of experience in the financial services industry. He is a registered representative and investment adviser representative of Equity Services Inc. He can be contacted at 904-296-3300.

Disclaimer: This is not offered as tax or legal advice. For advice concerning your own situation, consult with an appropriate professional advisor. The views and information contained herein have been prepared independently of the presenting representative and are presented for informational purposes only. TC58753(0910)