A plan to getting paid on time in just 31 days

By Amy Calfee

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. 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!

Amy Calfee is the Chief Listening Officer (CLO) for Temerity Creative LLC. She can be reached at 904-733-3511.

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)

By Robyn A. Friedman   

When David and Patricia Watkins started their mobile pet vaccination clinic, Pet Shots Cheap, about 18 months ago, they knew they needed insurance. So the Jacksonville-based entrepreneurs sat down with a local agent, who sold them liability and workers’ compensation policies.

Two days later, the agent called to say their application for insurance had been denied.

“We were really concerned because without insurance we couldn’t work,” said David. “And because the company was already insuring our competition, we were wondering what the real issue for the denial was.”

Rather than give up, the couple sought advice from the Small Business Development Center (SBDC) at the University of North Florida, where they were referred to another agent, who successfully obtained insurance for the fledgling venture.

The Watkins’ experience is not unusual. Many small business owners face challenges in procuring the proper insurance coverage for their companies. For some, it’s because they’re unfamiliar with the types of insurance they should have or the policy limits necessary to adequately protect them.

Others, particularly those with home-based businesses, may be underinsured. According to Independent Insurance Agents of America, 40 percent of home workers are underinsured because they believe—incorrectly—that their homeowners policy covers their business operations.

“Many entrepreneurs don’t understand insurance because they are intimidated by it,” said Vicky M. Zelen, president of Zelen Risk Solutions Inc. in Jacksonville. “Coverage forms are complicated and somewhat difficult to understand without a law degree.”

From the beginning

Most small businesses should have the following types of insurance in place from day one:

Property coverage. Commercial property insurance covers business property and physical assets—whether the property belongs to you or is in your care, custody, or control. For example: A dry cleaner that has customers’ clothing or a warehouse storing other businesses’ goods.

General liability. A liability policy protects a business owner against claims for accidental bodily injury or property damage to a third-person’s property. For example: General liability insurance covers a restaurant if a customer slips and falls while dining there or if someone claims the food made him sick.

Commercial auto. This covers your company vehicles for comprehensive or collision and protects the business from liability resulting from accidents with third parties. It covers bodily injury of third parties and/or property damage to the vehicles or other property of third parties.

Workers’ compensation. Workers’ compensation is required by the state for any nonconstruction business employing four or more people and any construction business with at least one employee. It provides medical and partial wage replacement benefits to employees who are injured while engaging in work-related activities.

Workers’ compensation is affordable and provides excellent coverage, so many insurance agents advise small business owners to obtain it—even if they are exempt because they only have one or two employees. 

In addition to

While the above four types are recommended—or required—for most small businesses in Florida, there are additional types of coverage that, depending on industry, may be relevant.

Business interruption. This covers lost business income as well as extra expenses to help get your business back up and running fast. If a fire destroys your restaurant, for example, you will receive a check for lost business income from the insurance company.

Errors and omissions/malpractice. This type of liability insurance protects those who provide professional advice or services, such as attorneys, accountants, physicians, architects, engineers, etc.

Key person. Key person insurance protects a business if an employee instrumental to the success of the venture dies or becomes disabled. If that person is a product developer, for example, it could cover the cost of finding a replacement.

Health. A group health insurance policy not only protects the employees of the business, but can also be a valuable tool for attracting and retaining employees.

Liquor liability. If your business serves liquor—even if you use caterers with bartenders—then liquor liability coverage is a necessity, and may be included in your general liability policy.

Employment practices liability. This protects employers for employee-related issues, such as wrongful termination, discrimination, harassment, etc. “This is the fastest rising claim in the property casualty industry,” said Christian Baird, a property and casualty specialist with MetLife in Jacksonville. “All an employee would have to do is say you pinched her once, and you’ve got a lawsuit.”

Disability overhead. Baird said this protects an entrepreneur in the event he gets sick or injured and cannot work. “We’re all three times more likely to get sick or injured and not be able to work for two and a half years than of dying before the age of 65,” he added. “So this helps make sure the business continues in the event of a debilitating disease or accident.”

In the market?

Some expert tips to consider when you are in the market for insurance:

•Consult with experts at the SBDC or SCORE. They can help ensure you have adequate property limits without overpaying on premiums.

•Get quotes from three different insurance agents, and consider using an independent broker, who represents many companies and may be more objective.

“Some of the captive insurance companies such as State Farm, Allstate, Nationwide, and Farm Bureau have excellent insurance programs and can be tough to beat for coverage and price,” Zelen said. “But independent agents can usually write all of your insurance.”

•Incorporate risk mitigation practices into your business operations. “There are a lot of different things you can do to assess your risk and mitigate that risk as opposed to buying insurance,” said Cathy Hagan, area director of the SBDC in Jacksonville.

“If you do background checks on employees or take care of your property so it doesn’t create hazards, that could protect you and maybe lessen the requirement of insurance.”

•If you work at home, remember your homeowners policy will not protect you from liability resulting from your business operations. So if a client injures himself in  your home, you may be in trouble—unless you have a rider to your policy that protects your home-based business or another type of general liability coverage.

•If you use subcontractors or have vendors, consider obtaining a certificate of insurance from each one to ensure they have adequate coverage as well as workers’ compensation. 

•Make sure your insurance carrier has a high rating and is financially secure. Look for a rating of A or better.

Most important, work with an insurance agent who specializes in business—or who at least devotes a large chunk of his time servicing the needs of business clients.

 “A good insurance agent will explain the coverages available to clients so they are knowledgeable and make smart insurance purchases,” said Zelen.

Robyn A. Friedman is a contributing editor to Advantage. She can be reached at RAFWriter@att.net.

What’s adequate insurance cost?

Premiums vary based on a business’s operations, assets, number of employees, payroll, property holdings, revenues, policy limits, etc. According to Vicky M. Zelen, president of Zelen Risk Solutions Inc., coverage can run as little as $300 per year—or can be unlimited for large entities with risky operations. General liability insurance is usually from 1% to 5% of annual revenues, she said, although this varies greatly depending upon the industry.

By Brian J. Bibb   

No doubt about it: Having a matching 401(k) plan is an asset when it comes to recruiting and retaining top talent. But are you aware that sponsoring a 401(k) can put you at risk?

If you, as an employer, choose to offer a 401(k) plan by becoming a plan sponsor, you incur a significant liability—and that liability extends to your personal assets.

If you act as a plan sponsor, you are held legally responsible for every aspect of the plan, such as fulfilling 5500 filing requirements, depositing employee contributions within the proper time frame, and providing investment oversight, along with many other operational requirements.

No assumptions

The Employee Retirement Income Security Act of 1974 (ERISA) Section 404c provides a plan sponsor with statutory relief from liability for the investment actions taken by participants in a participant directed account plan.

Unfortunately, you cannot assume that because you are meeting 404(c) requirements or have a full-service 401(k) vendor that all of your fiduciary exposure is covered. This reasoning is one of the biggest disconnects in the 401(k) market today.

Many plan sponsors and CFOs assume because they are using a recognized 401(k) vendor that that vendor is taking care of all the necessary compliance issues. Unfortunately, as demonstrated by recent court rulings, this is not always the case and could be a financially devastating assumption.

ERISA, a federal law that regulates retirement plans, defines fiduciary responsibility in functional terms as anyone who exercises authority and control over the plan’s assets or has discretionary authority and responsibility in the plan’s administration.

Its day in court

In recent years, court cases hold ERISA fiduciaries personally liable to replenish retirement plan funds that become depleted because of the fiduciary’s actions or inactions. Even failing to make employee contributions from payroll within the required time frame exposes the plan fiduciary to unnecessary risk.

In 2008, the United States saw ERISA-related class actions top $17.7 billion, a shocking increase from the $1.8 billion payout in 2007. Of these, some of the largest settlements involved allegations of breach of fiduciary duty. The plans involved are also more frequently those of smaller businesses.

In 2008, the Supreme Court (LaRue vs. Dewolff, Boberg, & Associates, Inc.) ruled that 401(k) plan participants be permitted to sue plan sponsors over the investment performance of their account. This ruling put all 401(k) plans at risk, regardless of size, because of the possibility that it allowed any individual participant the ability to file a claim for losses in their individual, self-directed account.

Because these class-action and individual lawsuits are often fueled by poor economic conditions, you will see more attorneys encouraging employees to sue. Each employer and/or CFO acting as a plan sponsor or fiduciary therefore must remember to take precautions by keeping up with new regulations and taking steps to reduce legal exposure. If you are a plan sponsor, you must also fully disclose to your employees the associated risks and costs.

Your alternatives

Employers acting as plan sponsors do have the option of delegating duties of a limited scope to a specialized fiduciary for the plan’s administration: one for selecting, monitoring, and replacing the plan’s investment options, or one for certain trustee duties.

Plan sponsors can even go so far as unloading the liability for other duties by delegating them to a full-scope, professional, and independent fiduciary in accordance with ERISA section 3(21).

If you are thinking about freeing yourself from the personal liability associated with your fiduciary role, you have options. One of the best and most overlooked options in the market is the use of a Multiple Employer Plan (MEP).

MEP is a single-employer plan maintained by two or more contributing sponsors that are not members of the same controlled group, under which all plan assets are available to pay benefits to all plan participants and beneficiaries. This allows two or more smaller employers to offer a more robust and affordable benefit to its employees.

With this MEP type of plan, a principal plan sponsor bears all responsibility and liability—including residual oversight duty to monitor a full-scope independent ERISA section 3(21) named fiduciary—for running the retirement plan.

For decades, small-business owners have used MEPs to provide top-quality plans for their employees without the liability and administrative burdens associated with traditional single employer plans.

In most cases, the costs to provide these plans are significantly less as well.

Know what you’re getting into

A 401(k) can actually be a great thing, and it’s important to assess how you, as a business owner, go about managing your employee benefits.

Remember to be wise when selecting a partner to assist you in your retirement plan benefits program. You will want a trusted partner who will not only show you options that provide your employees the greatest benefit in the marketplace, but one who will show you how to provide that benefit for the greatest value to you and your business without exposing you to unnecessary liability and administrative hardships.

Ask questions so you fully understand the delegation of responsibilities and who holds specific liabilities. This can save you an enormous amount of time, energy, and money.

Brian J. Bibb is the president of Bibb Financial Services. Bibb Financial Services offers custom 401(k) plan services for small- to medium-sized businesses in Florida and Georgia. Learn more by calling 800-395-0091 and visiting www.BibbFinancial.com.

With an ever-growing Federal budget deficit, the Internal Revenue Service (IRS) is working harder to find new or missing revenue and has hired more agents in the last five years to conduct business audits.

Alan Weinberg, leader of the IRS Tax Practice and Procedure Group with Dixon Hughes, PLLC, (www.dixon-hughes.com),certified public accountants and advisors, says the IRS is moving audits away from the largest corporations. “With our clients, we’re seeing a significant increase in audits of mid- to large-sized companies,” he says.

Pass through entities— corporations that pass income, losses, and deductions to shareholders for federal tax purposes, such as partnerships and S Corporations—are also seeing increased audit activity. But Weinberg indicates that audits are never random. The IRS has senior agents who classify returns for audit potential after selection by computer profile.

Jamie Smith, managing member of Dixon Hughes’ Jacksonville office, indicates that the IRS views small and mid-sized businesses as the biggest offenders in noncompliance with tax laws.

“In most cases, the business isn’t purposely attempting to defraud the government,” he says. Errors in bookkeeping, record keeping and misreporting information on tax returns are typically reasons why an audit occurs.

“Sometimes the classification of certain assets as depreciable or available for immediate expensing may be interpreted differently by the IRS then what was reported,” Smith says. “That will trigger an investigation.”

Weinberg adds that the IRS wants to expedite the audit process because more audits should mean more revenue for the treasury and better compliance in the future.

“It is best to be prepared for the day you get that telephone call from the revenue agent that your return has been selected for examination,” he says.

How to prepare

Weinberg says that many businesses immediately panic when contacted by the IRS. “Often taxpayers believe that they did nothing wrong and their initial reaction is to give the IRS more information than needed to prove what they did was correct,” he says. According to Weinberg, the best course of action is to seek the assistance of a professional. However, if you elect to go it alone, you need to make a plan.

Weinberg indicates that a few steps should be done to prepare for the audit, like assigning a person in your company to coordinate the audit and determine what company resources are needed.

Ask yourself what you may have done. Was there an unusual transaction that year? Have you pushed the envelope on deductions or maintained other practices that would make your return standout? A taxpayer should ask the agent for a risk analysis at the initial meeting to determine what issues will be examined.

Some mid-sized companies have invested in hiring in-house tax specialists, but many may not have adequate staff to handle the IRS requests.

“Audits can be very expensive due to the time and effort it takes to gather data and meet IRS demands in a timely manner,” Weinberg says. “The cost of time commitment, staff availability, and internal tax knowledge should be weighed against the cost of hiring an outside professional to help.”

The IRS confirms in writing that a company is under examination and issues an Individual Document Request (IDR), “which asks for a significant amount of information,” he says.

What the IDR does not tell you is that the agent will want to interview your highest-ranking official at the first meeting.

“The agent wants to know about the company, what it does, and how it does it,” he says.

The IRS Web site (irs.gov) has information on a number of issues, risks, and potential penalties that may provide insight about the reasons for the audit.

“Taxpayers need to know what the issues are and what needs to be provided to prove their position,” Weinberg says.

What the IRS knows

The IRS probably knows more about your company than they will lead you to believe. The agents will look up your Web page; the agents will Google your company and your corporate officers.

Different tactics may be used to get information such as asking for all records or for other information that may not seem relevant.

“Uninformed tax departments or individuals may be pushed pretty hard,” Weinberg says. “You need to have some knowledge of the regulations and the audit process to navigate an IRS examination smoothly.”

In an attempt to help auditors, the IRS developed a Market Segment Specialization Program (MSSP) to provide a better understanding of different industry issues. These MSSP guides are available to all business owners as well. Weinberg suggests that business owners become familiar with the guidelines for their types of business.

“The IRS is educating its agents and providing them with more information about issues they will encounter during a field examination,” he says. “There’s no doubt that the agent who walks into your office will have done his or her homework on your company,” he says.

The agent’s length of visit

The size of the company, how well books and records are kept, or other issues that arise determine the length of an audit, which can take from six to twelve months.

The IRS expects taxpayers to respond to IDRs within two weeks from issuance. How quickly requested information can be turned around will have an impact on how long the audit will take. If books and records are not well organized, an examination could take longer. The person representing the company wants to be available to respond to questions.

Weinberg adds, “The more time an agent is in your office, there is more room to find errors in your tax return. The agent becomes part of your office environment— tying up an office, desk, phone line and generally becoming part of the atmosphere— where break room discussions are overheard and access to even more information is gained. This intrusion can potentially put a business in jeopardy for penalties or worse.”

Afterwards

When the audit is finally finished, the IRS will issue a proposed adjustment, if one is required, and will request a response within two weeks. But be prepared. If there are adjustments made to the return, it is possible that a penalty will be assessed.

“The IRS is asserting more and more penalties against taxpayers,” he says. “It is getting harder to reach an agreement to drop the penalty.”

Many times, taxpayers must decide if the time and cost to fight the penalty exceeds the amount levied. According to Weinberg, a good agent is usually willing to work with a business to resolve many adjustments. If not, the taxpayer has the right to apply for review by the IRS Appeals Office. Any increased tax liability is not payable during the appeals process.

If an agreement still cannot be reached, the IRS issues a Statutory Notice of Deficiency to the company.

While a taxpayer can then petition the United States Tax Court “pro se” (without counsel), Weinberg says, “at that point, legal assistance may be a good idea.”

But be aware that all legal representation is at the taxpayer’s expense.

“Complex tax audits are best done with the assistance of an experienced specialist from the start,” says Smith. “That can be a small investment compared with a business’ lost time, productivity, and potential penalties.”

By Lewis Hunter, CPA    

Experts say the economy is improving, but Jacksonville unemployment reached 12%, and many business owners are worrying about a double-dip recession. Good planning requires business owners to consider their alternatives in case the economy does not improve as quickly as everyone hopes. This means transitioning your business practices to save money during a long-term recession.

Here are some cost-cutting strategies will help support your business’s bottom line while the economy perks up.

• Switch to a recession-time loan. The recession has changed lenders’ attitudes. They are much more skeptical and hesitant to give loans. Businesses that depend on loans will need to revise their pitch to lenders in order to get the financial backing they need.

You can do this by working the recession into your pitch for a loan. Present a realistic business plan to lenders that incorporates the recession, and mention how you plan to adjust your business to meet the challenges of the economy. 

Lenders don’t want to hear a “business as usual” approach because the economy has prevented business as usual for most companies. The more realistic you are about finances, the more likely lenders will be to give you a loan.

• Shorten your business cycle. During a recession, smart business owners review business activity more frequently so they can act swiftly on cash flow changes.

With shorter business cycles, you can see upward trends sooner and respond accordingly. If you were reviewing your finances quarterly in the past, you may want to start reviewing them bi-monthly or even monthly.

• Outsource services. It’s tempting to keep everything in-house when finances are tight, but outsourcing time-consuming services could save your business money in the long run.

Start by examining the services that take your team longest to complete. Focus the majority of your employees’ time on bringing in new business. Tasks such as bookkeeping, IT support, direct marketing, public relations, writing, and Web design are all good options to outsource if they are not a central part to your business.

In addition, the recession has put an abundance of freelancers into the market, giving business owners a chance to work with these specialists on contract to get quality work on a project-by-project basis.

• Update business technology. Although it’s difficult to justify investing in new technology during a recession, your business could lag behind competitors who have newer, faster equipment. Not only will your business processes become more efficient with new technology, but potential customers will also be impressed that your business continues to improve during a recession.

Many retailers are selling equipment at a discount, so you may be able to get a better deal now than if you wait until the recession passes.

• Increase your online presence. Although you may not have enough cash for an all-inclusive marketing campaign, you can still get your name into the market without breaking the bank. Start with your Web site. Invest in search engine optimization (SEO) software to bring your site out of hiding and make it easy to find online.

Also, if you don’t have control over editing your Web site, consider switching over to a site host that will allow you to maintain and update pages on your own. This will save time and money in working with a Web developer for all site changes.

Social media is one of the best ways to market online, and it is free. Create Twitter, Facebook and LinkedIn accounts and post to them regularly. Don’t forget to include links to your Web site or blog in each post to drive additional traffic to your Web site. 

• Market your company effectively. Don’t stop marketing and advertising because of the recession. Customers will want to see that you are still around and operating in any economy. Because finances are strained for everyone, you might be able to negotiate better advertising or printing deals now for external promotions.

Another way to market your company is to do some old-fashioned networking. Attend local business events, non-profit fundraisers, and community functions. This way, you can promote your company personally.

• Use a mentor. Confiding in an experienced mentor is extremely useful during business challenges. A mentor will help you pick out opportunities or threats you might have missed, as well as offer guidance during business growth or decline. Most of all, a mentor will keep you accountable.

Remember that even the strongest business plans can be deterred by unexpected changes in the economy. In your business plans, include a scenario that could test your revenue, expenses and cash flows.

Your business should be prepared to adapt as the economy changes to get the most out of every situation. 

Lewis Hunter is a certified public accountant and owner of Hunter & Associates, P.A. He specializes in financial planning, tax planning and business coaching for small businesses. Visit www.huntercpa.com.

By Robyn A. Friedman    

One of the biggest challenges for any entrepreneur is raising the necessary capital to launch—or grow—abusiness. Without adequate funding, any business is doomed to fail. But startups face a particular challenge: They don’t have a track record. While that may make the process of financing a business a bit more daunting, with proper research, preparation and planning, many startups can adequately meet their needs for cash.

Alysia Gilliam learned this firsthand. Gilliam, a behavior analyst, is owner of Pediatric Behavioral Services, a startup in Jacksonville. She needed working capital to cover the rent for her facility, as well as utilities, office furniture, and other costs of opening her firm, which provides behavioral services to children diagnosed with autism or other developmental disabilities. But after attending a workshop on raising capital, she was discouraged.

“In the workshop, it was emphasized that there are not many funding opportunities for startup businesses,” Gilliam said.

But she persevered. She developed a business plan, practiced interviewing techniques and researched funding sources. Her efforts resulted in a loan from Regions Bank under the Small Business Administration’s 7(a) loan program. “Make sure you know what the bank is looking for, in terms of cash, condition of the industry, capacity to repay and credit,” said Gilliam. “And know where you stand in terms of your strengths and weaknesses.”

Bank loans are just one of the ways that entrepreneurs can finance their ventures. Here are some other common ways:

• Personal savings. According to the SBA, this is the primary source of capital for most new businesses. Some people tap bank accounts, while others max out credit cards or utilize home equity loans. You retain control of the business this way, but you put your personal wealth and security on the line.

• Friends and family. Often, friends and relatives will lend money interest-free or at low rates, a huge advantage for a startup. But you’ll have to give up a piece of the business. Another disadvantage: Friends and family are no longer friends and family if you lose their money. “You better have a lot of conviction in your business if you’re going to have your aunt invest in it,” said Jim Philip, co-founder of Harbor View Advisors in Jacksonville, an investment banking firm.

• Banks and credit unions. A common source of funding, banks and credit unions will scrutinize your business plan to ensure that you are capable of paying back the loan. The SBA offers several programs to help new businesses get loans. These include the popular 7(a) Loan Guaranty Program, the SBAExpress loan, and the 504 loan program, more commonly used by seasoned entrepreneurs.

• Angel investors and venture capital firms. Angels and venture capitalists provide funding to new businesses in exchange for equity, or a percentage of ownership in the business. Fees are usually higher than a bank would charge, and you have to give up some control over your business. But for many businesses, venture capital is a necessary step toward growth. “If you can’t get a loan from a bank, and a venture capitalist is willing to lend to you, then you may want to take a hard look at that,” said Wilfredo J. Gonzalez, district director of the SBA’s North Florida District Office.

Planning to seek financing for your new venture? Here are some tips from the experts on successfully raising capital:

• Be prepared. Put together a binder before meeting with prospective sources of financing. The binder should contain your business plan, financial statements, tax returns, marketing projections, and any other information that’s relevant. “The person will think to themselves, ‘This guy has his act together,’” said Gonzalez. “He will feel very comfortable going to the committee on your behalf.” If you don’t know how to prepare properly, the Small Business Development Center (SBDC) and SCORE can help.

• Develop a relationship with your banker. Don’t just walk into your branch and apply for a loan. You need to know who the small business specialist is in your bank—and establish rapport with him or her prior to seeking financing. “Many people will tell you that they have a bank, but not a banker,” Gonzalez said. “It’s a big difference.” Your goal: To find someone willing to go to bat for your business.

• Apply for funding before you really need it. The worst time to go to a bank to apply for a loan is when you don’t have any money. If you have monetary reserves, however, your financial situation appears a lot better to a lender.

• Don’t underestimate your financial needs. The most common mistake entrepreneurs make, according to investment banker Philip, is underestimating the amount of capital they’re going to need. “If they believe they need one million dollars, chances are they need three,” he said. “You always need more capital than you think.”

• Don’t focus on exit strategy. Yes, angel investors and venture capitalists are going to want their money back—plus a sizeable profit. But entrepreneurs should focus not on how they’re going to exit or sell their company, they should focus on building a great company. “If you build a great company that has a great product and momentum, somebody’s going to want to buy you,” Philip said.

Tyler Saldutti is one entrepreneur who is doing just that. In October 2008, he founded Jacksonville-based Prime Realty, a commercial real estate brokerage, with $75,000 from savings. He was cautious, kept operating expenses low, and focused on cash flow. Saldutti wanted to avoid outside funding, so he ran his business conservatively, refusing to take on new overhead until he had sufficient cash flow to support it.

“Self-funding is a difficult way to go, but it offers the most flexibility and control,” he said. “My advice to the startup business owner writing their business plan is to get creative with your cash flow, fight the temptation to take money early on, come up with a plan to self-fund your business if you can and take investment as a last option. Then re-evaluate at the appropriate time when you are ready to grow to another level.”

Robyn A. Friedman is a contributing editor to Jacksonville Small Business Advantage. She can be reached at RAFWriter@att.net or through her Web site www.everythingwrite.com

By Joe Palermo    

Financing a small business can be a real challenge. Small businesses combine various methods of financing usually starting with the business owner’s saving, and in some cases their 401(k), home equity line of credit, friends and family, and credit cards.

After a two or three year track record the business may turn to bankers for a lease or loans to purchase equipment and establish lines of credit. Some business owners use factoring to speed cash flow when bank loans and personal borrowing power are not available.

But are these good choices? Understand your options before focusing on any one solution:

• Home equity line of credit. This is a convenient way to get the funding you need to grow or start a business. Although this was a sure method to finance a business if you had no credit history, in today’s business climate using a home equity line of credit is now one of the toughest and dangerous methods: Your house is used as collateral. If your business hits hard times and your income decreases or is eliminated your credit history will impact your ability to obtain additional business credit in the future.

• Credit cards. Credit cards are used for all types of expenses and depending on the various interest rates charged, this method can be a costly method. Because of high interest rates, you should make every effort to pay the balance off within the due date to avoid paying interest.

A word of caution: If you must use a credit card for short-term financing, keep in mind that the majority of small businesses do not pay off the balance each month. So, when you choose a card, select it for its low interest rate—not because of reward programs.   

• Business line of credit. If your business needs an occasional influx of capital, you might seek a line of credit, but the recession has made obtaining this difficult. A number of companies offer business loans to companies with questionable credit history but these firms usually want an up-front fee and higher interest rate, since the risk factor is greater due to the business’s credit history.

• Term loans. A term loan is a type of financing provided by banks to businesses as a “working capital loan” or “accounts receivable loan.” This type of loan enables businesses to consolidate high interest credit cards, expand the business, and cover equipment purchases.

From a business owner’s perspective a term loan is a preferred method of financing because of the the length of time—sometimes years—the business has to pay the loan off. But—always a but—getting approved for this type of loan is challenging today, since banks have tighten the requirements.

The question you must ask yourself is, “What is the best type of debt for my business to handle?” The answer is not simple. There is never “good debt.” One method of financing, however, might fit a your  business better than another business.

Best advice: Try to get the lowest interest rate, favorable payment terms, and reasonable line of credit. Search for non-traditional methods such as purchase order financing, accounts receivable factoring. And customize solutions that fit your business needs.

Joe Palermo is a partner in B2B CFO and can be reached at 925-548-3395 or jpalermo@b2bcfo.com.

SIDEBAR

Good bookkeeping essential for financing options

The majority of small businesses are undercapitalized right out of the gate. To improve the possibilities of obtaining any type of financing or even to be able to continue self-financing from company profits, you need to keep on top of your financial status.

A good set of books and records are essential. With those books, learn how to explain your company’s financial performance to run your business more efficiently and improve your chances of obtaining a loan.

By Steffanie  Wood    

Spring is here, and that means it’s time to spruce up your house, get rid of clutter and get things organized. But as you start your spring cleaning, go beyond the home and yard and look for ways to rejuvenate their investment portfolio.

Instead of taking the “out with the old, in with the new” approach, simply make a consistent effort to make progress toward your financial goals. You may need to make adjustments in response to changes in the financial markets, the economy and your personal situation.

Here are tips to get your started:

1. Dispose of things that aren’t working. Whether it’s a burnt-out computer or a treadmill that lost its grip back when “the Web” was reserved for spiders, we all own things that are no longer useful.

And the same may be true of some of your investments. If one hasn’t performed the way you had hoped, and you’ve given it adequate time, you may be better off by replacing it and using the proceeds to purchase another investment.

2. Get rid of duplicates. If you went through everything in your house, you might find several items that do the same thing. Do you really need two toaster ovens? And how many radios can you listen to at one time?

If you looked at your investment portfolio in this same way, you might be surprised to find some redundancies. For example, do you own several stocks issued by similar companies that make similar products? This might not be a problem when the stock market is booming, but it could be a definite concern if a downturn affects the industry to which these companies belong. Always look for ways to diversify your holdings. While diversification, by itself, can’t guarantee profits or protect against loss, it can help you reduce the effects of volatility.

3. Put things back in order: Over time, the spaces in your home can get “out of balance.” Perhaps your flat-screen television is crowding out your family pictures, or your new desk takes up too much space in your home office. With some rearranging, you can usually get things back in order.

The same need for rearrangement may apply to your portfolio, which might have become unbalanced with too much of one investment and too little of another. This situation could undermine your financial strategy, especially if the imbalance means you are taking on too much risk or, conversely, if your holdings have become too conservative to provide the growth you need. Look for ways to restore your portfolio to its proper balance — one that reflects your risk tolerance, time horizon and long-term goals.

By giving your portfolio an annual spring cleaning, you can help make sure it reflects your current needs and is positioned to help you make progress toward your key financial objectives. And you won’t even have to get near the dust cloths or furniture polish.

Steffanie  Wood is a financial advisor with Edward Jones, Unit 3103, 11251 Campfield Dr., Jacksonville. She can be reached at 904-751-1747 or Steffanie.Wood@edwardjones.com.

By Hal Rogers    

For the last several years the journalistic community has painted a pretty ugly picture of annuities and people who sell them. . From financial journalist Jane Bryant Quinn to the local beat reporter, writers have found annuity bashing to be a good bet to fill an empty page and satisfy their sensationalistic tendencies. 

 Some of these articles have stated things that simply weren’t true, blew up isolated incidents to make them sound epidemic, or generalized information to infer that something that was true about one type of annuity was true of all annuities.    

Annuities are good when they are appropriate—if they are part of a financial strategy. Let’s see how that works.

Annuities are investment vehicles offered by insurance companies.  However, the term “annuity” is so generic as to be virtually meaningless.  It is like saying “vehicle”—which could be a tricycle or a space shuttle, a skateboard or a BMW.  The word annuity itself only tells you that earnings are tax deferred until withdrawal and withdrawal of earnings before age 59½ are taxed like IRA withdrawals before age 59½—that is, they are subject to ordinary income taxes and a 10% penalty tax. 

Beyond that, the differences among types of annuities are legion.  There are fixed annuities, indexed annuities, and variable annuities.  There are immediate annuities and deferred annuities.  All annuities transfer some type of risk to the issuing company.

The perceived downside to annuities generally relates to their lack of liquidity and their cost.  There is no initial sales charge on an annuity purchase; there is a contingent deferred surrender penalty during the early years of a contract.  The surrender period can range from three to 20 years, the longer periods often on products that pay higher commissions to the selling agent.

An annuity isn’t the right product for every financial situation.  However, if an annuity is the right answer for you, you must realize that any annuity has a cost.  Everything of value has a cost.  In every purchase decision, consumers elect whether or not that value is worth the additional cost.  Annuities provide guaranteed benefits you don’t get with other investment vehicles. 

Sometimes the cost isn’t a dollar amount deducted from an account.  Sometimes that cost is an opportunity cost.  A given annuity may limit upside potential, but the trade-off is that it minimizes downside risk.  Along with tax advantage, risk mitigation is one of the primary advantages of annuities.  Annuities aren’t for everyone and aren’t the answer for every situation, but when risk transference is an objective, annuities are worth considering.

Much of the negative press surrounding annuities has stemmed from abusive sales practices, failure to consider client suitability, and the marketing of “bells and whistles.”  Agents recommend a particular product based on its selling points, but fail to integrate the use of the product and its particular characteristics with the rest of the client’s investment vehicles.  Sometimes this actually results in the client’s failure to be able to utilize the specific benefits of the contract, even though they must pay for those benefits for as long as they hold the contract. 

The key to the proper use of annuities lies in understanding their different characteristics and strategically integrating them with other annuity and non-annuity financial vehicles.  Doing so can result in investment performance, risk transference, guaranteed income streams, years of virtually tax-free income, and larger tax-free distributions to heirs. 

History shows that the strategic use of annuities works. The guarantees provided in the annuity contracts have accomplished what they are designed to do, even in economic downturns. As a result of the recent severe downturn the financial media has started looking at the valuable benefits enjoyed by many annuity owners.  Take a look at the Wall Street Journal article, July 24, 2009 (http://tiny.cc/annuitieswsj).

The bottom line is that annuities are tax-advantaged risk-transference vehicles.  Strategically integrated into a comprehensive asset allocation model, they can provide significant advantages over non-insured investment alternatives.  As an annuity’s insured benefits are subject to the claims paying ability of the carrier, it is important to choose an offering company that has not only strong financials, but one which hedges against the risks inherent in the contracts.  Glitzy product brochures and agent promises won’t do you any good if the company can’t honor its guarantees.

Harold J. Rogers, CFP, CSA, President of Retirement Services, is a Registered Representative with ProEquities, Inc., and an Investment  Advisor Representative of Investment Advisors, a division of ProEquities, Inc.  Securities offered through ProEquities, Inc., a Registered Broker/Dealer, Member FINRA & SIPC.  ProEquities, Inc., Branch Office, 8596 Arlington Expressway, Jacksonville, FL 32211.  (888) 720-0556.  Retirement Services is a sole proprietorship owned by Harold J. Rogers and is independent of ProEquities, Inc.  Information is for informational purposes and should not be construed to be specific tax, legal, or investment advice. 

When cash is short, consider invoice funding

Is this scenario familiar? Your customers are late in paying their invoices, making you short on cash, and the bank isn’t making any short-term loans. At the same time, your employees expect to be paid on time. What do you do?

You might consider a short-term option called accounts-receivable funding, suggests Chad Todd, regional vice president of AR Funding, Inc. (www.arfunding.com). “Accounts receivable funding is the oldest form of financing in the country,” he explains. “It accelerates cash flow.”

Accounts receivable (AR) funding (also called accounts receivable factoring) provides a line of credit against invoices, and that is what differentiates this source of finance from bank financing. “Traditional bank financing focuses on the business owner’s personal credit, the assets of the company, the kind of business the company is in, and the balance sheet in order to determine if it will lend money,” explains Todd. “Accounts receivable funding does not. Instead, it looks at your customers’ credit. The most important thing in this industry is who you are doing business with.”

What it boils down to is this: If you have good customers, you can get advances on the money they owe you.

How it works

Essentially, in AR funding, a business sells its invoices to the funding company. When a small business works with an AR financing company, it gets a portion of an invoice immediately upon origination. The business, at the same time, advises its customers to send payment to a post-office box. Although the invoice is made out to the business, it actually goes to the finance company. Once the invoice is paid, the business gets the remainder of the invoice amount from the finance company, less the finance fee.

“The value to our customers is that it they perform a service or sell goods today and invoice today, they can receive funding from us today. They don’t have to wait 30 to 45 days for the customer to pay them. In any business, you need money for payroll, rent, insurance, fuel, and other things. You need money; we eliminate the wait to get paid,” says Todd.

Pros and cons

As good as accounts receivable financing seems, there is one disadvantage: Cost. “Compared to traditional bank financing, this type of financing is more expensive,” admits Todd. “I always tell anyone interested in using accounts receivable financing to go to a bank first. If the bank can’t get you approved or will not provide you a line of credit, only then should we talk, because it is more expensive than a bank loan.”

On the plus side, however, is that this type of financing is available for startups. “We fund startups,” says Todd. “The most important thing to us is who you are doing business with. A startup will not have financial statements. But if it can give us a list of customers and how much are it will be invoicing them each month, it can get financing. We’ve gotten deals done with very little. We’ve done deals based on the articles of incorporation and an expected volume of dollars each month.”

Todd says that although AR funding is a very old type of financing, many small businesses have never heard of it. “We are admittedly a stepping stone for small businesses. And, we know we will only have our clients for perhaps up to 24 months, and then they will graduate to bank financing. We’re happy about that.”

By Joe Palermo    

Does the thought of preparing your business tax return leave you with an uneasy feeling? Then do not wait to the last minute to get all your documents organized. Block out time and begin the process of gathering and organizing all of your financial documentation of all business-related expenses.

Some expenses are deductible and are applied in their entirety to lower your tax bill. Other expenses are capitalized, which means a portion of them are recovered over time. And some—personal expenses—do not affect your tax bill. Unfortunately, the IRS does not allow deductions for personal expenses, such as personal living costs or personal use of your automobile. (However, if a cost is both personal and business and can be broken down with documentation, the business portion can be applied.)

Your accountant will need documentation on the following types of expenses:

• Ordinary and necessary business expenses. This is a broad category of costs incurred to run your business. They include a number of different types of expenses, including employee pay; retirement plans; rent expenses for your business property; interest charged on money you borrowed for business activities; various state, local and foreign taxes directly attributable to your business; insurance for your business; and office expenses as part of operating costs.

• Cost of goods sold. If you manufacture products or purchase goods for resale, you must generally value the inventory at the beginning and end of each tax year to determine the cost of goods sold, which is used to figure gross profits for the year by subtracting the cost of goods sold from your business’ gross receipts.

As you prepare for tax preparation, collect information on the cost of products or raw materials (including freight), storage, direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products, and factory overhead expenses.

• Capital expenses. Capital expenses fall into three general categories business start-up costs; business assets; and improvements. Expenses incurred in these areas are not deducted; however, they are capitalized to help reduce your tax bill. In other words, you may b able to recover a portion of the amount you spent on a capital expense through depreciation, amortization, or depletion.

Joe Palermo, CPA, is a partner in B2B CFO and can be reached at 925-548-3395 or jpalermo@b2bcfo.com.

 SIDEBAR 1

What kind of documentation do you need?

• Bank deposit slips

• Invoices

• Credit card charge slips

• Form 1099

• Canceled checks

• Account statements

SIDEBAR 2

Prepare for 2010 taxes now

To make tax preparation easier in 2010, take these steps now:

1. Set up and maintain a file for each vendor and file paid invoices.

2. Establish a file for each customer.

3. Complete bank reconciliation for each month; never get behind.

4. Prepare financial statements each month.

5. Review the financial statement each month with your accountant or business advisor

Do you believe paying taxes is voluntary? Or that you don’t have to comply with an administrative summons about your taxes? Think again. These beliefs—and many others—are erroneous, says the Internal Revenue Service, which has released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.

Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.

A number of tax laws enacted in 2009 may affect how much you pay in taxes this year. Business.gov, a portal for information on federal regulations affecting small businesses, summarized a few you should be aware of as you prepare for the 2010 filing season:

• Expensing business property and equipment. According to the IRS, many small businesses that invest in new property and equipment will be able to write off most of these purchases on their 2009 returns. This is because the American Recovery and Reinvestment Act (ARRA) extended the bonus depreciation and increased the Section 179 deduction.

Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. But this year a quick write off of up to $250,000 on the cost of machinery, equipment, vehicles, furniture, and other qualifying property place in service in 2009 is now possible. The IRS has more information on this here.

For more information on when and how to take the deduction, go to www.section179.org, which is a free resource for small businesses.

• Cancellation of business debt. The ARRA also enables certain businesses to elect to delay recognition of income from the cancellation of business debt in 2009 or 2010. Income recognition can be deferred until the fifth year after the reacquisition, and then the income is included ratably over the following five years.

• Business credit for COBRA premium assistance to employees. If your business provided COBRA assistance—extension of health benefits—to employees who were terminated in 2009, ARRA gives you a 65% credit against the COBRA amounts paid. The credit is taken against employment taxes on Form 941, Form 944, or Form 943. The credit is treated as a deposit made on the first day of the return period (quarter or year).

• Business energy credits. Credits for making purchases of qualifying fuel cells property, micro turbine property, and solar energy property have been extended through 2016. The business energy credit can be up to $4,000.

These are just a few of the major changes that pertain to small businesses, so be sure to talk to your tax advisor if you have questions about how your small business is impacted.

—Business.gov 

By Cathy Bracken    

A commonsense business rule is “make it easy for customers to pay.” Credit cards do that. So do other non-cash forms of payment, such as debit and purchasing cards. All of these things increase customer satisfaction and contribute to increased business volume.

These electronic non-cash transactions are processed through a merchant account, facilitated through  point-of-sale (POS) solutions,  only offered by merchant services providers.

The goal of a merchant account is to facilitate fast, reliable cash flow. Almost all types of businesses—even nonprofits— can qualify to have a merchant account, provided you have a business checking account and satisfy the processor’s underwriting credit guidelines. The size of your business really doesn’t matter.

To decide what kind of merchant account or POS solution is right for you consider asking the merchant services provider these questions:

• How do you want to process transactions? It is important to select the right POS solution(s) for your business. For example, a brick-and-mortar business may best benefit from a traditional retail POS merchant account—using a swipe terminal. But if that business also conducts transactions on the Internet, through mail order or telephone sales, or on-the-go, it would need additional types of POS  solutions.

Hint: Work with a merchants services professional who will customize a POS solution to meet your unique needs. There is no “one size fits all” solution in merchant accounts.

• Do you want to lease,  or buy your POS solution? Talk with your merchant services provider about the advantages and disadvantages of owning vs. leasing POS solutions.

• What do you get for the money? POS solutions come with fees. Ask questions to get the full picture about the services and their costs. Is there a set-up fee? Monthly service fees? You have a right to understand fully your merchant account services, how the transaction process will work for you, when you will be funded, and who you are paying each month.

• What are your risks and responsibilities? Ask about your responsibilities in having a merchant account, and find out if there are some types of transactions that carry a higher  risk  of chargebacks and what you must do if you process these types of transactions.

• What other services can be added to the merchant account? Most merchant service providers offer other value-added services, such as electronic check processing, as well as gift-card, specialty-card, and loyalty-card acceptance. 

• How much will a merchant account cost? The merchant account pricing options available today allow for you to be custom-fitted for services based on who your customers are and what types of cards you accept. There are three basic pricing programs— flat-rate pricing, break-out rate pricing, and interchange pass-through pricing. All three offer cost benefits, depending upon your business:

Flat-rate pricing is the most traditional type of pricing program. This pricing program is best for low processing merchants that accept only consumer credit cards. The program is the easiest to understand and reconcile on your monthly statement. It is still very popular, and the most widely marketed to date. If you are considering this type of pricing program, ask for rate detail and fine print in this pricing program to make sure it is the best fit for you.

Break-out rate pricing prices each transaction by the basic card-type categories— non PIN debit check cards, credit cards, reward cards, and commercial cards. These categories are cross-bucket into transaction types as well. Those transaction types are called qualified, mid or partially qualified, and non-qualified transactions. Depending on the processor, you may have from three to 12 different rates for Visa, MasterCard and Discover Cards in all the available categories the processor offers. Each card brand can have a different applicable rate for the card and transaction type categories.  Although it sounds complicated, this type of pricing is excellent for most merchants.

Interchange pass-through pricing prices each transaction at its base cost then adds a processing mark-up.  With more than 160 categories a single transaction can bucket into, this pricing program assures the greatest flexibility in processing venues as well as the most accurate lowest per transaction cost versus the standard averaged costing methods traditionally used.  Interchange pricing is the pricing method of choice traditionally reserved for high transaction volume merchants who accept many types of bankcards originating from several card issuing banks.

Work with your merchant services provider to create a win-win in providing the best processing services and POS solutions at a cost that makes sense for your business.

• What kind of commitment is required? Signing up for a merchant account is easy. There will be an application containing a contractual agreement, with some fine print that usually has a length of term provision and early cancellation penalties. Review the fine print carefully before signing the agreement. It’s also a good idea to inquire about the circumstances, if any, under which you may request to have fees waived.

Before your application is accepted, you will be required to provide basic business documents such as a company check, a business license, Web site(s), and marketing materials to support information provided on the merchant account application.

Merchant services are a great value to businesses. With so much uncertainty affecting businesses today, you can better prepare for future growth and prosperity by strengthening all processes within your control that are certain to yield improved cash flow. 

Cathy Bracken is the CEO of Cyberauthorize.Com (www.cyberauthorize.com), a 10-year-old local merchant services provider that services merchants nationally. She can be reached at 904-564 1228, Ext 204.

By Hal Rogers    

In bad economic times, good retirement planning is more important than ever. For personal accounts, one of the best opportunities still available comes from Individual Retirement Accounts, more commonly known as IRAs. 

Provisions for IRAs are found in the U.S. Tax Code Section 408(a).  Traditional IRAs were introduced into law in 1974 with the Employee Retirement Income Security Act (ERISA).  Originally limited to people who were not participants in employer-sponsored plans, they became available to all taxpayers in 1981 with the passage of the Economic Recovery Tax Act.  The Taxpayer Relief Act brought us Roth IRAs in 1997. 

Between traditional IRAs and Roth IRAs, the traditional IRA, referred to simply as an IRA, is the more popular. However the Roth IRA is generally considered to be the more advantageous of the two. Subject to income limitations, the traditional IRA allows an account owner to take an income tax deduction for the amount of the contribution in the year of the contribution, and then earnings accumulate tax deferred.  All distributions from the account are fully taxable at the account owner’s ordinary income tax bracket. 

The Roth IRA doesn’t have income limitations on tax deductibility; Roth IRA contributions are not tax deductible.  However, in addition to tax deferral during the life of the account, for account owners who are at least 59½ and have held the account for at least five years, Roth IRAs provide completely tax-free income.

So, which is best, an income tax deduction on the contribution, or tax-free income from the entire account?  This is not difficult to determine if you ask the question a different way: “Would you rather pay taxes on the seed or on the harvest?”  The Roth IRA makes you pay taxes on the seed, but the harvest is income tax-free.

Beginning in January 2010, anyone who earns income can contribute to a Roth IRA.  Contribution limits are the lesser of: 

• Your earned income for the year, or

• $5,000 if you are under age 50, or

• $6,000 if you are age 50 or older.

What’s more important for most individuals, however, is the opportunity to convert a traditional IRA to a Roth IRA.  The advantage of the Roth IRA is that at distribution time it allows tax-free distributions for the life of the account owner, the owner’s beneficiary spouse, and even beneficiary children, grandchildren, and other heirs. 

So where’s the rub?  Funds transferred to a Roth IRA are taxable in the year of the transfer—except for funds transferred in 2010. IRS has taxes “on sale” in 2010 for taxpayers who convert to a Roth IRA.  For this year only, there are no taxes on Roth Conversions.  Instead, half the taxes on the distribution are due for the 2011 tax year (paid in 2012) and half are due for the 2012 tax year (paid in 2013). 

So, what happens if you execute a Roth conversion, and the market subsequently plummets? You have now paid taxes on account values that no longer exist.  Not to worry.  Imagine that you are in a game of Texas Hold ’em.  You have been dealt a hand that looks pretty good, and you place your bet.  But, after seeing two more cards, you discover that your hand hasn’t worked out to your liking at all.  How would you like to be able to not only fold your hand, but get your bet back?

This is exactly what the IRS allows you to do.  It is called a Roth re-characterization.  If you act within a prescribed period of time from the time you executed the conversion, you simply return the money from the Roth conversion back to a traditional IRA and file an amended tax return. The IRS will give you your taxes back.  By the way, after a prescribed period of time, the IRS then allows you to start over and do the Roth conversion again, this time at the lower account values, thus permanently reducing your taxes on the transaction.  My kind of poker!

Timing is important in these transactions; check with a financial or tax advisor who is “in the know” for details to make sure you don’t run afoul of the rules. 

Harold J. Rogers, CFP, CSA, president of Retirement Services, is a registered representative with ProEquities, Inc.  Securities offered through ProEquities, Inc., a Registered Broker/Dealer, Member FINRA & SIPC.  Information is for informational purposes and should not be construed to be specific tax, legal, or investment advice. 

Money, money, everywhere, but not a coin to bank—at least that is what it seems to small business owners during hard economic times. “You do have money. However, your money is in accounts receivable,” Brian Barquilla, president of Barquilla Consulting and publisher of Jacksonville Advantage, told a group of small business owners in the October Knowledge Is Power workshop. Barquilla moderated a panel discussion that also included David Marovich of Florida Telco Credit Union, Chad Todd of AR Funding, and Cathy Bracken of Cyberauthorize.

Increasingly, customers are treating small businesses—in fact, all businesses—as if they were a bank. When customers delay paying, they are using your money—for free. But your business is not a bank, said Barquilla, and you need to get your accounts receivables converted to cash. It’s a challenge, he admitted: The entire payables cycle has been pushed from 30 days to 45 or 60 days or more.

Barquilla pointed out four main areas that small businesses can control to improve their financial outlook: expenses, productivity, purchasing, and collections.

“The name of the game is converting sales into cash—as fast and as easily as you can,” said Barquilla. He also reminded the group that the conversion process has a cost associated with it. “If you are paying your bookkeeper to call customers, you pay for that time. Even if you make the calls yourself, it is costing you. Time is money. Don’t let debt get a day past 30 days.”

Relationships for improving cash flow

In addition to these four areas, Barquilla emphasized the need to demand more from your business-support team—your banker, attorney, CPA, and other key support suppliers. “Your relationship should be such that you have them on your speed dial,” said Barquilla. “You want to be able to call them and ask them quick questions without being worried about being billed for every second. You want a relationship with your support staff so they can grow with you as you grow.”

“The bank should work for you; make your relationship active,” said Marovich of Florida Telco. “You should develop the relationship to the point that you can call your banker directly,” he said. “What you want is to have a bank that will be with you in good times as well as bad and help you through the bad times by deferring payments and modifying loans if necessary.”

Developing that relationship starts at the onset, when you hire the banker. “Interview your banker as if you were hiring an employee,” said Marovich. “Consider how you relate to the individual. Remember that you are the driver; the banker should not talk down to you.” And, once you hire the banker, set expectations about how the two of you should communicate—in person, by phone, or by e-mail.

A merchant services provider falls into the category of “other key supplier relationships.” “A merchant service provider can improve cash flow regardless of the size of your business,” said Bracken of Cyberauthorize. It can set up your business to accept different forms of payment in addition to cash. The easier you make it for customers to pay you, she said, the faster you can get paid.”

For instance, many companies are controlling costs by providing employees with purchasing cards, but you have to be set up to accept purchasing cards in your business to take advantage of this way to get paid instantly (no purchase order or invoice). Also, she said, businesses should be set up to process charge cards in the most cost effective manner.

Another key supplier relationship you may want to consider establishing to improve your cash flow is with an accounts receivable (AR) funding provider. This type of lender finances your invoices, explained Todd of AR Funding. “AR funding is one of the oldest forms of financing,” he said, advising small businesses to visit their banks first. When a business uses a receivables company, he said, it takes invoices to the company, who then gives them the amount of the invoice less a fee. The benefit is that the business gets its money right away.

AR funding companies are not collection agencies, he stressed. “We lend money to businesses to improve cash flow. We help fund your business.”

Brian Barquilla is publisher is Jacksonville Advantage and facilitates Executive Advantage (www.theexecadvantage.com), a group of professional- and business-development group for Jacksonville-area CEOs. Chad Todd is with AR Funding (www.arfunding.com), and Cathy Bracken is owner of Cyberauthorize (www.cyberauthorize.com).

SIDEBAR

More tips on improving your cash flow

• Talk to your banker early—before you run out of cash. Watch your financials carefully. If you anticipate problems, go to the bank early.

• Hire a part-time CFO consultant. Even though your business may not be big enough to have a full-time chief financial officer, consider hiring a part-time CFO or ask your CPA to consult with you in this manner.

• Renegotiate the terms of your lease. But do it early. Because of increasing vacancies, landlords may be willing to drop the cost of rent (or even give free rent for a period of time) in return for an extended lease. However, tenants should not wait until the end of the lease to ask for more lenient terms.

• Change your AR terms. Instead of 30 days, change it to 15 days. Spell out the terms so that the payment period does not begin again if you send a second invoice.

• Know the bureaucracy of your customer. Make sure you send your invoices to the right person. When you call to follow up, make detailed notes concerning the name of the person you spoke with, the time, the date, and the result of the conversation so you can make specific reference to the conversation, such as “When I spoke with you on Tuesday, Oct. 6, at 9:30 a.m., you said the check was to be cut on Oct. 9.”

• Offer a discount to get paid faster. A discount means less cash, but it also means getting cash into your account.

By David P. Barley Sr., CPA    

The economy has not been kind to individuals nor to businesses, and many people have found themselves in dire financial straits. Unemployment is on the rise; earnings are down; and credit is tight. Net worth has plummeted during the economic malaise. And your business may need extra cash.

What are you to do? These are difficult times that are requiring many people to make tough financial decisions.

If you offer and participate in a retirement plan, money is sitting in an account, seemingly locked up for many years unless you are willing to pay penalties for getting your hands on that money. What if you could get to that money? Would you? Or, more important should you?

Let us assume that you have taken every effort possible to improve your current personal economic situation by reducing overhead, trimming expenses, and improving cash flow. Now you see your last resort as invading the funds you put away for retirement.

You may have two options, depending upon your retirement plan: a loan or a hardship distribution.

• Loan. A loan is a required step before taking a hardship distribution. And, if your retirement plan offers loans, it would be a more expedient way to gain access to your funds.

Because a loan fails what is known as “constructive receipt”—a financial term used by the IRS, meaning that you do not have unfettered control of the loan proceeds—you are not liable for any tax or penalties on the money. Taking out a loan, however, has its downsides: You have to pay it back, and there are limits concerning how much you can take out of the retirement account. Some of these limitations are specific to the plan in which you participate, so you may need to check with your plan administrator.

Another issue regarding loans is what happens if you were to close your business and effectively separate from your employment. Some plans allow for you to continue paying the loans after you leave, but others require that you pay it back within a short number of days after you leave. If you do not pay the loan back as required by the plan, the loans are treated as a distribution and will be subject to taxes and possibly penalties.

• Hardship distribution.  According to the IRS, a hardship is an immediate and heavy financial need. The need can include the participant’s spouse and dependents. Facts and circumstances are used to determine immediate and heavy and these typically include medical expenses, the purchase of a principal residence, tuition and fees, avoidance of foreclosure on a principal residence, and funeral expenses. This list is not exhaustive, but is indicative of typical needs that meet the standard for a hardship distribution.

The hardship distribution is limited to addressing your needs, and you will not be able to contribute to the plan for at least six months.

Many people have IRA-based retirement plans such as a SIMPLE IRA. Generally speaking, hardship distributions are not allowed from IRA-based plans. That is because IRA owners can take distributions whenever they want to take them. Under certain circumstances, however, early distributions by individuals who are not yet 59½ years old incur a 10% penalty tax (25% for a SIMPLE IRA in the first two years).

If you are younger than 59½ you can avoid these tax penalties, however, if the distribution is to be used:

• To cover medical expenses in excess of 7.5% of your adjusted gross income;

• For the cost of medical insurance;

• Because you are disabled;

• To pay for qualified higher education costs, or

• To buy, build or rebuild your first home.

Times are tough; money is tight. As you try to figure out how to make it through to better economic times, consider taking money from your retirement savings as a last resort. If that is the route that you feel is in your best interests, you can get to get to your money. Exercise caution, though, because you are going to have to pay taxes on the distributed money, plus you are depleting your savings for your retirement years.

Disciplined savings in future years will be necessary to make up for the funds spent prior to retirement. Before taking any distribution from any retirement account, make sure to check with your tax and financial advisor to understand the consequences of your actions.

David P. Barley Sr. is principal of Barley, Martin & Wild, CPA, PL, www.bmwcpa.com, which provides financial planning and tax services to individuals and businesses. He can be reached at 904-694-4CPA (4272).

SIDEBAR 431

If an employee requests a hardship distribution…

A hardship distribution should be a last resort for anyone who participates in a retirement plan. If, however, an employee requests such a distribution, as an employer you should follow these seven steps, according to the Internal Revenue Service (IRS). (Most will be done by your plan administrator.)

1. Review the terms of your plan, including whether the plan allows hardship distributions; the procedures the employee must follow to request a hardship distribution; the plan’s definition of a hardship; and any limits on the amount and type of funds that can be distributed as a hardship from an employee’s accounts.

2. Ensure that the employee complies with the plan’s procedural requirements. For example, make sure the employee has provided a statement or verification of his or her hardship in the form required by the plan.

3. Verify that the employee’s specific reason for hardship qualifies for a distribution using the plan’s definition of what constitutes a hardship. For instance, the plan may limit a hardship distribution to pay burial or funeral expenses and not for any other reason.

By Rick Arthur     

Is your bank a friend—or a foe? The lending practices of banks is a topic of concern to all small business owners—especially during economically trying times. But if you understand how banks do business, you can take steps to make your banker your financial friend, not your enemy.

As providers of the capital small businesses need to grow or expand, banks are cautious about how they lend their money, particularly in today’s economy. How do they determine who gets a loan and who doesn’t? Essentially, bankers follow the guidelines of the five C’s affecting credit:

1. Character. Yes, character counts. The bank checks your business’ credit report. It looks into your past decisions as well as into what results those decisions have yielded. The bank wants to know the personal and professional background of the owners and managers on your team and how well they relate to financial and business management. To assess this, they look into how well you and the team have handled your financial affairs in the past.

Although “character” is the most subjective of the five C’s, you can influence this evaluation by reviewing both business and personal credit reports, preparing bios for owners and key managers, and providing both business and personal references.

2. Capacity. The bank looks at your company’s past performance and future forecast to make a determination if it has the capacity to repay the loan within the term requested. As the bank does an analysis of financial statements, it pays particular attention to past, present, and forecasted cash flow and profitability. It reviews all of the numbers from all perspectives and validates figures. Because of their importance, financial statements should be professionally prepared. 

In today’s lending environment capacity has become the most critical component in the lending formula: the ability to repay the loan from future cash flows. The company will need to submit two years of tax returns both company and personal; two years of financial statements plus the most recent financials. Although the bank will prepare its own forecasted cash flow analysis, it is important to include your own version to the bank.

3. Collateral. The bank protects its money by asking for collateral, which are generally assets of the company requesting the loan. Collateral is almost always deemed to be a secondary form of loan repayment and will be based on discounted values of the underlying collateral. Because your bank needs to know the value of the collateral, you will need to provide documentation to support the balance sheet value (for example, accounts receivable—an aging report by customer and inventory—a detailed listing by item for both cost and market value). If the collateral is real estate or machinery, an independent appraisal of value may be requested by the lender. 

4. Capital. The bank wants to know if you, the owner, have risked your own resources by investing in the business. In the process of determining your credit, it validates your business operations to determine if the capitalization currently supports operations and debts and to see if the business has a sufficient buffer to help handle difficult times and/or seasonal variations. 

5. Conditions. The bank prepares a clear assessment of the economic conditions, regional markets, industry situations, and seasonal variations among others that might affect the future success of the business. It is important that the borrower provide their own analysis of trends within their industry and any pertinent local economy information that would influence the banker’s decision. Once this is completed, the bank outlines the terms and conditions under which it will grant a loan.

One of the conditions is almost always the business owner’s personal guarantee. The bank’s business logic is simple: If the owner isn’t able and willing to risk his or her personal assets, why should it put its assets at risk?

Keeping your banker your friend

If you and your business pass muster and the bank grants you a loan, keep it your friend:

• Make the bank your one-stop-shop. In fact, the bank will probably expect more from you than just the repayment of the loan. It will most likely require a depository relationship as well as the opportunity to provide treasury and other value added services. While this is normally a quid pro quo in the banking relationship anyway, it is becoming mandatory in the present banking environment.

• Meet regularly. To keep and maintain the positive relationship you have now developed with your banker, make sure to meet with your banker regularly and keep him or her apprised of the good, the bad, and the ugly concerning your present business position and outlook. If you’re looking to make dramatic changes, make sure your banker is “in the loop.” By keeping constant communication ongoing with your banker, you are assuring him or her that you care about your business, your finances, and their money.

Rick Arthur is a partner with B2BCFO®, www.B2BCFO.com, a CFO firm servicing the needs of businesses with revenues under $75 million. With loans averaging $1.8 million, B2BCFO® partners are helping clients find cash to fund growth and create jobs in today’s economy. He can be reached at rather@b2bcfo.com or 904-477-8957.

Numbers matter. If you have the right numbers—and know how to interpret them—you can manage your business for growth, value, or performance, says Roger Birong of Birong Associates LLC.

Speaking to participants at the first Jacksonville Advantage Knowledge is Power breakfast workshop, co-sponsored by American Enterprise Bank of Florida, Birong explained that small businesses often fail to manage by numbers because they do not have the proper financial information.

That financial information is captured on several different “scorecards”—the income (profit and loss) statement, the balance sheet, and the cash flow statement. By analyzing information from these three sources, you are able to understand four different types of bottom lines: gross profit, operating profit, net profit, and cash flow. “These scorecards are functions of behaviors and management decisions,” he said. “They are the results of your behavior.” He explained:

• The income statement provides a picture of the various types of income (profit) you have— gross profit (total sales minus total direct cost of sales); operating profit (gross profit minus overhead expenses); and net profit (operating profit plus other income, minus interest expenses). Each of these types of profit is a different type of bottom line, and it is necessary to know what each is for your business.

• The balance sheet is broken down into two parts: assets and liabilities. The top section of the balance sheet is devoted to assets—things your company owns. Generally they are categorized as cash, current assets (which can be converted to cash within 12 months), and fixed assets (less their depreciation), which are the “big ticket” items, such as cars and equipment.

The bottom section of the balance sheet identifies the things you pay for—your liabilities. Current liabilities are those things you have to pay within a short period of time, such as rent, salaries, utilities. Liabilities also include long-term debt.

When you add your equity (that is, your net income plus your retained earnings) to liabilities, you should get a number that is the same as your assets—hence, the term balance sheet.

• The cash flow sheet is derived from data from the other two scorecards. It shows the amount of cash “at the end of the day.” Cash flow indicates your company’s liquidity.

Applying metrics

The scorecards give you the bottom lines, but those bottom lines are still data—not information. To turn the data into useful information, Birong said you need to apply some metrics and then make comparisons—against performance for a given time period (for example, year-to-date 2009 compared to YTD 2008) or against industry standards.

A number of different ratios (metrics) can be used to analyze the success of your business. Some work better than others, depending upon the type and maturity of the business. Three common ratios include profitability, activity, and liquidity.

Profitability ratios are called “common size” ratios, calculated from data from your income and balance sheets. Three profitability ratios to scrutinize are your gross profit margin (gross profits divided by total sales); operating expenses (operating expenses divided by total sales); and net profit margin (net profits divided by total sales).

Activity ratios reflect activities involved in the operation of the business. For example, you can calculate the average collection period in days for accounts receivable: accounts receivable divided by annual credits sales/365. This figure shows how fast customers are paying bills, he said. “If your terms of sale are 20 days and customers are paying on average in 33 days, you have a collections problem.”

Liquidity ratios tell you about your cash situation—if your company is liquid or not. To calculate your liquidity ratio, divide your total current assets (from the balance sheet) by your current liabilities. “Common sense says you should have a liquidity ratio of at least 1:1,” said Birong. “Inventory is the least liquid of your liquid assets,” he continued. “If you were to calculate your liquidity ratio by taking off inventory and still have a positive number, you are in good shape.”

A common financial metric is debt ratio (total debt divided by total assets) “It’s not bad to borrow money, but you want your debt ratio to be low,” said Birong.

Making comparisons

Metrics are of particular value when you use them to make comparisons—to your company’s past performance (such as year-to-date and end-of-year comparisons), as well as to industry standards. A number of services provide performance information by industry, Birong explained. An excellent source, available in large libraries, is Financial Ratio Benchmarks, published by the Risk Management Association (RMA).

The benchmarks are useful, but they are not infallible, he cautioned, since many factors influence the operation of your business. To get a better picture, make comparisons against your own performance, he advised. Then you can see if trends are developing or if deviations occur. If you are performing better than you expect, congratulate yourself. If worse, take action and correct it.

Roger C. Birong is a certified business appraiser and a certified management consultant. He can be reached at 904-641-3373 or through his company’s Web site, www.birongassociates.com.

American Enterprise Bank of Florida, www.aebfl.com, is a community bank located at 10611 Deerwood Park Blvd.

Don’t miss the next Knowledge Is Power breakfast workshop. The topic: How to reduce your company’s healthcare costs. Go to www.advantagebizmag.com to register.

SIDEBAR 1

Growth, value, or performance?

Financial statements are tools that allow you to manage your company to achieve your goals. The three broad goals are growth, value, and performance.

• Growth. Companies that are in a start-up phase need to grow fast to get market share.

• Value. This is very important, especially if you planning to exit your business. There are ways to manage your company to increase your equity value in it.

• Performance. Managing for performance optimizes your company.

SIDEBAR 2

3 steps to manage by numbers

1. Hire the right person. There are five levels of accounting sophistication, said Birong: mom-and-pop, bookkeeper, accountant, controller, and chief financial officer. As your business grows, your need for better financial information also grows. “Most companies are one level behind,” he observed. You need the right level of skill and knowledge to assure you have the proper information and reports to make good decisions.

2. Learn the basics. Learn how to read the income statement, balance sheet, and cash flow sheet and be able to apply the basic metrics (ratios) to that information, so that you can assess where you are and if you are doing what you want to do with your business.

3. Develop management systems. One of these critical systems is an operating budget, which then allows you to determine if you are on track—and if not, how to get back on track.

By Hal Rogers     

In 1992 economist Harry Dent, author of The Great Depression Ahead, Free Press, 2009, predicted the greatest economic boom the United States would ever see—and he was right on target.  Dent hitched a caveat on the tail end of his prediction, however.  He said the boom would be followed by an economic downturn that would be worse than 1929 and last longer. 

Dent correlates demographics with financial markets to make his uncannily sound predictions. The essence of his theories is this: As baby boomers reach their peak spending years, the financial markets should likewise increase and peak. But, as the number of people in their peak spending years decreases, so should the economy.

The recession we have been experiencing was a significant downturn—but it was not the one Dent predicted. That one, unfortunately, may still be on the horizon; the demographics have not changed. Bottom line: If the correlation Dent assumed is accurate, there are worse times coming.

The solution: Strategize now on how to minimize the impact of those anticipated worse times.

In financial, tax, and estate planning, strategizing essentially means long-term planning. And that is done in five steps:

1. Assess your risk-tolerance level. How willing are you to take risks with your money? How far will you go to secure your financial future?

2. Determine your investment objectives. What do you want your investments to do—both now and in the future? List all of the possibilities, then prioritize them according to their importance to you. Some things to consider:

• Provide an income now;

• Secure retirement income for life;

• Growth (if realized would provide more income in the future;

• Minimize income taxes;

• Provide an estate for heirs

• Protect against nursing home costs

Ability to cash out the portfolio and spend the invested dollars;

• Have your assets managed by a professional;

• Avoid probate.

3. Design your portfolio based on your specific objectives.  Design doesn’t just mean risk allocation; it also means strategic allocation based on what you want the money to do, given the possibilities noted above.     

4. Consider the unforeseen. Your objectives are what you expect to happen, but things don’t always go as planned. For example, you might need income sooner rather than later, or you might find yourself requiring additional money to tap into reserve funds (perhaps to put on a new roof or to buy a new car). Or, despite your planning, the stock market could drop; income tax rates could go up; or your health could deteriorate.

5. Develop strategies to cover the unexpected. Strategies are unique to individuals. A number of things affect the choice of strategies, including your estate objectives, income level, net-worth level, net-worth amount, tax bracket, and family situation.

Some tax-saving and estate-transfer strategies are simple and may even be cost free to implement. For example, depending upon your objectives, you could:

• Spend down certain assets before others, to minimize total taxation.

• Change account registrations to avoid probate.

• Establish “Payable on Death” or “Transfer on Death” designations to avoid probate and/or direct distribution.

• Upgrade beneficiary designations to ensure correct distribution to desired heirs. (Note: Simply filling in the blanks on beneficiary designation forms can lead to catastrophic results.)

• Take charities out of your will or trust and add them to your IRA beneficiary designations to increase tax-free distributions to your heirs.

Investment strategies can be complex and extend beyond the scope of a single financial article, but correlating seemingly unrelated investment accounts can make those accounts provide significantly improved value for account owners. (Correlating accounts means that one account gives you permission to use another, so the other can make your money work harder for you.)

When economic conditions worsen, income becomes harder to come by and assets tend to lose value.  If this is the direction in which the economy is going, it is going to be more important than ever to protect financial assets, minimize taxes, and increase financial security. 

Current data says times are tough and getting tougher.  Some strategic planning might be more than just a good idea whose time has come; it might be an economic necessity.

Harold J. Rogers, CFP, CSA, president of Retirement Services, is a registered representative with ProEquities, Inc., and an investment  advisor representative of Investment Advisors, a division of ProEquities, Inc.  Securities offered through ProEquities, Inc., a registered broker/dealer, member FINRA & SIPC.  His office is located at 8596 Arlington Expressway, Jacksonville, FL 32211, and he can be contacted at 888-720-0556.  Retirement Services is a sole proprietorship owned by Harold J. Rogers and is independent of ProEquities, Inc.

By Richard Close             

Taking the path of entrepreneur isn’t easy. Self management takes discipline that many fledgling business owners haven’t mastered. But even the masters make mistakes when it comes to the IRS and their taxes.

For small business beginners, masters, and everyone in-between, here is an ultimate small business tax guide:

1. Make sure your business is not a hobby. Key questions to ask are, “Do I engage in this business for profit?” “Do I depend on this activity for income?” and “Do I change methods of operation to improve profitability?” If the answer to any of these is “no,” the IRS may consider your activity a hobby and not allow it to take business deductions.

2. Determine your business structure. Next you have to determine which form of business entity to establish. This is important, because the structure determines which income tax form you have to file. The most common business types are:

• Sole proprietorship, which is an unincorporated business you own by yourself;

• A partnership, which is a business owned by two or more people who contribute to the business and are affected by profits and losses;

• A corporation, which is a structure owned by shareholders who exchange money, property, or both for the corporation’s stock. Incorporation is the best way to protect yourself when IRS issues arise, because the liability is the company’s not yours personally; and

• A limited liability company (LLC), which is a relatively new structure. It is popular because of the ease to attain it. Like a “regular” corporation, an LLC makes you less liable.

3. Obtain your employee ID number. After you determine your business structure, you’ll need an Employer Identification Number (EIN). This is used by the IRS to identify your business entity. You can apply for an EIN online on the IRS website, www.irs.govor you can use IRS Form SS-4. Generally, businesses need a new EIN number when their ownership or structure has changed.

4. Prepare for business taxes. The form of business you choose to operate determines the taxes you’ll be required to pay, along with when and how you pay them. Five types of business taxes exist:

• Income tax. With the exception of partnerships, all businesses must file an annual income tax return. Partnerships file an information return.

• Estimated tax. You must pay taxes on income, including self-employment tax, by making regular payments of Estimated Tax during the year.

• Self-employment tax. Self employment tax (SE tax) is a Social Security and Medicare tax. It’s primarily for individuals who work for themselves. Typically, you have to pay this if your net earnings from self employment are more than $400.

• Employment taxes. If you have anyone on your payroll, you must pay your employees’ Social Security and Medicare taxes, federal income tax withholding, and federal unemployment (FUTA) tax. You’re also required to file certain forms on your employees’ behalf. Failure to do so will bring serious consequences.

• Excise tax. This tax is imposed only on those businesses that manufacture or sell certain products, operate certain kinds of machinery, or receive payments for certain services. 

5. Establish record keeping and accounting methods

Keeping good records is vital for preventing tax problems down the line. All of the information provided in this guide is simply a brief overview of all of the complexities involved in paying taxes for a business; it’s incredibly difficult to stay afloat with so many rules to adhere to. If you don’t feel like you can dedicate yourself to keep records on every purchase your company makes, consider relegating this task to a staff accountant.

Richard Close is a former IRS revenue officer and is currently the tax resolution program director at Tax Defense Network, www.taxdefensenetwork.com.

SIDEBAR 1

Too much to handle? How to choose a tax preparer or CPA

If you feel overwhelmed by your tax obligations, hire a reliable professional to ease the burden. But how do you find one you can trust? The National Society of Accountants (www.nsacct.org) suggests staying away from any tax preparer who:

·         Refuses to answer questions. Don’t let a shifty tax preparer drag you down. You have the right to answers.

·         Demands a cut of your tax refund. This provides incentive for the tax preparer to do anything it takes to increase the amount of your refund- even going against IRS codes and policies.

·         Guarantees a tax refund or IRS settlement. Sorry, but there are no guarantees with the IRS, especially when it comes to tax refunds or settlements.

As you consider hiring a tax attorney or a tax resolution service, look at:

• BBB rating. Choose a company that meets the Better Business Bureau’s (BBB) official standards for accreditation and make sure it has an A-rating or higher and no unresolved complaints.
• Dun & Bradstreet. Make sure the company adheres to Dun & Bradstreet’s highest quality standards. Dun & Bradstreet is the world’s premier source of commercial information and insight on businesses.
• Stability. How long has the company been in business? Look for a company that has a good history.
• Chamber of Commerce. Consider a company that is a member of the local and/or U.S Chamber of Commerce.

SIDEBAR 2

The best online resources

Taxes are confusing. Here are some online resources that can help clear the muddy waters for you.

• Business.gov. Business.gov guides you through the maze of government rules and regulations and provides access to services and resources to help you start, grow, and succeed in business.
• GobiernoUSA.gov. The U.S. government’s official Spanish-language Web portal.
• SBTV.com. SBTV.com is an online television network that provides streaming video content to small businesses. It gives technical information on how to run your business, inspirational stories from entrepreneurs across the country, information about small business conferences and events, and resources to help solve day-to-day business challenges.
• USA.gov. The U.S. government’s official website.
• IRS.gov. Search small business or go to the business section in the menu for detailed, comprehensive information straight from the source.

Plug-in electric vehicles using certain types of batteries may qualify for a new tax credit if purchased this year, the Internal Revenue Service has announced.  

The Emergency Economic Stabilization Act of 2008 (EESA) and the American Recovery and Reinvestment Act of 2009 (ARRA) created two new tax credits for various types of electric vehicles, which may include what are commonly referred to as neighborhood electric vehicles.

ARRA creates a tax credit for low-speed or two- or three-wheel electric vehicles, such as motor scooters, purchased after Feb. 17, 2009, and before Jan. 1, 2012. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500. To qualify, a vehicle must be either a low-speed vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 4 kilowatt hours or be a two- or three-wheeled vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 2.5 kilowatt hours.

EESA created a tax credit for vehicles that have at least four wheels and draw propulsion using a rechargeable traction battery with at least four kilowatt hours of capacity. For 2009, the minimum credit is $2,500 and the credit tops out at $7,500 to $15,000, depending on the weight of the vehicle and the capacity of the battery.

During 2009, low-speed, four-wheeled vehicles manufactured primarily for use on public streets, roads and highways (neighborhood electric vehicles) may qualify both for the EESA credit and, if purchased after February 17, 2009, for the ARRA credit for low-speed electric vehicles. A taxpayer may not claim both credits for the same vehicle. Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for either credit.

The Internal Revenue Service is working on guidance regarding certification procedures for both of these credits.

Source: U.S. Small Business Administration

By Ronnie Hicks

Time is up for filing your taxes. The April 15th deadline for filing taxes is passed, but this isn’t the end of tax season for a large number of taxpayers, particularly small business owners. 

The projected tax gap for 2009 is $343 billion, the largest in U.S history. Pair this with the IRS’s increased collections budget and renewed tenacity for collecting funds from small businesses and you can expect tax season to drag on for months to come.

The kinder, gentler IRS?

The IRS kicked off tax season for 2009 on a positive note by announcing its intentions to ease the burden on taxpayers who owe in these difficult financial times. IRS Commissioner Doug Shulman has stated, “With so many people facing financial difficulties, we want taxpayers to get all the tax credits they’re entitled to as quickly as they can. In addition, we are creating new protections to help people trying to meet their tax obligations. The IRS will do everything it can to help during these tough times.”

Additionally, the IRS national taxpayer advocate Nina Olson stated in her annual report to Congress that it is “imperative” for tax collectors to consider the economic circumstances of a taxpayer before initiating enforcement actions

But is the IRS really changing their policies to help the American taxpayer?

The budget for the U.S. Department of the Treasury for 2009 paints a different picture of the IRS than the IRS’ “kinder, gentler” campaign. The IRS is looking to increase revenue through effective tax collection for 2009. To achieve this, its enforcement budget has increased to $7.5 billion; this is a 7% increase over 2008.

In 2007, the IRS collected a record $59 billion through enforcement activities, a 20% increase over 2006. These numbers show a return on investment for enforcement activities of $8.6 to $1.

The IRS will target small business for 2009 to continue their success from prior years.

Owning your own business to be your own boss is the American Dream. But that dream could become a nightmare now that the IRS takes a takes special interest in small business owners.

Small business owners are estimated to be the largest component of the $343 billion tax gap. Because of this the IRS plans to issue new enforcement initiatives to improve revenue reporting for small business and self-employed individuals. Additionally, the IRS will require the reporting of automated payments to support business income claims.

Larger corporations and businesses are not immune to increased scrutiny; the IRS is looking to collect more revenue from corporations by increasing the number of audits.

Small business’ No. 1 fault

The key reason why businesses end up owing the IRS is failing to make their quarterly payroll taxes. Payroll taxes are the first thing businesses put on the back burner to stay afloat. Paying your quarterly 941 payroll tax forms is an obligation, not an option.  

Too often small business owners take that tax withholding money and put it toward the business, especially if their finances are suffering due to the economy. Many business owners promise they’ll make it up next quarter; but when the next quarter comes around and business still isn’t good, the cycle continues until the tax debt is monumental.

Interest and penalties accrue immediately after the first quarterly payment is missed. Even if the business owner manages to pay the money back by the next quarter, there will be interest and non-filing penalties to pay. This adds up quickly, and if the business owner cannot pay the obligation, the IRS may go after accounts receivable, equipment, and other assets. In extreme cases, the IRS can shut down the business and pocket the proceeds from selling all of the business assets.

Because the IRS is particularly aggressive when it comes to collecting on delinquent payroll taxes, anyone with check-signing power for the business runs the risk of being held responsible for the tax debt.

At-risk professions

Several professions have a high risk of being audited and eventually owing the IRS.  These include:

• Doctors and dentists. Doctors and dentists running their own small business or offices are prone to forgetting or omitting their obligations as taxpayers. The IRS can attack accounts receivables, effectively preventing the doctor from being paid.

• Attorneys and accountants. It’s a surprising fact that attorneys and accountants, who should know the IRS rules and laws inside and out, often owe the IRS. Attorneys and accountants who already know the tax laws inside and out are prone to getting creative with their tax returns, and getting into trouble with the IRS.

• Cash-intensive businesses. Hair salons, auto repair shops, and other businesses that receive tips and cash-only transactions are closely monitored by the IRS. It’s easier to hide income and tips from the IRS when it’s a cash transaction, and the IRS doesn’t want to risk losing that income.

Getting yourself out from under tax debt

Do you already owe the IRS? You can get help to get back into compliance:

• Consider a loan. IRS penalties and interest can have a devastating impact on a small business. The high interest rates cause the tax debt to grow exponentially. To reduce this burden and save money, consider paying the entire debt amount with a loan. The interest rate on the loan will be lower than the IRS’s interest rate, which can save you thousands of dollars in the long run.

• Installment agreement. Installment agreements are binding contracts with the IRS. Once you are set up in an installment agreement, you need to pay your full debt in monthly payments for a set number of months. Interest and penalties continue to accrue on your debt while you pay the monthly installments, but keeping current with the payments will prevent the IRS from seizing assets or accounts receivables.

• Hire a professional. Working with a tax resolution professional with experience in handling small business issues is a wise idea if you feel overwhelmed by the IRS collections process.

Start now to prepare for next tax season

Now is the time to start on 2009 taxes.

1. Hire an accountant. Working with a CPA or a reliable tax professional is well worth the investment if it will save you from trouble with the IRS. Utilizing the services of a professional tax preparer and/or an accountant will help keep you from owing the IRS in the future.

2. Pay the IRS first. Many business owners owe a number of creditors, but paying the IRS should be your No. 1 priority. No other creditor can do the amount of damage the IRS can do. The IRS can seize accounts receivables, assets, business equipment, and even take the keys to your business. Other creditors don’t yield the same amount of power

3. Stay in compliance. When you are a new business, it is really tempting to use the payroll tax withholdings to make improvements to your business rather than borrowing money from a bank or creditor. But this could have devastating effects, and could even lead to the shutdown of the business. No matter what, it’s important to keep on top of the game and pay your taxes on time every quarter.

Ronnie Hicks, Esq. is a tax attorney with Jacksonville-based Tax Defense Network, Inc. (www.taxdefensenetwork.com). He can be reached at info@taxdefensenetwork.com or at 888-248-9058. Tax Defense Network a tax resolution firm, with more than $145 million in tax debt under management.

Tax day is fast approaching. If you pay someone to prepare your tax return, choose that preparer wisely, advises the Internal Revenue Service. Taxpayers are legally responsible for what’s on their own tax returns even if prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your personal returns. Most return preparers are professional, honest and provide excellent service to their clients. Here are a few points to keep in mind when someone else prepares your return:

• Get a signature. A paid preparer is required by law to sign the return and fill in the preparer areas of the form. The preparer should also include his appropriate identifying number on the return. Remember, though, that although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must give you a copy of the return.
  
• Review carefully. Go over the completed return to ensure all tax information, your name, address and Social Security number(s) are correct. Make sure that none of these spaces is left blank. Ask questions to make sure you understand the entries and are comfortable with the accuracy of the return before you sign.
  
• Never sign a blank return. And never sign in pencil.
  
• Be careful of power of attorney. If you have provided specific authorization in a power of attorney filed with the IRS, you may have copies of notices or refund checks mailed to your preparer or representative; but only you can sign and cash your refund check.
  
• Check the box. A Third Party Authorization Check Box on Form 1040 allows you to designate your paid preparer to speak to the IRS concerning how your return was prepared, payment and refund issues, and mathematical errors.

It’s important for taxpayers to find qualified tax professionals if they need help preparing and filing their tax returns. Unqualified tax preparers may overlook legitimate deductions or credits that could cause clients to pay more tax than they should. Unqualified preparers may also make costly mistakes causing their clients to incur assessed deficiencies, penalties, and interest. Here are some suggestions to consider when hiring a tax professional:

• Don’t get scammed. Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.
  
• Don’t hire on percentage of refund. Beware of a preparer who guarantees results or who bases fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return.
  
• Expect to show documentation. Understand that the most reputable preparers will request to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions, and other items. By doing so, they have your best interest in mind and are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.
  
• Know your tax partner. Choose a preparer you will be able to contact and one who will be responsive to your needs. Ask who will actually prepare the return before engaging services. Avoid firms where your work may be delegated down to someone with less training or some unknown worker. You should know exactly who works with your tax matters at all times and how to contact him or her; after all, you are paying for it.
  
• Keep it at home. Determine if the preparer is exporting your return to a foreign country for preparation. Foreign countries do not have the same security and privacy laws as the United States nor is there any recourse should your information be compromised as a result of lax or nonexistent privacy procedures.
  
• Check the BBB. Investigate whether the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys, or the IRS Office of Professional Responsibility (OPR) for enrolled agents or the oversight agency in states that license or register tax preparers.
  
• Check credentials. Determine if the preparer’s credentials meet your needs. As of 2008, California and Oregon are the only two states that regulate paid tax preparers. Is he or she an Enrolled Agent, Certified Public Accountant (CPA) or Tax Attorney? Only attorneys, CPAs, and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return that they signed as a preparer.
  
• Verify professional affiliation. Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.
  
• Look into tax schemes. Check IRS.gov for information regarding abusive shelters and other tax schemes and scams. Remember, if it sounds too good to be true, chances are it is.

Unfortunately, unscrupulous tax return preparers do exist and can cause considerable financial and legal problems for their clients. Examples of improper actions by unscrupulous preparers include the preparation and filing of false paper or electronic income tax returns that claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions.

Tax evasion is both risky and a crime, punishable by up to five years imprisonment and a $250,000 fine. Remember, no matter who prepares a tax return, the taxpayer is legally responsible for all of the information on that tax return.

Source: Internal Revenue Service, www.irs.gov