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  • Aspire » Finance

    24 Feb

    taxshelter

    Tax season is shifting into high gear.   This is also the time of year we are most likely to think about the potential of being audited by the IRS.  Even though the potential for an Audit is only about 1% for  business owners,  the simple math says out of 100 of your business peers at least one of you are going have more intimate relationship with the IRS this year.

    For many business owners tax season is viewed as a dreaded time of the year when they are forced to sit down with their CPA and begrudgingly discuss the numbers of their business.   It should be noted our experience shows that businesses that meet more regularly with their CPA’s (at a minimum quarterly) have a much better handle on the finances of their business.  That discipline would be referred to as Tax Planning.   Tax Planning is a good thing; it is legal and highly recommended.   If your business has any level of complexity, seeking consultation from a tax professional is always good advice.  However, it’s sometimes tempting counterpart, Tax Evasion is another; Tax evasion is deliberately misrepresenting the state of your affairs to the IRS.

    Improper tax accounting is usually not viewed as tax evasion unless the IRS determines there was fraudulent intent by the business owner.

    In 2011, British accountant Richard Murphy estimated global tax evasion to be 5% of the global economy.  The USA led the way with 337.3 billion.   But because the US is the largest global economy, the amount as percent of GDP, was only 8.6%; the lowest of the top 10 countries.   So I guess as American Business owners, you can pat yourself on the back for that statistic!   Regardless of size, at its core, any number above 0% says something about the overall moral fiber and principles being practiced.

    taxchart

    With those numbers in mind, here are 4 discrepancies the IRS has been known to target should this be the year you are part of the 1% of audited businesses.

    1)      Discrepancies in Accounting. 

    • The amounts on the financial statements should match what is on the corporations return.
    • Any irregularities raise questions.

    2)      Not reporting significant amounts of Income.  

    • Business owners not accurately reporting business receipts.
    • Shareholders not reporting dividends they pay themselves.

    3)      Deduction Claims

    • Grossly overstating travel expenses
    • Fictitious deductions
    • Stating personal expenses as business expenses
    • Overstating charitable contributions.
    • Lack of Verification

    4)      Improper distribution of income

    • An example of this would be a stockholder directing income to a lower income bracket family member(s) to reduce their tax liability. (paying the kids)

    The list above is not meant to be a complete list.  It would be logical to assume that during an audit, if something is uncovered that doesn’t add up, the auditors will naturally dig deeper in the area of the discrepancy.   And the goal of this post is not to sound like a tax expert, but to remind you as a business owner this is serious stuff and it should not be taken lightly.

    Have you ever been audited?  If anyone has some additional thoughts on this subject, please share them in the space below.   Without a doubt as business owners this is a common thread that binds us all so your input and suggestions would be greatly appreciated.

    Chris Steinlage Kansas City Business Coach

    Photo by JD Hancock via Flickr

    03 Feb

     

    photo by Tax Credits via Flickr

    photo by Tax Credits via Flickr

    I met with a business owner last week who had a record year for revenue last year.  He worked really hard, he spent a lot of time and effort on sales and marketing, he aggressively went after any opportunities he could find and if any customers wavered on sticking around he gave them a great deal so they would stay…even the ones that complained all the time and required a lot of extra work.

    Final result for the year?  He was up 25% to 30% in Revenue during a tough year.

    Great success, right?

    If you dig a little bit deeper, it turns out that his bottom line…the money that he actually was able to take home was basically flat from the year before.

    He worked a lot more hours, hustled more than ever, sold more than ever, but none of that translated to his personal bank account!  On the Effort vs. Success chart – he basically just went straight up…more effort but no additional success.

    Focus on Profitability…

    This business owner fell into the trap of focusing (almost exclusively) on revenue growth.  Revenue is easy to track, it generates the illusion of success and it’s easy to talk about. But it’s not a good measure of success…unless your goal is to work more and make less per hour!

    Here’s a quick exercise to help make the point. Let’s keep the math simple and look at a business that has a flat $1 Million in revenue and a profit of 5% – so the business owner is taking home $50,000 on that $1 Million worth of work.

    However…let’s imagine that this business owner opts to try something different and they cut their revenue by $100,000 and now they are only making $900,000 for the year…but their profitability is 10% – which means they are taking home $90,000 and doing 10% less work than they were before!

    In fact in this example, the business owner could do ½ the revenue / work and still earn the same $50,000 (10% of $500,000) – it’s an extreme example, but it’s not crazy.

    Maybe you’re making more than $1 M in revenue, or less…or maybe your business or industry can’t support 10%, 20%…30% profit, the numbers change based on your situation, but the overall principle is the same – higher profitability is always going to be a better indicator of success than revenue growth.

    How to Drive Higher Profits

    Driving higher profitability is simple…although definitely not easy. There are only a couple of levers you can pull that will translate into higher profits, here’s the high level view:

    1. 1.       Raise your prices – if everything else stays the same, any time you raise your prices that extra money you’re charging will flow directly to your profitability…your bottom line.  Raise the price of a product by 10% and every penny of that becomes more profit for you. Note – by raising prices, you may sell less, but the odds are good that you’ll still be ahead in terms of bottom line (see example above).
    2. 2.       Cut cost of delivery – Almost all businesses have some sort of variable costs. If you’re making widgets, your variable cost includes the raw materials, some labor costs, etc. If you’re delivering a service, then your primary variable delivery cost is going to be labor. Can you find a cheaper way to deliver your product or service? If so, those savings will flow through as more profits.
    3. 3.       Cut your overhead costs – Your final option to drive higher profits is to cut your fixed costs…your monthly overhead. This includes stuff like your rent or mortgage, any staff that aren’t directly involved in delivering your service, office supplies, etc.

    That pretty much sums up your options – again it’s simple but not easy.

    Strategically I’d suggest you try these 3 ideas…and sooner rather than later:

    Drop your worst clients – Almost every business has a bottom tier of clients who are difficult to deal with, pay late, complain and constantly push for the best deals.  These are the clients that are killing your profitability and if you could lose the bottom 10% you will be better off in a lot of ways, including profitability.

    Do a cost audit – Do a line by line view of your expenses…compare them to previous years and see if there’s any big line items that jump out at you as not being critical or necessary.  What can you cut?

    Raise your prices – I know it’s obvious, but I also know most business owners need to do this more.  If you haven’t raised your prices in a year or two, then you likely need to bump them up – unless you are consistently losing business due to your price, then you have room to grow…and even then you could look into increasing the value of what you offer.

    What can you do to improve your profitability? Is it something you’re consistently focused on? We’d love to hear your thoughts – share them in the comments below.

    Shawn Kinkade  Kansas City Business Coach

    24 Sep
    Photo by amagill via Flickr

    Photo by amagill via Flickr

    Few things stress a business owner more than running out of cash. It really is the lifeblood of your business and when you’re out of cash, you’re probably out of business.

    Considering how important cash is to your operation, you’d expect business owners to be pretty sophisticated when it comes to tracking it. Truth be told there are a large percentage of small business owners who measure success based only on how much money is in their business bank account.   There is also a large percentage that measure how well they are doing solely based on top line sales.  To run a healthy successful business you need to know your numbers. Striking the proper balance of cash flowing through the business and building up an adequate reserve to weather soft periods is critical if you want to have a business designed to seize opportunities when they arise.

    Your company may have a net worth of several million, but if you only have $10,000 in the bank with little or no revenue coming in you will be out of cash in no time just paying salaries and utilities. Typically the faster a business is growing the more they tend to struggle with cash flow and having cash reserves on hand. But established businesses can fall into the same trap as high growth companies if they don’t take the time to watch their numbers.

    There are many areas in a business that can tie up cash.  Knowing where to look and setting a few parameters will help keep your business running smooth in good times and be better prepared for slow times.  These are 4 that every business should focus on.

    Invoice Promptly:  Most businesses pay invoices at a minimum 30 days, some companies only pay a couple times a month.  The bottom line is the clock does not start ticking until your customer receives the invoice.  If you invoice 2 weeks after the fact, you just gave your customer 2 extra weeks to enjoy whatever was purchased from you and you are getting nothing for it.  If that work included your business spending money (cost of goods sold) you have unnecessarily strained your business for 2 weeks.  What would it take to get that invoice out right away?

    Cash Reserve to cover 3 months of fixed expenses:    Depending on your business this may take time, but building cash reserve that pays the fixed expenses even if your business doesn’t sell a thing allows you to not have to borrow money just because your business has a slow month.   It puts you in a position of power to establish a business line of credit (for bigger emergencies), because you aren’t in a panic to get it.  In the event of a “fire sale” you can be the buyer and not the seller.

    Manage your Inventory: If your business requires it, you have to manage it.   Overstocked inventories can tie up substantial amounts of cash in a business.  You need to know the turnover ratio for your industry – it’s easy to calculate (COGS / total inventory value)  Holding on to old inventory, obsolete inventory will only guarantee the price you sell it for tomorrow will be less than today.   Also don’t be tempted to buy bulk, if the excess doesn’t help you with inventory turns. They money you get saving in bulk may actually be costing you.   Ever end up throwing out food you bought from a warehouse grocery store?

    Review all your expenses:  Start by printing a report of your vendors and reviewing them one at a time.   Expenses also include employee reimbursement, auto expenses, suppliers and benefit packages.   Depending on the circumstances, having clearly defined guidelines for your employees regarding expenses and timely report submitting can make a dramatic impact on cash flow.    When is the last time you asked a vendor to review their pricing?   To get discount terms for early payment?  Compared insurance rates?  100% of the money you reduce in unnecessary expenses is additional profit and cash to your business.

    What about your business?  Where are some of the areas you have found that focusing additional effort has improved your cash position and overall business health?    Managing your cash is just one component of running a successful healthy business, but it’s an important one and it won’t happen on it’s own. Managing cash flow can be challenging, but be assured it is always rewarding.

    What do you think? We’d love to hear your thoughts in the comments below.

    Chris Steinlage Kansas City Business Coach

    23 Dec
    Rainy Day

    Photo by JD Hancock via Flickr

    If you are reading this, the Mayan calendar was off at least by a few days and the end of world did not come as it was predicted.   And, hopefully you’re enjoying the Christmas & Holiday season and reflecting on the year as it comes to a close.

    Speaking of reflection… we were having an interesting conversation last week about some businesses who despite the overall disposition of the economy experienced not only growth but a very a profitable year in 2012.   The conversation reminded me of the first few years that I owned my equipment dealership; the fiber optic boom was moving at lightning speed (pun intendedJ) and our equipment was very instrumental in getting it put in the ground.    Our customers were enjoying very profitable years and the dealerships that provided equipment to install it benefited as well.

    It was very easy to get pulled into a cycle of reckless spending, because you start convincing yourself it is the “new normal” and the additional revenue will just keep coming.   But the reality is almost everything has a cycle, some are not as severe as others, but the growth arrow seldom points upward 100% of the time.

    The closest thing I had to a “business coach” when I owned my own business was the dealership where I cut my teeth in business.  And that dealer had not only been a good leader as my former employer, but continued to be a trusted advisor, mentor, and friend as my dealership was growing.   A couple things he often stressed about growth were the importance of having controlled growth and the importance of reinvesting profits back into your business.  (By the way – this particular idea was one of the big findings from Jim Collins latest book – Great By Choice…we wrote about that a few months ago in 5 Ways Your Business Can Fall Off the Cliff).

    The controlled growth mindset keeps you from doing things like over staffing the first time you get a backlog or opening a new branch in a high growth area without researching it thoroughly before implementing.   It is mostly about asking more questions before you make a decision that is going to have a significant financial impact on the business.

    But reinvesting profits back into the business was without question the best advice he ever gave me.   His experience was, the best stock he ever put money into was his own business.  So as my business grew that was the approach I took.  It may sound simplistic, but it takes a lot of willpower, especially when things are going great and you see others splurging.  Successful business owners are often tempted to take profits out of the company and start “diversifying their interests”.  Those “interests” will range from other businesses, to lake houses, boats, and real estate.  And trust me you can find all kinds of reason to justify every one of them.

    But I poured the profits back into the business, we paid down debt where we could and built up a reserve of cash so if the economy turned south we wouldn’t be overly exposed.   As it turned out, it was a great move - things changed quick when the dot.com bubble burst and 9/11 happened.  The tide turned, sales plummeted and it became survival of the fittest.   Many equipment dealers had over built, they had bloated inventories (guilty!), and stretched credit lines.    Thankfully, we  had been practicing  controlled growth and reinvesting profits as a consistent part of our business plan.  And because of  those two strategies we were better positioned to navigate the downturn and maintain a healthy business.   It wasn’t easy, but relative to many others we were in good shape!  I will say that until that downturn happened, that rainy day, it was really hard to keep from “diversifying my interests”.  Thanks,  John!

    How about you, do you have a plan to save for a rainy day in your business?    As always we enjoy your comments & Merry Christmas and Happy Holidays to all.

    Chris Steinlage   Kansas City Business Coach

    09 Apr

    burning-money

    A “Do-Over” takes on many shapes and forms in business; warranty work, improper billing, improper invoicing, arriving at the wrong address for an appointment, shipping to the wrong address, wasted materials…you get the picture. Unfortunately as a business owner (especially with employees) the opportunities to excel in this expensive and unwanted category are almost endless.

    Obviously the goal of every business is to shrink this category to a level of irrelevancy. That’s why you focus on building good systems and procedures with appropriate checks and balances so errors are reduced before they ever happen.  These are critical and costly issues and if you don’t get a handle on them, they can drive you out of business.

    But if you have employees, how do you get them to understand how to value a mistake that cost the business $50, $500, or $5,000 or even more? It isn’t their money and often it’s hard to make it seem real (although it’s definitely real to you as the owner).  Even if your business has a strong profit sharing program most employees don’t easily connect the link of the cost of a mistake to less money in their pocket. The larger the business, the harder it can be for a single employee to quantify how his/her “Do-Over” is making much of a negative impact on the overall business.

    One simple technique that can be very effective is to use a visual of money burning. Everyone values cash and the thought of it burning creates a clear picture you have entered a point of no return as far as every being able to use it again. You can use this technique individually when a “Do-Over” happens or cumulatively if you are effectively tracking this as a line item in your business.  The idea is to visually paint a picture of real money going up in smoke.

    Try This:

    The next time a significant, preventable, “Do-Over” occurs with an individual, on a project, or within a department of your business consider this approach. In addition to reviewing your policy and procedures that allowed the mistake to happen in the first place, gather everyone involved together and explain what just happened was the equivalent to taking that same amount of $1 bills ($1 bills create a bigger pile) piling them up in the middle of room, (yard/street, etc) and burning them. Let them know, no matter how hard we work that money is gone forever. If you can get them to visualize the mistake as real money and not just a number on a spreadsheet, you will create a connection that will resonate deeper.

    We would love to hear your thoughts on this topic. Share them in the comments below.

    Chris Steinlage  Kansas Business Coach

    Photo by Images_of_money