6 WAYS TO DIVERSIFY YOUR BUSINESS

     For many years I have consulted with businesses about their problems. Although profitability and growth have been the overriding topics one that often arises is that of diversity. Should I or shouldn’t I have been asked of me so many times I can not count. Obviously each business is different.. Therefore there is no sure way to know when and if to diversify. Here are 7 ways to diversify if you should feel the need.

   1/ As a manufacturer are there ancillary products you produce that can be used either in another product or sold for additional revenue ?  I had a manufacturer of heavy equipment that due to the design had significant scrap after producing the machinery. They used to sell the scrap for pennies on the dollar until the owners son needed a piece of metal for his street rod car. Thus was borne an ancillary product business that has survived today some twenty years after the machine business was sold.

   2/ As a distributor you are often delivering product that can be associated with another product that matches up well with yours. An example was a small parts dealer delivering maintenance products that were totally different in size and use but needed by all of his customers. He was once asked about maintenance from a customer. This lead to his locating a similar dealer that distributed this product. Within a year they were doing and increasing business together. A merger ensued that exists today.

  3/ As a service provider what have your customers been asking for from you. In the accounting business, firms now do management consulting, human resources, business valuations et al. All were a far thought when every one of these firms were founded on tax and accounting service.

  4/ As a retailer can you use your customer base to purchase other non aligned products ?. The other day I am in a hardware store that referenced and sold house cleaning and maintenance. The kicker was that as a hardware customer the store granted you a % discount when you used these outside services. When I asked the owner he said it was good business for the customer to deal with a small contractor that was referred as well as the hardware owner who shared in the job profit by the contractor.

5 / For some businesses diversification can come in the form of buying the real estate that the business resides in. This tactic has been a staple of most small business owners for decades. Use the business to buy the real estate and you will diversify your investment between business and real estate. Sell one or both in the future but if you don’t the result will be a controlled situation whatever happens.

6/ Finally do not overlook opportunities that happen in your business each day. The company that both supplies you product could turn out to be a future asset. The customer that looks like it needs a partner can help you in two ways, within and outside your business.

Keep your eyes open you will be surprised of what you may have missed in a chance to diversify.

6 GUIDELINES FOR BUSINESS RECORD RETENTION

     Every January as businesses wrap up the previous year I get the same question. How long must I keep this information ? While it is fresh in our minds here are 6 guidelines to use when retaining business records.

   1/ Always back up ALL of your computer files and documents. It is the simplest thing to do to help in the future but it does tend to be forgotten by a number of businesses. I once had a client that had a fire in Mid January without having backed up the prior years info and sorting that out for tax purposes was a real mess.

   2/Certain records of each business should be kept permanently. Consider tax returns and applicable payments, retirement/pension documents, audit reports, legal documents along with important correspondence to be permanent records.

   3/ Documents related to the above records including cancelled checks, engagement letters, accident reports and claims, real estate records,wage garnishments and other correspondence to have a life of six years.

   4/ Medical bills, credit card statements, old insurance policies and utility records have a life of three years. After that period most of the issues involving these records have been satisfied.

   5/ All other business records will normally have a life of only 1 year. However if these documents are used to support an issue taken by the business within the last year (e.g. an announcement made to all employees about a company policy) then you need to consider making them permanent  in order to prove enactment.

   6/ The Federal tax code has a statute of limitations of three years from the due date (with extensions) of the particular return.(If after audit, fraud or a deficient in taxes greater than a statutory % is proven there is no limit.) This does not mean that you can throw out all of your 2008 info today. I always suggest that the information used to prepare the Federal and State tax returns be kept five years. This gives you a 1 year grace period.

     Keep in mind that some states and local governments have NO statute of limitations. I have seen states go after non filings for up to ten years. I have seen local and municipal governments go back twenty years in some cases. I am not sure the legality of these searches but can tell you that people pay whatever is asked of them by some of these localities.

Many local governments employ a tax search company to go after back taxes. There incentive is to collect whatever they can since they will be compensated by the amount collected. Make sure to contact your professionals before ever responding to such collection letters.

7 WAYS TO CONTROL COSTS IN 2012

     Happy New Year to all. I am back from a three-week hiatus and ready to jump into 2012. I had sufficient time to reflect on small business during my break and wondered if it would be better to begin the year with a few cost savings ideas. Although business may be better in the new year we can’t forget what we need to do to stay in the game so we are here a year from now. So here are my 7 attempts to put your business in the proper direction for 2012.

   1/ Summarize your 2011 information. If that is adding up your checkbook so be it. If you have an automated accounting system produce your year-end financial information. This should include your profit (loss) statement for the year as well as a year-end balance sheet.

   2/ Before you do anything with the numbers ask yourself  ”Is this what I expected my business to do in 2011″ ? In your mind question the numbers that appear to be out of line for the past year.

   3/ If you see what appears to be a mistake in either the amount or the  number of accounts, check, deposits etc. check it out immediately. I know when I do this with my business it forces me to relive the good and bad parts of the past year.

   4/ Upon reviewing the items that appear to be out of line, keep in mind how and what you visualize 2012 to be like. Often during this review you can make changes on the go so to speak, to adjust 2012 immediately. A review of a particular expense may remind you to put out this service to bid which may have been your thought when you were surprised by a high bill in 2011.

   5/ For those amounts or accounts that appear way out of line you will need to do some work to substantiate there balances. These are probably the areas of your business that have the most fluctuations. We call these expenses variable costs which means they vary with the level of business. If your plan for 2012 is greater or less than 2011 you will need to deal with such costs. Remember since they are variable they present the greatest challenge to your profitability.

   6/ Based upon what your plans for 2012 are look at your performance in 2011 with that in mind. If you had more sales why ? if you had less why ? Lessons learned from numbers are normally those just experienced. If you did something wrong in pricing, staging or generating business in 2011 do not let that happen in 2012. In effect use your recent financial history to help you manage the new year.

   7/ Finally in this economy everything changes. Do not be afraid to change be it pricing, delivery of your product, new vendors, new people, new outside relationships. Business in 2012 will go to those who have knowledge of their recent past and can make changes to capitalize on prior performance.

All in all it is an interesting time to be an entrepreneur. In your mind you can make it a better year than last. It is all up to you.

6 BUSINESS GIFTS THIS CHRISTMAS

   It is that time of year when people begin to think of gift receiving more than gift giving. I was never one for dreaming of expensive or outlandish gifts since I truly believe in the concept “it is the thought that matters”. However we business types deserve a wish list of gifts this year. It will help us get out of this economic rut and make Christmas 2012 all that much better. So here we go :

   1/ I want a year in which business has no further regulations to follow, a moretorium so to speak. This will give all of us some very valued free time to actually think about growing our business.

   2/ I want all businesses to hire one more person in 2012. This will not only reduce our unemployment but stir the economy to gretaer growth.

   3/ I want 30% of our foreign aid budget redirected to training facilities in the good old USA. Although I am a ” political ” in this blog, I think it is about time that we help ourselves in redirecting workers in this new technology century.

   4/ I want lending institutions to offer 1 million dollars of loans without interest for one year as a community reinvestment tool. After the first year many businesses will have made it on their way and can pay twice the interest in year two to catch up.

   5/ I want a commitment to greatness between labor and management. We all have children and grandchildren that will need good sound businesses to work in and why not now to get that started.

   6/ BUT most of all I want COMPRIMISE between all of us as a goal. What has happened to meeting halfway to get things done. We do not compromise anymore in most anything we do. It adds time, effort and the sense of non being when all we do is argue with each other. Let us all agree to grow up in 2012 for the good of business, family, politics and friendship.

7 REASONS TO GROW YOUR BUSINESS

     This past week I met with a couple of business owners regarding what might be ahead for 2012. As one might expect , one was very positive on their business for 2012 and the other was not. With the latter we spent some time talking about the many positives that come from growing a business. In today’s post I wanted to share with you 7 of the reasons why every business should grow. here they are:

   1/ The old adage of declining if you do not grow is almost always correct. I can’t remember a business that I serviced that wanted not to grow or even thought about it. Each had a different approach but the object to grow was present in all.

   2/ With growth comes value. This does not always happen but growth can bring other things such as greater market share, better pricing and manageable inventory levels that all influence growth.

   3/ Employees want to be with a growing company. In today’s environment, no growth predicts unhappiness in your workforce. People leave for better opportunities or simply give up in their everyday job functions. This drop in morale can signal tough times ahead for all.

   4/ Competitors take notice and you can begin to affect how they do business. If your growth is due to service, inventory levels or pricing this can make your competition react adversely and indirectly increase your business.

   5/ Growth provides protection. Growing businesses offer an advantage in the marketplace. Customers want to be with a company that is growing and will leave a declining business faster.

   6/ Why be in business if you are not in it to succeed ? I remember a few years back a client of mine was involved in a number of industry organizations. In each one he took an executive position and when I asked him why he stated that it is actually easier to be active than non-active. His point was to influence his industry and conversely make his business more recognizable.

   7/ Finally those of you looking for an exit strategy should consider growth paramount. With growth you can hire and train more good people who will add value as well as an alternative to selling sometime in the future. Don’t overlook this key reason to grow since it offers you the owner a variety of ways to deal with your business.

     I am sure there are many other reasons to grow that are not listed here. One thing all have in mind is bringing value to your business. Always expect big things from your business and never be disappointed. Just work smarter.

6 YEAR END COMPENSATION IDEAS FOR BUSINESS

     Around this time of year I get unusually busy trying to project where my client’s business will end up. Often besides ways to enhance the look of financial statements we discuss various tools to accomplish a particular goal. Sales, inventory levels, collecting accounts receivable and equipment purchases are all constant areas of concern for small business. In addition many of my talks evolve around compensation levels for the current year and what they believe will be issues for them in the next calendar year.

     Some of these discussions pertain to rewarding employees for their hard work. Many involve bonuses, salary increases, benefit increases and other forms of compensation. Here are 6 ideas for compensating your employees to consider.

     1/ If your business has had a good year and you wish to share it with your employees , year-end bonuses are an easy way to accomplish your goal. I often caution businesses on these in that you may need to stress to your employees that these only come about in good company years. It is often hard for employees to understand that they may have had a great year but the company overall has not. Be cautious in both the amount and the reason for its payment when announcing these to your workforce.

   2/ Often in small businesses the company has a profit-sharing or company match savings plan. Many businesses look at this as a way to reward all employees for their service. Increasing the annual contribution can help your entire organization but again be careful on how it is presented.

   3/ Non cash compensation takes many forms and is often used by businesses that are in a growth stage with limited cash and capital. Extra days off for birthdays, early dismissals on Fridays and a shortened workweek in the summer are always a good way to reward employees without having to use cash.

   4/ Increasing benefits is another form of compensation that you can use to foster rewards to your employees. Adding insurance coverages for disability, health or adding a Section 125 plan can add value to every employee.

   5/ Job promotions can both stimulate and increase rewards to key employees. If your workforce does not see such promotions then you either have the wrong employees or are willing to lose them without this type of recognition.

   6/ Finally consider giving some ownership in your company to employees you want to keep over the long haul. You do not have to give them stock physically but earning a percentage of stock over a 5 or 10 year term can work wonders for your company. Many small businesses have so-called “phantom” stock plans. In these plans normally incorporated in an employee agreement your employee can earn a percentage of the company when and only when you sell. In this way you control the company until you decide to pay what has been earned. It is not unusual to see such agreements in a small business but consult your attorney before you dive in too quickly.

These are not everything you can do but offer you some alternatives to use if compensation is an issue with your company.

7 YEAR END THOUGHTS FOR FINANCIAL STATEMENTS

     As we get near the end of the calendar year  many businesses begin to plan for last-minute changes. Do we buy equipment or do we invest less or are we going to expand in the next year are all thoughts that go through an owners mind around this time of year. Therefore here are seven thoughts that will affect your year-end financial statements and could prove beneficial to the business if applicable.

   1/ Reduce inventory as much as possible. Keep in mind that the more invested in inventory at year-end inflates your balance sheet, reduces cash flow and can even increase profitability.

   2/ Pay down lines of credit. Banks and other financial institutions use your year-end financial statements as a basis for borrowing in the year ahead. Lower credit lines show proper use and impact favorably on the business.

   3/ Reduce payables to the number of days in your operating cycle. If receivables are collected on average  40 days then payables should not exceed 45 days of operating expenses.

   4/ Collect accounts receivables . The more cash your business has at year-end the better to pay down debt, reduce payables or maintain cash reserves. All of these things enhance a financial statement.

   5/ Institute payroll changes and or bonuses in January rather than in December. This will benefit both the business and the individual due to the tax implications in the following year. If your business is on an accrual basis of accounting you will still be able to deduct any such accrual.

   6/  Unless necessary for tax or operating purposes put off any capital purchases until the following year. This will conserve cash and improve the balance sheet.

   7/ Meet with your accountant or financial advisor before the middle of the month of December. This will help with the year-end planning process and make sure what moves are better before and after year-end.

Remember that your year-end financials are merely a snapshot of what happened on the last day of the year. Be aware of what impact your moves will make. They can both help and hurt.

6 THOUGHTS ON STARTING A BUSINESS

     I met this past week with a long-term client that had sold his company a little over a year ago. He and his wife were enjoying a retirement life filled with sun and recreation. However the entrepreneur in him was itching to get out. We spoke about an idea he had for a new business and after an hour or so of conversation he was left with more questions than answers. So in today’s blog I wanted to express some thoughts on starting a business.

   1/ Why are you interested in starting a business ? Is it out of necessity or out of boredom like my client ? This question will be the first question you are asked by friends, associates, business contacts and especially sources of finance. Although I do not have the best answer I believe doing this out of need versus boredom raises the antenna of interested parties and can make or break your idea.

   2/ Does the product or service in your idea currently compete with a similar product or service ? If this is the case it will be that much harder to separate yourself from the others. Quality of the product or service will eventually sell but it could be a long road.

   3/ Have you put together a business plan ? Many people come to me with an idea for a business and they often do not think through all of what is involved. A detailed business plan will force you to think of some of the problems your business may entail and how to react to them.

   4/ Have you solicited opinions from other people in business to vent your idea ? Many times opening up with a trusted source especially one that has some business experience is easier to take than getting rejected in the marketplace.

   5/ How do you plan on financing this business ? If you are self financed be careful that you do not exceed your comfort zone. Like any other investment set some limits on how much you want this venture to cost you.

   6/ Are you realistic in your thoughts of success ? I once spent a great deal of time with a person starting a new business that when started exceeded beyond their business plan and they could not deal with the additional commitment. This was a good problem but caused havoc in this person’s life since their idea of a lifestyle business was different from what was necessary.

     These are some simple questions all new business owners should ask of themselves. Business today is not for the part timers. It is all-encompassing and can drain your health as well as your finances. Consider the downsides as well as the upsides. Remember it will be your business where the buck will stop with you.

7 WAYS TO LOOK AT INVENTORY

     Today I was reviewing a monthly set of financials for a manufacturing client and noticed that inventory was rising pretty steadily over the past year. We spoke about the build up and how to monitor it so it does not become a problem. I thought that today’s blog should incorporate some of the things we discussed as they apply to almost all inventory intense companies.

   1/ There can be too much inventory. In today’s economy the business goes to the one who has it in stock. However too much of a good thing can hurt you especially if you carry significant sums of slow-moving inventory. Be very careful to cull items in inventory once they become over six months old.

   2/ Update your costs at least quarterly. Again in todays markets, the costs for items like fuel and transportation are changing rapidly. What you think is your profit on an item can shift overnite and possibly rob you of increased profits.

   3/ Track your orders especially of fast-moving items. You may find that these orders are not keeping up with your needs either in delivery time or costs. Running out of your famous stock items will overtime start to affect your business.

   4/ Walk through your warehouse more often than not and keep an eye on what is building up. Often a visual check will bring you a better understanding of what is in excess or slow to move.

   5/ Do some financial modeling on your business. Ask your accountant to help you calculate inventory turnover, vendor invoices in payable by days, costs of products last year versus current and compare quantities last year to current.

   6/ Physically count your inventory a few times per year and not just at the end of the year. Counts always beg questions and it is better to deal with them during the year than at year-end just in case there are some errors.

   7/ Always monitor scrap sales for items and amounts. I once found a cleaning company helping themselves to the company’s scrap which was bronze. Over the years we estimated that some significant scrap was taken resulting in criminal charges against the cleaning company.

     This is not all-inclusive but ways to think about what in many cases is your largest asset. Remember that inventory can walk so protect yourself with established controls.

SIX THOUGHTS ON LEASE VS. BUY

     One of the most asked questions I have received over all my years in public accounting is ” Is it better to lease or buy ? “. That is sometimes a hard question to answer as a variety of issues can make either one better than the other option. Here are 6 thoughts on this commonly asked question.

   1/ What advantage is it to lease or buy ? – In years past the lease option held a variety of benefits to businesspeople. In the old days leases had little impact on your financials since there was no need to disclose such transactions. That changed some time ago when the accounting authorities required both disclosure and possible capitalization when they released capital versus operating lease disclosure requirements.

   2/ Are their tax considerations when you lease versus buy ? – Currently there are some differences in one versus the other regarding taxes since capitalization offers a quicker depreciation structure than an operating lease payment. However over the course of time each will give the same benefit but in order for one to be better than the other a certain tax situation must be present that would accentuate the quicker depreciation model.

   3/ Can one offer less cash upfront than the other ? – This answer is tough since today a business may be able to finance a purchase as easily as leasing. Again the particulars of a situation may offer one a better benefit but unless the effective interest rate on the lease is less than what the bank may offer , no cash down deals create equality.

   4/ How will my cash flow be effected ? – Leasing will often be cheaper in the initial stages of an assets’ life. It is not unusual to see a larger buy out option at the end of the lease versus a steady monthly payment offered by the bank or financing institution. Again if your business is short of cash and can’t borrow for the purchase, you can save early cash if you lease.

     5/ Am I stuck with the asset at the end of the lease ? – Some if not all leases today offer you a buyout option at the end of the lease. When the asset in question is one that could last well beyond the lease term it could be beneficial to buy out the lease and own the asset directly. In the case of assets that often do not outlive the lease term (office equipment, computers etc.) you may not want to extend the lease beyond the initial term.

   6/ Do economics play a part in a lease versus buy decision ? – Absolutely, with todays interest rates where they are situations that had advantages such as leasing many have become much more difficult to compare. Autos that are leased today are normally due to the leasee wanting to drive another car in three or four years. Unless your credit is bad you must consider the life of the asset you are either leasing or buying.

     In summary many of the easy differences between leasing and buying have become clouded today due to the economy and the low interest rates. You must consider a few things to help you with this decision. Economics, the life of the asset in question, cash needs, a particular tax advantage and  cash flow all play a part. I often ask clients to look at the cash outflow for autos in a lease versus buy scenario. Total cash out-of-pocket is often an easy comparison. Whatever the verdict ask as many questions as you can think of before closing the transaction. Use some of the above as a start.