April refunds bring May expenditures?

California Poppies

Now that you’ve hopefully completed the annual rite of tax return preparation, you have time to dedicate to other more fruitful pursuits.  Yes, we all dread the process of our annual interaction with the IRS.  Some come out on top receiving a refund and others are left to figure out not only why they owe more taxes, and how can they keep from paying more in the future.  I leave this up to the highly competent and professional CPA’s.

But what about how your tax planning affects your business planning?  How many times have you made a decision that compromised your strategic business plan in order to save a few tax dollars?  What is “wagging the dog” of your business, the financial plan or the marketing plan?  Yes, there are smart ways to finance your business, occupy a building, acquire capital equipment and purchase inventory.  And all of the financial choices you make affect your tax burden, both in the business and personally.  The important point is that you aware that you have choices and some choices are more expensive than others for your business.

Let’s look at the four financial decisions mentioned above and how you can consider the choices.

Financing your business – For most small businesses, the first choice you usually consider is whether or not to take on a partner.  Whether it’s a family member, friend or business acquaintance, this decision should not be taken lightly.  The biggest advantage is that an equity partner is probably not going to require a monthly interest payment like a bank or other debt holder.  The flipside of this decision is that someone else is part of the decision making process regarding the overall strategy of the business.  The bigger the percentage of the business that you give up, the less control you have as a business owner.  Debt is also another method of funding your cash needs.  The big advantage is that you maintain control of your business.  The big disadvantage is that you have to make a periodic payment based on an interest rate determined by the debt holder (and those payments have to be made or else!).

Occupying a building – This decision is typically a “buy or lease” decision.  Just as with your personal living arrangements, owning or renting has their distinct advantages and disadvantages.  My personal bias has always been toward being an owner versus a renter. Owning your business property can be a great long-term investment as well as being a source of control of your business destiny.  You don’t have to get a landlord’s approval for improvements and by acquiring the building as an asset; it can provide cash flow in retirement after divesting yourself from the business.  That said, if your business is growing and your needs are changing, locking yourself into a building may not be the best scenario for you.  Having the flexibility to move to another facility may mean that renting is the best choice.

Acquiring capital equipment – The purchase of capital equipment is a long-term decision in order to further the business for many years.   And purchasing may not be the best decision either.  While I’ll jump on my “purchase” soapbox most of the time, cash flow may not be adequate and leasing may be a better alternative.  A “buy or lease” exercise is needed to properly identify the correct choice for you.  This exercise will include performing research into the various methods of purchasing or leasing the specific equipment you want to acquire.  There are many characteristics of this type of transaction that may affect your tax burden and your cash flow.  I cannot emphasize enough the need for a thorough analysis before making this critical, long-term decision.  Also, make sure you’re aware of any special considerations you need to give to the method of depreciation or tax credits.

Purchasing inventory – In many businesses, particularly retail and distribution, inventory can be a real killer.  Buy too much and you have to liquidate excess inventory, thus squeezing profit margins.  Buy too little and you could lose customers.  One key factor in purchasing inventory is to get the longest terms possible from your vendors.  If you can get 90, 120 or 180-day terms from your vendors and can get paid in 30 days from your customers, you are that far ahead of the game.  Just make sure that your cash flow planning is done so that you really do have the cash when the vendor bills come due.  Also, remember that your inventory valuation methods will have an affect on your tax burden.  Make sure that you consult your CPA on the correct method for your business.

If you have a question or would like to see a specific subject covered in this blog, please let me know. 

MBWA, Vince Lombari and Dr. Belasco

Well spring is finally here.  Maybe you were the type that was “wintering” over the past few months waiting for the weather to break so that you could really get your business going.  Maybe you’ve been like the squirrel that saved nuts all last fall, living off last year’s business.  Now you’ve come out of your “burrow” to find that the business landscape is changing much faster than in the past.   Competition is stiffer.  Social media seems to be passing you by.  Maybe you find that you need to increase your marketing budget more than is comfortable to help meet your goals.  Maybe it's getting harder to keep your staff engaged and motivated.  Yes, loyalty in business is a thing of the past.  And the political landscape is more polarized than ever.  And technology can make or break you.

So, how do you go forward?  Are your systems and procedures meeting the pace of your business?  Is your staff trained to handle the on-going activity as well as the exceptions and fire drills?  Can you rely on your organization to “get 'er done”?  Can you financially support even the replacement of assets as they have worn out or become obsolete?  Is everyone still fresh or do they seem frazzled and worn out? 

Assessing your organization is a critical management task that can be done using a number of management techniques.  Management by planning would have a regular assessment time set up to review not only staff performance but also performance of the primary assets of the company.  Considering the critical nature of key equipment, are you asking the financial questions needed to determine if replacement is necessary?  Make or buy?  Lease or purchase?  You need to have the proper financial information needed to answer these questions and the correct systems to get the information on a timely basis.

Management by exception is a popular method since it makes the basic assumption that everything is working to handle normal, regular activity.  It also assumes that the problem areas are where a manager needs to spend time.  The downside of this management technique is that it can seem like all you are doing is putting out fires.  Before you know it you feel like you don’t have time to plan and rework procedures to make them more efficient.  If you have talented staff that can dedicate the time to help with planning and fire fighting, then you may be okay.  If not, this may not be your best choice.

I have always preferred the management by walking around technique.  MBWA.  If you can spend even 15-30 minutes every day simply walking around and listening to your staff, you would be surprised at how much information you would get.  And the endearment to your staff can be amazing.  When I made the decision to step down as COO of a manufacturing company, I was truly touched by the comments from some of the entry-level staff.  It was because I spent the time to get to know them.  And I know that since they knew me better as a person and could ask anything, their increased knowledge of the company made them more productive and emotionally connected as a team. 

In these days of disloyalty between staff and business owners, it is always refreshing to see when people describe their workplace as “family”.  If you want that kind of culture in your company, communication and honesty go much farther than you would ever know.  I’ve always felt that as a manager or owner that your primary job is to provide the tools and training for others so that they can do their jobs at the peak of efficiency.  If you don’t incorporate fun and comradeship, you will lose out on an opportunity to create a great organization.

My teacher in Management 101 at San Diego State University was a public relations professional with the Green Bay Packers when Vince Lombardi was the head coach.  Dr. Belasco had high expectations of us as students.  Much like Lombardi had of his football team.  We were taught about how one leader put the tiny town of Green Bay on the professional football map.  Our teacher knew that each one of us had that kind of leadership potential.  There are many ways to manage people and only one way to lead and that is with integrity.  I challenge each of you to find that Vince Lombardi in each of you and have the courage and compassion to provide business leadership in your community.  It is always needed.

Do you need to hire an outside consultant?

Okay, let’s get the jokes out of the way first. Most are just like attorney’s jokes except maybe not so insulting. I particularly like the comment that a consultant just takes your watch and tells you what time it is and then charges an
outrageous fee. Hopefully you haven’t had that type of experience in working with consultants. I can imagine that many of you have been caught scratching your head after an engagement was over wondering what value you just got out of this relationship.

Usually, there are two reasons for hiring a consultant to help solve a business problem: 1) you don’t have the expertise in-house, or 2) you don’t have the time. If you are the top person in your organization, you typically are worrying about threats from the environment external to your organization and the vulnerability of your staff to react when bad things do happen. And unless you’re Bill Gates or Rupert Murdoch, you probably are dealing with limited resources as well. And even though you’ve done the best job possible in hiring the most talented staff that can handle the majority of issues that can be thrown at them, something is bound to come up.

Occasionally, there will be something that they (or you) don’t know how to handle. There can be many keys to knowing when to bring in someone from the outside. Maybe you wake up in a sweat in the middle of the night, screaming something unintelligible and all you can remember is everything is at stake and you’ve got to do something, but you just don’t know what, where, who or how much. Maybe you’re losing customers for reasons that you’ve never heard, or suppliers are cutting into your margins, or maybe your staff turnover is costing much more than in the past. Whatever the symptoms, you realize that there are no easy answers, but hopefully you have a solid idea of what is the problem. When you realize that you need to ask for help, the key is to know what the problem is. If you don’t, then you are even more vulnerable than you can imagine!

If you’ve considered that the skill set of your staff is not the problem, maybe it’s that everyone is working 110% and someone or something is going to blow unless you do something. The biggest problem with limited resources is that they are limited! Many times the business model that has been developed allows for day-to-day operations and can be so lean that when unusual circumstances come up, it throws the whole organization for a loop. Now I’m not talking about calling up a temp service or getting an intern to take up the slack for seasonal workloads. I’m talking about an issue that can have significant impact to your business model and no one can be assigned to tackle this issue because everyone is stretched to the limit.

The real temptation here is to say to yourself, “By the time I explain everything and the problem, I could just get it done myself!” And that is probably true and you could, if you could ignore the additional stress that could be created on top of what you already are shouldering. And you could just forget the weekend fun stuff that you have planned because you are going to be working all weekend just to get ready for Monday. While you probably do have the best view of the capabilities of yourself and your staff, it is possible that sometimes you could be a little too close to the problem, issue or challenge (whatever your organization calls these things these days). One advantage to consulting with someone from outside your organization is that they can bring to you the experience of seeing similar problems from other organizations. Options and potential solutions are what a consultant should bring to you. While you may be in danger of being myopic I would warn you not to totally abdicate your decision-making responsibility. You are still accountable. The consultant could be long gone by the time the results are in and you will still be responsible for the decisions you make based on the advice of outsiders (or insiders as well).

So when you need a consultant? When you need help seeing the future and you need additional tools in your toolbox to create the best strategy for your organization. I’m not talking crystal ball, hocus pocus stuff. What I hope you are doing is always looking out to the future, trying to position your organization so that it is viable going forward.