Especially in these challenging financial times, having a plan and sticking to it, as well as analyzing virtually every initiative and/or transaction from a profitability standpoint are MUSTS for small business owners.

Suggestions of action items that can positively impact your bottom line:

-          Understand the differences between fixed and variable costs: categorize your expenses accordingly. If you must make significant changes to remain a viable business entity-your variable costs must be cut first, starting with personnel. Next, reduce outsourced costs: office cleaning; local courier; cell phones/handheld communication device charges; office & other supplies; overtime and bonuses; employee benefits and your contributions to 401(k) or other plans: ALL should be given strong, non-emotional consideration to be either reduced or eliminated.

-          Before you significantly cut or eliminate your marketing/advertising budget, re-think it. Consider launching “Guerilla marketing” efforts- inexpensive flyers, Internet blasts to your customer base, partnering with a non-competitive entity to share costs. Completely eliminating your marketing efforts can result in losing your market share.

Once you’ve itemized all that you can lower or eliminate, turn your focus to your fixed expenses.

-          Are you paying too much for rented space? If so, ask your landlord to adjust your monthly payments downward by one-third or more for a year, and agree to repay the reduced amount added to your contractual rent amount after 12 months.

-          If you own the space you’re in, and you’re not fully utilizing it, lease out the extra space.

-          If you are making payments on a ‘company car’ for yourself, attempt to refinance the payments to a lesser amount over more time.

-          Have your office utilities analyzed – are you wasting electricity?

-          Get a competitive bid on your business insurance. Don’t cut coverage – instead, cut costs.

-          Work closely with your CPA, and be absolutely certain that he or she understands your business. Have your statements analyzed monthly.

-          Investigate the cost of having the individual who controls your bank account bonded. This expenditure might be the best investment you’ve ever made.

Review every facet of your banking activity- fees, interest rates, credit card processing percentages, ‘float’, options for electronic banking and check processing, and more. Republic Bank can do a confidential analysis comparison of your current relationship with any other bank: if we can save you money and time with our innovation and financial acumen, we’ll tell you: the analysis is free.

It’s that time of the year. . . time to pack up and head out for your summer vacation. However, if you’re like many owners of closely-held businesses, this is sometimes easier said than done. If important things seem to grind to a halt when you’re out of the office, it may be time to consider developing processes in your organization that aren’t dependent on your being around. In other words, get the business out of your head and on paper in the form of policies and procedures that your trusted employees can administer.

But you only have two weeks until you leave for Disney? Then start small and document and implement a credit and collection policy that will work for your company even while you’re not.

Create Accountability in Your Organization

The first step to take this responsibility off your plate is to identify someone in your organization to be the Credit and Collection Administrator. Next, you must provide them with the clear responsibility and authority to manage this area (under your supervision, of course).

The Credit and Collection Administrator’s responsibilities should include, but not be limited to the following:

• Ensure completeness of customer records.
• Develop and update your credit and collection systems and policies.
• Field phone calls from customers.
• File mechanic’s liens, if appropriate.
• Evaluate new customers and their credit limits.
• Oversee and execute collections efforts.
• Provide you with reports and key performance indicators.

Qualify your Customers

One of the first steps in an effective credit and collections process is to make sure that a new customer understands not only what they are required to pay for your product or service, but also when. If you deal with large transactions or balances, you may elect to obtain a signed credit agreement every time a new customer is brought on and take a less formal approach for smaller accounts. The important thing is to define your policy and stick to it.

A formal credit approval process will remove much of the guess-work involved with who to issue credit and at what level. For example, you could create a tiered approach in your organization for credit approval. Perhaps the sales force can automatically extend credit up to $2,500, while a larger approval may require sign-off by the credit manager, controller, or someone higher in the organization.

In any event, you want to make sure you have a clear internal process to authorize credit terms for customers. Then ensure your customer understands the terms and how they could lose their credit privileges.

Identify Customer Problems Quickly

Time is not your friend when dealing with delinquent accounts. The earlier collection efforts are started, the better the results. Be sure to prepare a periodic aging of customer accounts identifying those that are over 60 days delinquent and distribute to key members of management.

In addition, you want to ensure that your credit professionals can identify potential red flags of fraud or other problems. Some examples are:

• Your primary contact no longer works at the company.
• Company ownership has changed.
• The customer has only been in business a short time and has a credit record or financials that look too good to be true.
• Credit references do not answer the phone with the given business name or are answered by an answering machine.
• A well-paying company has suddenly slowed payments or built a large balance.
• Broken promises (i.e., the checks in the mail).
• Balance for customer is at all-time high and a large order is placed.

As a business owner, you have to be flexible and maintain good relationships with customers, but also limit your exposure. Remember, you are not your customer’s bank. Beware if you have to constantly deviate from your credit policies for particular customers.

Collecting on Delinquent Accounts

Prompt action on delinquent accounts is your best collections tool. Another valuable tool is an overall policy for timing of collections and follow-up. Some companies choose to adopt a polite and courteous “Squeaky Wheel” policy, so that the customer chooses to pay the company before its other creditors. Depending on your industry, this may or may not be an appropriate approach. The key is persistence and timely follow-up on delinquent accounts. If you are not receiving payment, you want to know why. Is there a dispute? Is the invoice incorrect or confusing? To speed collections, problems with product and billings must be resolved as soon as possible. Also, remember to document, document, and document. Don’t be afraid to remind a customer that they told you that the “check was in the mail” last week.

What to do When You Can’t Collect

When all of your internal methods of collection have been exhausted, you may wish to use collection agencies or attorneys. Since this likely will damage customer relations, it is usually a method of last resort. Before turning an account over to collections, you will want to be sure that there is little chance of doing future business with the customer.

When preparing to take an account to collections, documentation is the key (remember document, document, and document above?). You will want to be sure you have copies of unpaid invoices, details of all charges and payments including interest, credit application, and copies of any other contracts signed by the customer. You will also want to provide all communication with the customer and any internal notes to the file

Write-Off of Bad Debts

No matter how well you design and implement your credit and collection policy, you cannot protect yourself from the inevitable bad debt. However, to protect yourself from writing off accounts that are still collectible, or in the collection process, you should implement a formal policy defining when an account should be written off.

In the meantime, you should maintain an allowance for bad debts on your financial statements. A periodic review should be made to determine the adequacy of the allowance for doubtful accounts in relation to your accounts receivable.

Enjoy your Vacation!

If you begin to develop a sense of accountability and responsibility in your organization with a structure of effective policies and procedures you are comfortable with, you will be amazed at the results.

Start small; you can’t do it all immediately. But, do start. Remember, you only have two weeks left until Disney!!

Scott Olinger

The new economic stimulus package known as the American Recovery and Reinvestment Act of 2009 was signed into law by President Obama on February 17, 2009. The $787 billion new law, which contains nearly $300 billion in tax relief (of which $280 million is concentrated in the first two years), is a massive and ambitious program intended to pull the U.S. economy out of recession.

Regardless of your opinion about the plan or political affiliation, there are some significant tax incentives available to closely held business owners. Unfortunately, as is often the case, some of these incentives are provided in a neatly wrapped package complete with plenty of “red tape” and limitations.

KEY BUSINESS INCENTIVES AND OTHER PROVISIONS

Bonus depreciation

This year is a great time to purchase equipment if you are planning to expand. The bonus depreciation provision of 2008, which allows first-year depreciation of 50 percent of the cost of new equipment additions, was extended through December 31, 2009. We believe this provision will help many businesses, whether they are struggling to compete or trying to grow their operations.

Increase in luxury auto depreciation

The $8,000 increase in the first-year luxury passenger auto limitation was also extended through December 31, 2009.

Section 179 expensing for capital expenditures

Certain businesses can write-off the entire cost of up to $250,000 of capital expenditures for equipment purchased in 2009, subject to certain limitations related to maximum capital purchases and taxable income.

Monetization of AMT and R&D credit carryforwards

This is a way to convert unused credit carryforwards into cash refunds. C-Corporations and certain S-Corporations may convert part of their alternative minimum tax and research and development tax credit carryforwards into currently refundable credits by foregoing bonus depreciation on equipment purchases.

NOL carryback for small businesses

Taxpayers with net operating losses can carry the losses back and apply for refunds of taxes previously paid. The Act increases the carryback period to five years, previously two years, for 2008 tax losses incurred by small business taxpayers with $15 million or less of gross receipts.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit essentially provides businesses with a $2,400 credit for each employee hired from certain targeted groups. This was expanded to include unemployed veterans and certain disconnected youth.

S-Corp Built-In Gain Period

This provision applies to S-corporations that recognize built-in gains on the sale of assets in tax years beginning in 2009 and 2010. The new law temporarily shortens the potential built-in gains period, following S election, from 10 years to seven years for asset sales that would have otherwise been subject to the built-in gains tax.

Employer-provided transportation

Under the Act, the amount that employees may receive as tax-free fringe benefits for employer-provided transportation and van pool arrangements is the same as the amount they may receive tax-free for employer-provided parking.

COBRA premium assistance

COBRA requires that involuntarily terminated employees are entitled to continue certain insurance coverage previously provided by their employers for a limited period of time, provided the former employee pays the premiums for that coverage. Persons terminated from September 1, 2008 through December 31, 2009 may elect to pay only 35% of the COBRA coverage. The former employer will be required to subsidize the remaining 65% but will receive reimbursement by claiming a credit on subsequent payroll tax returns. The temporary subsidy ends on the earlier of nine months after the subsidy starts, or whenever normal COBRA protection would end.

INDIVIDUAL TAXPAYER INCENTIVES AND TAX BREAKS

New homebuyer credit

For purchases of new principal residences made through November 20, 2009, the maximum for this 10 percent credit has been increased to $8,000 (certain limitations and phase-outs apply). The law also eliminates any required repayment to the IRS after 36 months in the home. Unfortunately, purchases of homes in 2008 subject to the $7,500 credit will continue to be governed by the original first-time homebuyer credit enacted last year and will still require repayment over fifteen years.

Deduction for sales and excise taxes on new car purchases

This is a new, above-the-line (meaning non-itemizers can qualify) deduction applying to new cars purchased on or after Feb. 17, 2009 and before Jan. 1, 2010. Sales and excise taxes on vehicles qualify (applies to SUVs and light trucks as well, but not over $49,500 in price). This new deduction phases out at higher income levels ($125,000 single, $250,000 married).

Education credit

The HOPE Education Credit has been renamed the American Opportunity Tax Credit. The credit has been increased from a maximum of $1,800 to $2,500 and also makes 40% of the credit refundable.

Estimated tax relief for Business Owners

Certain individual taxpayers who are small business owners may qualify to pay in reduced safe-harbor tax estimates of 90 percent of their 2008 tax liability.

Computers as qualified education expenses

Computers and computer technology (including Internet access) will be considered qualified education expenses for Section 529 plans in 2009 and 2010.

New Making Work Pay income tax credit

This new credit is intended to boost workers’ take home pay and encourage them to spend more. The credit is limited to the lesser of 6.2 percent of earned income or $400 for individuals or $800 for families, subject to certain income level phase-outs. This credit ends after 2010.

ENERGY INCENTIVES

The new law also creates or expands a litany of energy related tax credits including the following:

• Credit for advanced energy manufacturing facilities
• Electricity production credit from renewable resources
• Alternative energy investment credit
• Residential energy property credit
• Residential energy efficient property credit
• Plug-in electric drive vehicle credit
• Neighborhood electric vehicle credit
• Alternative fuel vehicle refueling property credit

To see more resources and details related to the new tax law, please visit our web site at http://www.hsccpa.com/resources/news_alerts.html.

In these challenging economic times we must be diligent to take advantage of all available opportunities to reduce taxes and increase cash flow. To maximize the benefits of this planning and avoid paying more than your fair share of taxes, it’s important to understand how the new law affects you and your business. Be sure to discuss these matters with your CPA or other trusted business and financial advisor.

In the “2008 Report to the Nation on Occupational Fraud and Abuse,” the Association of Certified Fraud Examiners (ACFE) estimated that fraud costs American companies $994 billion per year or 7% of the gross national product (or possibly 7% of your sales).

The Hidden Expense – Case Study

Let’s assume you are an owner of the small business in Figure 1. Based on these financial statements you are making $280,000. Now, answer this question: Would you be fine with knowing that $350,000 ($5 million times 7%) might be walking out the door every year with your employees? Of course you wouldn’t.

The problem is that fraud is a hidden expense and is not easily identified. But for discussion purposes, let’s assume that you could easily identify the cost of employee fraud for your company. As you can see in Figure 2, after separately classifying Employee Fraud, all three expense categories have gone down. Why?

· For cost of sales, it might be that your director of purchasing has worked out a deal to buy product at an inflated price in return for a kickback.

· For selling expenses, it might be the result of Slick Williams, your top salesman, submitting false travel and entertainment expenditures on his monthly expense report.

· For general and administrative expenses, your office manager might be writing a weekly check to a “ghost employee.”

If you could isolate and remove all instances of fraud in your company, your net income would be $630,000 instead of $280,000. Short of doing that, the only way to make up the amount lost to fraud is to create an additional $1,400,000 in sales ($350,000 divided by 25% gross profit percentage). That shouldn’t be too difficult for Slick.

Preventing and Detecting Occupational Fraud

So what are some practical things you can do to prevent fraud within your organization? Here are just a few ideas:

• Create a corporate culture that communicates clearly that stealing or improperly using company assets will not be tolerated and could be grounds for prosecution by adopting a written code of ethics for all corporate directors and employees.
• Maintain adequate segregation of duties between all departments. For example, make sure that the person who opens the mail is not the person who applies payments to accounts receivable.
• Utilize an effective budgeting process. This allows you to compare results with a baseline expectation of where expenses should be.
• Implement an internal or third-party fraud hotline. According to the ACFE this is the single most effective means of detecting fraud.
• Offer a $500 bonus to employees who report an employee theft, no matter how small the theft is.

• Be wary of those employees who insist on doing everything themselves, work long and unusual hours, or never take vacation.

Use of Data Extraction Tools to Detect Fraud

There are many simple things that you can do by mining existing data in your internal systems. Here are just a few examples:

• Identify vendor price increases greater than acceptable percentages (identify potential kickback situations).
• Compare employee home addresses and telephone numbers to those in the vendor master file.
• Analyze invoices and expense reports falling just under the corporate authorization levels.
• Perform tests to identify “ghost employees” on the payroll.

In Conclusion

Good internal controls along with a culture of “checks and balances” are among the best deterrents against fraud. It’s important to note that if you do come across an instance of fraud within your organization, take the appropriate measures to ensure that the evidence could be used in a court of law. While you can’t be skeptical of every employee, a certain amount of systems review could save you a significant amount of money as well as provide you with an additional competitive advantage over firms who have not taken measures to mitigate occupational fraud.

Do I want to offer a retirement plan to my employees? If so, what type of plan should I offer? How much, if any, do I want to contribute toward my employees’ retirement? How much do I want to contribute for myself? These are all questions you should ask when deciding whether or not to offer a retirement plan to your employees. These are also the same questions you should ask if you’re evaluating your current retirement plan design to see if it’s still the best fit for you and your company’s objectives.

While not all-inclusive, the three most common retirement plan designs for small businesses are the Simplified Employee Pension (“SEP”), the Savings Incentive Match Plan for Employees (“SIMPLE”), and the 401(k) Plan. Some advantages and disadvantages of each are listed below.

Simplified Employee Pension (“SEP”)

A SEP is an individual retirement account (“IRA”) set up to receive discretionary employer contributions. A SEP is often used by sole proprietors as they are able to contribute 20% of earned income to the plan (computed after the self-employment tax deduction but before the SEP contribution). A SEP contribution of up to $46,000 may be made for 2008. The SEP contribution percentage is discretionary; therefore, you may provide a SEP contribution one year and decide to either reduce the contribution the following year or not provide one at all.

Two additional advantages to a SEP are: (1) there is very little bookkeeping and paperwork required, and costs for consultants (i.e., attorney, accountants) are very minimal, if any; and (2) a SEP can be established after the end of the employer’s taxable year.

The main disadvantages to a SEP are: (1) the eligibility rules to determine which employees should be covered are not very restrictive, thereby allowing seasonal and part-time employees to be covered; (2) if a SEP is established for a company with employees, a similar contribution percentage must be contributed for all employees (including the business owner); and (3) employees are always 100% vested in the SEP contributions.

Savings Incentive Match Plan for Employees (“SIMPLE”)

A SIMPLE is a retirement plan that allows employee contributions and requires employer contributions. A SIMPLE is often used by employers who want to provide their employees the opportunity to defer current income taxes through pre-tax salary reduction contributions, while also providing them an employer contribution.

A SIMPLE requires either a 3% employer match (dollar for dollar) or 2% employer non-elective contribution. The employer can elect to reduce the matching contribution to 1% as long as it is not reduced for more than 2 years out of the 5 preceding years; however, the employer must give employees a notice explaining the match reduction. If the 2% non-elective contribution is provided, employees must also be given a notice explaining the non-elective contribution. Employees are always 100% vested in the employer contributions to the SIMPLE.

Even though the contribution limits are lower than that of a SEP and a 401(k) plan (described below), it is often the preferable plan design for small employers because there is very little bookkeeping and paperwork, and costs are much lower than that charged to administer a 401(k) plan. A SIMPLE may only be implemented if the employer has less than 100 employees who earned $5,000 or more during the preceding calendar year. A SIMPLE can only be established between January 1^st and October 1^st for the calendar year in which the SIMPLE will be effective.

401(k) Plan

The greatest advantage to designing a 401(k) plan is business owners can maximize their retirement contributions (up to $46,000 for 2008 and up to $51,000 for those age 50 or older), while minimizing what they must contribute to their employees through the use of employee contributions, employer match, and profit sharing contributions.

There are also additional features with a 401(k) plan that are not available through a SEP or a SIMPLE, two of which are participant loans and the application of vesting schedules to employer contributions. While participant loans may cause an additional administrative burden, this feature usually encourages employees to participate in the 401(k) plan because they know they can get to their money if they really need it. With a 401(k) plan, employee participation is crucial to passing certain nondiscrimination tests that are required. Also, attaching vesting schedules to employer contributions encourages low employee turnover. A common vesting schedule is the 6-year graded. An employee must work 1,000 hours each year for 6 years to become 100% vested in the employer contributions. The employee becomes 20% vested after 2 years of service, 40% after 3 years, 60% after 4 years, 80% after 5 years and then 100% after the 6^th year of service.

Employer contributions under a 401(k) plan can be designed differently for different employers. Because there is great flexibility with the design of employer contributions, 401(k) plans are subject to several nondiscrimination tests. Some of the nondiscrimination tests can be avoided with more advanced 401(k) plan designing (i.e., safe harbor plans). There are annual filings and additional administrative costs associated with the operation of a 401(k) plan; however, with the flexibility you are afforded and the potential cost savings in taxes and employer contributions, the benefits of offering a 401(k) plan may far outweigh the costs.

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Employer contributions provided under any of the plan designs discussed above would be business deductions. In addition, any fees for the administration of the plan would be deductible (tax credits may also apply). Highlights of the plan designs described above are set forth in the comparison table below.

Choosing the right plan design depends on your company’s size, your company’s financial position, and the objectives of the company and the business owner…which retirement plan design is right for you and your company?

“These are the times that try men’s souls.”

Thomas Paine

 This simple quotation from Founding Father, Thomas Paine’s “The Crisis”, not only describes the beginning of the American Revolution, but also our life in the stock and bond market.  Look at numbers from the past seven years as compared to the previous twenty:

 How are professional investors handling this downturn in both the stock and bond markets?  Professional investors know something that most of us don’t.

 Benjamin Franklin is famous for stating “An investment in knowledge always pays the best interest. “ ¹ Lets go to two of the best sources of knowledge in our United States, Yale and Harvard.  How do they invest their $20 Billion Endowment Funds?  Are they silently waiting out the stock and bond markets?  The answer is partially yes, but as you can see in the graph below, they have drastically changed their model from the traditional Stock/Bond mix to Stock/Bond/Alternatives.

 That is not a misprint.  Yale and Harvard, according to their annual endowment reports have an average of 65% of their investment assets in an asset class that is neither stocks nor bonds.

 Alternative asset classes are defined as uncorrelated assets that do not move in the same direction at the same time as traditional asset classes.  An alternative asset class can benefit investors during various market cycles by providing a higher level of diversification and potentially reducing risk.

 Examples of alternative assets are market neutral funds such as long-short funds that buy stocks like the traditional mutual fund but also shorts (sells) stocks that it does not like within the same portfolio.  Other categories are real estate, natural resources, gold, commodities such as livestock and timber, treasury inflation protected securities (TIPS) and emerging market stocks and bonds.

 Founding father, John Adams, was guided by this belief: “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” ²

 The evidence of our asset allocation models suggests that we can benefit from diversifying alternative assets into our portfolios.  If we used a sample portfolio of 15% Commodities, 20% Global Real Estate, 20% Market Neutral, 20% TIPS, 10% Emerging Market Stock, 10% Emerging Market Bond and 5% Gold and Precious Metal from September 30, 1997 to September 30, 2007, an average annualized rate of return for the ten year period of 10.9% was produced versus 6.6% for the S&P 500.  More importantly, during the bear market the cumulative return of the portfolio was 18.6% versus the S&P 500 at -43.1% ^3.

 Even Thomas Jefferson knew the value of real assets as alternative investments. He was able to make the Louisiana Purchase happen in 1803.  The United States paid $15 million dollars for over 800,000 square miles of land.  The land area of America nearly doubled with this one transaction.  The Louisiana Purchase contained vast amounts of natural resources, commodities and the land itself.

As individual investors we have different liquidity issues than Yale and Harvard.  We also do not have access to the same investment managers, although the amount of top notch alternative investment managers keeps increasing each year.  It is interesting to see quality companies who used to cater only to institutions like Yale and Harvard begin packaging their services to the individual investor.

What is important to understand is that we can take these lessons and apply some real strategies to our portfolio to help us create less volatile portfolios while hopefully increasing our returns.  See your investment advisor for information on which of these asset classes might make sense in your portfolio.

NOTE 1  (http://www.quotationspage.com/quotes/Benjamin_Franklin/

NOTE 2 http://www.quotationspage.com/quotes/Thomas Jefferson/)

NOTE 3