Author Archives: c05572520

Tuesday Tax Tip – Are You Responsible for a Gift Tax? – 2/6/19

If you give a non-spouse a gift valued more than the annual exclusion amount, you could be  subject to a gift tax.

For 2019, the annual federal gift tax exclusion amount for gifts to a non-spouse is $15,000 per person, per year.

If you are married, you and your spouse may give up to $30,000, per person, per year, free from federal gift tax.

Although there are no immediate tax concerns for the recipient of a gift because federal gift tax is imposed upon the donor, the recipient could be liable for capital gains tax in the future. Highly appreciated gifts such as real estate or stocks will render the recipient liable for capital gains tax when he or she decides to sell the gift at a later date.

The general rule from the IRS is that the recipient’s basis in the gifted property is the same as the basis of the donor. The IRS provides this example: If you were given stock that the donor had purchased for $10 per share (which was also his/her basis) and you later sold it for $100 per share, you would pay tax on a gain of $90 per share.

Source: www.irs.gov

Tuesday Tax Tip – Prohibited Transactions and IRAs – 1/15/19

A prohibited transaction is an impermissible transaction under the Internal Revenue Code that occurs between an IRA and a disqualified person.

Disqualified persons include the IRA owner, the owner’s spouse, the owner’s lineal descendants (and their spouses), IRA beneficiaries and any IRA fiduciary.

If you engage in a prohibited transaction, under IRS rules, your entire IRA will lose its status as an IRA. Your tax-deferred IRA will then be treated as though the assets were distributed to you as of the first day of the year the prohibited transaction occurred. Ordinary income tax will be due on the distributed amount and if you are under age 59½ you will also be subject to a 10% early distribution penalty.

Below are just a few common examples of traditional IRA prohibited transactions:

• The sale, exchange or leasing of property involving your IRA
• Borrowing money from or lending money to your IRA
• Receiving personal benefits or payments from your IRA
• Using your IRA as collateral for a loan
• A transfer of your IRA plan income or assets to, or use of the assets by or for the benefit of,
a disqualified person

Strategy Tip: If you are unsure whether the transaction you wish to participate in with your IRA is
prohibited (a lot of self-directed IRA owners have faced this problem) you may want to consider
splitting your IRA prior to the transaction. You will essentially carve out the amount you want to
use from your original IRA, creating a separate IRA specifically for the questionable transaction.
This way, if it turns out that the transaction you wish to engage in is in fact a prohibited
transaction, it will only impact this second IRA and you avoid destroying your entire original IRA.

Source: www.irs.gov

Check Withholding Now To Avoid Tax Surprises Later

With the year more than halfway over, the Internal Revenue Service urges taxpayers who haven’t yet done a “Paycheck Checkup” to take a few minutes to see if they are having the right amount of tax withholding following major changes in the tax law.

A summertime check on tax withholding is critical for millions of taxpayers who haven’t reviewed their tax situation. Recent reports note that many taxpayers could see their refund amounts change when they file their 2018 taxes in early 2019.

The Tax Cuts and Jobs Act, passed in December 2017, made significant changes, which will affect 2018 tax returns that people file in 2019. These changes make checking withholding amounts even more important. These tax law changes include:

  • Increased standard deduction
  • Eliminated personal exemptions
  • Increased Child Tax Credit
  • Limited or discontinued certain deductions
  • Changed the tax rates and brackets

Checking and adjusting withholding now can prevent an unexpected tax bill and penalties next year at tax time. It can also help taxpayers avoid a large refund if they’d prefer to have their money in their paychecks throughout the year.

You can use the free IRS Withholding Calculator to check your withholding now.

Special Alert: Taxpayers who should check their withholding include those who:

  • Are a two-income family.
  • Have two or more jobs at the same time or only work part of the year.
  • Claim credits like the Child Tax Credit.
  • Have dependents age 17 or older.
  • Itemized deductions in 2017.
  • Have high income or a complex tax return.
  • Had a large tax refund or tax bill for 2017.

How Businesses in California Can Acquire and Keep a Positive Cash Flow – July 17, 2018

As the saying goes, “cash is king!”  Cash flow is the lifeblood of any business organization. Small-business owners are often so concerned with other matters that they fail to pay proper attention to managing their cash resources properly.

More businesses go out of business for this above all other reasons. The hard reality is this – When you’re out of cash, you’re out of business. The fortunate thing is that proper cash management, like many other skills, can be learned.

Once understood and implemented, you will wonder how you got along without using “cash management” as an integral tool in managing your small business.  This chapter will show you how.

What is Cash Flow?

Cash flow is the movement of money in and out of your business over a period of time; these movements are called inflow and outflow. Inflows for your business primarily come about from the sales of goods, collections of your receivables, borrowed money, investment income from interest, and finally, sale of assets.

Outflows for your business are measured by the checks you write and the cash you disburse to pay expenses. Some examples of cash outflow are payroll, operating costs such as utilities, rent and telephone, purchasing inventory, and any loan repayments.

A positive cash flow results if the cash inflows are greater than the cash outflows. A negative cash flow results when the opposite takes place; cash outflows exceed cash inflows.

Cash Flow Verses Profit

Although cash is critical, people think in profits instead of cash. We all do. When you imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which are profits. Unfortunately, we don’t spend the profits in a business. We spend cash.

Profitable companies go broke because they had all their money tied up in assets and couldn’t pay their expenses. Working capital is critical to business health. Unfortunately, we don’t see the cash implications as clearly as we should, which is one of the best reasons for proper cash planning. We have to manage cash, as well as profits.

Cash flow and profit are two concepts that are very different from each other and very often misunderstood by many small-business owners. The two major differences between cash flow and profit come about due to:

  1. Difference in timing when transactions are recorded. Profits are the excess of revenues over expenses. Revenues are recorded in the books when your customers buy from you, with cash or on credit. Even though you haven’t received the cash, the sale shows up on your income statement and is part of your profits (assuming you are on the accrual basis). As part of your management review, if you were to look only at your income statement for that period of time, you’d think all was well because your books are showing a healthy profit. Your cash flow statement, however, shows a very different picture. This difference between when a sale is made and the cash is received can have serious financial consequences on your business if not understood and reviewed regularly.
  2. Type of transactions that are used when computing each one. The second important difference between cash flow and profit is the type of transactions included in each. Cash flow considerations include items such as funds borrowed, equipment sold, and loan repayments. These items don’t figure into profits and don’t show up on your income statement. But such items do have a significant impact on your cash flows. Likewise, there are other items such as depreciation which are not considered when computing cash flow but do play an important role when computing profit.

Practicing Proper Cash Management

Proper cash management can contribute much to the success of your small business. Cash makes business owners’ dreams come true! Managing your cash well means making the best, most productive use of what you have.   It involves knowing the following: 1) what your cash needs are; 2) when, during the year, you generally need cash; 3) the best sources for meeting additional cash needs.

Proper cash management also means you must be prepared to meet needs when they occur. The quality of relationship you maintain with bankers and creditors will go a long way towards determining your supply of cash.  Equipped with the necessary financial statement tools in hand (the cash flow statement, the cash projection and the variance report), you are ready to maximize the cash in your business.

What happens when your cash needs outpace your cash available?  The answer is clear – it is difficult, if not impossible, to plan for the future!  Even some of the best-managed companies may find themselves vulnerable to cash shortages.  Adding employees or inventory too rapidly is one way in which this can occur.

These ideas can provide relief and positively influence your cash flow:

  1. Bill promptly: Prepare invoices immediately after you have delivered your goods or services to each customer. Once the invoice has been prepared, be sure it is sent immediately to the customer.
  2. Payment in advance: A number of businesses require payment in advance for some part of the sales price, and often encourage up-front payment with a substantial discount. This leads directly to cash in the bank.
  3. Collect on your accounts receivable: If you do nothing else, make certain that your credit-and-collection system is operating at peak efficiency.
  4. Trim your Inventory: Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. Keeping too much product on hand can tie up a great deal of cash. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
  5. Accounts payable: Accounts payable represent amounts you owe to your suppliers that are payable sometime within the near future. In this case, “near” probably means between 30 and 90 days. To maximize the flow of your cash, you should speed up collection of your receivables, but slow the payment of your bills.
  6. Minimize Expenses: The absolute best way to improve your cash flow, and in particular to improve your accounts payable, is to minimize your business’ operational expenses and ensure you make the most efficient use of every dollar you spend.

Cash is king.  Simply put, “no cash equals no business.” It is the gas that keeps your business going.  As the owner, you must know how much cash comes in and how much goes out on a regular basis. Companies go out of business for cash flow problems over profitability.

Even otherwise-healthy companies can go under for lack of cash. It can kill a company if it sneaks up by surprise, but can be easily managed when there is a plan for it. Tracking the amount of cash you have is a vital function that you can never lose a handle on.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

How to Keep Records that Help You Control Your Business in California – June 26, 2018

Keeping accurate and clear business financial records can, for many business owners, be the most difficult, and frankly the most stressful, part of running a business.

Simply understanding these records is often challenging. And yet maintaining a set of clear and understandable financial records is perhaps the single most important factor that separates successful businesses from those that fail.

Good decision-making requires it. And you, the business owner, must take responsibility for obtaining this knowledge.

Use the basic principles of sound financial management on a daily basis – you can leave the more complicated accounting work to professionals, but don’t underestimate your need to know!

Maintaining good financial records is a must. For all of the things you will want to achieve in building your business – saving on taxes, obtaining financing, selling your business, monitoring your business’ progress – a solid bookkeeping system is essential.

Why You Need Good Records

Develop good habits from the beginning. Although you’d much rather spend your time selling your product or service, take some time to learn about financial records. Accurate and timely financial information is a must. Here are some of the reasons why you need a good financial record-keeping system:

  • To monitor the success of your business
  • To get the information you need to make decisions
  • To obtain bank financing
  • To obtain other sources of capital
  • To budget your money
  • To prepare your income tax return
  • To ensure compliance with federal and state payroll tax rules
  • To properly submit sales taxes
  • To distribute profits

Record Keeping Tips

For many small businesses the most common bookkeeping errors are also the easiest to fix. Use these six tips to help keep your business on sound financial footing.

  1. Use the right accounting system
  2. Maintain daily records
  3. Handle and review checks carefully
  4. Get a bank statement with a month-end cutoff
  5. Leave an audit trail
  6. Use a computer

There are five basic records that are required for any small business record-keeping system:

  • Sales records
  • Cash receipts
  • Cash disbursements
  • Accounts receivable
  • Accounts payable

Other important records include Payroll. This is perhaps the most complex function when it comes to accounting.  There are myriad state and federal forms that must be completed, and highly specific payroll laws that must be followed.

Most businesses have several types of insurance and, for each policy, you should keep detailed information about what is covered and the effective dates.

In addition, keep an accurate list of business equipment.  The list should describe the equipment and provide serial numbers, date of purchase and original cost.

Finally, keep records of your transportation expenses – those are the ordinary and necessary business expenses of getting from one place to another in the course of your business.

Record Keeping Requirements

There are four basic requirements your record keeping system must fulfill:

  1. It must be simple to use and easy to understand. The information will be kept current if the system is “user-friendly.”
  2. Your record-keeping system should be both relevant and accurate. It should be specific to your business in order to minimize time recording information, and recording only what is needed and necessary. “Accurate” means it should be free of errors, thus conforming to the standards you have for your record-keeping system.
  3. Your system should ensure that records are kept current. The information will only be effective if records are done in a timely fashion.
  4. Your record-keeping system should be consistent. The same standards and principles should be followed throughout the system, and at all times.

Knowledge of finances and financial record keeping is essential to business success.  Good decisions are only made with the benefit of quality information.  No matter how skilled you are at creating, manufacturing, selling or marketing your product, any profit you might earn will quickly dissipate if you do not know how to track it, save it, spend or invest it.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

Small Business Financing: How and Where to Get the Money You Need – June 6, 2018

Every day thousands of businesses are forced to close their doors. The most common reason given for the high failure rate of small businesses is a lack of adequate capital.

Whether you’re starting a business or expanding one, sufficient ready capital is essential.

But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.

There are three typical financing arrangements for any business:

  • Self-funding: you put up your own money
  • Debt financing: you borrow money
  • Equity financing: you share ownership with a partner or shareholder in return for money

Self-Funding

Self-funding is often the more popular option for small-business owners. Without substantial physical assets in the business, banks will often be hesitant to offer a direct business loan. Even if you can get a business loan, a lender often wants you to personally guarantee it.

Many business owners also don’t want to get involved in the intricacies of equity financing. This leads to most small-business owners choosing the option of self-funding.

There are five ways to raise funds for your small business without obtaining a business loan.

  • Personal savings
  • Home equity loans
  • Life insurance
  • Retirement plans
  • Credit cards

Debt Financing

Businesses may use debt financing to operate over a period of time.  Funds secured through debt financing must be repaid over a predetermined period of time, usually with interest.  Short-term (less than one year) and long-term (more than one year) options are available.

Debt financing does not require any change in ownership structure, one advantage of this method.  Further, interest paid is deductible as a legitimate business expense.  Sources of debt financing include banks, trust companies and credit unions, for example. Other sources include family and friends, suppliers and equipment manufacturers, third-party leasing companies, government agencies and other financing organizations.

Types of debt financing include demand loans, lines of credit, term loans, and leasing and supplier credit. Remember to shop around and compare terms, costs and flexibility.

Equity Financing

Equity means ownership. Equity financing describes an exchange of money for a share of business ownership. This form of financing allows you to obtain funds without incurring debt.

Equity financing is good if you don’t want an obligation to repay a lender. The major disadvantage to equity financing is the dilution of your ownership interests and the possible loss of control that may accompany a sharing of ownership with additional investors.

The most basic hurdle to equity financing is finding investors who are willing to buy into your business, especially if you are a new business. No matter how sure you are that your business will succeed, others will not always share your conviction.

Different types of equity funding include:

  • Venture Capital (VC)
  • Small Business Investment Corps. (SBIC)
  • Informal Investors/Business Angels
  • Initial Public Offerings

Conclusion

When it comes to financing, you essentially have three options – put up your own money, borrow it from a bank, or secure it through a business partner.  While any or all may work, one thing is certain – your business must be properly financed or it will not succeed.  While doing your business planning, spend the time necessary to determine your financing needs and sources.

Remember to keep yourself connected to others who may be able to impart the wisdom of their experience unto you.  Other business owners, friends, and associates are resource options; remember, too, the Small Business Administration provides helpful information and resources to all small-business owners.  Use them.

Finally, work hard to avoid common mistakes associated with financing your business.  Ask yourself the right questions, and spend time evaluating and reevaluating your needs on a regular basis.  Understanding the intricacies of financing will go a long way towards securing the financial future of your business.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

HSA Limit Adjustments – June 5, 2018

Following are the Health Savings Account (HSA) Limits for 2018

Maximum Contribution
Individual Only: $3,450
Family Coverage: $6,900

HDHP Minimum Deductibles
Individual Only: $1,350
Family Coverage: $2,700

HDHP Maximum Out-of-Pocket Amounts
Individual Only: $6,650
Family Coverage: $13,300

Catch-up Contribution (age 55 or older)
Individual Only: $1,000
Source: Rev. Proc. 2018-27

*This latest procedure update was provided by the IRS in response to a previous reduction in the maximum contribution amount for individuals, Rev. Proc. 2018-18.

Three Ways to Grow Your Business in California – May 15, 2018

Regardless of what your product or service is, there are only three ways to grow your business, i.e., increase revenues and improve profitability. That’s it. All paths to growth are a variation on one of these themes.

Once you have grasped this idea, your marketing will become more focused, more organized and more powerful. The three ways to grow your business are:

  1. Increase the number of customers
  2. Increase the average size of the sale per customer
  3. Increase the frequency of purchase

Let’s look at each one in more detail:

1) Increase the number of customers

There’s no denying that customers are very important to any business. It is imperative that you keep a steady stream of customers coming in to your establishment, or taking advantage of your service.  They’re out there; you just have to find them.  Once you identify them as prospects (leads), you must help them believe in the uniqueness of your product or service.  When they believe, then you’ll have a customer.  Here are some ideas on how to turn leads into customers:

  1. Increase the number of referrals: Getting new customers through referrals is one of the most cost-effective methods there is for growing a business.
  2. Establish joint ventures: Find companies similar to yours that have already spent considerable time, effort and money establishing and building relationships with their customers.
  3. Select marketing media that can deliver your message to your target market in a cost-effective way.
  4. Increase your conversion: Increase the conversion ratio of prospects into paying customers.
  5. Reduce customer loss: Reduce customer defections – don’t let existing customers slip away to do business with the competition.

2) Increase the average size of the sale per customer

Once you have got the customer in the door or in your database, you want them to spend more money, if it is in their best interest to do so. You can do this by raising prices, up-selling, packaging items/services as attractive solutions or expanding your product line.

Always keep in mind that it can cost a fortune to acquire a new customer. However, once you have the customer, you must maximize your sales to them over the life of your business relationship. Here’s how you can do it:

  1. Raise your prices: Customers are often willing to pay much higher prices than you expect for something. Try raising prices in small increments.
  2. Up-sell and cross-sell: Don’t be afraid to sell a customer more than what she wants, if you believe she can benefit more from the next level product.
  3. Package different products or services together: Different people want different things, but everyone loves a “package” deal.

3) Increase the frequency of purchase

The third way to grow your business is to increase the frequency of purchase. A prior purchase (and being satisfied with that purchase) is more likely to bring a customer back. Reselling someone is far less expensive than selling to someone new. And with trust comes more purchasing.

Optimal profits can be earned when you create a structured program that welcomes these folks to purchase more products and services from you.

So keep your customers coming back to you again and again. Here are a few ways you can do that:

  1. Thank you cards/letters: Everyone likes to receive thank you cards or letters. Frequent communication with your customers also creates expectations that they will hear from you. This can be used to your advantage as well.
  2. Make new offers: They may not buy every time you promote something, but they will continually “keep you in mind.” Staying in touch with your customers has proven to be an effective way to retain them.
  3. Customer clubs/loyalty programs: Rewarding customers for frequent purchases is a fast, easy and low cost way to retain customer loyalty.
  4. “By invitation only” events: Any opportunity you can create for your customers to feel more “connected” to your business will pay dividends down the road.
  5. Reactivate old customers: Inevitably some customers are going to stop doing business with you. Some may get busy with work or the kids’ sports. They may become ill for a few months. Or they may just forget about you. Herein lies a gold-mine of opportunity.

Becoming an astute marketer is a process that will take time and money to master. Learning and implementing this one skill will ensure a steady flow of new customers to your door – a very necessary ingredient for a healthy cash flow and continued prosperity of your business.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.

Secrets of Growing Your Business Sensibly and Profitably in California – April 24, 2018

It appears that many small businesses believe in the age-old adage that says, “Build a better mouse trap, and the world will beat a path to your door.”

In the real world, this little piece of wisdom does not hold true.

Unless you have invented a totally unique product or service uncommon in the marketplace, it is very likely there are tens or even hundreds of businesses out there that are similar to yours.

Each day, the average American is bombarded by an average of 100 television commercials, 30 radio spots, 194 newspaper ads, and up to 10 direct mail solicitations.  This doesn’t even include telemarketers!

Competition for your customers’ money is fierce.  If you want to win the battle for their hearts and money, you must first prove that you understand them, and then you must find the right vehicle to “connect” with them.

Let’s talk about the fundamentals of marketing. It is getting the right message to the right people via the right media. Marketing means: “market first, message second, and media third” – in that order!  I often refer to them as the 3 Ms. Let’s look at each.

Market

Not every product appeals to everyone.  That’s why marketing is so vital; it is the process by which potential customers are identified and “targeted.”

Your target market is one that has high probability of purchasing your products or services and which you have selected for focused marketing activities. Unfortunately, most small-business owners get to their best prospects randomly – by throwing out their message to everybody and letting the right people find it.

This is like getting a message to your uncle in Manhattan by dropping 100,000 copies of your letter out of an airplane as you fly over New York. I refer to this as “blind archery.” Imagine launching 100 arrows while blindfolded.  You might hit a target or two, but think of what else you’ll hit along the way!

And arrows are one thing. A limited supply of dollars is another. If you market wisely, you’ll hit the target, and you won’t waste money.

Message

Your message is the words that crystallize or articulate the “uniqueness” of your business.

Why is your business unique?  What sets it apart?  What is that “something special” you can offer that no one else does?  How you answer these questions matters very much to how attractive your business will be to potential customers.

This can be identified as a “unique selling proposition,” or USP.  The USP is the heart of your business, and as such it should be the heart of your marketing.  All in all, your USP is the most powerful marketing tool you have.

The USP for Federal Express is “When it absolutely, positively has to be there.” They based it on a promise of delivery reliability.

Domino’s based their slogan on the fact that most pizza eaters don’t care how much stuff is on their pizza, but that it is hot, fresh, and delivered quickly. Their slogan goes as “Fresh, hot pizza in 30 minutes or less.”

Once you have defined your target market and your message, you are ready to move to the third M in Marketing, “Media.”

Media

Your marketing medium is the communication vehicle you use to deliver your marketing message. It’s important to choose a marketing medium that gives you the highest return on your marketing dollar. This means you want to choose the medium that delivers your marketing message to your targeted prospects at the least possible cost.

What I have seen most small-business owners do is market their product or service through one marketing medium only. So the florist will place a Yellow-Page ad and do nothing else to promote her business.

The auto mechanic will place an ad in the newspapers and not explore all the other marketing media available. The small-business owner must instead test several marketing media and use them in their arsenal of marketing media.

The fact is effective marketing is more an art than a science.  Don’t believe for a second that many of these techniques are obvious to everyone – they’re not. Only a few know and understand them. As one of those few, you’ll not only learn how to make your small business stay alive and thrive, but you’ll learn to dominate your marketplace.

For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.