Archive for March, 2007

A big tax refund might feel like a windfall - free money! - but in reality it’s a zero-interest loan to the IRS. And zero interest means you’re actually losing ground when you take into account inflation.

So if you’re expecting a big refund from last year, fine tune your tax strategy for this year. Ask your CPA: given certain assumptions about business profitability, W-2, and personal deductions, how much are you likely to owe this year? Pay the minimum required to avoid underpayment penalties, and then tuck the rest aside in an interest-bearing account. Ask your bank about their short-term CDs, or go to bankrate.com to get a feel for the market. Five percent on $20,000 is $1,000 in interest. Now that’s free money.

On April 1, 2007, several cities and counties in California will have new sales tax rates. For the California State Board of Equalization (BOE) notice click here. Other California sales tax resources to bookmark:

• Insider tips for working with BOE sales tax in general
• Access to the most current rates for all California cities and counties
• Sales tax classes offered by the BOE
• Online tutorial about BOE sales tax.

A $1,500 watch run through the books as “Uniforms Expense.” Twenty dollar bills peeled off a big wad of cash at a construction site in lieu of paying hefty union overtime rates. The systematic re-routing of thousands of dollars in revenue so it never actually hits the books.

Everyone cheats on their taxes, right?  Well, actually no, they don’t. I doubt that the entrepreneurs we’ve worked with are the only ones in America who don’t cheat on their taxes. So if you extrapolate from our experience, hundreds of thousands of small business owners manage to succeed – and many get plenty rich — without cheating on their taxes.

Am I just being prudish? I don’t think so. There are a lot of good reasons not to cheat on your taxes, the first of which is that you don’t need to. The biggest tax problem I see among entrepreneurs is that they don’t proactively plan their tax strategy and end up paying too much to Uncle Sam.

In addition, the entrepreneurs I know have enough to worry about. The last thing they need is a constant fear of being audited, a sense of dread that their tax avoidance scheme will come crashing down on them. As Mark Twain said, “If you tell the truth you don’t have to remember anything.”

And if you cheat on your taxes in a major way, remembering is what you’ll have to do plenty of when it comes time to sell your business. During due diligence you have to swear up and down that your books are squeaky clean. Yet at the same time you’ll be arguing for a higher selling price because your prior period earnings were, shall we say, “understated” due to “robust” owner’s perqs. That’s an awkward situation to be in and can get in the way of doing a deal.

Do we ask clients to justify the business necessity of every single meal on their credit cards? Of course not. But when asked in the past to help someone keep two sets of books, I’ve politely declined. Setting aside the reasons above, the ethical considerations, and the professional liability, there’s a fatal flaw with cooking the books: you end up with bogus numbers that are just no good for business planning. So you might be saving money on taxes, but by running blind in other respects, how much money are you leaving on the table?

A few weeks ago I wrote about QuickBooks Online, but what about other Web 2.0 accounting programs? In the small business on-demand accounting space we haven’t seen a clear leader emerge yet, but development activity is intense and we’re tracking these three trends:

1. Demanding a lot from “on-demand”. Vendors are writing code like crazy, stuffing an array of features into their Software-As-A-Service (SaaS) offerings. For example: dashboards, Key Performance Indicators (KPIs), Point of Sale (POS), web store / shopping cart, time and billing, A/R, A/P, Enterprise Resource Planning (ERP), purchasing, inventory, payroll, Customer Relationship Management (CRM), merchant card service, project management, Electronic Data Interchange (EDI), bar coding, shipping management, document and image management, government contract compliance…and the list goes on. It’s as if once the “software” is liberated from the shrink wrap box, we expect it to do everything.

2. Niche market excellence. At the same time, several vendors tackle a narrow segment of the online accounting space. One popular example: invoicing and accounts receivable management. Check out FreshBooks and Blinksale. With such a narrow focus you get a well-honed, easy-to-use service but since they handle revenues but not expenses, you can’t create a full Profit & Loss (P&L) or Balance Sheet, the two most important financial reports for managing your business, applying for bank loans, and doing tax returns. I’ve heard that some entrepreneurs combine the revenue data from the invoicing app with expenses tracked in Excel, and…that’s far enough for me – too problematic.

3. Integration. Not surprisingly, then, we’re seeing efforts at integration between apps. For instance both Blinksale and FreshBooks will integrate with BaseCamp’s project management and time tracking systems. Good, but not there yet in my opinion: you still can’t print financial statements. QuickBooks Online Edition is a full general ledger system that prints financial statements, and Intuit’s strategy is to integrate this service with third party apps and custom developers. NetSuite takes it a step further by including more functions into its online offering, and is taking aim at QuickBooks directly. The danger of course is that the all-in-one software might not do a great job at individual components.

The promise of Web 2.0 accounting is enormous – quick start, small upfront investment, and anywhere/anytime access for your financial team – the question now is which combinations of full general ledger and niche apps will work best for entrepreneurs. We’ll keep tracking the trends, and please let us know what you’re seeing out there, too, in this new frontier.

“I almost never work for clients who get multiple bids; it’s a huge waste of my time.”

Ring true?

It’s a quote from a general contractor in Saturday’s Sweat Equity column in the S.F. Chronicle’s Home & Garden section. It hits the nail on the head (pardon the pun) in terms of something all business people face: the price-service gap between us and our customers.

The article addresses, for instance, how customers don’t understand how expensive it is to run a legitimate business – licensed, insured, pays all taxes, etc. Many contractors operate on profit margins of less than five percent. That means, to be concrete, that you do a million dollars’ worth of work, you take a million dollars’ worth of risk, and you make a $50,000 profit. A lot can go wrong when doing a million dollars’ worth of work.

But from the customer’s standpoint, “Who cares?” She or he has every right to expect good service at a decent price from nice people, and doesn’t know the ins and outs of your business. So how do you bridge the gap?

1. Sell the Invisible. Maybe your customer would be thrilled to pay your price but doesn’t yet know why you’re worth it. I’m inspired here by Harry Beckwith’s 1997 yet ever-so-current book on marketing.
2. Know your costs. It’s the only way you’ll know how much you need to charge to make a profit.
3. Know your industry. How do your costs, your prices, and your profits stack up? What’s considered reasonable? Benchmark your business.
4. Don’t be greedy. If chance delivers you an occasional windfall – fantastic! But never gouge a customer: it’s not ethical, and it’s not a good long-term business strategy.
5. Be willing to walk away. Walk away to protect your business, yes, but also to protect your customer, who won’t be happy if you say “yes” to the wrong project.