Jim Payne's Blog

1099 Rules

2010-11-12T10:54:00.000-05:00

Complying with government reporting requirements have been greatly expanded starting in January 2011. Congress figured that that it could theoretically pay for some of its spending by giving the IRS more information to chase down unreported income. All business owners, including rental property owners, need to pay attention to this.

For as long as I can remember, and I got out of College in 1973, the rule has been that businesses who pay any one individual more $600 in a calendar year for services must report the payment total on a IRS Form 1099-MISC. The IRS usually did not do much with this information, in fact it was reported several times that various service centers would use them as fuel for their furnaces since they didn’t have the people to enter the information. Those 1099’s that did get inputted where matched by the computer to tax returns and in many cases automated letters were sent out asking for an explanation of the differences. Most tax preparer’s have stories of the difficulty of dealing with the IRS on these issues even though the 1099 was obviously in error and the taxpayer could not have possibly provided any service to the 1099 reporter who operated on a different coast. The burden of proof was on us to prove that we didn’t get the money or somehow get the reporting company to amend their 1099. So get ready for a lot of problems with this down the road.

The big changes this year are:

The Small Business Jobs Act expands the 1099 reporting requirements to include rental property owners starting January 1, 2011. Additionally it significantly increased the penalties for not reporting to $30 for each unreported 1099 to a maximum of $75,000 beginning in 2012.
The Patent Protection and Affordable Care Act or Obama Care as most of us know it requires that beginning in 2012 the 1099 reporting is greatly expanded to include all payments by cash or check to all businesses, including corporations, for any and all manner of products or services purchased in a calendar year.

Why did they not include payments by credit cards? The credit card processing companies are already required to report the totals paid to each of their customers electronically to the IRS. Congress wanted to avoid as much as possible double accounting of reported receipts.

What does this mean to you the business owner? Two things: You are at substantial risk for penalties if you don’t comply and secondly there will be a lot more letters issued by the IRS asking for an explanation of the differences between your tax return and the reported 1099’s.

What should you do about this? As a minimum, require any company or individual to provide you with a form W-9 before you issue any payments. You must have their identification number in order to prepare the 1099’s at year-end. It would also behoove you to think about what reports you get from your accounting system. Sooner or later you are probably going to need to chase down the differences in what is in your accounting records with some list produced of 1099’s produced by the IRS.

What else can you do? Support the Fair Tax by going to the Fair Tax Organziation web site at http://fairtax.org/. The costs for us as a nation to comply with this and the rest of the current tax system are staggering. We need to get back on track of producing ever higher GDP per capita numbers and wasting our time on this Mickey Mouse stuff is hurting our productivty as a nation.

First Steps in Inproving Productivity

2010-11-09T10:41:00.000-05:00

Economists are in agreement that the only way to improve profits in the long-term is to improve productivity. Events and luck can produce shortages of your products and services that may result in higher demand from your customers, but it won’t last. Competitive markets will eventually bring in competition to drive those prices back down. Only the ability to produce more products and services with fewer inputs will allow you to sustain higher profits.

This can be a daunting task depending upon how you look at it. The idea of spending the rest of your life constantly searching for process improvements can be a downright depressing thought. But, isn’t this the historical definition of the purpose of management -- to produce more outputs with less inputs. Maybe the real problem is that most of us in small business have no formal training in management and as a result we don’t think of managing our business in a manner other than giving orders and overseeing work. If we had, maybe we would see this as a great opportunity rather than a drudge task that takes them away from the sexier role of being a leader. The fact that most small business owners will not make regular productivity reviews a part of their routine means less competition for those that do.

Okay, so you have decided that the economists are right and productivity is the key to better profits. Now what do you do? The old saw “You can’t manage it unless you can measure it” is particularly true when it comes to productivity. The first step is to develop measures. This works best by looking at your major processes and finding some staple of the output that will most likely always be around. The purchasing system is probably always going to produce purchase orders as its core activity. Therefore, the natural measure for the purchasing system productivity is the Cost per Purchase Order. Similarly, the natural measure for the sales order process is the total cost of recording and delivery of the products divided by the number of sales orders.

Once you have established measures, the accounting system must be changed to report the total costs to be related to the measures. This is difficult initially for most small businesses since it is a concept change from classifying costs by the type of costs to grouping them in the process that they are used. This step has some investment requirements, but is not all that expensive to maintain once the system is setup and working.

Once these two steps are complete, you will have some management tools available to you that will allow you to constantly fine tune those processes. These tools will allow you to make changes to the process and give you empirical evidence that the changes worked or did not work. Over time, constant improvement to your processes will lead to higher productivity and higher profits.

Is empting the trash productive?

2010-11-05T12:20:00.000-04:00

In the hopes of saving money, some government units and colleges are requiring their employees to empty their own trash in order to save in custodial costs. To give their employees an incentive to produce less trash they are also giving them smaller trash cans. What a plan. Cut your custodial costs while saving the environment at the same time.

While taking out the trash for most small people is something we do without a formal plan, I certainly have to question the logic of these bigger organizations. I can certainly imagine that their claim of cutting payouts to custodial employees and contractors is true. However, transferring work from the lower paid custodian to higher paid employees would even more certainly produce lower productivity results. Making the trash cans smaller would magnify this even more by making the higher paid employees empty their trash more often. Just imagine the cost of having a $100k per year person making a couple of trips a day to some central trash pickup location. Of course that cost will never show up in their accounting records making it appear that they have cut their total custodial costs when in fact they have increased it.

It’s easy to lose sight of the overall goal of any organization. To produce more output with less input. Shifting costs around to higher paid employees might do something for their humility, but it does nothing for their productivity.

IRS Audits are going to be more difficult

2010-11-02T10:15:00.000-04:00

It has been reported that the IRS recently purchased more than 1,000 copies of QuickBooks 2010 to allow their agents to load all of the target taxpayers accounting data from full backups. It seems like it would be a relatively easy step from there to produce customized analysis of the data to do such things as produce a graph of cash vs. check and credit card sales.

This is clearly going to produce a very uncomfortable situation for taxpayers and their representatives. In the past, IRS policy has been to mostly avoid fishing expeditions. Loading all of the taxpayer’s data on to a government owned notebook and performing computerized analysis is fishing with the biggest fish finder around. Worse is the question of what happens to that data after the audit is completed? I know that in the back of my mind I am going to wonder for years whether the agent deleted the files or they are now sitting on some server somewhere.

If you believe that the IRS does not have the power to demand your backup files, think again. Revenue Procedure 98-25 provides IRS Agents with the authority to request financial records in electronic form when those records are maintained electronically. Additionally, Internal Revenue Code Section 7601 gives them broad powers to investigate for unpaid taxes including what we might call a “fishing expedition.” Unlike the TV crime shows, they are not required to have any reasonable grounds to justify a look-see at your records.

What can you do about this? Probably not much other than to recognize that what you are doing today in your bookkeeping procedures might be looked at some years in the future by either a human IRS agent or an IRS statistics gathering program.

Actually, there is one big thing you can do about this and that is to support the passage of the Fair Tax Act. The Fair Tax pushes much of the burden of proof onto the Government where it should be. For more information about the Fair Tax, go to http://fairtax.org. It’s past time to bring some sanity to our methods of collecting taxes.

Software Design's Impact on Productivity

2010-10-30T12:11:00.000-04:00

The design phase of a software project will have ramifications to the users far beyond just getting it to work. The users’ productivity itself will be impacted by decisions made in the design phase. Here is a list of productivity issues to think about in the design phase of a software project:

1. People need to see what is only relevant to them in what they do. Too much information slows people down. This is probably the biggest productivity issue of all.

2. Minimize options. The more buttons on a screen, the more the user has to think about the process and how to proceed. This also has a negative impact on new employee training. They have to try all the buttons to really understand how the software works.

3. Involve the Users early in the design process. Release beta versions of the software as soon as possible and make it easy for the users to respond with their likes and dislikes. Finding out what works and does not work for users early in the project allows for relatively cheap changes with a big impact on productivity down the road.

4. Minimize innovation. Innovate only to solve technical challenges or to gain a specific business advantage. Innovation for innovations sake is hard to resist for most technical people, but it is more expensive and the outcome is less than certain. Changes to the look and feel of input screens, while neat, makes it tougher on the users.

5. Keep the coding simple. Simple coding is easier to read and understand a year or more later when all the design details are no longer fresh. Easier reading makes it easier to throw some little change into the mix and avoiding any cascading impact on other programs.

Better Passwords

2010-10-29T12:10:00.000-04:00

Here is a super idea on using passwords. Most of us probably have a couple of basic passwords that we use to sign up with on various websites. The problem is that if any one of those sites becomes compromised, the key to all the other sites could become available to a hacker. To better control this problem, David H. Freedman wrote an article in the NY Times suggesting that you design a different password for each site using the following.

Come up with a simple formula for generating passwords in your head that’s based on the name of the site or organization you’re signing up with. For example, you might take the name of the site (tractortires.com), drop everything but the first six characters to the left of the “dot” (tracto), reverse the first three letters (artcto), add the number “5″ after the third character and a capital “Z” at the end (art5ctoZ). By this formula, “plan9movie.net” gets the password “alp5n9mZ,” and “cellphone.org” yields “lec5lphZ.”

You’ll also need a trick for dealing with site or organization names that have fewer than six letters, because you’ll want an eight-character password. You might, for example, just add in extra “5″s, so that the password for beer.net becomes eebr555Z. Make up your own formula, and don’t share it with anyone. It may sound a bit complicated, but after doing it a few times you’ll be able to do it in your sleep, and you’ll have a unique, impossible-to-guess password for every one of your accounts and sites without having to write anything down. The formula could be easily cracked, of course, but a hacker would need to get his hands on at least a few of your different passwords to figure it out.

This rather simple approach beats all of the others I have heard of including the idea of changing passwords every 30 days which nobody will do more than 3 months in a row.

How to Improve your Construction Firms Profitability

2010-10-19T10:38:00.000-04:00

Every economist will tell you that the key to making more money than you make today is to increase your productivity. So, just how the heck do you do that? The answer is simple, improve how you do business. For small construction firms, the major deficiency that I see in their processes is how they do bids.

Most small firms don’t know what it costs them to bid a job. Absolutely no clue! Some of them can ball park what the last one cost, but they could not even hazard a guess on what their annual cost is. So, if everybody is bad does it make a difference? The answer is yes, if you want to make more money than the rest of the industry.

Just picture what an advantage you would have, not only knowing what it costs to bid, but having the cheapest bid system around. You could bid more often than your competitors for the same amount of money. You could also know when it’s profitable to bid and when it’s not. Just think about what this advantage could do for your bottom line over the life time of your business.

Once you begin to realize how important your bid process is to your firm, the next question is how do you make it more productive. The answer to this will never be a cookie cutter approach of downloading some software package from the web and begin pounding away. The problem is that many factors come into developing a better process that must be customized to your business and its strengths and weaknesses. Here are a few of the things to think about when it comes to getting started on improving your process.

1. This project will never be complete. Nature never remains static and your business is part of nature and always changing. Therefore, you should adopt a mindset that your bid process will always need more improvements and you need tools built into that process to monitor how it is doing.

2. It is the entire process and how it works together that determines its productivity. Bidding does involve a lot of accounting and software will be a major part of the process. But a lot of other factors are also included such as how experienced are the field people at inspecting the site and how efficiently are they scheduled for those visits.

3. Every business process has an error rate and fixing errors are far more costly than getting it right the first time. Your bid process should be able to monitor this error rate and its costs.

4. Your business and its bid process are unique to every other business. Given the cost of bidding and the potential benefit of getting it right, this is probably great time to consider outside help to get a customized approach to making bids more affordable.

How will the Fair Tax Impact you?

2010-10-18T15:12:00.000-04:00

Our current tax system is costing us big time in compliance costs. The complexity is legendary and reached a point of absurdity. The most moral and ethical person in the world devoting 100% of their time to calculating the correct tax has no good reason for believing that they have succeeded at their task. It’s time for real reform and that means consideration of the Fair Tax, a national sales tax on consumption to replace the Income, Payroll, and Estate tax system. For information about the proposed Fair Tax Act, go to the Fair Tax Organization website at http://fairtax.org.

How will the adoption of the Fair Tax impact the different parties in society? I have compiled the following list to make it easy to figure out.

All Businesses:
• Corporate Income Tax Returns and 941 go away.
• All individual Income tax returns, including those of the self-employed and related self-employment taxes go away.
• Eliminates the need to hire professionals for tax planning purposes. All decisions, such as whether or not to purchase a piece of equipment or another business, can be made purely on the economic merits without considering the tax impact.
• Will be required to report employee gross pay once a year. This information is used to calculate individual social security eligibility and benefits.
• Exempt from paying the Fair Tax on any of its purchases provided the property is used in the business or is for resale. Failure to show a profit in at least 2 of the last 3 years could result in being reclassified as a hobby rather than a business.
• Must register as a sell with their state sales tax authority.
• May claim reasonable fees do to a direct dispute with the Government unless the Government can establish that its position was substantially justified.
• Must keep records of all purchases that were exempted from the Fair Tax for a period of seven years.
• Must remit the Fair Tax on goods or services given as gifts (i.e. Christmas turkeys, employee discounts) if purchased with an exemption certificate.

Retail & Service Businesses (includes quasi government units such as the USPO and Amtrak that receive payments from private individuals for goods and services):
• Must collect and pay the sales tax.
• Get a fee of .0025 of gross collections for their efforts.
• Liable for the tax unless they retain a copy of the registered seller certificate or other qualification statement issued by their state.
• Credit for sales tax paid on bad debts (assumes the seller elected the accrual basis).
• Insurance companies must report and pay Fair Tax on the amount paid for the service i.e. not the claims portion of the premium.
• Refunds for Fair Tax overpayments must be made within 60 days of the claim.
• Fair Tax return is due on the 15th of the following month.
• Small sellers that collect less $20K tax for the previous 12 months must remit by the 15th of the following month.
• Medium sellers that collect between $20K and $100K in any of the previous 12 months must deposit the collected taxes in a separate bank account each week within 3 business days. Remittance is required by the 15th of the following month.
• Large sellers must deposit all Fair Tax collected in a separate bank account and remit on a weekly basis. Additionally, they must post a bond equal to the greater of $100k or 1.5 times the average monthly tax liability for the last six months.
• Burden of proof regarding exempt sales is on the Government if the seller has the properly completed intermediate sale or export sale certificate.
• Must keep records to include copies of all tax receipts provided to customers, copies of intermediate and export sales records, copies of certificates received from customers.
• Must provide customers with a receipt for each transaction that includes the price without the Fair Tax, the Fair Tax amount and rate, date of sale and the name and registration number of the seller. Exceptions for vending and financial intermediation services.
• Gaming businesses must report the tax based upon their gross receipts rather than when they sell lottery tickets or chips.

Not-for-profit organizations:
• Issued a “Qualification Certificate” by the state.
• Services provided at no charge are exempt from the Fair Tax.
• Products or services sold are taxable.

State Governments and Agencies:
• Can elect to collect the federal tax on behalf of the federal government for a fee.
• Must pay the Fair Tax on all purchases including the gross wages paid their employees. (Because governments normally do not charge for their service directly).

All Individuals:
• All income tax returns go away.
• All withholding and social security taxes go away from pay checks.
• Get a monthly “Prebate” check to reimburse them for the Fair Tax paid on basic living requirements.
• Liable for the tax unless they pay it to the seller and has a receipt with the amount of the tax separately stated.
• Liable for the tax on direct imports.
• Liable for the tax on goods purchased for business use and subsequently converted to private use.
• Up to $1200 per year in payments received by a person not in connection with a business are exempt i.e babysitting jobs.
• First $400 of directly imported goods per year does not have to be reported.
• Can expect an average price increase in the products they buy of between 1 and 2 percent. The tax itself is 23% but economic studies have shown that the average price paid today includes the buildup of income and payroll taxes of 21% which will be eliminated.

Investors:
• Earnings from investments are not taxed.
• Fees related to earnings are taxed.

Improving Business Productivity

2010-10-17T12:35:00.000-04:00

In the end, it is productivity that will produce better long-term profits and nothing else. Yes, you could come up with a great sales slogan or package your product in such a way that people will pay a higher price for it. But such techniques will not produce superior profits for the long-term simply because your competitors will emulate you and commoditize the product. Improving productivity is the only reliable technique for getting more money to your bottom line.

So, how do you get your business to be more productive? This boils down to having better processes for doing business and who would better know how to improve those processes but the people working in them. However, as we all know, getting those people to think about efficiency and then actually speak up about it is a monumental task all in its own. So here is an idea that I recently read about that might work.

Have an “Idea Campaign” that runs for maybe 2 weeks soliciting suggestions that might reduce waste and inefficiency. To provide the right incentive to participate, offer a reward to share the first year’s savings with whoever makes a suggestion this is actually implemented. Be upfront in your requirements that the suggestion be measurable in order to qualify.

There are lots of stories about big companies using this approach to save millions. I can think of no reason why it couldn’t be used by small companies to save thousands while giving employees a good reason to think of their company in a different light.

Understanding your Cost Curve

2010-10-12T15:46:00.000-04:00

I recently visited a new company using high tech equipment to frame pictures that were uploaded from the web by their customers. It is an impressive operation and it got me to thinking about a useful tool for anybody in lite manufacturing. A Cost Curve Graph showing the operational cost of producing the product at various levels of production.

The basic breakeven formula of (Variable Cost Percentage * Quantity) + Fixed Costs / Quantity would produce the total cost for any particular quantity. The steps in producing the Cost Curve Graph using a spreadsheet would be as follows:

Set the Variable Cost Percentage and the Fixed Costs at the top of the sheet.
Create a column for the Production Quantity.
Create a second column for the calculation of the per unit costs using the breakeven formula.
Create a range of the various quantities from zero to the maximum quantity your operations could handle in the first column.
Copy the calculation formula down the page.
Create a graph of the two columns.

What could you do with the graph?

You could use it as an easy reference when quoting orders.
You change the fixed costs to equal your weekly nut and use it as an estimator of profit for that week.
You could use it to plan your capital improvements. At some point in time, maybe around 80% of capacity, your cost per unit begins to climb as bottlenecks in the production process start to develop.

There is a Cost to Flexibility in Business Design

2009-06-29T11:55:00.001-04:00

The future is not predictable with any precession. Yes, we can say our busy season is between the months of X and Y, but what the actual demand in those months will be is a guess. In normal times, i.e. non-recessionary, we might be able to make pretty good guesses based upon the prior year. However, the last two years has probably shown you the fallacy of using the prior year as an estimate of the current year. So, what does one do if they don’t have a good working crystal ball?

The answer is to design your business to be flexible so that you can adapt to whatever the future brings. There are two basic categories for this design – decision making and financial resources. This flexibility does come with a cost.

Deciding how you are going to decide is a key, low cost, process that can return millions. Decentralized decision making, the willingness to revisit previous decisions, and decisions made with the implementation tied to a contingency are all factors that you can build into the decision process that will allow you to adopt more quickly. But, to make this work you must also maintain the financial resources necessary to implement the changes, and this is not free.

Maintaining a low debt/equity ratio and a higher than average current ratio means that your resources are not all committed. But the very fact that they are not committed means that your profitability is not as high as it might be. You can think of this as taking lower profits in order to maintain a level of safety. You can ballpark what this safety factor is costing you in lower profits by calculating the total amount of additional equity that is not invested in operations times the operating profit percentage.

The Scalable Company

2009-03-09T14:40:00.002-04:00

Software designers are always worried about the scalability of their programs. That is “how easily can the package be expanded if the number of users or transactions were to triple or quadruple?” Businesses do the same thing, although usually not by design. If a process gets to be a problem, then it is redesigned at that time in order to more efficiently handle expected future volumes. The current recession however shows that there is also a need to contract at times, which got me to thinking about what a “Scalable Company” might look like.

Actually, a few minutes thought will give you an ‘ah ha’ moment in which you realize that a Scalable Company is simply one that management, when given the option of a variable vs. a fixed cost, they always elect the variable. These companies avoid operational leverage like the plague and as a result there bottom line isn’t as good when sales are booming, but they have a much easier time adjusting to slow years since their fixed cost “nut” is small. Once I realized this, it was an easy start to producing a list of characteristics that would belong to a Scalable Company:

Low inventories – pays more for shipping less than idea volumes, i.e. LTL, and foregoes many volume discounts.

Salaries - negotiates lower base salaries coupled with a profit sharing plan for employees with salary plans. This makes their wages behave a little more like commissioned people. Wherever practical, commission plans are offered over straight salary.

Pension plans elect to use profit sharing rather than safe-harbor options for company matches.

Building rental agreements have a fixed, below market share, component and a percentage of sales.

Long-term debts are structured to keep the payments low while allowing rapid pay-down in good times.

Rental equipment is preferred to ownership.

Business processes are highly automated so that can continue to function even if the number of people using them decline.

Fringe benefits are few and do not include complex qualified plans.

Advertising and other agreements always allow for an adjustment downward in volume allowing the business to elect to forgo discounts during the agreement period if their needs decrease.

Is the Scalable Company a good idea? Well maybe, after all there are a lot of businesses currently paying the price for not being able to contract as consumer demand declined. However, there is always the danger of preparing to fight the last war rather than the one that will actually happen. That said, once the recovery has happened and we have a few good years behind us, you might want to prepare for the next down-turn by making your business more scalable.

What should you be doing during a recession?

2009-02-25T17:04:00.001-05:00

The answer is mostly the same things when the economy is not in a recession – taking care of basics first. These things include:
• Interview perspective employees regularly and don’t try and hide it. Regular interviewing has a lot of advantages. It keeps your interviewing skills sharp and provides you with a lot of recent resumes should you need someone in a hurry. It also puts your staff on notice that they are not indispensible.
• Adjust your marketing plans to be in-line with expected sales. Spending more on advertising when people aren’t hitting the doors might seem like the right thing, but in my experience, if the public isn’t ready to buy, they won’t. Conversely, spending nothing is probably not a wise idea either. The few people that are spending need to know that you are still in business. I believe that the better plan is to spend no more and no less than what you normally would as a percentage of the sales that you can expect.
• Treat your customers better than ever. They are always valuable, but today more than ever.
• Keep your premises looking clean, neat and the shelves stocked. You need to always appear to be ready to do business even if the number of people coming through the doors is down.
• Evaluate one of your major business processes each week. Operating on a reduced staff as many businesses are today puts your staff under a considerable amount of stress. Stress that will eventually affect your customers. This can be reduced by reviewing and eliminating things that people do that are no longer as important as they once might have been.

As the leader of your business, it’s always your job to be looking ahead and only thing that I know for certain in these uncertain times is that this recession, like all the others before it, will eventually pass into history.

Book Review – The Great Depression Ahead by Harry S. Dent, Jr.

2009-02-23T19:26:00.001-05:00

If you really want to get depressed, this is the book for you. I bought two copies of this new release, one for me and another for a client. However, I haven’t yet sent the client, a retailer, his copy because I was afraid he had enough problems with the current economy that adding Mr. Dent’s predictions of the future might be too much. Sooner or later I will have to deliver it because I suspect Mr. Dent is more right than he is wrong.

Predicting the future is extremely problematic as any historian will tell you. We only have the current trend lines to work with in an increasing interdependent and complex world that will undoubtedly produce unpredictable changes in those trend lines. People who read Thomas Malthus’ An Essay of the Principle of Population also had good reasons to believe that his predictions of population growth vs. food production would most certainly lead to mass starvation. Nobody of that time period could have foreseen the benefits that technology would eventually produce in the efficiency of production. Nor, could they have foreseen the decline in population growth rates by modern industrial societies. It turns out that the desire to have a lot of kids was mostly driven by potential economic benefits rather than some natural desire to produce as many copies of your genes as possible. That said, I think Mr. Dent’s approach to prediction is much more solid than those of all the experts that the cable news people constantly parade in front of us.

I have read Mr. Dent’s previous two books predicting great time from the 80’s onward. He was certainly right for the most part. He has also made some fairly large flubs including the prediction that the Dow would reach 40,000. This miss must have stung, because I have seen several explanations from him regarding how he was right except for things like dollar demand, etc. The current recession was not predicted in his earlier books which is understandable since the root cause of this downturn appears to be systemic rather than demographic driven. However, it is apparent that this recession is going to be longer than most which might be the result of it running into the demographic slow down in spending that Mr. Dent did predict.

I highly recommend that every business owner read this book. Demographics is probably the best explanation for a good part of why you have a series of good years and then a demand drop off when you are essentially doing the same thing for the whole period. The net gain or loss of population fitting your customer profiles might be the best predictor of the future for your business. I would net bet the farm on his predictions, but I would certainly consider them as possibilities.

Business Cyles are Alive and Well

2009-01-24T12:30:00.003-05:00

When the economy is booming along, we occasionally hear people theorize that business cycles have lost their significance. Usually, this prophecy is based upon the idea that the Government and the Fed have gotten so good at managing the money supply, only small amounts of inflation and deflation are needed to keep everything on course. The current recession makes this idea look kind of silly, but we will get through this and sooner or later the theory will resurface.

Capitalism has proven to be a great motivator and in conjunction with open markets it has been the proven model for producing economic efficiency. However, it does have at least two forms of instability built into the system that will always be a part of it.

Old ways of doing business are constantly being challenged by people with new ideas in the hopes that their concepts will make them wealthy. A certain number of times they succeed which puts the old businesses out of business.

Business owners are incurable optimists about the demand for their products and services, otherwise why would they be in the business. This optimism drives them to over inventory which inevitably produces an oversupply and eventually a slowdown as they try to get those inventory levels back under control.

Recognizing that business cycles are an inevitable and natural part of life can greatly improve your business and investment planning. The tendency for most of us is to think that the next day, month, quarter or year will be a lot like yesterday. It is a mistake to think this way. Better to recognize that we are somewhere around the bottom of a recession and that sooner or later the recovery is going to happen. It’s not hard for me to picture a few years in the future wishing I had bought a lot of Ford stock when it was $2 a share.

Identifying your Business Processes

2009-01-10T14:19:00.003-05:00

A process is any set of repetitive steps. It’s important to have a process starting and ending place that makes sense for your size business. Every small retail chain has these processes that make them money.

Purchasing process – starts with a decision by the store manager to replenish the inventory, through the receipt of goods by the store and ends with payment of the vendor’s invoice by the accounting department.
Sales process – starts when a potential customer enters the door and ends with their commitment to buy.
Delivery process – starts with the customer commitment to buy, through their receipt of goods and ends with their payment in the bank, including all the necessary accounting.

Additionally, there are a number of other processes your business may have, such as:

Payroll
Media buying
Store cleaning
Return Goods Process

Shaving just a little bit of time and cost off any of the process steps has a significant impact when viewed over any 12 month period. If lean mean operations are your goal, the process steps is where you need to be focused.

Business Process Strategy

2009-01-10T13:57:00.002-05:00

Trying to be great at all things is a guaranteed loser. Your business must be truly great at something that appeals to your customers and adequate at all others. When you identify what you are, or hope to be great at, you need to identify all those business process that support that “one thing”.

For example, let’s say your “one thing” is superior delivery. You get it there on time, every time, with all the right stuff. That’s why your customers prize you over your competitors. Obviously, your delivery systems must be superb. Additionally, the systems that directly support the delivery systems must be above average. Your inventory system needs to provide the goods for delivery on time, every time. However, if your billing system isn’t the world’s greatest, your customers won’t leave. If billing was so important to them, they would already have left for the competitor with the superior billing process that probably isn’t that good at delivering on time.

When you identify the processes critical for the application of your business strategy, you know what processes need to be constantly improved to stay on top of your game. I recommend you formally review these systems at least once a year to explore what else can be done to keep them in superb shape.

The other processes only require being adequate to good. To spend money and time building a truly superb payroll system when your business advantage is speedy delivery is a waste of resources and poor management. Instead, regularly review the list of these processes and ask, “Is this business process adequate?” Fix those that are not and then go back to work on your critical processes.

Profitability Principal 3 - Profits and Cash Flow are usually not the same thing.

2008-09-13T16:38:00.003-04:00

Cash either leads or lags profits. An increase in your accounts receivable balance means that while sales may be up, the cash has yet to come in. Conversely, you could be loosing money and not realize it due to strong cash flow produced by lowering accounts receivable and inventory balances.

It’s not all that hard to temporarily produce positive cash flow while suffering a loss of profits. A new loan will do it. However, the only way to produce long-term positive cash flow is to produce profits. You can’t borrow your way to prosperity so concentrate your management time on producing profits rather than cash.

There are two big factors that produce a difference between cash flow and profits. Accounts receivable and more importantly inventory levels. Failure to keep your A/R current and your inventory levels low will begin sucking up cash faster than your profits can generate them. Additionally, high inventory and receivables inevitably results in eventual losses due to write-offs. Many times these losses are not discovered until year-end when it is too late to do anything about it.

If a business that is in danger of collapsing then the only thing that counts is cash flow, not profits. This strategy only buys time for a new plan to work. With a new plan, maybe you can save it. Without a new plan there is no chance for success. In my experience, you are better off minimizing the loss to the owner by giving it up and moving on with your life.

Profitability Principal 2 - In order for any profitability formula to succeed you must make sure that it does not conflict with your primary strategy.

2008-09-13T16:32:00.005-04:00

You can’t be all things to all people and businesses are no different. Adopting a strategy of being extraordinarily good at all things produces a business that is mediocre at best with nothing to differentiate them from their competitors.

Successful retailers have, by design or happenstance, become very good at one or two things and at least adequate at all other things. That “One Thing”, be it speedy delivery or depth of product offerings, is not to be trifled with lightly.

Make sure that any changes to your business processes do not impede your
excellence at that “One Thing” or you might end up with a net loss due to lower
sales.

Profitability Principal 1 - It's the process that makes long-term profits.

2008-09-13T16:15:00.004-04:00

This principal took me the longest to learn. Let’s say you decide that you want to reduce your inventory levels. You could achieve this by requiring that all purchase orders be approved by you. Then you could then reduce the quantities ordered for products that are being over ordered. Inventory levels will then begin to drop.

However, this will only work until such time that you get busy with other projects. The PO's start to backup and you start rubber stamping them to eliminate the backlog. Eventually, the inventory levels slip back to their previous levels. To permanently lower the inventory levels you have to make some change in the business process so that the system will produce the needed results without the necessity of supervisory intervention.