Monday, July 26, 2010

Improve the World

I recently saw this video and enjoyed its message.  I think its message is clear - entrepreneurs are changing and improving the world.  Many people incorrectly think that entrepreneurs start businesses for money.  Money is a means to an end, while the challenge of building something that makes a difference is the reason they get up in the morning to pursue their passion.  Kudos to the entrepreneurs of the world - enjoy this video!

Monday, July 19, 2010

Tax Planning to Minimize Taxes

Compliance is not very interesting or fun according to most entrepreneurs or business owners.  That's why they usually put off discussing taxes until the very last moment possible.  Not only does this usually cost them more in taxes, but the entire process can be one of the most compelling things they do, if they do it right.

In a recent article I wrote for the American Express OPEN Forum, I share 4 Tips to Get the Most From Your Tax Planning.  In addition to using the right professionals, defining objectives, forecasting, and the right timing/frequency, I want to address one more element that underlines why so many fail to properly plan to save taxes - complexity.

Most businesses are complex organisms with many dynamic and ever-changing components to them.  It is hard enough to build a business in this difficult and extremely competitive and often litigious economy.  Most business owners and entrepreneurs are juggling many priorities, initiatives, and tasks to try to maintain or maybe even grow their businesses.  Adding another complexity, planning for tax, is often neglected with one of the following statements:

"Why should I plan for tax?  I will just pay what I owe, and planning cannot change how much income I make."

"I cannot understand why I have to pay more in taxes every year than I have brought home from my business.  But I just pay it because my CPA tells me too."

"Every year is a big question mark on what amount I will put on the check to the IRS.  I don't understand it, but I pay it and hope the IRS does not audit me."

Just typing those often-uttered sentences makes me cringe.  If you don't understand taxes, then it's time to start.  I'm not suggesting you become an expert, but the principles are not complex in theory, just in practice.  Understand the theory and take ownership of your tax situation.  It needs to be a priority to you because it is one of the major cash outflows of every business (and business owner).

Sorry, that was a little bit of a rant, but claiming ignorance is not a valid excuse, in my opinion.  Rely on your tax CPA and/or advisors to help you understand.  If you cannot understand them, then fire them and hire some who you can understand.  The point of all of this is that shying away from taxes and tax planning because they are complex is not acceptable.

Some tax planning strategies require adding some complexity to a business, and this is OK as long as the tax savings are far in excess of any extra costs to handle the additional complexity.  Embrace the complexity of taxes and tax planning and you will see your cash flow improve!

Monday, July 5, 2010

Are Your Numbers as Deceptive as an Eclipse?

[Author's Note: This post is not about the Twilight Series' release of its third movie.  I do, however, admit that my wife took me to the first two and will likely take me to the third soon.]

At 4:17am on Saturday, June 26th 2010 I saw the beginning of a lunar eclipse.  I was on an early-morning (or more like a middle of the night) hiking trip and we stopped to watch this rare occurrence (this was the first of only two this year).  What we initially saw was unimpressive.  At first, a dark cloud seemed to cover the upper arc of the moon.  The earth's shadow was barely beginning to interfere with what appeared to otherwise be a full moon.

As the morning carried on, the eclipse continued to black-out a quarter and then an entire half of the moon.  I have never seen anything like this before - it was amazing to watch.  If I was not aware that we were expecting a lunar eclipse, I may not have even noticed this phenomenon.  I wondered how many people, not knowing it was supposed to be a full moon, might have looked at the moon in those early morning hours without realizing what they were seeing.

Then, I couldn't help but relate this to one of the common business problems I see.  Many businesses will occasionally look at their numbers (in the form of financial statements or some other form of dashboard/KPI data) but the data and information they are looking at is not meaningful and is not helping them improve their business.  Why?  Because they lack context and comparison.  I took several "snapshots" of this event throughout the morning and ultimately I could comprehend what was happening.

Just as I grew to appreciate the eclipse as I saw it progress, others who perhaps only briefly looked at the moon once at any time that morning likely missed out on the eclipse altogether.  So, how do we solve this?  We have to put the numbers of the business into context against where we have been, where we are going, and what our competitors and industry are doing.

We refer to this as comparative analysis, and it works as simply as this.  If we generated $250,000 of sales this month, is that good or bad and what can we do to improve it?  First, we should understand what we have done in the past (last month, last year, same month last year, etc.) to understand if we are growing or shrinking.  Then we should compare it to what we were hoping to accomplish that month and if those sales are helping us to or hindering us from getting where we are headed.  Here's an example: if we had sales in the same month of the prior year of $200,000, and last month we had sales of $230,000, and we were planning on $240,000 to achieve our goals for the year, then we can call $250,000 in sales a very good month.

While this revenue example may seem very simple and like most businesses do some type of similar analysis, we need to consider if they are doing the same analysis on their lead generation, conversions, operational efficiencies, and other financial metrics.  This will truly put the entire month into perspective in terms of our performance with one exception - industry benchmarks.

How are we doing relative to others in our industry?  As much as we may claim to have an innovative business model, the truth is that business models have been around a long time and there is very little innovation possible (although there is at least a little).  Even if we feel we are better than our competitors, we can still learn from their numbers and we can use them effectively as benchmarks for our own performance.

Are your numbers deceptive like a lunar eclipse?  Avoid the deception with comparative techniques that will make your numbers more meaningful.  Ultimately, the more meaningful your numbers are the better decisions you will be able to make, which will help you improve your cash flow and profitability!