Category: Accounting

What is Your Brand?

~ C.O.R.E. Beliefs ~ Leave a comment

Good morning.  It’s a little overcast this morning here in Vancouver but it should burn off shortly and we ought to have a very nice day today.

I think that many small businesses completely misunderstand the idea of a Brand.  We hear it often and think it has something to do with a cool business name, an imaginary slogan, a logo, a phone number which spells out your business name, domain name: You get the picture.

These items are very important but they are not your Brand – they support your Brand.  Now, what is a Brand?

The best definition of a Brand I have found comes from Al Reis and it is really about “Your Customer’s Image of You.”

If your customers think you are the best widget-maker in town, that is your Brand.  If your customers think you are the only lawyer in town who calls back within 4 hours, that is your Brand.  Their perception becomes your reality and your concern is capitalizing on this and helping spread your Brand.

What do you want your customers talking about when the opportunity arises for them to potentially refer you to a colleague who fits your ideal customer profile?  This is your Brand talking.  Is your current customer missing a vital tool to help you grow your business?

By identifying your Brand, you can start to align your other marketing overhead expenses to support your image.  For instance, if your image in the marketplace is a highly knowledgeable commercial realtor, are you spending your marketing dollars and keeping potential leads, current prospects, and clients informed about real estate trends?  My good friend Jim West of Coldwell Banker does this better than anyone I know.  I am fortunate to be able to call Jim a good friend for many years and he always goes out of his way to share his wealth of information.

His Brand is my image of him.  He cultivates this and when the opportunity comes up to have a conversation with someone about commercial real estate, guess who is top of mind?  By the way, the imagine I have of Jim is exactly the same image that all of Jim’s network sees.  He ensures a consistent message and this is the important part.

The best part of sharing your Brand is that it doesn’t need to consume your entire marketing budget.  Once you identify a possible Brand issue, create a few flyers, perhaps update your website, but most of all, talk the talk.  If you are the most approachable Dentist in town, then cultivate that.  Do presentations to local community groups with lots of Q&A, ask to speak at a school assembly.  You get the point.  Expand on your approachability and enhance your Brand.

If you are unsure of your real Brand, ask a few customers what makes you different than every other widget-maker.  They might be shocked, they might even say they never even think about it as you feel like a perfect fit as you get them (what a Brand!), but their response might open up new avenues for spreading your message and growing your business.

I would encourage you to have a conversation about your marketing expenses and if they are really generating the revenues you would like with your accounting professional.  If you are not currently working with an accountant or would like to have a second opinion, feel free to contact me to set up a free no obligation consultation about your business.

Have a great Tuesday.

Owning versus Renting Continued

~ C.O.R.E. Beliefs ~ Leave a comment

Good morning and happy Monday!  I hope everyone had a great weekend.  Mine was filled with time in the gym, laundry and a walk around the Fort.  Plus lots of reading and the occasional show on Netflix.  A very nice weekend indeed.

For small business owners, there is one part of the own versus rent conversation that concerns them; and it has to do with their business property.  I share their concern.  On the one hand, it can be cheaper than leasing and you build equity, on the other, it potentially ties up a huge chunk of liquidity.  Lets dig into this a little bit.

On the use of the property, most business owners swear they use the property 24×7.  But do they really?  Even if your hours are 6am to 6pm M-S, that is only 72 hours a week out of a possible 168.  I know, the business parks the fleet there, has tools, etc. in the building that need to be protected 24×7.  It doesn’t really meet the 80% test, but it does fall squarely into the lease category.  If you still feel it best to consider buying the property, there are other things to be aware of.

The bigger concern is how to pay for the purchase of the property.  With a lease/rental situation, you may have to leave a deposit, perhaps first and last months rent plus $1,000.  For this conversation, lets say the rent is $5,000 per month so your initial out-of-pocket to move in is $10,000.  Coming up with $10,000 is not a real challenge for most small businesses looking for property.

To buy that same property though, you may need a lot more than $10,000.  Let’s say the building is worth $500,000.  If you are fortunate, you may be able to put a down-payment of 3% (assuming you qualify for some sort of SBA guaranteed loan).  Most typically, plan for a 10% down payment.  That is $50,000 of liquidity you must have available to buy the property.  It is also liquidity you can’t get back quickly or easily.

But you cannot forget the other costs of ownership.  Remember, you still have property taxes which say runs about 1.5% of the value of the property.  And don’t forget, now that you own the building, you are responsible for its upkeep and maintenance.

If you have talked to some professionals about this (which I very strongly encourage), you set the building up in an LLC and are now renting it to your business.  Your business rents from you  at $5,000 per month, which is what you were going to pay in rents to begin with.

I know that there are tax benefits from the ability to take depreciation, but your business doesn’t see that, you do.  Don’t get me wrong, you may have other forms of income where having rental losses can be very helpful.  But if you are a typical small business owner, you have your income from the business and that is pretty much it.

I also realize that there is the potential for the gain on the investment.  But the net gain after realtor fees, lawyers and taxes might not be as great as you imagined.

There is nothing wrong with owning your business property and renting it to your business.  Remember though, it can suck down your liquidity and possibly slow your business growth.  Really analyze your current and future cash position and ask yourself if tying up your cash in real estate is the right investment.  If you need help or want to understand the impact of owning versus renting commercial property, talk with your accounting professional and ask her advice.  If you are not working with an accounting professional or are interested in a second opinion, feel free to contact me and enjoy a free no obligation consultation.

 

Owning Versus Renting

~ C.O.R.E. Beliefs ~ Leave a comment

Good morning and happy Thursday.

Today’s blog is brought to you by Kubae’s insistence.  It was brought on by our being guests of Jeff Taylor with Key Bank at the Portland Thorns match last night.  It was our first visit to the Key Box at Providence Park and she fell in love with it.  By it, I mean the food and the opportunity to watch the match while also enjoy some interesting conversations with the other guests.  It was a great evening and my thanks again to Jeff and the team at Key Bank.

The decision to rent or buy is often a very challenging decision.  You would think that it would be pretty logical – I will generate X dollars of revenues (or cost savings) by spending Y dollars on equipment.  Sadly, it hardly ever is given that level of scrutiny.  Most rent versus buy decisions come down to an emotional “Ownership” decision where I look at the fact I can call it my own instead of admitting to the world I rent.

For you lovers of logic and numbers, I do have a spreadsheet which will help you through this part of the analysis.  I also have a spreadsheet (actually it is just a blank workbook) for you to list out and quantify all the emotional reasons to own.  If you are interested in my Rent versus Buy spreadsheet, shoot me an email and I will send you a copy.

When asked if a small business owner should rent or buy, My first question is about utilization.  How much will it be used over the useful life of the item?  There are a few rules of thumbs out there but the one I work with is:

  • Rent if used less than 20% of its useful life
  • Lease if it is used between 20 and 80% of its useful life
  • Buy if used over 80%

An example:  A contractor needs a new work truck.  It can be driven about 350,000 over 10 years before it starts to run into trouble and should probably be disposed.  The contractor estimates she will put on 210,000 miles over a 7 year period.  First pass answer is  Buy.

The truck is designed to handle about 35,000 miles per year.  The contractor will use the truck 30,000 miles per year.  This comes out to 85% of the useful life of the truck.

I would not stop there though because the important question is, does it make financial sense?  My spreadsheet helps with that as it calculates the Net Present Value (NPV) of the investment in equipment and forces us to think about all the costs of owning the new item.  For instance, with a truck (like above) there are oil changes, maintenance, tire changes, axle replacement, etc. that one needs to consider.  I also consider potential revenue benefits for the investment as well since in most cases that is the main reason for buying an asset!  If all of these items generate a positive value then the decision is supported.

So back to why Kubae suggested that Owning versus Renting would be a good topic for today.  First, we lease our condo.  When we really do the math on the Rule of Thumb, we only  use the space about 62% of the time – since we both work in other offices and we typically spend our alternate weekends exploring; but to be sure we ran it through the Net Present Value calculation.  It actually calculated out with a better return on investment for us to lease a Condo rather than purchase it.

By the way, the same for the Subaru that Kubae drives.  We put on less than 1,000 miles a month so we definitely fell into that Lease category.  We didn’t even bother with the calculation as the answer felt right.  Plus we are excited about the changes to automotive technology which will reduce our dependence on driving even more, but that will come in a future article.

Key Bank did the exact same thing when it came to that Box at Providence Park.  They knew it would generate more than sufficient revenues to offset the cost and ran it through their own NPV calculation system.  Emotionally it might have made sense to invest in that Box but it only happened because it added value to their business.  Have you ever wondered why there are no Apple Fields or Intel arenas?

In business, especially in a small business where every dollar counts, I would strongly encourage you to try to take as much emotion out of the Buy versus Rent decision as you can.  If you insist on owning it even though all the logic says rent, then purchase it personally (or though a separate LLC) and then rent/lease it back to the Company.  If it can generate positive NPV for you that way, then your emotional hunch paid off.

I strongly encourage you to talk with your accounting professional about how to go about buying equipment and other assets for your business.  If you do not have an accounting professional or would like a second opinion, feel free to contact me.  I offer a free no obligation consultation to help us get acquainted and for you to see if we are good fit.

Have a great day.

 

Taxes

~ C.O.R.E. Beliefs ~ Leave a comment

Happy Wednesday.  It is an amazingly beautiful day in Vancouver and tonight Kubae and I are guests of Key Bank and Jeff Taylor at the Portland Thorns game.  We haven’t decided if we are eating in before we go or heading over to the Max station early and grabbing something to eat in Portland before the game?  Kubae and I are from different parts of the spectrum as I enjoy cooking and eating at home while she loves trying new restaurants every chance we get!  Does anyone have a suggest for a pre-game meal?

I was asked the other day why I never talk taxes.  This is not entirely true as I have older posts where I talked about it; and in this blog I haven’t gotten around to it yet!  But to dispel the concern about taxes, I will gladly write a few words.

There are two separate issues to address when writing about taxes: Filing and Planning.  Filing tax returns is an obligation.  Now, it can be easy or painful and it is your choice!  To make tax filing easy (and less costly) I strongly suggest you follow my guidelines in the various blog articles about how to structure and organize your accounting.  If you keep it simple and put transactions in the right place, your tax preparer will be able to easily complete your return for you to file.  No muss no fuss.

On the other hand, the small business owner who does not pay attention to his accounting generally makes tax filing a massive undertaking.  You are now paying someone with an advanced degree several hundreds of dollars an hour to fix your books.  I have seen year-end accounting services run to several thousands of dollars, all because the business owner had no idea what he was doing and the accounting firm (us as much as I hate to admit it) never took the time to properly teach the client how to keep a good set of records.

Planning for taxes is not an obligation, but is essential to the health of your business.  However, there are a few rules to tax planning you should be mindful of:

  1. Planning requires your business to be profitable before taxes
  2. Planning demands time
  3. Planning needs alternatives

Keeping these simple rules in mind, here is how to work with your accounting firm on tax planning:

  • Keep your books up-to-date and properly adjusted
  • Set an appointment no later than August 31 to review your books with the accountant
  • Be clear on your objectives for planning (new purchases, retirement, etc.)
  • Think about what you and your business might need over the next 12-18 months

There is nothing more frustrating, for you or your accountant, than waiting until February to discuss the fact you made $250,000 in profit for the prior year and then went out and bought vital business equipment which cost $250,000 in January.  The problem becomes, obviously, that you owe $75,000 in taxes on the prior year profits and you spent all your liquid cash on the equipment!

Yes, this happened more than once.

By coming in early and discussing your plans and objectives, you give your accountant the alternatives for you to review and approve.  In the situation above, for instance (and in hindsight), a planning meeting in August might have showed that profit was $175,000 and the owner might have addressed the fact that a new piece of equipment was needed early the next year.

Two things would have come out of that conversation – accelerate the purchase of the equipment and use some reasonable amount of debt to finance the purchase.  Due to the way the tax law works, taxes would have been reduced and the Company could have retained working capital – two objectives met for the price of one!

Since we are now approaching optimal tax planning time, consider making an appointment with your accounting firm to discuss and plan your tax situation.  And if you are currently not working with an accounting professional or would like a second opinion, feel free to contact me and have a free no obligation consultation on your business and plans.

Have a great day.