Monthly Archives: August 2012

Top 5 Reasons Businesses Fail

When an entrepreneur embarks on their journey to build the next big thing, they will undoubtedly come across the “statistics” that we’ve heard a thousand times.  You know the ones where 50% of businesses fail within a year and 95% are gone within five years.  But just what is it that causes these new establishments to go belly up?  Here is a list of the top five drivers based on our experience helping new companies navigate those early startup waters:

5. You start your business for the wrong reasons.  The thought of being your own boss is cool until the first major issue comes up.  Is the sole reason you’re starting your business because you want to make a lot of money? Do you think if you had your own business that you’d have more time with your family? If so, you’d better think again.  Running a business is hard work – often much harder than what you have previously been doing to earn a living (especially if you’re coming from an office job).  With that said, when times get tough (mentally, financially, spiritually, etc.) you need to have a firm resolve as to why you’re in this game.  If your reason is planted on a weak foundation, don’t be surprised if you find yourself quitting before success has had a chance to begin.

4. Lack of Planning.  Anyone who has ever been in charge of an event knows that that were it not for their careful, methodical, strategic planning (and hard work) success would not have followed. The same should be said of most business successes.  Many small businesses fail because something which was very fundamental to their success (such as marketing or customer seasonality) was not thoroughly understood and addressed.   If for no other reason than to flush out these potential sticking points, we always recommend that a new entrepreneur take the time to prepare a business plan.  Besides, most lenders will request one if you’re seeking to secure capital for your company so you might as well go through the exercise.

3. Over-expansion.  A leading cause of business failure, expanding too quickly, often happens when owners confuse success with how fast they can grow.   Thus, a focus on slow and steadily planned growth is far more ideal. Many a bankruptcy has been caused by rapidly expanding companies.

At the same time, you do not want to repress growth. Once you have an established solid customer base and good cash flow, let your success help you set the right measured pace. Some indications that expansion may be warranted include the inability to fill customer orders/requests in a timely manner and employees having difficulty keeping up with production demands.  If expansion is what you need to succeed,  identify what and who you need to add in order for your business to grow.

2. Poor Management.  Many a new business owner often find themselves admitting that they know how to make the product or deliver the service , but lack management expertise in areas such as finance, purchasing, selling, production and hiring/managing employees. Unless they recognize what they don’t do well and seek help quickly, many owners may soon face disaster.

Neglect of a business can also be its downfall. Care must be taken to regularly study, organize, plan and control all activities of its operations. This includes continually staying in touch with market research, customer data and of course the financials.  The moment that that you take your eyes of the game so to speak is when your competitors will take the opportunity to make their move.  Thus, new owners must always be aware of what’s going on or risk sinking their ship!

1. Insufficient Capital.  The most common yet fatal mistake for many failed businesses is having insufficient operating funds. Many owners often underestimate how much money is needed to weather the start up phase and are forced to close before they even have had a fair chance to succeed.  Some also may have an unrealistic expectation of incoming revenues from sales, which can exacerbate the situation.

Before you begin your venture it is imperative to ascertain how much money your business will require.  We’re not talking about only the costs of starting your endeavor, but the cost of staying in business.  It is not uncommon for a business to take a year or two to get going. This means you will need enough funds to cover all your expenses until sales can eventually pay for these costs.  To start, we’d recommend using a business start up cost calculator such as this one or setting up a consultation with a local accounting firm or CPA.  Many will be happy to talk with you as no one wants to see a business fail.

Upcoming Tax Changes in 2013

Q: I’ve heard that tax year 2013 could be much different than 2012 due to the expiration of the Bush tax cuts.  Do you all have any perspective on this?

A:  Back in 2001, then President Bush passed what was known as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), more commonly known as the Bush Tax cuts.  For the last few years ever since the cuts were extended through 2012, there has been much consternation as to what is going to happen to tax rates in 2013 when they expire.  The question on everyone’s mind is if the expiration of the cuts in 2013 will really be all that painful?  Some also wonder if Congress will extend the tax cuts as they did in 2010 when the expiration was originally scheduled to occur. Not knowing the final outcome, it’s important to have a plan in place to prepare for whatever Congress decides.

In addition to the above, the Patient Protection and Affordable Care Act (PPACA), also referred to as Obamacare, will also have provisions that begin in 2013.

If we take a look at the provisions that President Obama has included in his fiscal year 2013 budget, we can get an idea if we need to worry much about what may potentially happen.

EGTRRA

Increase in ordinary tax brackets.  The most significant changes from the expiration of the 2001 tax cuts would be the increase of the Ordinary Income Tax Brackets. For most earners, the Income Tax would not increase, but individuals who are in the top two brackets would see changes.  For example, if you earn over $390,050 a year, expect an increase of 4.6% in the top most bracket.

Increase in long-term capital gains rates.  Ever since 2003 long term capital gains tax for assets held greater than 1 year has been 15% for those in the 15% bracket and higher and 10% for those in the 10% bracket.  The change would affect single taxpayers with taxable income below $200,000, head of households below $225,000 and joint couples below $250,000.  These individuals long term rate would remain at 15% while filers above these amounts would have a have a 20% rate.

Qualified dividend tax rate.  Since 2003 the maximum qualified dividend tax rate has been 15%.  President Obama’s budget proposal looks to keep the current dividend rate of 15% for everyone not considered an upper income taxpayer. For these individuals, dividends would be taxed at their ordinary income tax rate of either 36% or 39.6%.

Change in benefit of itemized deductions.  Itemized deductions allow one to reduce taxable income be deducting amounts greater than the standard deduction. This includes things such as charitable deductions, mortgage interest, state income taxes, medical expenses, etc.  The value of itemized deductions for those upper income taxpayers would be capped at 28%, so someone in the 35% that currently receives $3,500 of benefit for $10,000 of itemized deductions, would only receive $2,800 of tax savings.

PPACA

Change in the health care deduction limit.  Through December 31st 2012 you can deduct health care expenses that exceed 7.5% of your adjusted gross income (AGI). However, beginning January 1st 2013 that threshold will rise to 10%. For some, that essentially results in a tax increase, since you have to spend more on health care before seeing the deduction. A way to get around this is to use a FSA or HSA so that all of your expenses are basically tax deductible.

Medicare wage surtax. Starting in 2013, if you make more than $200,000 as a single person ($250,000 if married filing jointly) you will pay a 0.9% tax on the income above that level.

Medicare unearned income surtax.  Another tax will be applied to Modified AGI (in this case AGI + tax-free income) for those with income levels that are the same as above.  There is an additional 3.8% surtax applied to the lesser of your net investment income OR the excess Modified AGI beyond the limits.

Excise tax on medical devices.  Medical devices such as prosthetics and wheelchairs will be assessed an excise tax of 2.3%, although items like hearing aids and eyewear that are sold in retail settings won’t be subject to the tax.

While the impact of most of these items won’t be felt until you file your 2013 return in 2014, it’s good to give some thought as to how you will plan out next year in light of what may be on the horizon.  But then again, this is an election year so there is always the probability that no increases will happen.  Who wants to increases taxes when you’re trying to get elected?

The Advantage of Being A “Small” Business

This past weekend my family and friends celebrated our daughter Pilar’s 3rd birthday.  Her grand event was held at the Bronzeville Children’s Museum  which meant that I would have the designated job of “goffer” until it was done.  One of the things on my list was getting two Yo Gabba Gabba character balloons filled with helium so that I could bring them to the party.

Well, in case you didn’t know there is apparently a shortage of helium going on currently.  Seems like it happens on an annual basis, but this year party store retailers appear to be limited in their ability to obtain it.  Unless you are in the medical, brewing or welding industries, you are not considered top priority.  Thus, many of the retailers who are selling it have their own restrictions on how they dole it out.  Unfortunately, one of the restrictions that I came across from the “big boys” was that they weren’t filling outside balloons with helium, only ones that were purchased from them.

If you’ve ever hosted a kid’s party, you can relate to the stress of trying to make it all come together.  Needless to say, after going to a couple of the big stores I was getting pretty fed up with the inability to get these balloons filled.  So I decided that I would take a different approach, I’d find a “small business” that specialized in party decorations and the like.

This is where my friend Jo Jo The Balloon Lady enters.  You see, this is a shop that I have seen on my way to our office quite a few times.  I’ve never had a reason to frequent their establishment before this, but as I knew where it was I figured I would see if they would fill my balloons.  I was greeted by a young woman who promptly took my order and told me that it wouldn’t be a problem to get them filled.  It would cost me a little more than normal due to the helium shortage, but as a parent you know there is no price too great when it comes to your child’s happiness.

During this time I also got to speak with the proprietor and learn a little more about their business and just how long they had been there (15 years).  I learned about the passion they had for the business, their commitment to it and just how much their customers meant to them.  I vowed that they would have my business in the future and that I would spread the word about what a gem this little place was.  Which brings me to the subject of this post.

When you’re small business, you have a set of competitive advantages that larger competitors may not.  Thus, always make sure that you leverage the following as they are true tools that can bring you business:

Genuine Customer Service.  The customer service experience is one that can make or break your opportunity to turn a first time customer into a repeat one.  To this end, make sure that your staff is fully vested in just how important it is to make each customer happy.  Whether it’s engaging in conversation, listing to their stories or just greeting them with a smile, make it a part of your operating procedures.

Opportunistic Thinking.  Small businesses are started and run by entrepreneurs.  These are the type of people that see a problem and try to build a better mouse trap to solve it.  Likewise, they are also the ones most likely to “think outside the box” so to speak.  So when the big boys set a certain status quo in the market, but you can figure out a way to capitalize on it, by all means go for it.  “So you don’t want to fill outside balloons because you want the increased margin that comes with people buying balloons from you?  That’s okay, we’ll fill all the balloons you won’t and make a nice little penny off it too!”

Build Relationships.  I’ve said it before but I’ll mention it again; people do business with people they like.  Better yet, people will go out of their way to rant, rave and refer business to people they like.  So treat every customer as a friend and invite them to get to know you.  Likewise, just like Sal the butcher learned that you would want your “special cut” of meat every Friday, make it a point to learn what makes your customers happy.  You’ll soon find that by building these relationships you’ll have the opportunity to service a customer for a lifetime versus just a single transaction.

Taxes When You Live In One State & Work In Another

Q: I just took a new job, but heard that it may make my tax situation a little complicated.  I live in Illinois but I work full time in Indiana.  Is there anything you can tell me about this?

 A:  Living in one state and working in another can make things complicated from an income tax standpoint.  However, there are many mechanisms written into the state tax codes that ensure you don’t pay tax to more than one state on the same income.  For example, reciprocal agreements between states exempt some people from filing a return.  Thus, if you are a resident of Iowa, Kentucky, Michigan or Wisconsin and only have wage income from Illinois, you are not required to file a return.  But what about Indiana?

Indiana and Illinois don’t have a reciprocal agreement, however, they do offer a credit for taxes paid to another state.  The steps to filing are as follows:

File Your Federal Return.  An individual’s Illinois return begins by using the Adjusted Gross Income (AGI) from their Federal (IRS) return.  Thus, once you have your Federal return done you’ll be ready to begin your state returns.

File Your Indiana Return.  As your income is earned in Indiana and you more than likely had Indiana Income Taxes withheld from your checks, it’s best to start with this return next.  You will file a NONRESIDENT return for Indiana (Form IT-40PNR) and owe Indiana tax on the money you earned in that state.  If you have Indiana tax withheld, that will go against your Indiana tax liability and produce a refund or an amount due, depending on how much you had withheld.

File Your Illinois Return.  Since you live in Illinois you will file a full-year RESIDENT return and compute tax on your entire income (Form IL-1040). You will then complete the “Credit for Tax Paid to Another State” where you subtract what you paid to Indiana from your tentative Illinois tax liability.  In theory, you should wind up not owing Illinois if you paid enough taxes to Indiana.

Now what if you live in Indiana and work in Illinois?  You simply reverse the process as Indiana also offers a credit for taxes paid to another state.