Monthly Archives: May 2015

Top Small Business Marketing Mistakes

Recently we were having lunch at Columbus’ Curry, a new quick dining establishment specializing in Indian cuisine.  During this visit, we had the fortunate opportunity to meet the owner.  Turns out that they had only been open for four weeks, but they indicated that things were going well thus far.  At some point, our conversation turned to what the “most important” thing to focus on should be.  Our response?  Generating sales!

As we’ve said in previous posts, nothing happens in an organization until a sale is made and sales don’t happen without marketing.  Unfortunately, many new/fledgling small businesses often underestimate their marketing needs.  With that said, we figured we’d discuss the top marketing mistakes new business often make and how you can avoid them.

No marketing plan.  Failure to plan is like planning to fail – we’ve all heard that statement correct?  Well, if you don’t have a marketing plan, then you can rest assured that your marketing will not be is effective as it needs to be.  People often think that a marketing plan needs to be this overly complicated document that takes months to develop.  That is not the case.  A simple marketing plan can be made in short order.  Take a look at this article to see just how to put one together and what it should contain.

No marketing budget.  Equally egregious as not having a marketing plan, is not having a marketing budget.  When you start a business you may be consumed in pouring all of your dollars into research and development, product engineering, hiring staff or outfitting your headquarters.  However, if you don’t have the budget to tell your target market about your product or services, how will they find you?  “Oh, if we build it they will come” is your response?  Read the next bullet dear friend.

Having a “build it and they will come” mentality.  We’ve written about this before in our Small Business Marketing 101 post.  The key takeaway from it is that even with a highly visible location it’s EXTREMELY hard for potential customers to “see” you.  The only way to ensure that the do, is to market to them.  Furthermore, even if they know you are there, what is going to make them choose you over your competitors?  For that, we recommend that you emphasize your Unique Selling Proposition or USP in all of your marketing collateral.

Failing to “test” your marketing.  Marketing should never be viewed as a “one and done” type of activity.  The one thing that is constant in the world is change.  Thus, you must frequently look at your marketing activities, vehicles, collateral, etc. and make sure that it is working.  If it isn’t, then you need to make adjustments to it.  If you do a mailing and you get a 2% response rate, test doing a similar mailing but tweek the headline, body, mailing list, etc to see if the results change.  Keep “testing” various elements of the campaign until you get the desired result.  All of this leads us to the next point.

Not holding your marketing accountable.  If you are involved in various marketing activities, you should always hold your marketing ruthlessly accountable for revenue.  One of the first things we ask customers is how they heard of us.  Why?  We want to know which vehicle brought them to us.  We then track various metrics associated with this such as number of leads, leads converted to customers, revenue spent per customer, cost of client acquisition, etc.  If we don’t see the return on investment for a particular vehicle we either 1) test it, 2) change it or 3) abandon it.  If we get to the third, that allows us to shift those dollars to something that IS producing desired results.  The worst thing you can do is continue to pour money into something that is not generating sales.

Trying to reinvent the “Marketing” wheel.  Marketing is not hard stuff (in simplistic terms of course).  Yes, there is the need to reinvent and refresh your marketing so that it remains relevant and in sync with the times, but you don’t have to go back to the drawing board to make it yours.  In this post, we talk about 50 ways that you can market your small business.  The point?  You don’t have to start from scratch; look at the items, choose what works for you and then make it fit your business.

Continuous planning without execution.  The fear of failure is a very powerful thing.  In this post, our CEO Jared Rogers talks about getting over his fears when he struck out to head the Beverly office.  In the end he got over them and started doing things. The point is that you can be so busy preparing, organizing, and researching your marketing to prevent failure that you never get around to the actual marketing.  To combat this remember:

  1. Activity is not productivity.
  2. In order to sell a million of something, you have to sell the first ONE.

At some point you have to start your marketing and just see what happens.  Remember, mistakes are the price of entry into the world of success. A failed promotion means you have SUCCESSFULLY determined what does NOT work; and that is a invaluable tool in getting you closer to discovering what DOES work.

Avoiding 401(k) Early Withdrawal Penalties

The point of investing in a 401(k) plan is to build your savings for retirement.  Generally, if an individual withdraws from their 401(k) plan before reaching age 59½ they are taking what are called ”early” or ”premature” distributions. As such, individuals must pay an additional 10% early withdrawal tax, unless an exception applies, AND include the amount of the distribution in their income when they file their income tax return.

Sometimes you have no choice and are forced to tap into your account.  Here are some ways that you can make withdrawals and avoid getting hit with penalties for doing so.

Age – Begin after age 59½ once you leave your employment (at any age).

Separation From Service – Begin after you separate from service during or after the year you reach age 55 (age 50 for public safety employees in a governmental defined benefit plan).

High Unreimbursed Medical Expenses – If you, your spouse, or your qualified dependent face these expenses, you may be allowed to withdraw a limited amount (the actual expenses minus 10% of your AGI) without penalty.

Death – If you die, your beneficiaries are able to take distributions from your 401k without penalty.

Disability – If you are “totally and permanently disabled” by IRS definition, you may be able to take distributions from your 401k without penalty.

Series Of Substantially Equal Periodic Payments –  Essentially you agree to continue taking the same amount from your plan for the greater of five years or until you reach age 59½. There are three methods of doing this:

  1. Required Minimum Distribution method – This uses the IRS RMD table to determine your Equal Payments.
  2. Fixed Amortization method – Under this method, you calculate your Equal Payment based on one of three life expectancy tables published by the IRS.
  3. Fixed Annuitization method – This uses an annuitization factor published by the IRS to determine your Equal Payments.

IRC Section 72(t) provides additional methods for taking a distribution from your 401k which can occur before leaving employment (if the plan allows).  However, note that the following are NOT applicable to a 401(k), but DO apply to an IRA withdrawal:

  1. Qualified higher education expenses
  2. Qualified first-time homebuyers, up to $10,000
  3. Health insurance premiums paid while unemployed

So if you are considering using your 401(k) funds for any of the above, you might want to make a “trustee-to-trustee” transfer to an IRA account first and then take the distribution from that account.

First Time Homebuyer 10% IRA Penalty Exception

If you withdraw amounts from your 401(k) plan or IRA before you are 59 1/2, the amount will be subject to income tax and a 10% early-distribution penalty. But what if you use those funds to purchase your first home? Well, if done properly, you may be able to avoid the 10% penaly.

Avoiding the penalty.  The IRS allows taxpayers to avoid the 10% early distribution penalty from a retirement account under certain circumstances. One of those exceptions is if IRA monies are used to purchase a taxpayer’s first home. The maximum amount that may be distributed from the IRA on a penalty-free basis for the purpose of buying a first home is $10,000. This is a lifetime limit.

Qualified expenses defined. Per the IRS, the funds must be used in the following manner to qualify:

  • It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
  • It must be used to pay qualified acquisition costs for the main home of a first time homebuyer (defined later) who is any of the following.
    • Yourself.
    • Your spouse.
    • Your or your spouse’s child.
    • Your or your spouse’s grandchild.
    • Your or your spouse’s parent or other ancestor.
  • When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000.
  • If both you and your spouse are first time homebuyers each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.

Qualified acquisition costs include the following items.

  • Costs of buying, building, or rebuilding a home.
  • Any usual or reasonable settlement, financing, or other closing costs.

Coordination of IRS Form 1099R with your plan administrator. Whenever one takes money out of a retirement plan, the plan administrator will report it to you and the IRS on Form 1099R. The codes in Box 7 will help one report what type of distribution was made and if there were any exceptions. If you are under 59 1/2 an will be using the amounts to purchase a home, while not required, it may be a good idea to let the plan administrator know. That way they can report the amounts with Code 2 on the 1099-R, which indicates that there is an exception to the 10% penalty.

How to make 401(k) funds penalty free. Even if a distribution form your 401(k) will be used towards the purchase of your first home, the first-time homebuyer exception does not apply to distributions from qualified plans such as a 401(k). Furthermore, if the amount you receive is rollover eligible, your employer is required by law to withhold 20% of it for federal income tax.

Assuming you are eligible to receive the distribution and the amount is rollover-eligible, you can instruct the 401(k) plan to process your distribution as a direct rollover to an IRA. You would have to open the IRA before the rollover occurs and tell them to deposit the funds to this new account (or your existing IRA). This will ensure that the 20% federal tax withholding is not applied to the amount. Additionally, you can then withdraw the amount from your IRA for use towards the purchase of your first home, thereby avoiding the 10% early-distribution penalty.

Properly reporting exceptions that were incorrectly reported. Sometimes despite letting the plan administrator know that the IRA funds will be used to purchase your first home, they may still be reported incorrectly on Form 1099R. Typically, this will result in Box 7 of the form indicating Code 1 – Early distribution, no known exception (in most cases, under age 59½).

However, if the funds were used to purchase your first home, there is a fix. One would need to use IRS Form 5329 Part I to report the exception. Specifically, one would list the amount reported on the Form 1099R on line one. You would then list the amount that was used to purchase the home (up to $10K during your lifetime) on line two and enter in exception Code 09 – IRA distributions made for the purchase of a first home, up to $10,000. For more details and specifics on the steps, see the Form 5329 Instructions.

Spending to Save Taxes vs. Generate Revenue

A few weeks ago we were speaking to one of our business clients about their tax planning needs for the upcoming year.  During this session, we got to talking about how spending money yields a “tax rate” reduction of one’s taxes for every dollar they spend.  This then prompted the analysis of spending to save on taxes versus to generate revenue.  Let us elaborate.

How Income Taxes Work.  A while back, we wrote about how the income tax system works with regards to refunds and balances due in this post.  The short version is that for each $1 you earn, you have to pay an associated amount of taxes based on your marginal tax bracket.  Conversely, for each $1 you spend on a deductible expense, it reduces your associated taxes by the tax rate applicable to your highest marginal tax bracket.

Spending To Save On Taxes.  One of the things we always try to convey to clients is to spend money on what makes financial, life or business sense.  Don’t spend money to save on taxes; if you receive an associated tax benefit, that’s just icing on the cake.  Why?  Let us illustrate.

Let’s say that Ricky lives in his mothers basement.  She doesn’t charge him any rent, but he gets this “idea” of buying a house so he can get a tax deduction.  So he goes and gets a mortgage and spends $10,000 on mortgage interest, which is tax deductible.  To keep things simple, we’ll assume that all of the mortgage interest is reflected on his return and that his last marginal tax bracket is 25%.  Based on this, he can expect to see his tax liability drop by $2,500.  But let’s look at it another way…

Ricky wasn’t paying anything to live in the basement.  Zero, zip, zilch!  But to get a $2,500 tax deduction, he went out and spent $10,000 on mortgage interest?  In the world of Finance we go by two rules:

  1. Cash now is better than cash later – due to inflation $1 today is worth more than $1 in the future so give me the money NOW!
  2. You only “save” money when you spend $0 – spending money is just that, an expenditure (no matter how big of a discount; sorry discount shoppers).

Using these two rules, it’s pretty clear that Ricky is in violation of the second.

Spending to Generate Revenue.  Thus, if you are faced with a decision to spend money, we usually recommend that you do so to generate more revenue (especially if you are in business).  Why?  There are numerous reasons but some include:

  1. You won’t see as big of a tax reduction as you would hope for by spending it on deductible expenses (see the example above).
  2. Increased revenue will allow you to spend on more beneficial expenses (e.g. increased payroll for yourself).
  3. Who doesn’t like more money?  Oh yeah, the Capital One Baby!

So let’s change things up and assume that Ricky owns his own delivery business.  He files his business income and expenses on a Schedule C so any profit from his business shows up on his personal return and is taxed at his marginal tax rate (25%).  For this tax year thus far, he has $50,000 in profit (income less expenses) from his business.

Instead of buying a house, he decides to spend $10,000 on some billboard advertising.  Now his profit is only $40,000 because the advertising expense is tax deductible.  But those ads generate $25,000 of new business.  Way to go Ricky!  So his profit then becomes $65,000.  Sure, he will have to pay $3,750 more in taxes ($65K – $50K = $15K x 25%) then he would have had to if he didn’t run the advertisements.  But the flip side is that he will be left with $11,250 in more cash.

Now, if Ricky has a smart tax accountant on his team (like us), they might tell him to open a SEP IRA where he could put almost all of that additional $15K above his original $50,000 profit towards his retirement savings.  Best thing about that is 1) it’s deductible on his tax return and 2) he’s funding the day he can park that delivery van for good!

Need some help with your tax planning?  Want to brainstorm on how you can best spend your money?  Give us a call or shoot us an email and we’d be happy to chat with you!

Until next time…