Business Banking E-Newsletter - December 2012

Seven End-of-Year Payroll Tips for Small Business Owners

The holiday season is upon us and now is the time for small business owners to finalize their year-end tax planning.

There are ways to minimize the tax hit that often comes at this time of the year, and some of them involve Human Resources and payroll issues. Here are some things to consider:

  1. Hire a vet. You have until Dec. 31 to hire a veteran and qualify for the Expanded Tax Credit. The maximum tax credit is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations.

    The amount of the credit depends upon how long the vet has been unemployed, the number of hours he/she works for your firm and the wage amount. If the veteran is disabled due to his service, the employer may receive the maximum credit. Visit and enter ‘WOTC’ in the search field for forms and more details about the expanded tax credit for hiring veterans.
  1. Review fringe benefit packages. Check out IRS publication 15 to find what pre-tax fringe benefits are available. Consider offering employees fringe benefits instead of standard raises to help reduce your tax burden. Offering things like health vision and child-care assistance will save money in payroll taxes and your employees will be happy to receive tax-free benefits.
  1. Bonuses. Keep in mind that bonuses are subject to payroll tax withholding and employer matching of FICA and Medicare taxes and payment of FUTA taxes. If you want to give a year-end bonus that is a flat amount, for example $1,000 rather than $923.84 after withholdings, then ask your payroll provider to gross up from the net figure. But do not make the mistake of paying out a bonus without processing it through payroll. The IRS and your state taxing agency will reclassify the bonus as wages and punish you severely for failing to treat the payment properly.
  1. Prepare for 2013. Ask your employees to review the number of exemptions claimed and complete new W4 Forms. Employees who claim exempt are required to submit a new Form W4 by Feb. 18, 2013. Use IRS Publication 505 to determine how much withholding should be taken and how many exemptions to claim. 
  1. When posting payroll to your accounting program reconcile so that gross wages match the year to date wages on the payroll report. Employer paid payroll taxes should be kept as a separate line item on the profit and loss statement, and withholdings from paychecks should be assigned to a current liability account on the balance sheet. Many businesses neglect to balance payroll figures from the payroll report to the profit and loss statement and the balance sheet. It’s important that the figures you include for payroll expense on your Schedule C or other business income tax return match the totals reflected on Form W3.
  1. If you pay into the state unemployment fund, you should receive a statement by January 2013 which reflects any rate changes. Be sure to provide this information to your payroll provider in order to ward off any penalties for paying the wrong amount.
  2. Don’t forget to include the cost of health insurance provided to your employees on Form W2 at year end. Your payroll provider may neglect to ask you for the figures, so be sure that you are proactive in providing these figures to them.


7 Deadly Sins of Business Growth

There are several underlying issues that make growing your company completely different from everything else you do in your business. But there's hope.

The sole purpose of a business is to grow. This can take on many dimensions -- profits, revenues, market share, brand or community influence, just to name a few. The road to growth is very simple. Innovation is required to drive growth. You make something better or new (products, services, solutions, etc.) and you sell to someone better or new (markets, segments, channels, etc.). Basically, that's it; the rest is just fine print.

It sounds easy enough, but of course it isn't. This is because there are seven underlying issues -- deadly sins if you will -- that make growth difficult and completely different from everything else you do in your business. But there is hope -- simple things you can do to avoid the anguish and misery that often accompany the wide range of chaotic activities that produce valuable growth.

1. Believing you can see the future.
The fresher the innovation, the more likely it will come to fruition sometime in a distant future for which there presently is no data. Unless you possess a crystal ball and remarkable prophetic abilities, believing you can see the future is delusional at best. Borders was a pioneer of the mega bookstore category, but when things began to go digital, it bet big on in-store media downloads. Instead of making midcourse corrections, it rode its strategy all the way to bankruptcy. A sure sign of a company that is stuck in the planning phase of innovation is an incessant collection of data and obsession over the business plan. Current research suggests that planning is important, but learning from real experience is absolutely critical. We all need to know the facts to move forward, but when we focus on data collection at the expense of running meaningful experiments that will yield results, it becomes counterproductive.

Redemption: Prototyping, test marketing, and post-mortem reviews will tell you more about opportunities, shifting customer preferences, and the potential of a new technology than any spreadsheet or PowerPoint stack. Take your cue from venture capitalists who hedge their bets. They will make small investments in a wide array of therapies for the same disease state to quickly learn what really works. They seldom bet it all on one sure winner. Make smaller and wider bets.

2. Choosing big over fast.

An innovation is only innovative for just a brief moment in time. It has a shelf life and goes sour like milk. The smart phone with all the latest technology you bought for your daughter at Christmas will be a historical artifact by the same time next year. To compound matters, it's not just time that makes innovation so elusive but timing. Get there too early and there is no demand, too late and the day belongs to your competitors. Yet, leaders commonly trade magnitude for speed -- big for fast. Those who crow "go big, or go home" can usually be found sitting on the coach.

Redemption: Momentum is everything. Domino's Pizza went from a small regional chain to a multinational multibillion-dollar enterprise. They virtually invented the home delivery concept. While Pizza Hut spent almost a year planning new sit-down parlors, they identified promising locations in strip malls, equipped and supplied them, and opened stores within three weeks. Most importantly, they hired highly energetic managers who could multitask and keep things moving quickly. They would run promotion after promotion and within a month would develop the winning formula for that area. By the time competitors entered the market, they already owned it. Domino's grew over 200% a year for almost a decade. Pick up your pace.

3. Mistaking your managers for innovators.

The virtues of a good manager are well known. They make lives easier by keeping things on track and under control. They squeeze the most out of the least by eliminating variation. The problem is that all forms of growth require deviance to produce something that's both useful and novel.

If what you are offering is not better, faster, or newer, your company will be sentenced to an eternity of cost-cutting. When efficiency-focused leaders are put in charge of projects aimed at disrupting the way the firm operates, you are headed for trouble. No matter their good intentions, they will conform to the acceptable practices that led to their previous successes and inadvertently squelch growth.

Redemption: Deviance requires deviants. Every company has a collection of misfits that show real promise but are difficult to manage. The bad news is that they pretty much do whatever they believe to be right. The good news is that they demonstrate a high degree of ownership for their work -- a key attribute of a natural innovator. Apple in the early 1980s identified and embraced its most effective non-conformists. They called them Apple Fellows. These leaders had both the skills and drive to move new ideas through the company. Former fellows include Alan Kay, chief designer of the Macintosh, Donald Norman, author of The Design of Everyday Things and Guy Kawasaki, the founder of Alltop. No one had to motivate them to take on the system. Encourage and support your deviants.

4. Having more ambition than capability.

The gifted amateur as heroic innovator is one of the great American myths. Journalists love to tell us how Google co-founders Larry Page and Sergey Brin started it all in their garage in Palo Alto but fail to mention that they were doctoral students at Stanford University working in the Human–Computer Interaction Group where an assortment of geniuses and Nobel Laureates congregate. Similarly, stories about Benjamin Franklin, Thomas Edison, and Steve Jobs conveniently overlook their unique brilliance and years of experience. If everyone could really do it, they would. The point is, if you are creating anything better or of real consequence -- from a miracle drug to a new business model for your delicatessen -- you need experts to help you get it right. Strategy is relatively easy when compared to finding and developing highly competent practitioners.

Redemption: Several years ago an innovation lab called Innovatrium was built across the street from the University of Michigan. Similar to the Juilliard School, which only accepts the best performers, you can't take someone who is mediocre and make them great but you can help someone who is great become exceptional. Base your strategy on your capability.

5. Starting at the center and moving out.

Most great innovation happens at the outer edges of the firm, just beyond the reach of the center's power and influence. Skunk works, secret labs, and coffee shops have long been the venues for treasonous talk and radical experiments. The farther away you are from the center of the company, both physically and emotionally, the more likely you are to seek alternative ways of doing things. Companies have standard operating procedures to keep their equilibrium, which is essential to sustaining the business. But these same procedures are designed to destroy variation, no matter the intention.

After years of marketing research, Coca-Cola launched a mid-calorie cola called C2 that was formulated to taste like Classic Coke but with half the calories. Sales were disappointing. But when Coke did a post-mortem review of what worked and what didn't, they gained real insights that ultimately led to the highly successful Coke Zero.

Redemption: It's easier to change 20% of your organization by 80% than it is to change 80% of your firm by 20%. Work your innovations from the outside-in.

6. Listening to the wrong customers.

It's a common story. A company develops a technology and becomes the corporate standard. For the next few years, it plays defense until an upstart emerges and they are rapidly undone. Consider the case of Research In Motion, which has faithfully listened to its loyal customer base -- security-conscious multinationals -- and adjusted its product to better meet their needs. The only problem was that adjacent consumer segments, such as professional service providers, were the ones changing the game with their iPhones and Androids.

The worst of all possible growth strategies is to have an increasing share of a shrinking market. Smith Corona, one of the last typewriter manufacturers, made some of the very best machines right before they went out of business. IBM made the same mistake a decade before, and dozens of other great firms have fallen into the same trap at one time or another. The problem is that it's easy to ignore the customers who have a line of sight to the future in favor of the more established and cautious ones who demand more immediate attention.

Redemption: Friedrich Nietzsche argued that civilizations that were placid and predictable were in the last throes of their existence, while highly contentious and dynamic cultures were entering their growth phase. His point was that while most pander to the former, the future belongs to the latter. Think of the time it takes to bring a new innovation to market as the time it takes to escape a burning building. If you benchmark the incumbent customers in your market, typically late movers, you will be the last one out. First adopters are eager to gain an advantage because they often cannot compete on resources, scope, or scale. It also turns out that these influencers mobilize other groups to follow their lead. Follow the customers who move first.

7. Failing to connect the dots.

Innovation is one of the few things that can apply to every function and discipline within your company. To compound matters, companies of all sizes are now competing in federations, loose clusters of businesses across traditional boundaries. In the Facebook economy, synchronizing networks of innovation requires moving beyond a hierarchical concept of the company itself. While this has long been a strategy for smaller entrepreneurial firms, the largest and most complex of organizations are adopting it now as well. Boeing is building tailor-made Dreamliners in dozens of countries with hundreds of companies and thousands of suppliers. The aircraft has had several delays, which has cost Boeing lucrative contracts, but the company's ability to sync up all these parts to create customized complicated products will be a significant competitive advantage for future ventures.

Redemption: Economist Joseph Schumpeter observed that entrepreneurs create companies to show their value as superior people. The challenge for these movers and shakers is that the drive and ability to innovate is often concentrated around them in small pockets of brilliance. If you are at the center of innovation activities, you are probably the proverbial hub to the spokes of your firm. The problem is that this stretches you beyond your capability and obstructs your company's ability to search and reapply winning ideas quickly.

While many businesses resort to prescriptive processes because they don't know how else to connect the dots, it is much wiser to develop what Harvard professor Dorothy Leonard calls "deep smarts." You focus your attention on teaching your understudies. They focus their attention on teaching their understudies, and so on. By reimagining your company this way, you can create something akin to a great university that is both innovative and sustainable. Teach your leaders to be free and responsible.

While these solutions won't guarantee that your company will attain seventh heaven, they just might help it grow and prosper.


4 Smart Ways to Avoid a Cash Crisis

Here’s an interesting puzzler. How is it possible for a profitable business to be growing and failing at the same time? The all important answer to this conundrum lies in the company’s cash flow. 

Hot product companies that experience rapid sales growth have to purchase and assemble inventory months in advance of shipment to retailers and distribution partners. This eats up a company’s cash. And, just when customers get around to paying for last month’s product shipments the company has to invest its available cash in the next inventory production run. This is how too much success can quickly lead to an empty bank account.

If a commercial bank doesn’t step in to help a company catch up, the company may have to lay off workers, cut back production or face bankruptcy. This scenario is the living nightmare of American business today. 

Here are five easy ways to protect your company’s precious cash life line. 

No. 1: Limit exposure to high risk customers. Are your largest customers also your company’s slowest paying customers?  If so, take immediate steps to diversify the customer mix to favor faster paying customers. Sales commission payments should be tied to the timing of customer collections too. 

No. 2: Bill frequently. Most service-oriented businesses bill on a monthly basis or at the end of a project. Why not bill customers every week or every two weeks in the form of progress payments? The faster companies invoice customers, the faster they get paid.

No. 3: Streamline product lines. Entrepreneurs who don’t have a lot of loose cash should avoid producing too many products in too many styles to sell to too many different types of customers. The more complex a company’s product line, the more cash that is required to produce, store, advertise and deliver goods to customers. 

No. 4: Set high profitability standards. The companies that are most vulnerable to financial heartaches during a recession or credit crisis are low profit margin businesses. Simply stated, low margin businesses have no margin for error. Don’t be shy about axing products or services that don’t match or exceed your industry’s average gross profit margins.


Documenting your Business Income

They may be some small business owners’ biggest fear, but sometimes audits can be a good thing for a bottom line.

Take this story: A business owner was going through an audit and things had not been looking good until it was discovered that the bank funds transfers from the operating account to the payroll account had been recorded as taxable income. This money had already been included in sales and taxed, and just because you move funds from one bank account to another doesn’t make it taxable again. So rather than the client owing a significant tax liability, there will likely be a substantial refund from Uncle Sam.

Imagine had there never been an audit. This business would have spent years, perhaps decades overpaying their income taxes. Here’s how to properly record income to the company so you don’t make the same mistake.

Hopefully you are keeping your records on a computer system such as QuickBooks. Whenever you record invoices to customers and payments from them you are recording sales, and that should be the only income (with a few exceptions listed below) that shows up on the profit and loss statement.

Other types of nontaxable income and bank transfers must also be recorded so it’s important to know the inner workings of this software product in order to ensure that your transactions are being recorded properly and you are therefore showing the correct amount of income and paying the correct amount of tax.

Funds Transfers.  In the example above, the taxpayer was showing the bank transfer as taxable income. The way to prevent this from occurring is to use the bank transfer module in the program. Under “Banking” on the top ruler bar, select “Transfer Funds.” The window that pops up will show the ‘from’ bank account and the ‘to’ bank account. Merely enter the date and the transfer amount and save the transaction.

If you look at the check registers you will see a withdrawal from one and a deposit to the other. If you cannot perform an auto transfer because the funds are in different banks, cut a check to the recipient bank and on the “account” line of the stub, select the recipient bank account from the chart of accounts listing. This way you ensure that no income accounts are used to record the transfer.

Customer Payments. If you deal with accounts receivable, tracking individual customer balances then you use the invoice selection for billing. When the customer pays remember to use the “Receive Payments” selection in the customer center in order to apply payments to invoices and route the funds to the bank account.

If you receive more than one payment in one day, you will want to fill in “Undeposited funds” in the “Deposit to” box on the “Receive payments” screen. This way you can group all payments together on one deposit slip and this facilitates checkbook reconciliation. Go to “Banking, Make deposits” a screen will come up that displays all of the payments received during the period that have not been deposited. Select the ones that will go onto the deposit for that day. By using the “Receive payments” mode rather than entering the customer payment directly on the deposit slip, you do not make the mistake of recording income twice. Your Accounts Receivable balances and aging will also be correct.

Retail. If you have a retail store or otherwise do not track payments by customer, then you will want to group your sales activity possibly in a general journal entry. Go to “Company, Make journal entry.” You can credit sales, sales tax payable, debit payouts from the drawer, debit or credit cash over/short and the offsetting bank deposit as a debit to the bank account.

Or you can use the invoice selection and record your sales that way. Use the ‘Receive payments’ mode to deposit the funds to the bank.

Other Income. Sometimes incidental taxable income is received and can be added directly to the “Make deposits” feature. This could be a refund of an expense previously deducted, like an insurance premium refund. Or it could be periodic income from a vending machine. If it’s taxable income it should be assigned to Other Income and show on the profit and loss statement at the bottom.

Nontaxable Income. Loans to the company, credit card cash advances, business line advances, and owner contributions and paid in capital are major sources of nontaxable income. These should be assigned to a liability account rather than a sales or income account. They should not show up on the profit and loss statement but rather as liabilities in the case of loans or equity in the case of owner contributions on the balance sheet.


Getting to Know Bonds

Many investors own bonds or debt based investments as a strategy for balancing the short-term market risk historically associated with stocks.1 It's important to understand the characteristics of bonds when making decisions about how to invest.

A bond is an "IOU" for money loaned by an investor to the bond's issuer. In return for the use of that money, the issuer agrees to pay interest at a stated rate known as the "coupon rate." When the bond matures, the issuer repays the investor's principal.

Benefits and Risks of Bonds
Because bonds may not move in tandem with stock investments, they may help provide diversification within an investor's portfolio.2 Bonds frequently provide investors with a steady income stream, although zero-coupon bonds and Treasury bills are exceptions: The interest income is deducted from their purchase price, and the investor then receives the full value of the bond at maturity. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

Some bonds carry credit risk, or the risk that the bond issuer will default before the bond reaches maturity. In that case, you may lose some or all of the principal amount invested and any outstanding income that is due. Bonds are often rated by Moody's and Standard & Poor's (S&P), with ratings based on the issuer's creditworthiness.

High yield "Junk" bonds (so-called because of their lower credit ratings) are fairly common investment vehicles. Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer and may not be suitable for all investors.

Like stocks, bonds can present the risk of price fluctuation, or market risk, to an investor who is unable to hold them until the maturity date when the principal and interest are paid to the bondholder. If the investor is forced to sell or liquidate a bond before it matures, and the bond's price has fallen, the investor will lose part of the principal investment as well as the future income stream.

An Inverse Relationship: Interest Rate Risk
Another risk common to all bonds is interest rate risk. When interest rates rise, a bond's price usually will drop. When interest rates fall, the price of a bond usually rises. Historically, bond prices have been more stable than their stock counterparts. Moreover, because bond investors may be concerned primarily with receiving income (instead of capital appreciation) from their bonds, they may not be as concerned with fluctuating bond prices.

Types of Bonds
Most bonds fall into four general categories: corporate, government, government agency, and municipal.

  • Corporate bonds can provide an investor with a steady stream of income at a generally higher rate than other bonds.
  • Government bonds include long-term and U.S. Treasury bonds. Intermediate-term bonds mature in three to 10 years, whereas long-term bonds generally mature in periods of up to 30 years.
  • Government agency and government-sponsored entity bonds include those issued by the Federal National Mortgage Association ("Fannie Mae") and the Government National Mortgage Association ("Ginnie Mae").
  • Municipal bonds are issued by a government authority to raise funds for general use or particular public works projects. Municipal bonds are subject to availability and change in price. They are also subject to market and interest rate risk if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax free, but other state and local taxes may apply.


1Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

2There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.

GNMA’s are guaranteed by the U.S. government as to the timely payment of principal and interest, however this guarantee does not apply to the yield, nor does it protect against loss of principal if the bonds are sold prior to the payment of all underlying mortgages.

High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.

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