Business Strategies
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TABLE OF CONTENTS

SMALL BUSINESS

MARKETING AND PRICING

FINANCING

EMPLOYEE BENEFITS

RECORDKEEPING

TRAVEL & ENTERTAINMENT EXPENSES

BUSINESS FORMS OF ORGANIZATION

 

 

 

 

 
































Business Strategies

Q.  

How can I ensure that my small business will survive the transition
into the next generation?

 
A.   Less than one third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few.

The following is a list of options to consider:

  • Close the doors.
  • Sell to an outsider or employee.
  • Retain ownership but hire outside management.
  • Retain family ownership and management control.

There are four basic reasons why family firms fail to transfer the business successfully:

  • Lack of viability of the business.
  • Lack of planning.
  • Little desire on the owner's part to transfer the firm.
  • Reluctance of offspring to join the firm.

The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.

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Business Strategies

Q.  

What’s involved in succession planning for family businesses?

  
A.  Transferring the family business requires the family to make a determined effort to do the following:
  • Create a business strategic plan.
  • Create a family strategic plan.
  • Prepare an Estate Plan.
  • Prepare a Succession Plan, including arranging for successor training and setting a retirement date.

These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.

Q: What is a business strategic plan?

A:  A strategic plan for the business will allow each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company's future. This plan is long term in nature and focuses on where you want the business to be at some future date.

Q: What is a family strategic plan?

A: The family strategic plan is needed to maintain a healthy, viable business. It establishes policies for the family's role in the business. For example, it may include an entry and exit policy that outlines the criteria for working in the business. It should include the creed or mission statement that spells out your family's values and basic policies for the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.

Q: What is an estate plan?

A: An estate plan is critical for the family and the business. Without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.

Q: What is a succession plan?

A: A succession plan will ease the founding or current generation's concerns about transferring the firm. It outlines how succession will occur and how to know when the successor is ready.

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Business Strategies

Q.  

How do I know whether I have what it takes to run my own
business?

  
A.  Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business include wanting to be self-employed, wanting financial and creative independence, and wanting to maximize your skills and knowledge.

When determining what business is "right for you," consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you’re willing to make to running a business.

Then you should do research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?

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Business Strategies

Q.  

What should I include in a business plan?

  
A.  The following outline of a typical business plan can serve as a guide that you can adapt to your specific business:
  • Introduction
  • Marketing
  • Financial Management
  • Operations
  • Concluding Statement

 

Q: What should be included in the introduction to my business plan?

A: The introductory section of your business plan should give a detailed description of the business and its goals, discuss its ownership and legal structure, list the skills and experience you bring to the business, and identify the competitive advantage your business possesses.

Q: What should be included in the marketing section of my business plan?

A: In the marketing section, you should discuss what products/services your business offers and the customer demand for them. Furthermore, this section should identify your market and discuss its size and locations. Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.

Q: What should be included in the financial management section of my business plan?

A: In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide "what if" statements that address alternative approaches to any problem that may develop.

Q: What should be included in the operations section of my business plan?

A: This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, lease or rent agreements. It should also account for the equipment necessary to produce your products or services and for production and delivery of products and services.

Q: What should be included in the concluding statement of my business plan?

A: In the ending summary statement, summarize your business goals and objectives and express your commitment to the success of your business. Also be specific as to how you plan to achieve your goals.

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Business Strategies

Q.  

Is a home-based business right for me?

  
A.  To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, an understanding of what's involved, and a lot of hard work.

You have to be willing to plan ahead, then make improvements and adjustments along the road. Overall, it is important that you establish a professional environment in your home; you should even set up a separate office in your home, if possible.

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Business Strategies

Q.  

What legal requirements might affect a home-based business?

A.  A home-based business is subject to many of the same laws and regulations affecting other businesses. Be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business. For instance, be aware of your city's zoning regulations. Also, certain products may not be produced in the home.

Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing. 

In terms of registration and accounting requirements, you may need a work certificate or a license from the state, a sales tax number, a separate business telephone, and a separate business bank account.

Finally, if your business has employees, you are responsible for withholding income and social security taxes, and for complying with minimum wage and employee health and safety laws.

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Business Strategies

Q.  

How can I avoid running into cash flow problems in my small business?

  
A.  Failure to properly plan cash flow is one of the leading causes for small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.

A business's monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

The Operating Cycle

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable - credit sales. Accounts receivable are usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, which increases your cash. Now your cash has completed its flow through the operating cycle and is ready to begin again

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear. 

A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

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Business Strategies

Q.  

What steps can I take to improve my business cash flow?

  
A.  To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:
  • Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are not aggressive.
  • Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
  • Manipulating price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product's market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
  • Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
  • Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.

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Business Strategies

Q.  

Should I keep a cash reserve in my small business?

  
A.  You should always keep enough cash on hand to cover expenses and as an added cushion for security. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill.

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Business Strategies

Q.  

How do I research whether my small business’ product or service
will sell?

  
A.  Market research is the most critical element of successful business planning because it provides the basic data that will determine if and where you can successfully sell your product or service and how much to charge. It is a process that involves scrutinizing your competition and your customer base, and interviewing potential suppliers.

There are any number of benefits to conducting market research. It can help you create primary and alternative sales approaches to a given market, make profit projections from a more accurate base, organize marketing activities, develop critical short/mid-term sales goals, and establish the market's profit boundaries. First, you must define your goals and organize the collection/analysis process.

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Business Strategies

Q.  

What market research questions should I ask?

  
A.  Your research should ask questions of your customers concerning location, their needs and resources, what they can afford. I should also address larger questions, such as where you can create a demand, and can you compete effectively in price, quality, and delivery?

Furthermore, can you price the product or service to assure a profit? In addition, find out how many competitors provide the same service or product. Finally, it is helpful to understand the general economy of your service or product area and the areas within your market that are declining or growing.

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Business Strategies

Q.  

What costs should I consider in determining how much to charge
for my products or services?

  
A.  Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, and therefore fail to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service. Cost components include material, labor and overhead costs.

Material Costs are the costs of all materials found in the final product.

Labor Costs are the costs of the work that goes into the manufacturing of a product. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel-hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include social security, workers' compensation, unemployment compensation, insurance, retirement benefits, etc.

Overhead Costs are any costs not readily identifiable with a particular product. These costs include indirect materials, such as supplies, heat and light, depreciation, taxes, rent, advertising, transportation and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling and/or storage as well as other cost components.

Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs semiannually, including increased executive salaries and other projected costs.

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Business Strategies

Q.  

How can I raise money for my small business?

  
A.  Even though, raising capital is the most basic of all business activities, it can be a complex and frustrating process. There are several sources to consider when looking for financing. The primary source of capital for most new businesses comes from savings and other forms of personal resources. While credit cards are often used to finance business needs, there may be better options available, even for very small loans.

Many entrepreneurs also look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest free or at a low interest rate, which can be beneficial when getting started.

Outside of personal resources, the most common source of funding are banks and credit unions, which provide a loan if you can show that your proposal is sound. Finally, venture capital firms help companies grow in exchange for equity or partial ownership.

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Business Strategies

Q.  

What types of loans exist for business financing?

  
A.  To be successful in obtaining a loan, you must know exactly how much money you need, why you need it, and how you will pay it back. Your written proposal must be able to convince your lender that you are a good credit risk.

Terms of loans may vary from lender to lender, but there are two basic types of loans:

Short-term and long-term. Generally, a short-term loan has a maturity of up one year. These include working-capital loans, accounts-receivable loans and lines of credit. 

Long-term loans have maturities greater than one year but usually less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.

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Business Strategies

Q.  

What do banks look for when considering a loan request?

  
A.  When reviewing a loan request, the bank official is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your business credit report from a credit-reporting agency. 

Using the credit report and the information you have provided, the lending officer will consider the following issues:

  • Have you invested savings or personal equity in your business totaling at least 25 percent to 50 percent of the loan you are requesting? (Remember, a lender or investor will not finance 100 percent of your business.)
  • Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommendation? This is very important.
  • Do you have sufficient experience and training to operate a successful business?
  • Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business?
  • Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request?

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Business Strategies

Q.  

How do I write a good loan proposal?

  
A.  A good loan proposal will contain the following key elements:

General Information

  • Business name and address, names of principals and their social security numbers.
  • Purpose of the loan: exactly what the loan will be used for and why it is needed.
  • >Amount required: the exact amount you need to achieve your purpose.

Business Description

  • Details of what kind of business it is, its age, number of employees and current business assets.
  • Ownership structure: details on your company's legal structure.

Management Profile

Develop a short statement on each principal in your business; provide background, education, experience, skills and accomplishments.

Market Information

Clearly define your company's products as well as your markets. Identify your competition and explain how your business competes in the marketplace. Profile your customers and explain how your business can satisfy their needs.

Financial Information

  • Financial statements: balance sheets and income statements for the past three years. If you are just starting out, provide a projected balance sheet and income statement.
  • Personal financial statements on yourself and other principal owners of the business.
  • Collateral you would be willing to pledge as security for the loan.

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Business Strategies

Q.  

As a small employer, what do I need to know about employee
benefits?

  

A. The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage, including Social Security, unemployment insurance, and workers’ compensation. Funding for the Social Security program comes from payments by employers, employees and self-employed persons into an insurance fund that provides income during retirement years. 

Full retirement benefits normally become available at age 65. Other aspects of Social Security deal with survivor, dependent and disability benefits, Medicare, Supplemental Security Income and Medicaid. Unemployment insurance benefits are payable under the laws of individual states from the Federal-State Unemployment Compensation Program. 

Employer payments, based on total payroll, contribute to the program. Workers' compensation provides benefits to workers disabled by occupational illness or injury. Each state mandates coverage and provides benefits. In most states, private insurance or an employer self-insurance arrangement provides the coverage. Some states mandate short-term disability benefits as well.

Optional Benefits

A comprehensive benefit plan can include the following elements health insurance, disability insurance, life insurance, a retirement plan, flexible compensation, and leave. A benefit plan can also include bonuses, service awards, reimbursement of employee educational expenses and perquisites appropriate to employee responsibility. 

Before you implement any benefit plan, you should decide what you’re willing to pay for this coverage. You may also want to seek employee input on what benefits interest them. For instance, is a good medical plan more important than a retirement plan? Furthermore, you must decide whether it is more important to protect your employees from economic hardship now or in the future. Finally, you must decide if you want to administer the plan or have the insurance carrier do it.

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Business Strategies

Q.  

What type of medical plans are available for employees?

  
A.  As an employer, you can choose either an insured (also known as an indemnity or fee-for-service plan) or a pre-paid plan (also known as a health maintenance organization) 

An indemnity plan allows the employee to choose his or her own physician. The employee typically pays for the medical care and then files a claim form with the insurance company for reimbursement. These plans use deductibles and coinsurance as well. The deductible can range from $100 to $1,000 a year.

Coinsurance is a percentage of medical expenses the employee pays, with the plan paying the remaining portion. A typical coinsurance amount is 20 percent, with the plan paying 80 percent of approved medical expenses. 

The most common types of indemnity plans, provide health care to groups of employees, are a basic health insurance plan that covers hospitalization and surgery and physicians’ care in the hospital, a major medical insurance plan that supplements a basic plan by reimbursing charges not paid by that plan, and a comprehensive plan that covers both hospital and medical care with one common deductible and coinsurance feature.

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Business Strategies

Q.  

What is a preferred provider organization (PPO)?

  
A.  A preferred provider organization (PPO) is a network of physicians and/or hospitals that contracts with a health insurer or employer to provide health care to employees at predetermined discounted rates. PPOs offer a broad choice of health care providers.

Because of the broader choice of providers, PPOs are more expensive than HMOs. Although there is no requirement for employees to use the PPO providers, there are strong financial reasons to do so. PPOs may have less comprehensive benefits than HMOs, but the benefits usually can meet almost any need. Furthermore, PPO providers usually collect payments directly from insurers.

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Business Strategies

Q.  

What is a health maintenance organization (HMO)?

 
A.  Health maintenance organizations (HMOs) provide health care for their members through a network of hospitals and physicians. Comprehensive benefits typically include preventive care, such as physical examinations, well baby care and immunizations, and stop-smoking and weight control programs. The main characteristics of HMOs are as follows. The choice of primary care providers is limited to one physician within a network; however, there is frequently a wide choice for the primary care physician.

There is no coverage outside the HMO network of hospitals and physicians. Costs are lower, due to limited choice. Physicians are encouraged to keep patients healthy; accordingly, they often are paid on a per capita basis, regardless of how much care the patient needs. The employer prepays HMO premiums on a fixed, per employee basis. Employees do not have to apply for reimbursement of charges, but they may have small co-payments for medical services.

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Business Strategies

Q.  

What types of disability benefits do companies provide to
employees?

  
A.  A disability plan provides income replacement for the employee who cannot work due to illness or accident. These plans are either short term or long term and are distinct from workers' compensation because they pay benefits for non-work-related illness or injury. 

Short-term disability (STD) is usually defined as an employee's inability to perform the duties of his or her normal occupation. Benefits may begin on the first or the eighth day of disability and are usually paid for a maximum of 26 weeks. The employee's salary determines the benefit level, ranging from 60 to 80 percent of pay.

Long-term disability (LTD) benefits usually begin after short-term benefits conclude. LTD benefits continue for the length of the disability or until normal retirement. Again, benefit levels are a percentage of the employee's pay, usually between 60 and 80 percent. Social Security disability frequently offsets employer-provided LTD benefits. Thus, if an employee qualifies for Social Security disability benefits, these are deducted from benefits paid by the employer.

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Business Strategies

Q.  

What types of life insurance plans are available for employees?

  
A.  Traditionally, life insurance pays death benefits to beneficiaries of employees who die during their working years. There are two main types of life insurance: 
  1. Survivor income plans, which make regular payments to survivors and 
  2. Group life insurance plans, which normally make lump-sum payments to specified beneficiaries. 

Protection provided by one-year, renewable, group term life insurance, with no cash surrender value or paid-up insurance benefit, is very popular. Frequently, health insurance programs offer this coverage.

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Business Strategies

Q.  

What is self-insurance?

  
A.  With self-insurance, the business predetermines and then pays a portion or all of the medical expenses of employees in a manner similar to that of traditional health care providers. Funding comes through establishment of a trust or a simple reserve account.

As with other health care plans, the employee may pay a portion of the cost in premiums. Catastrophic coverage is usually provided through a "stop loss" policy, a type of coinsurance purchased by the company. The plan may be administered directly by the company or through an administrative services contract.

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Business Strategies

Q.  

What is a "cafeteria plan"?

  
A.  Cafeteria plans offer employees a minimum level or "core" of basic benefits. Employees are then able to choose from several levels of supplemental coverage or different benefit packages. 

All packages are of relatively equal value, but can be selected to help employees achieve personal goals or meet differing needs, such as health coverage (family, dental, vision), tax reduction (thrift plans, salary reduction), retirement income (pension plans) or specialized services (day care, financial planning, legal services).

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Business Strategies

Q.  

What kind of records do I need to keep in my business?

 
A.  Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that help you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income and expenses. That information helps you pinpoint both the strong and weak phases of your business operations. 

Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.

To assure your success, your financial records should show how much income you are generating now and project how much income can you expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied-up in inventory. They should reveal which of your product lines, departments, or service are making a profit, as well as your gross and net profit.

The Basic Recordkeeping System

A basic record-keeping system needs a basic journal to record transactions, accounts receivable records, accounts payable records, payroll records, petty cash records, and inventory records.

An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.

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Business Strategies

Q.  

What do I need to know about automating part or all of my business?

  
A.  You must have a clear understanding of your firm's long- and short-range goals, the advantages and disadvantages of all of the alternatives to a computer and, specifically, what you want to accomplish with a computer. Compare the best manual (non-computerized) system you can develop with the computer system you hope to get. It may be possible to improve your existing manual system enough to accomplish your goals. In any event, one cannot automate a business without first creating and improving manual systems.

Business Applications Performed by Computers

A computer's multiple capabilities can solve many business problems from keeping transaction records and preparing statements and reports to maintaining customer and lead lists, creating brochures, and paying your staff. A complete computer system can organize and store many similarly structured pieces of information, perform complicated mathematical computations quickly and accurately, print information quickly and accurately, facilitate communications among individuals, departments and branches, and link the office to many sources of data available through larger networks. A computer can also streamline such manual business operations as accounts receivable, advertising, inventory, payroll, and planning. With all of these operations, the computer increases efficiency, reduces errors, and cuts costs.

Computer Business Applications

Computers also can perform more complicated operations, such as financial modeling programs that prepare and analyze financial statements and spreadsheet and accounting programs that compile statistics, plot trends and markets and do market analysis, modeling, graphs and forms. Various word processing programs produce typewritten documents and provide text-editing functions, while desktop publishing programs enable you to create good quality print materials on your computer. Critical path analysis programs divide large projects into smaller, more easily managed segments or steps.

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Q.  

How can I ensure that I’m choosing the right computer system?

  
A.  To computerize your business you will have to choose the right programs, select the right equipment and implement the various applications. Generally, there are three types of software. Compilers and interpreters translate programs written in programming language that people can use into machine language that the CPU can execute. Operating system software control all the separate components of the computer. System software generally comes with the computer and must loaded into memory before the application software can work. 

In addition, application software is composed of programs that make the computer perform particular functions, such as payroll check writing, accounts receivable, posting or inventory reporting and are normally purchased separately from the computer hardware.

To determine your requirements, prepare a list of all functions in your business in which speed and accuracy are needed for handling volumes of information. These are called applications.

For each of these applications make a list of all reports that are currently produced. You should also include any preprinted forms such as checks, billing statements or vouchers. If such forms don't exist, develop a good idea of what you want - a hand-drawn version will help. For each report list the frequency with which it is to be generated, who will generate it and the number of copies needed. In addition to printed matter, make a list of information you want displayed on the computer video screen (CRT). 

Again, design a hand-drawn version. List the circumstances under which you want this information displayed. For each application make a list of all materials used as input into your manual system. These may include items such as time cards, work orders, receipts, etc. Describe the time period in which these items are created, who creates them and how they get into the system. Also, describe the maximum and average expected number of these items generated in the appropriate time period. 

For all files you are keeping manually or expect to computerize list the maximum and average expected number of entries in a specific time period. Identify how you retrieve a particular entry. Do you use account numbers or are they organized alphabetically by name? What other methods would you like to use to retrieve a particular entry? Zip code? Product purchased? Indeed, the more detailed you are, the better your chance of finding programs compatible with your business.

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Q.  

How can I successfully implement a new computer system?

  
A.  When implementing computer applications for your business, problems are inevitable, but proper planning can help you avoid some and mitigate the effects of others. First, explain to each affected employee how the computer will change his or her position. Set target dates for key phases of the implementation, especially the last date for format changes. Be sure the location for your new computer meets the system's requirements for temperature, humidity and electrical power. Prepare a prioritized list of applications to be converted from manual to computer systems, and convert them one at a time rather than all at once. And, train, or have the vendors train, everyone who will be using the system.

After installation, each application on the conversion list should be entered and run parallel with the preexisting, corresponding manual system until you have verified that the new system works.

System Security

If you will have confidential information in your system, you will want safeguards to keep unauthorized users from stealing, modifying or destroying the data. You can simply lock up the equipment, or you can install user identification and password software.

Data Safety

The best and cheapest insurance against lost data is to back-up information on each diskette regularly. Copies should be kept in a safe place away from the business site. Also, it is useful to have and test a disaster recovery plan and to identify all data, programs and documents needed for essential tasks during recovery from a disaster.

Finally, be sure to employ more than one person who can operate the system, and ensure that all systems are continually monitored.

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Business Strategies

Q.  

Can I deduct the cost of meals on days I call on customers or clients
away from my office?
A.  Generally not. Usually, you can only deduct costs of meals when you’re away from home overnight, or as part of business-related entertainment.

Even when deduction is allowed, it’s only to the extent of 50% of the meals costs and related tips.

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Business Strategies

Q.  

Must I report employer reimbursements for travel, entertainment
and meals?

  
A.  It depends. If you give your employer a detailed expense accounting, return any excess reimbursement, and meet other requirements, you don’t have to report the reimbursement—and don’t deduct the expenses.

This means that any deduction limits are imposed on your boss, not you, and the 2% limit on miscellaneous itemized deductions won’t affect your travel, entertainment and meals costs.

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Business Strategies

Q.  

What are the limits on deductible travel, entertainment and meals
costs?

 
A.  There are no dollar limits. Expenses must be "ordinary and necessary" (meaning appropriate and helpful) and not "lavish or extravagant", but this doesn’t bar deluxe accommodations, travel or meals.

Deduction for business entertainment and business meals can’t exceed 50% of the cost.

There are additional special limitations on skyboxes and luxury water travel.

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Business Strategies

Q.  

Can I deduct living expenses on temporary assignment away from
the area where I live and work?

  
A.  Yes. Living expenses at the temporary work site are away from home travel expenses.

An assignment is temporary if it’s expected to last no more than a year. If it’s expected to last more than a year, the new area is your tax home, so you can’t deduct expenses there as away from home travel.

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Business Strategies

Q.  

What expenses can I deduct while traveling away from home?

 
A.  A wide range of expenses can be deducted while traveling away from home. 

Here are the main ones:
  • Transportation fares, or actual costs (or a per mile rate) of using your own vehicle. Also, transportation costs of getting around in the work area—to and from hotels, restaurants, offices, terminals, etc.
  • Lodging and meals (subject to the 50% limit on meals)
  • Phone, fax, laundry, baggage handling
  • Tips related to the above

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Business Strategies

Q.  

What can’t be deducted as travel expenses?

 
A.  The following travel expenses cannot be deducted:
  • Costs of commuting between your residence and a work site, but it’s a deductible business trip if your residence is your business headquarters.
  • Travel as education
  • Job hunting in a new field or looking for a new business site

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Business Strategies

Q.  

What can I deduct for business entertainment?

 
A.  There are various conditions and limits for deductions for business and entertainment.
  • Generally, there should be a business discussion before, during or after the entertainment.
  • Generally, deduction for entertainment and meals is limited to 50% of the cost.
  • There are further limitations for club dues, entertainment facilities and skyboxes.
  • Spouses of business associates, and your own spouse, can be included in the entertainment in settings where spouse attendance is customary.

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Business Strategies

Q.  

How do I prove my travel and entertainment expenses?

 
A.  If you’re an employee who is reimbursed for expenses, it’s best if you can prove them only to your employer. This will require a written accounting to the employer, and return to the employer of any amounts in excess of expenses.

Some per diem arrangements and mileage allowances—called "accountable plans"—take the place of detailed accounting to the employer, if time, place and business purpose are established.

Where expenses aren’t fully reimbursed by your employer, or excess reimbursements aren’t returned, detailed substantiation to IRS is required and, if you’re an employee, your deductions are subject to the 2% floor on miscellaneous itemized deductions.

Your expense records should be "contemporaneous"—recorded close to the time expenses are incurred.

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Business Strategies

Q.  

I bought a car I will use in my work. What tax relief is available?

  
A.  If you’re an employee who is reimbursed for expenses, it’s best if you can prove them only to your employer. This will require a written accounting to the employer, and return to the employer of any amounts in excess of expenses.

Some per diem arrangements and mileage allowances—called "accountable plans"—take the place of detailed accounting to the employer, if time, place and business purpose are established.

Where expenses aren’t fully reimbursed by your employer, or excess reimbursements aren’t returned, detailed substantiation to IRS is required and, if you’re an employee, your deductions are subject to the 2% floor on miscellaneous itemized deductions.

Your expense records should be "contemporaneous"—recorded close to the time expenses are incurred.

If you use it more than 50% for business, you can treat it as business property that can be written off in the year purchased (up to a dollar ceiling, plus a percentage ceiling if sometimes used for personal purposes).

If the write-off just mentioned is not available, not chosen, or not fully used, you are allowed annual depreciation deductions for the car, based on the proportion of business use and sometimes subject to a dollar ceiling.

You can also deduct the cost of operating the car on business. At your option, you can deduct actual operating expenses, or a flat rate per business mile. Some tax relief—one-year write-off and rapid depreciation—is not available once you have used a mileage rate.

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Business Strategies

Q.  

Which kinds of business organization or business entity will limit 
my liability to business creditors?

  
A. Leading forms are corporations, limited liability companies (LLCs), limited partnerships, and limited liability partnerships (LLPs). General partnerships and sole proprietorships don’t limit owners’ liability. Limited partnerships limit liability of some partners (limited partners) and not others (general partners).

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Business Strategies

Q.  

What is the "corporate double tax" and how can it be avoided?

  
A. The "corporate double tax" occurs where a business corporation (or an entity treated for tax purposes as a business corporation) pays a federal tax on its income, and then a tax is paid by its owners as they collect corporate profits. The tax on the corporation is called an "entity level tax" and an entity so taxed is called a "C corporation" (C corp). 

The double tax can be avoided:
  • By electing to be an S corp. This doesn’t change its nature under state business law, but in most cases eliminates federal tax at the corporate level.
  • By postponing profits distributions to corporate owners, the second tax (on the owners) can be postponed.

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Business Strategies

Q.  

Which types of business entity are best for tax purposes?

  
A. It depends, but the "passthrough" type of entity generally saves tax overall by eliminating tax at the entity level. Passthrough entity owners are taxed directly on their share of entity profits. Another passthrough advantage is that owners can take tax deductions for startup or operating losses, against their income from investments or other businesses.

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Business Strategies

Q.  

Which are the "passthrough" entities?

  
A. You have much control over whether the entity you choose is treated as a passthrough entity for federal tax purposes (see below), but the leading passthrough forms are general partnerships, limited partnerships, LLPs, LLCs, S corps, and sole proprietorships.

If your business is in the form of a partnership (any type) or limited liability company, you may choose whether your business is treated for tax purposes as a corporation or a partnership (or, if you’re the only one in the LLC, as a corporation or disregarded for tax purposes). Tax and business advisors call this choice the "check-the-box" system. If it’s actually incorporated, or you choose to have it treated as a corporation, you may qualify to have it treated as a passthrough by electing S corp status.

Your choice under check-the-box is binding. That is, if you choose one entity (say, corporation) in one year and another (say, partnership) the next year, you must pay tax as if you sold last year’s entity and put the proceeds into this year’s.

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Business Strategies

Q.  

What entities will let me both limit my liability and avoid the double
tax?

  
A.  S corps (usually), and all the following types, assuming you don’t choose to have them treated as corporations: LLCs; LLPs; and limited partnerships, for the limited partners. For sole owners, the choice is limited to S corps or, in states that allow single owners, LLCs.

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Business Strategies

Q.  

What's so great about limited liability companies (LLCs)?

  
A.  LLCs combine limited liability with passthrough tax treatment. They can offer benefits unavailable from S corps, their nearest rival (for businesses other than professional practices). The key benefits:
  • A way to allocate certain tax benefits disproportionately among owners.
  • Opportunity for greater loss deductions.
  • Avoiding or reducing tax when a new owner joins the business or when distributions are made to owners in business liquidation.

Some state do, and some don’t, allow LLCs with a single owner. Where allowed, the owner can choose under check-the-box rules to have the LLC disregarded for tax purposes (without losing LLC limited liability), and pay tax directly on LLC income.

S corps are a good alternative where single member LLCs aren’t allowed. And they can also postpone tax, as compared to LLCs, where the business is to be bought out by a corporate giant.

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Business Strategies

Q.  

What special considerations are there if my business is a
professional practice?

  
A. Limitation of liability, especially malpractice liability, is a major concern. No entity will protect you against liability for your own malpractice. But LLCs, Professional Limited Liability Companies (PLLCs), and LLPs, where available for professional practices, will protect you against liability for malpractice of co-owner professionals in the firm, and maybe (depending on state law) for other debts. Professional Corporations (PCs) may not protect against liability for a co-owner’s malpractice, depending on state law.

The tax rules governing those in LLCs, PLLCs, and LLPs are about the same, and somewhat more liberal than those for PCs.

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Business Strategies

Q.  

What are the federal tax consequences of changing your form of 
business organization?

  
A. This is a critical decision that should be studied carefully with professional guidance. But briefly stated:
  • There’s no tax on a change from C corp to S corp or vice versa.
  • There is no tax on a change from LLC, partnership or sole proprietorship to a C or S corp.
  • There is no tax on a change from a proprietorship or partnership to LLC or vice versa.
  • There is a tax on a change from C or S corp to an LLC, partnership or sole proprietorship.

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Business Strategies

Q.  

Do state business entity rules follow federal tax rules?

.  
A. Keep in mind the difference between state business law and state tax law. The tax status you choose for your entity under the federal check-the-box system doesn’t make it that entity for state business law purposes. So, for example, choosing corporate tax treatment for a partnership won’t bring corporate limited liability.

There is a trend for states to treat the entity chosen under federal check-the-box as the entity recognized for state tax purposes—but this is optional with the state.

State law may accept passthrough status for an entity (such as an S corp or an LLC) and still impose a tax of some kind on the entity.

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