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Ten Ways to Protect Your Business

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					                  Ten Ways to Protect Your Business



There are no certainties when it comes to business cycles, and no amount of

guesswork can protect business owners from the ups and downs of a changing

economy. There are, however, fundamental steps you as a business owner can

take to minimize disruptions from increasing costs, changing consumer habits,

growing operating risks, competition and fraud.



Your business may have been up and running smoothly for some time, but

as in any business, changes will occur, and it’s important to recognize the

potential warning signs early and respond accordingly. For example, be

alert for such things as slight decreases in sales, a decline in the number of

potential clients or customers who respond to your promotions, and new

market developments that could adversely affect the business.



The bottom line is to identify the key issues facing your business and take

the right actions to minimize the downsides and maximize the

opportunities. That’s what I’d like to cover today – the ten ways to protect

and grow your business.
Let’s start with a well-developed business plan. A business plan reflects

both the goals of your company and the action steps necessary to

accomplish them. Simply put, the plan describes where your company is

today, where you want it to be tomorrow, and how you plan to get it there.



The plan also should include a well-defined statement about the market

need for your product or service, a description of your roles and the roles of

your partners and staff, as applicable, and a detailed outline of your

operations. Be sure to list existing assets and liabilities, along with

historical financial results, projections and a statement of cash flow.

Besides the numerical data, also include your organizational structure,

personnel policies, a description of reporting processes and other internal

management plans.



Putting together a business plan is a critical step as it forces you to step

back to gauge your market, its potential size, the competition, and the

marketing and advertising strategies you will need to implement. When

you look at your competitors, ask yourself these questions: How does their

share in the market compare to mine? What are they doing that I should

consider? What sort of marketing strategy should I pursue?



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As you’re developing your business plan, you’ll also need to consider the

financial aspects…another component I’d like to discuss. The single most

pressing concern for any business is its financial health. It’s likely that

some of you started your business using personal resources – and possibly

loans from family members or friends. While this helps to get you over the

initial hump, it can prevent you from establishing a credit history early on.



Fortunately, there are a number of financing sources, including angel

investors, venture capital firms, local banks and the Small Business

Administration. When applying for financing, be sure you have a business

proposal that clearly outlines your plans for growth. Keep in mind that the

SBA is a government agency and generally requires more documentation

than banks. At a minimum, include a balance sheet, income statement and

a statement of cash flows from the most recent period. However, if your

business is a start up, you’ll need to put together a balance sheet reflecting

personal assets and liabilities.



Determine ahead of time the loan schedule that best fits your business

needs, the cash flow you’ll need to repay the loan, and the collateral you



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may need to get the loan. Also, make sure your financial records are in

order by reconciling bank statements, tracking purchases and payments,

and operating your business, at a minimum, as effectively as other

businesses in the same industry.



There are two major types of financing: debt financing and equity financing.

With debt financing, the loans must be repaid. Sources include

commercial, savings banks, and credit unions if you belong to a company

or labor group. Other sources include consumer-financing companies,

which charge higher rates than banks, and commercial finance companies

that make loans for business purposes, such as for the purchase of

inventory and equipment.



Equity financing essentially involves selling all or part of your business or

control of it to others. Venture capital firms provide funds to finance

growth, and in return, get to own part of your business, while you keep

control and decision-making authority. Other alternatives include employee

stock ownership plans, where employees generally work for smaller pay

and benefits in return for part ownership; or joint venture or licensing

agreements involving a partial or complete purchase of your company.



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Another major consideration for maintaining your business’s financial

health is managing cash flow. Effective cash management not only

enables you to increase cash inflow, but also allows you to put your money

to work as you invest idle funds in higher yielding vehicles. Working with

your CPA, you can employ a variety of cash management practices simply

by reviewing your financial statements and the key underlying ratios, such

as accounts receivable turnover, inventory turnover, net profits on sales

and outstanding accounts receivable as a percentage of total revenue.



One simple way to improve cash flow is to bill your customers at the time of

the transaction, rather than waiting until the end of the month. If your policy

is to allow 30 days to pay, you are placing an almost two-month gap

between the sale and any collection of money owed to you. Also, consider

offering discounts for early payment of invoices, if applicable.



Lastly, it’s important to create an annual budget and periodically review it,

assessing your overall operations and identifying factors that are either

helping or hurting the business. A budget also allows you to compare

actual performance against your projections and isolate the differences so



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you can identify the problem and take the appropriate steps to correct it.

Finally, a budget enables you to communicate to your employees

expectations for the year as well as inform your lender about your

objectives.



Let’s now consider marketing…an essential consideration for the health

and prosperity of any business. What does a punch card from a coffee

shop and a discount card on your next book purchase have in common? If

you said “customer loyalty,” you would be 100 percent right! Customer

loyalty is a proven approach for retaining the customer base you worked so

hard to attract.



To build your business, there are a number of promotional efforts you can

undertake to raise your visibility. One approach is to identify new niche

markets you can serve and customize your advertising to appeal to the

special needs of prospects in each niche. For example, an office supply

business may want to tailor its advertising to people who run businesses

out of their homes.




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One simple approach is to identify and respond to emerging trends. For

example, if you see local businesses advertising through the Internet,

consider moving in this direction if it’s appropriate for your business and a

good way to reach your target audience. Another approach is to set up

joint promotions. This involves identifying the characteristics and activities

of your most profitable customers. Look for a non-competing business that

is already reaching them. Then think of ideas to jointly promote your

products and services. For example, an ophthalmologist may want to run a

joint promotion with an optician.



Other ideas include becoming involved with local business associations,

such as the Chamber of Commerce or the Rotary Club, and giving

speeches in your community or target market area at local banks, libraries

or community centers.



Selecting the appropriate legal structure for your business is also crucial

to protect your business and minimize your taxes. The basic forms of

business structures are sole proprietorship, partnership – either general or

limited – a limited liability company, or a C or S corporation.




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If you’re considering starting a business or have been operating one, it’s

important to know which structure provides the best legal and tax

advantages for you. A sole proprietorship is simply that – a one-person

business that is not registered with the state as a partnership, limited

liability company or a corporation. You don’t have to do anything special or

file any papers to set up a sole proprietorship. Legally, the sole

proprietorship, and you as its owner, are one and the same. All business

income and losses are reported on your personal income tax return, and

you are personally liable for any business obligations such as debts and

court judgments.



From a tax standpoint, a partnership is similar to a sole proprietorship; the

only real difference is that a partnership is owned by two or more people.

In a partnership, you as a partner pay tax on your share of the business

income on your personal income tax return. You and your partner are each

personally liable for the entire amount of any business debts or legal

claims. When forming a partnership, be sure an attorney sets up a

partnership agreement describing the role of each partner, the money that

is involved, the property and skills to be contributed by each partner, profit

splits, and the terms under which the partnership can be dissolved.



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A limited partnership tends not to be a good option for most small business

owners. Under this structure, there is at least one limited partner and one

general partner. The limited partner has minimal control over daily

business decisions and operations and, in exchange, is not responsible for

business debts or claims. The general partner, in contrast, is responsible

for the daily business operations and is personally liable for business debts.

This structure also can be costly and complicated to set up and operate.

Some states require general partnerships to be registered and limited

partnerships must be registered as LLPs – limited liability partnerships.



Limited liability companies, or LLCs, on the other hand, can be a good

option. As with corporations, this structure provides for limited personal

liability for business debts and claims. When it comes to taxes, however,

LLCs are more like partnerships. The owners of an LLC pay taxes on their

share of the business income on their personal tax returns.



So when does an LLC make sense? If you as a business owner potentially

could be sued by customers or clients or end up piling up a lot of business

debt, an LLC will serve to protect your personal assets from creditors.



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A corporation, unlike the other structures, results in the formation of a

completely independent legal and tax entity. A corporation is considered

separate from the people who own, control and manage it. With an S

Corporation, stockholders pay income taxes on the business income on

their personal tax returns the same as sole proprietorships or partnerships.

In a regular corporation – known as a C corporation, the company itself is

taxed on business profits. You and the other owners pay individual income

tax only on money paid out of the corporation as a salary, bonus or

dividends. It is important, however, to check with the state tax division to

make absolutely sure how S corporations are taxed since some states,

instead of taxing the business profits on the shareholder’s personal returns,

will tax an S corporation like a regular corporation.



Let’s now focus on managing business risk, which involves determining

your business’s exposure to the likelihood of a loss or less-than-expected

return and how you can best protect against such exposure.



A tool typically used to manage a business’ risk is insurance. There are

different types of insurance you may want to consider, such as group life



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and health, casualty and theft, disability, workman’s compensation, “key

man,” liability and automobile insurance. Work with your insurance adviser

to establish a plan that best fits your needs and budget. Also, consider

working with an insurance broker instead of an agent, since a broker

represents many insurance companies and can be more objective in

offering recommendations. But be aware that some insurers offer larger

commissions and broker incentives.



Generally the more assets you have, the greater your potential for suffering

a loss. Given that, it is critical to have your business periodically appraised;

a service a CPA skilled in this area can provide you with.



Managing your workforce effectively is also critical to business success.

In a changing economy like ours, there will be periods of expansion and

contraction in the workforce and issues surrounding hiring or terminating

employees. Also, because of the unknown factor when hiring someone, it’s

crucial to apply appropriate screening and employment practices.



After you have determined the need for adding a position but BEFORE you

advertise it, carefully analyze the important facts about the job so you can



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attract those with the appropriate skill levels. Keep in mind that you must

also follow federal and state hiring guidelines to avoid violating

discrimination laws. Where you advertise for a position is also key in

attracting a broad audience.



When writing a job description, focus on such things as the purpose and

responsibilities of the job; the tasks involved and the methods used to

complete them; the qualifications needed for the job; and the relationship

the job has to other areas of the company. Keep in mind that the job

description will be the tool you use for subsequent performance evaluations

as well as the basis for creating job-training programs.



Believe it or not, even in the 21st century, racial and other forms of

discrimination still exist in the hiring practices of some companies. We

have read about the consequences companies have suffered for

discriminating against individuals. What is your responsibility as a business

owner? First, you must establish a philosophy and practice, and clearly

communicate it to your employees. There are a number of basic protocols

to follow to help ensure you are not accused of employment discrimination.




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Monitor your employees’ performance and provide regular evaluations to

put any employee on notice about his or her performance if it is less than

desired. Be sure to document your discussion, so if legal action is taken

against you, you will have the necessary paper trail to support your actions.



If you must terminate an employee, make sure your reasons to dismiss are

legitimate and justifiable and you have carefully documented them.

Whether it’s dishonesty, poor performance, violating a company policy,

harassment, or repeated failure to follow directions, be sure you’re on solid

footing, perhaps consulting with your attorney before taking action.



Another good practice is to communicate with your employees on a regular

basis through an open door policy. In other words, don’t punish the

employee who brings you information about harassment, unsafe practices

or improper actions, such as theft by another employee. We hear so much

today about whistle blowing. If you have created an environment of trust,

employees should not be hesitant about coming to you.



I’d like to spend a few minutes talking about effectively using technology.

Today, processing capabilities are measured in fractions of seconds. We



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have instantaneous communications with vendors, suppliers, lenders and

service providers. Moore’s Law predicts that processing speed will double

every 18 months. That tells us that we need to consistently monitor

whether the technology we have in place is serving the needs of the

business and customers.



Our government grants tax advantages to small businesses for technology.

Businesses now can deduct, rather than depreciate, up to $100,000 in new

equipment purchases through 2005. After that, the deduction drops back

to $25,000, adjusted for inflation. This is a terrific break you may want to

take advantage of by purchasing new PCs whose prices have dropped by

more than 40 percent since 2000. Also, if you have a need for other tools,

such as scanners, copiers, and hand-held devices, you may be eligible for

a limited depreciation deduction. To some business owners, this may

come as news, so the government allows you to recoup depreciation

deductions not taken from prior years on your current year’s tax return.



If you have limited capital and are concerned about what to buy and when

because of the rapid change of technology, you may want to consider

leasing. Leasing technology equipment allows you to expense the



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equipment rather than purchase a depreciable asset, while freeing up your

capital to purchase additional PCs or other assets critical to your business.



Let’s now turn to succession planning, another consideration in protecting

your business’ continuity. Consider this startling fact: more than 70 percent

of family-owned businesses don’t survive the transition from founder to

second generation. In most cases, the "killers" are estate taxes,

management or family discord; issues covered in a good succession plan.



My advice is to plan well in advance so you can determine whether there is

any interest on the part of family members to continue the business, and if

not, identify a strategy for passing the business to another owner.

Succession planning should begin at least five years before you plan to

leave your business.



Tax savings strategies are an integral part of a succession plan since a

business owner’s assets tend to be a major part of his or her estate. Your

goal is to minimize taxes upon your death and avoid forcing your children

or heirs to sell the business to pay estate taxes. With appropriate planning,




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you can restructure your company's legal form, spin off certain assets or

arrange for special long-term payment plans for the estate taxes.



Life insurance is an important planning tool for ensuring the continuity of

your business. Estate taxes are generally due within nine months from the

date of death and payable only in cash. If the business owner makes no

provision to pay these taxes upon his or her death, the heirs may be forced

to liquidate the business to cover the costs. Since life insurance pays out a

cash settlement upon death, it can cover the taxes that are owed.



Retaining key employees also should not be overlooked since their

departure from your company could mean a reduction in business or a

change in its quality. You should consider some incentives to retain these

employees, such as a strong compensation package, possibly with

retention incentives over the period of purchase, or perhaps with the

potential for future ownership.



CPAs who specialize in business succession planning can provide

invaluable advice about various tax strategies. So to be certain that your




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hard work does not go to waste, make sure you have a solid plan of action

that can be implemented.



My next topic for discussion is fraud. Resulting from the increasing use of

technology, businesses now more than ever need to take steps to protect

against fraudulent activity ranging from identity theft – such as stolen bank

account numbers – to the illegal generation of documents such as sales

invoices, purchase orders and bank statements. Check fraud, which has

become a frightening reality for many businesses, results in losses from 12

to 15 billion dollars annually. There are a number of ways to reduce your

exposure, and although some may sound obvious, it’s amazing how many

owners overlook these as they focus on growing their business.



Be sure to conduct periodic audits of your operations and processes to help

uncover irregularities. An area that cannot be emphasized enough is to

separate your various recordkeeping functions, such as having your cash

receipts and cash deposit functions performed by two different people.

How many times have we heard about schemes involving fictitious vendors

created by a bookkeeper to divert company funds into his or her personal




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account? Even worse is that many times these schemes go undetected for

a considerable period of time.



Should you discover a discrepancy, what should you do? First, call your

bank. Your bank can examine the case and take immediate measures,

especially if an unauthorized payment due to document alteration,

counterfeiting or forgery is involved. Make sure you -- or someone you

absolutely trust -- has control over documents, such as checks, invoices

and purchase orders, and the equipment used to generate those

documents – such as signing machines. Also, check your credit report

every six months to see if there are any early warning signs.



Regarding your computer system, be sure you have the proper firewalls,

virus protection and encryption in place, and that you limit access to

sensitive computer systems and records through the use of passwords and

door locks. Other steps to take to protect you against fraud include:

screening all new hires by conducting background checks; shredding all

unnecessary financial documents, especially pre-approved credit card

offers; and protecting all key documents, such as tax returns.




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Last, but certainly not least, in considering your business’ well being is

using professional advisers effectively. Small businesses usually don’t

have the necessary capital to hire full-time experts to assist with all areas of

their business. You will likely need to hire professionals with business and

legal expertise, such as a CPA and an attorney. CPA specialists in

business valuation or financial planning may also be helpful to you in

achieving your business goals.



CPAs are widely used by companies of all types and sizes for their

expertise; not only in financial recordkeeping and reporting, but also for

their knowledge of how businesses can best be managed profitably and

positioned for growth.



How can you find a CPA if you don’t already have one? First, start by

asking business associates, friends or other professional and business

owners in the area. Another good resource is your industry association,

local chamber of commerce, or a professional association like your state

CPA society. Here, the {STATE NAME} Society of Certified Public

Accountants provides a referral service, you can use. {INSERT INFO}.




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Most likely, you’ll also need guidance concerning the legal structure,

contractual arrangements with suppliers and distributors, leases, litigation

protection, etc. And, of course, if a partnership ends in a less-than-friendly

manner, you’ll need the advice of an attorney to resolve disputed issues.

Your state bar association may have a referral service to help you identify

lawyers in your area with the necessary expertise.



Whether you’re seeking a CPA, an attorney or other specialized

professional, you’ll want to screen and verify their expertise, just as you

would when hiring employees. Ask how long they have been practicing;

what references they can provide; his or her experience level with your type

of business; and how fees are determined. A good way to determine if a

CPA or lawyer is right for you is to conduct an in-person interview.



Consider what you want your CPA or lawyer to do with respect to your

business needs. This way you can make an intelligent decision. This is

critical especially for the new business owner or one whose products or

services are unique.




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When arranging for the services of professional advisers, ask for a written

proposal outlining the objective and scope of the assignment. Be sure the

proposal outlines the adviser’s responsibilities, as well as your own, and

what will be done jointly. Also make sure the proposal includes the

anticipated cost of the project – both fees and expenses and the terms of

payment and cancellation fees.



In summary, as a business owner, you face internal and external

challenges each day that can impact the success of your operations. You

may at some point face challenges related to issues such as cash flow,

getting the necessary financing, uncovering fraudulent activities, the

effective use of technology, and passing your business on to the next

owner. Consider selecting a CPA as your business adviser – a CPA who

understands how to help you create, maintain and grow your business --

and who can help you realize your dreams of business success.



Thank you. I would be happy to answer any questions now.




                                                                   © AICPA 2004




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