Accounting & Finance

Business Owner's Guide to Profit Planning

Owner's Guide to Profit Planning

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Friend Raising -- Getting the People Right Before Raising the Money

Money is the focus of many business meetings and strategic planning sessions. How do we get more sales? How do we fund our growth plans? How do we cover our cash flow? These are just a few of the multitude of money issues that small business owners deal with on a daily basis. As important as the answers to these questions are; there is something more important than FUND raising and that is FRIEND RAISING.

Friend raising can take many forms. For a start-up it is getting those closest to us to buy into our crazy ideas. And for established businesses, networking is a popular and effective technique to open new sales opportunities. But there is so much more to be gained by making new business friends inside and outside your business. The best part is many of these ideas can be done for free.

 Build your board. Every company should have a board. It doesn’t have to be a board of directors that have authority over your organization, but an advisory board can be a very invaluable tool, especially when facing tough decisions. An advisory board will provide an outside perspective to your business and can both encourage and challenge you. When selecting board members, look for people who believe in you and your business. Be selective, not every personal friend should be on your board. Choose people who will bring a different perspective to your business. Often retired professionals in your industry can impart a wealth of information from their years of experience.

 Make friends in your industry. Even competitors can be friends and you never know when you may need to partner with someone on a project or vice versa. Attending trade shows and industry events is a great place to meet new friends and become aware of even more opportunities. Keith Ferrazzi talks about the many techniques for making friends in his book, “Never Eat Alone.” This includes, as the title says, building friends over coffee, lunch and dinner. Spending time together and sharing reality with each other builds friendships. Be honest and expect honesty from others and true friends will emerge.

There are many other friends you can make including mentors and political allies that you will find to be valuable contacts when the need arises.

"If you go out looking for a friend, you’re going to find they’re very scarce. If you go out to be a friend, you’ll find them everywhere.”
— Zig Ziglar

Nothing is ever free. Making friends is hard work. If you look for friends that can help you but are not willing to reciprocate your friendship may be short lived. You must be the friend that you seek in others. See everyone not as a sales target but a potential friend and you will find many friends and sales opportunities will follow.

Todd A. Luhtanen is a serial entrepreneur, business consultant and founder of Talan SBS a Michigan-based provider of Small Business Services, www.talansbs.com.

DIVERSIFICATION – One Path to Increasing Revenue

By Nancy Boese, Michigan Small Business and Technology Development Center. From SBAM’s member-only Focus on Small Business magazine.

Companies have different stages of development and the decision to diversify into new markets or new products can be daunting. There are several situations that indicate a company may be ready to diversify. Companies should consider diversifying for any of the following reasons:
  • One customer is over 50 percent of the total revenue
  • One industry is over 50 percent of the total revenue
  • Company has reached a plateau in sales and the market is saturated
  • Company has reached a plateau in sales and opportunities are available
  • Company has excess cash and can purchase a business to expand its markets

There are many options to solve these situations. One factor to consider is the risk the company is willing to take to expand. A renowned business tool is the Ansoff matrix. The Ansoff Matrix provides four options for diversification:

  • Market Penetration: The company increases revenue with existing products in existing markets. The intent is to increase its market share.
  • Market Development: The company sells existing products to new market segments.
  • Product Development: The company develops new products/services to sell to its current customers.
  • Diversification: The firm grows by developing new business opportunities with new products for new markets.

What are the Risks?

There is risk involved with each quadrant. The Market Penetration quadrant with existing products and existing customers is the least risky, takes the least amount of money, and provides the quickest results. The highest risk section would be Diversification. This area takes the longest to develop and requires extensive investment of time, people, resources, and money. The Product Development and Market Development both have a higher level of risk than using the Market Penetration strategy. The level of risk for these two areas is dependent on development time, financial commitment, and company resource requirements.

To determine which opportunity the company should pursue, several steps need to be completed.

1. The first is to conduct market research. This can include any or all of the following: Primary research, which could include surveying current or future customers, in-depth interviews, focus groups, and various other techniques. A wealth of information is also available through secondary sources. Research conducted by various government offices, trade associations, or private companies can help provide a base for discussion and analysis. For example: If the company decided to use the Market Development Strategy and wanted to diversify geographically, information could be gathered on the area’s economic situation, number of customers in the area that meet the target market definition, and other vital information.

2. Once the information has been gathered and analyzed, the company needs to establish what they want to accomplish with their strategy. Establishing realistic goals that will accomplish the outcomes desired by the company is vital to evaluating if the diversification strategy is working. The outcomes should be easily extracted from the accounting system or customer relationship management system.

3. Reaching an agreement on which diversification strategy to use can be the most challenging step. There are different decision making models which can be utilized. In general, the company wants to determine which opportunity will best help accomplish the goals already established. In addition, the company may need information on costs, staffing, new infrastructure requirements, etc to identify the best diversification strategy.

The University of Michigan is Open for Business

By Daryl Weinert (from the Small Business Association of Michigan’s member-only Focus on Small Business magazine)

Recently, economists from the University of Michigan gave us all a rare piece of good news – Michigan will see positive job growth in 2011 for the first time in over a decade. At the same time, they asserted that challenges remain. One critical challenge is how to connect the state’s universities to the needs of the business community. At the University of Michigan, we’ve created The Business Engagement Center (BEC) – a new mechanism to help companies find solutions to real-world business challenges. 

Essentially, the BEC serves as a “matchmaker,” helping companies navigate the complex structure of the university to find resources for their business. One resource is student projects. When Adaptive Materials – an Ann Arbor-based fuel cell manufacturer – needed help with defining a new commercial market strategy for its fuel cell systems, the BEC matched the company to the Ross School of Business’s Multidisciplinary Action Program. This seven-week program pairs first year MBA students with companies seeking solutions to a variety of business challenges. The team was able to conduct research on the market, compile a list of customer contacts, and assemble a pitch for use in future sales campaigns. Additionally, the team delivered the tools to help company executives evaluate and prioritize new inquiries for other uses for their products.

Another critical resource is talent. Recently, the BEC helped North American Bancard – a Troy-based credit card payment solutions provider- sponsor a ‘Hackathon’ – a 48-hour mobile device application creation contest. Through their sponsorship, the company was able to increase their visibility specifically to a targeted group of students and establish a pipeline program for students to participate in internships and independent study courses. The university has also experimented with several small company programs building on its research strength. EcoMotors, an Allen Park-based developer of clean, efficient and lightweight propulsion systems, participated in the university’s Small Company Innovation Program. This cost-sharing research collaboration allows companies to leverage U-M research expertise by partnering to tackle relevant technical challenges (the university provides matching funds of up to $30,000). The BEC also helps to connect companies with university collaborators in pursuing federal or state research grants such as Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) funding.

The university has also launched a small company career fair to expose students to job opportunities at smaller, high growth companies within the state of Michigan. Known as the MPowered Career Fair, nearly 100 organizations attended in 2010. Companies that attend the career fair can also apply for the Small Company Internship Program, which offers university cost sharing to hire students for a 12 week summer internship.

The University of Michigan has never before been so ready for collaboration. With programs designed to unlock the entrepreneurial aspirations of our students, with our Technology Transfer office spinning out companies and commercializing ideas at an increasing pace, and with new interfaces like the Business Engagement Center, U-M is open for business as never before. The BEC is designed to help companies find talent, explore research partnerships, educate professional staff, identify technologies, engage with students, and consult with faculty. Make a date with the Business Engagement Center: www.bec.umich.edu.

Daryl Weinert is Executive Director of the University of Michigan’s Business Engagement Center.

Uncertainty about Tax Law for 2011 Means Use Common Sense Approach to Planning

By Paul Hense, CPA

This may be the most difficult year-end planning tax advisors have ever experienced. It is fall and we still don’t know what the tax law will look like in 2011. The political parties are in a struggle over a fundamental concept of who best knows how to spend your money – you or them. It is fairly certain that taxes will rise for those making over $250,000 per year.

Predicting a political outcome is risky; Here are a two examples where last minute tax law decisions may affect your actions:

Due to the uncertainty of the tax rates for 2011, we may do a reversal of the normal process of delaying income and accelerating expenses. In a normal year, in order to defer taxes, it often makes sense to delay income and move expenses to an earlier year. If in the next few months it becomes apparent that taxes will be higher in 2011, you may want to reverse that process. There is nothing in the tax law that requires you maximize your taxes. The use of accelerated depreciation is an example of an option that moves expenses from one year to the next or vice versa. It is generally considered prudent to use expensing equipment to reduce current year tax liability. If small business loses the political battle and tax rates increase, it may be wise to take normal depreciation and use the remainder depreciation in future years offsetting the higher tax rate. Keep in touch with your accountant for developing strategies.

We have enjoyed a favorable treatment for capital gains over the past several years. We may continue to have a favorable treatment; but possibly not quite as favorable. Again we have to wait until politicians hash out their differences to see what the end result will yield. The most likely scenario is that the capital gains rate will increase – by how much, we do not know. You and your accountant need to be on top of the situation because you may want to accelerate the sale of a capital asset or a business to take advantage of the lower 2010 capital gains rate. This is not a sure thing. We cannot say for sure that capital gains rates will increase. However, if they do, you need to be prepared to make the proper moves to take advantage of the situation.

Even though this is an unusual year due to tax uncertainties in 2011 you still must do some basic year-end tax planning.

If you have a pension plan, you should review your documents and make sure that everyone who is eligible is included and make sure you do not include ineligible people. The tax benefits of a pension plan are obvious, but the cash flow issues can be a problem. You must remember when committing funds to pay a pension plan that those funds must be deposited by the mandated date. Different plans have different funding arrangements, but in all cases remember to have the funds available at the time they are due.

Consider your equipment needs for the coming year. Don’t buy assets you don’t need in order to take advantage of a tax deduction. If you’re going to need new equipment in the near future, sit down with your accountant and decide the best time to buy the equipment considering cash flow and section 179 write offs – also referred to as expensing. If cash and credit are tight, you may decide to lease as opposed to buy equipment. The tax advantages are not as good, but cash flow dictates decision-making as opposed to taxes. Make good business decisions, be profitable, and then figure out the tax consequences. Do remember however, that a reduction in your taxes can be part of providing the cash flow for the purchase of equipment. Do the math with your accountant.

We are in a difficult economy with an unstable tax system. With these two issues in mind, cash flow and tax planning can be in conflict. I have only touched on a couple issues as examples. It is advised that every small business owner do a complete checklist of year-end is

No Money

By Nathan Peck | MiBiz WEST MICHIGAN

SBA loans, small business lending rise on improving economic news  Today’s level of small business loan activity over a year ago is another tentative sign that business owners’ confidence in the recovery is growing.

For the first six months of its fiscal year, Small Business Administration 7(a) loans are up 84 percent over a year ago to $234 million, up $76.5 million over the same period in 2009. Lenders are freeing up capital, albeit cautiously, and using continued government subsidies to help offset risk, said Allen Cook, assistant district director for lender relations at the SBA’s office in Detroit.

“We are seeing all different forms of financing here — from an increase in startups, businesses still in the process of overcoming some problems that they have, to businesses needing growth capital. It is all across the board and across all industries,” Cook said. “This is a sign of lenders’ willingness to providing more lending. They are looking to increase their commercial loan activity and looking harder at using SBA loans because of the (uncertain) financial times.”

The increased lending activity adds positive momentum to what is a somewhat mixed economic picture in terms of consumer activity. Economic indicators of consumers’ confidence in the recovery were split in April: the University of Michigan’s index of consumer confidence fell from March, while the Consumer Board’s index showed an increase.
Adding further murkiness to the picture, the U.S. Commerce Department released statistics showing that consumer spending rose in the first quarter of 2010 by the largest amount in three years.

As lenders have gotten more cautious about commercial lending, borrowers are finding it difficult at times to find banks willing to lend. Cook said that banks have historically differed relatively little in their commercial lending practices. Not so today. As banks work to lessen their risk, some are not looking at any business less than two years old while others are talking to any eligible candidates who meet their coverage, credit and collateral requirements.

“Those that are lending to startups are still looking at startups very hard, but willing to look,” Cook said. “It is hard to decipher where the lender is — it takes some perseverance on the part of borrowers.”

The Michigan Certified Development Corp., a nonprofit corporation, has seen 504 activity pick up over the last six months as businesses look to take advantage of drops in real estate prices. The size of loans has decreased slightly, dropping to an average of $1.1 million in 2010 from $1.3 million a year ago. The MCDC completed 56 transactions in 2009, and has more than doubled that in the last six months, having completed 126 transactions through April, Kelly Hutchings, senior loan officer, told MiBiz.

“We’ve seen a significant increase in activity. The value of transactions have come down some because businesses are looking to preserve more of their working capital,” Hutchings said. “We are seeing businesses that are taking advantage of the real estate market and are buying a building rather than leasing. There is not a lot of interest in purchasing equipment at this point.”

Huntington Bank is using SBA loans to garner market share in the small business market. The Columbus, Ohio-based bank was the fifth most active lender for SBA 504 loans, completing loans in Michigan totaling $105 million over the last six months. That’s part of its larger strategy in pledging $4 billion for small business loans in the Midwest. Participating in SBA lending gives Huntington the ability to provide business loans at the margins of the traditional underwriting standards, said Craig Street, national director of SBA lending for Huntington.

“SBA extends your ability to take
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