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Five to Ten a Day for Better Health (of Your Business)

By Randall Orser | Home Based Business , Small Business

We have been inundated with advice to eat well for our health’s sake. But, what about five to ten tips to better health of our business? Shouldn’t that be as important to the business owner?  Five to ten tips to follow a day can reduce the risk of failure and ensure your business enjoys a long and healthy life!

Five Tips to Overall Health:

  1. Prioritize and get things done:  When prioritizing, keep customers forefront (and suppliers, inventory, and staff). Without customers, where would you be? Complete tasks. Follow through. Finish paperwork.
  2. Plan ahead (but be flexible) – Get Organized:  Keep your eye on the road ahead. Ensure that you (and your staff) focus on the business plan, the marketing plan, and your original vision. Ensure that marketing campaigns are done ahead of time (ideally, a year in advance). Budgets and buying plans should be completed six months ahead, as well as any open-to-buy for product for promotional sales. Staff schedules and training should be well organized in order to coincide with seasonal upswings.
  3. Customers and Customer Service – It’s always about the customers:  Every business owner should prioritize any task that involves customer satisfaction. If you tell a customer that the product will arrive by the end of the week, then ensure that your promise is kept. If you tell a customer that you will call them, then ensure that you do. Broken promises do not impress customers. Always under-promise and over-deliver!
  4. Nurture all relationships including staff and suppliers:  Reward your staff, motivate your staff and keep them in the loop. Join professional associations.   Expand your communication channels. Get into the habit of mailing thank you notes to customers, staff, suppliers and those who have benefited your business. Pick up the telephone and have a one on one conversation. Stay in touch.
  5. Core competencies – What do you do best?  To thrive in the marketplace, a business must excel in at least one of the following: product offering, customer service, promotional strategies (branding), price or location.  Reminders to not only keep doing what you do best, but initiatives to keep improving. Never lose sight of what distinguishes your business from the rest. Learn to identify your strengths and build on them.

Five More Tips to Overall Health:

  1. Look after the details – it’s always about the small details:  Is the exterior fresh and clean? Does a brightly painted door welcome your customers? Is there a bench, an attractive door wreath, or an eye-catching window display that attracts new customers? Do you have an area for weary customers? Does your children’s store have a toy area for children? Do you supply customers with coupons if you have inconvenienced them? Do you greet your customers by name? Do you capture their names on your mailing list?
  2. Look after the expenses – Pay your bills on time: Send out invoices and request payment in a timely fashion. Eliminate unnecessary perks; eliminate waste; eliminate frills that are not important to the customer. Look for less expensive ways to do everything. If not sure where to begin…call your accountant. Better yet, read your expense sheet and cut costs by ten percent. Pay your bills on time. If possible, pay within ten days and get a two percent reduction for early payment.
  3. Grow (innovate):  Successful entrepreneurs are never satisfied with the status quo. They understand that to increase their share in the marketplace the business must grow: better product; newer technology; more effective website; more informed and knowledgeable staff; timelier shipping: better distribution channels; and so on.
  4. Constantly change – re-invent yourself:  A healthy business realizes that change is a constant; change will keep customers coming back. Customers will return to see new product displays, new demonstrations, and new content. Customers will brand your business – as a leader. Keep your customers delighted, inspired and motivated.
  5. Old-fashioned principles are still true:  Keep your business honest, reliable and trustworthy. Stand behind your policies – with no exceptions. Advocate privacy and honesty on your website and in print. Ensure that all practices value those principles. When a business values old-fashioned principles, customers will learn to trust that business and sales will follow. (There are some values that never grow old.)

You will know that your business is strong and healthy when you have difficulty prioritizing the above tips. Is change more important than principles? Are relationships more important than the bottom line?   A business owner that puts the customer (and customer service) to the forefront understands that the suppliers, the product, the service and the staff make up the equation.

The most successful businesses thrive because their owners understand that all aspects of business must be healthy; one area cannot stagnate or be left unattended for the sake of another area. Because a successful business is a component of all best practices – each integrated to make the whole.

A healthy business will enjoy a long life…so integrate five to ten a day to increase your chances to survive. The life of your business might depend on it.

How to Determine Your Hourly Fees

By Randall Orser | Small Business

As an entrepreneur, are you concerned about whether your hourly fees are enough to cover your own salary, your expenses and are enough to secure a reasonable profit? If so, don’t despair. A number of entrepreneurs and small businesses have difficulty determining their hourly charges. Most have these issues when their new business venture first gets off the ground. Only later do they find out that their hourly charges aren’t enough. As such, it’s imperative to clearly define your enterprise’s hourly fees. This involves taking steps to ensure your hourly fees not only cover your salary, but that they cover your direct expenses, indirect expenses and provide a profit. So, where to begin?

A simple calculation to determine hourly fees

The calculation to determine hourly charges is quite simple. Hourly charges must account or the entrepreneur’s salary, their direct expenses, their overhead and their profit. When looking to determine your hourly salary, think of the salary you would be paid if you were an employee of a company. Next, your direct expenses and overhead must be accounted for within your hourly charges. Finally, you’re in business to make a profit. Don’t forget about the importance of securing the profit you’ll need to finance your enterprise’s future growth. It’s never enough to just cover your salary and expenses. You must account for profit in order to secure your company’s future. That profit comes from adding your hourly salary, direct expenses & overhead and dividing this total by your desired profit. We’ll provide the calculation below and then analyze each portion of the calculation in detain.

Calculation: (salary + direct expenses + {overhead or “indirect expenses”}) / profit

Coming up with your hourly salary

Don’t shy away from your hourly salary. If you’ve decided to move forward with your own business, then you’re well within your right to have the same salary, if not more, than you would if you were working for another company. This may require you to research your given profession. Concentrate on defining your hourly salary relative to your experience, where you live and where your customers will be located. Again, it might require some analysis, but you should have plenty of information at your disposal.

Understanding the difference between direct & indirect expenses

Determining your hourly fee means you must understand the difference between direct and indirect expenses and how both play a role in your enterprise’s cost structure. First, direct expenses are those expenditures that go directly to a specific job, product or service. In essence, these expenses include the raw material, parts and labour that cover the production of a given product or the work involved in providing a given service. Indirect expenses are those expenses that are seen as above and beyond a company’s direct expenses. These would include those costs pertaining to gas, equipment and car maintenance, taxes, insurance and other miscellaneous support costs. Indirect expenses are expenses that can’t be attributed to any one product or customer, but who are still an essential part of running a business.

  • Direct expenses: Expenditures that go directly to a specific job, product or service.
  • Indirect expenses: Support expenses that can’t be attributed to a specific job or product, but who are essential in running a business.

The Role of Overhead

Overhead essentially summarizes the company’s indirect expenses. These overhead expenses pertain to those support expenses that are an essential part of the company’s operations. As an entrepreneur, you’re likely just concerned with covering your own time. However, as your company grows, you may need to hire employees. Their salary will become a part of your company’s overhead, as they fall under those indirect expenses that are an essential part of managing your business. The easiest way to calculate a company’s overhead is to take indirect expenses and divide them by direct expenses. Most companies will track their expenditures over a given period. Some may track expenses by week, while others will focus on monthly or quarterly periods. In this case, it really depends upon the size of the enterprise and the fluctuations in those expenses. Small companies have more flexibility in tracking their overhead because they can immediately determine the impact of any minor changes. Larger enterprises typically review their overhead over a given quarter or year. The calculation for overhead rate is shown below.

Overhead rate = indirect expenses / direct expenses

The key is to determine your overhead rate and then use that rate to determine your indirect expenses for each hour charged to customers. This simply involves taking the overhead rate and multiplying it by your direct expenses. Why use overhead when you can simply track indirect expenses? Well, the fact is, as your enterprise grows, you’ll have to track your overhead more closely. Gradually, your overhead will likely level out and become more consistent over time.

The importance of profit

Never forget the importance of securing a profit within your hourly fee. Profit finances expansion and secures your enterprise’s long-term future. Most entrepreneurs simply cover salary and expenses. Therefore, define your enterprise’s profit and be sure to include that profit within the fees you charge your customers.

An example of working out the hourly fee

Let’s assume you work 50 hours a week and that you’ve defined your hourly salary to be $50.00. In addition, you’ve tracked your direct and indirect expenses over a period of one week. Your direct expenses total $3,000.00, while your indirect expenses total $1,000.00. Your direct expenses would be the $3,000.00 divided by 50 hours, or $60.00 an hour. Your overhead rate would be your indirect expenses of $1,000.00 divided by your direct expenses of $3,000.00. This would give you an overhead rate of .33 or 33%. Now, you could just use your indirect expenses of $1,000.00 and divide it by your 50 hours per week. This would give you $20.00 an hour in indirect expenses. Or, you could use your overhead rate of .33 and multiply it by your direct expenses, which would give you $990.00 of indirect expenses, or $19.80 for every hour charged. For this example, we’ll stick with the $20.00 an hour as summarized by our indirect expenses.

  • Salary: $50.00 an hour
  • Direct expenses: $60.00 an hour
  • Overhead or indirect expenses: $20.00 an hour
  • Profit: 20%

Calculation: (salary + direct expenses + {overhead or “indirect expenses”}) / profit

($50.00 + $60.00 + $20.00) = $130.00 / .80 = $162.50

In this case, you should charge your customers $162.50 an hour.

Now, all of this may seem confusing, but the basic approach is to determine your salary, add your direct and indirect expenses and then determine your profit. Be comfortable with tracking your enterprise’s overhead as you will likely be hiring some help in the future. By tracking overhead, you’ll become more comfortable with how it impacts your hourly fees. If it’s simpler to track your indirect expenses at the beginning, then do so. However, be cognizant of the fact that as your enterprise grows, you’ll have to enact strategies to mitigate your expenditures, and that means to reduce your company’s overhead.

Four Questions to Ask Yourself Before Starting a New Business

By Randall Orser | Home Based Business , Small Business

As companies all over the country are downsizing and jobs are lost or because workers are retiring but need more income, millions of people have taken to starting their own businesses and are hoping to earn a considerable income through their own efforts. While many individuals have succeeded as small business owners, some were met with failure simply because of inadequate planning. The truth is that starting a new business takes a lot of time and effort; you need to consider certain factors before launching a business. If you’re toying with a business idea you think is going to be a hit, ask yourself a few questions before you take the plunge into the business world.

  1. Do you have time to run your business? So many people mistakenly assume that just because they will be running their business from home, it means they will have a lot of free time on their hands. On the contrary, quite the opposite is true. Most home-based business owners need to work a lot more and a lot harder to match the income they used to make when they were working in a traditional office. This is particularly true during the first few months of running the business. Once your business has taken off, however, you may be able to relax a bit and work less hours. Before this happens, you will probably have to work extra long hours, so that’s an important factor you have to consider.
  2. Are you qualified? Quite often, people think they have a brilliant business idea and find out too late they aren’t qualified to offer that particular service. Let’s assume you’re a mom of four and you’ve just started a business that involves child care. Being a mother of four, you’re quite confident in your capabilities in this field. Your potential clients, however, are likely going to look for an individual who is not only experienced but certified in child care as well. In this case, you will have to get the certification or come up with another business idea where your skills will be put to better use.
  3. Do you have room for your business? Many home businesses start out small. Once your business takes off, however, you may find yourself in need of bigger space for your supplies or your products. Unless you have extra space in your home (e.g., a spare room or garage), you may soon have to expand outside by renting storage space, which is obviously an additional expense. If you don’t want to deal with such problems, think ahead when you are still in the business planning stage.
  4. Are you financially capable of running the business? Money is one of the most significant factors you have to consider before starting a business. Many people underestimate the costs required to set up a business. Even if they take out a loan, sometimes it isn’t enough to cover all the initial expenses. To avoid these hassles and to increase your chances of business success, plan your finances thoroughly.

Are you a First Time Tax Filer? Here are Some Tips for you.

By Randall Orser | Personal Income Tax

You’re lucky enough that this is your first year filing a tax return. How exciting! There are many reasons you’re filing a return for the first time, such as you’ve started your first job, or maybe it’s your first year of university. Welcome to the wonderful world of taxes. While it’s not rocket science, there are some things to know before filing for the first time.

Do you need to file a tax return?

Probably yes. Did you earn income in the year? Did you go to university/college? Even if you were in school, and earned no income, you need to file as you can transfer some of your credits to a parent/guardian or spouse. Also, to get your credits for GST/HST (over 19 years old), child tax benefit, and others, you’ll need to file a tax return. In the end, it’s best to file a tax return, even if it’s a nil return.

Be Prepared!

Being prepared is a must when it comes to filing your taxes. You need to ensure you have all our slips (T4s, T4A, T5s, T4E, etc.) for your employment and other income.

Are you in university/college? Don’t forget your T2202 Tuition/Education Certificate (you may have to login to your student account to get the T2202). You’ll need the T2202 to know how much tuition applies to the current tax year, plus it states how many months of part-time or full-time schooling you did in the year. You do not write off books or other school fees, as the credit for the number of months of schooling takes care of this. Also, you will get a T4A slip (Box 105) if you received any scholarships, bursaries, fellowships or grants, so don’t forget this slip.

Do you qualify as disabled? You may want to look into filing a T2201 Disability Tax Certificate. You’ll need a doctor to fill this out, and ensure he does a good job; whether or not you get the credit depends on how well he writes the T2201. This gives you a major credit against any income you earned in the year, and can be transferred to a spouse, parent, or caregiver.

There may be some deductions you are able to claim. Canada Revenue Agency (CRA) allows you to claim for donations, retirement contributions, employment expenses, and more.

Did you make donations to charity? If you did contribute to charities during the year, you should have gotten receipts. The receipt should state the charity’s name, registered number with CRA, and the amount. If you can’t find one, the charity should be able to et you a copy; some even allow you to go online to get a copy.

Did you make RRSP contributions? You can make contributions up to March 1st of the following year, so ensure you get all your receipts for any contributions you make. Usually you’ll get these sometimes in January/February for the prior year contributions, and later in March if you made any contributions in January or February.

Do you belong to a union or professional organization? Union dues generally show up on the T4. Professional associations, such as the College of Teachers, send you a receipt after you pay; some unions send a receipt if it’s not taken off your paycheques.

Did you move during the year? If you moved more than 40 KMs to either your place of employment or school, you can claim moving expenses. The cost of movers, renting a truck, hotels, meals, vehicle expenses (for your car), lease cancelation costs, costs of selling your old residence. Of course, you’ll have to deduct any allowance or reimbursement you got from your employer.

Did you have to purchase supplies in order to perform your job? Employment expenses can add up for many people. Employment expenses can include: accounting/legal fees, advertising/promotion, meals/entertainment (50%), lodging, parking, other automobile expenses (based on mileage), supplies (postage, stationery, etc.), home-office expenses (if you are required to have on by the employer). Trades people, apprentice mechanics, artists, and musicians can deduct expenses that relate to their profession, such as hammers, saws, musical instruments, art supplies, and more.

Some other information you should have at the ready when it comes time to file is your current address, phone number, email address, social insurance number, and birthdate.

The best thing to do is gather all your information you have that you believe will relate to your taxes, and when it comes to filing go through everything as you enter your slips. Or better yet, let a professional handle the whole thing, and relieve you of the headache.

Remember to keep all your slips, receipts, etc. for 6 years after the filing year.

Reduce Cash Flow Volatility

By Randall Orser | Small Business

Remember, cash is king, right? Maintaining a smooth cash flow makes your company better, and, perhaps, less reliant on costly outside financing. If your business has an unstable cash flow, then it may have sizable disparities in earnings, and that may escalate the likelihood of default, which harmfully affects a company’s cost of capital. Your company will be of a greater value if it keeps an even cash flow over one that doesn’t. By implementing adequate cash flow management processes, you’ll reduce cash flow volatility.

Cash Flow Management

Neil C. Churchill, professor emeritus of entrepreneurship at INSEAD in Fontainebleau, France, says ‘a major risk for most entrepreneurs is inadequate cash flow management.’ Managing your cash flow requires managing your risk, and that means thorough budgeting. What is your long-term contingency plan? Are you setting aside reserve funds of at least three up to six months of your operating costs? You need to do these if you want to control your cash flow risk. Having the cash on hand allows you to continue operations should your cash flow hit a soft spot.

Diversify Your Customer Base

Are all your customers in one industry? Having all your customers in one industry could be devastating in an economic downturn in that industry, and it will affect your business as well. If the need for your customers’ products or services falls, then their need for yours will drop as well.
Work with multiple industries as much as you can. You can start in one industry become known for that one, however, branch out into other industries as soon as you can. Look at related industries to the one you’re in now.

One Client Does Not a Business Make

Are you trying to achieve your revenue goals with one big client? Having your sales come from one big client leaves you at risk that if you lost that contract (especially if you’re selling based on price alone), your business will die and you’ll have to close. You need to develop your client list, and grow sales to current clients to reduce your businesses exposure to the operations of another.
Admit it if you have just one client, or one huge client, you’ve just created a ‘job’.

Use Insurance to Tackle the Loss of Key Personnel

Do you have one or two key people in your business, including you? Does a positive cash flow rely on a corps of key people? Then having key person insurance is a definite yes. Key person insurance counteracts the potential risk of your business dropping if a key player in your business leaves, is injured and is not able to work, or dies.
That means calculating three major factors: the individual’s salary, the individual’s impact on the company’s bottom line, and the cost to replace him or her upon departure.

Your Business Plan Needs a Checkup Every So Often

You spent all that time coming up with a plan, then shoved it in the drawer and forgot about, didn’t you? Over time a business’s goals will change due to internal and external situation changes. For this reason, you need to occasionally review, and update your plan as needed. You’ll be able to adapt to situational changes as they occur and exploit the benefits of new possibilities and decrease the potential results of any new risks.

Reinvest Your Profits

By putting your profits back into the company, instead of paying it out to investors (or yourself), you’ll lighten the pressure on your cash flow. By reinvesting the profits your business could still be at risk (depends on your business plan), however, a bigger risk would be not enough cash to run your business.
Many business owners make the mistake of taking out all the funds from the company, then end up loaning it back later as cash was short, and the business needed it. Or, ended up financing what could have been purchased outright.

Make Your Payments as Low as Possible

Your business’ credit rating can be damaged by making payments late, even just a few days. Whenever negotiating with suppliers try for the lowest arranged payment possible, this reduces your risk. This ensures you can make payments on time all the time; even when cash flows dips suddenly. You also free up cash for paying your variable expenses with lower payments.

All Contracts Must be in Writing

Always get contracts, proposals, business transactions and agreements in writing. With written documents, you have a chance to read and assess the terms, notices, and other critical documents. Therefore, the chance of a failure in communication is less than if it was a verbal agreement. By having these records in writing, you reduce cash flow risk as you can design your budget and cash flow needs more precisely.
Taking advantage of new business opportunities, and decreasing risk, is more art than science. And, not one you can perfect either. However, the above steps are more likely to help you achieve your business goals. And, by doing these steps you lessen your businesses cash flow unpredictability.

Minimize Taxes on Your Small Business 

By Randall Orser | Business Income Taxes

Income from unincorporated businesses is taxed in the hands of the owners. If you earn income from such a business, you must prepare an income statement each year, showing all the income and expenses of the business. The resulting net profit or loss is then transferred to your tax return and is taxed, along with all your income from other sources. The Canada Revenue Agency (CRA) provides standard business statement forms which it encourages you to use in calculating your profit and loss. However, you are not required to use these forms, as the CRA will accept other types of financial statements.

As a small business owner, you are entitled to deduct the ongoing costs of doing business, so long as the expenses are reasonable and have a profit-producing motive. It is important to have a good record-keeping system, however; otherwise it is inevitable that you will forget about certain expenses that you incurred when tax time comes around! Every dollar of expense that you overlook is one more dollar added to your taxable income, so don’t trust your memory. Instead, write it down, and save those receipts! Some of the more common deductible expenses include advertising, promotion, rent, salaries, legal and accounting fees, and auto expenses.

Deductions Available to Your Small Business

The cost of advertising is deductible, as is the cost of flyers, brochures and other promotional activities. This includes the cost of entertainment and business lunches, if used to promote your business to existing or prospective clients. However, unlike advertising or promotion, only 50% of the total cost for meals and entertainment is deductible.

Office rent paid to a third party is deductible. However, if you own your business premises, or run your business out of your home, you may not deduct the rental value of these premises. Instead, you may deduct any related expenses, such as mortgage interest, property taxes and insurance. These expenses must be prorated if part of the building is used for personal purposes.

Salaries and wages paid to employees are deductible in full, as are the employer-paid premiums for Canada or Québec Pension Plan contributions, Employment Insurance, Workers’ Compensation, and sickness, accident, disability or income insurance plans. Salaries and wages paid to your spouse or child are deductible if the work done is necessary for earning business income, and the amount paid is reasonable, or equivalent to what you would have paid an unrelated person for the same type of work. Salaries drawn by you, the owner, are not deductible, however, and should not be included on the income statement.

Fees for outside professional advice or services are deductible, including consulting fees, bookkeeping and accounting fees, and tax return preparation fees.

Legal fees and similar professional fees incurred for earning business income are deductible. These include fees paid for legal advice related to on-going business activities, or to a collection agency for the collection of bad debts. However, legal fees incurred to buy capital property are not deductible. Instead, these are added to the capital cost of the property.

Business taxes and annual business licenses are deductible. Fines and penalties for infractions of public laws, however, are generally not deductible.

Automobile expenses related to earning business income are deductible. If the auto is used only partly for business, the expenses must be prorated between business and personal use based on the relative number of kilometres driven. Apart from proration, there are no restrictions on operating expenses, such as gas, oil, repairs, insurance and maintenance. However, items related to the capital cost of the auto, like capital cost allowance, interest on auto loans, or lease payments, are restricted. For automobiles acquired 2001 and later, deductibility of interest payments is limited to $300 per month and lease payments to $800 per month, plus GST and PST, or HST. Capital cost allowance is calculated on a maximum value of $30,000, plus GST and PST, or HST. Special-use vehicles, such as taxis, hearses, vans, pick-up trucks, or other vehicles used mainly to transport goods or passengers during business are not subject to these capital-cost restrictions.

You may not deduct the cost of capital expenditures (expenses relating to the acquisition or improvement of a property used by the business) in the year acquired. Such expenditures normally supply a long-lasting benefit; therefore, tax law requires that their entire costs be claimed slowly, over a period of years. This is accomplished through the mechanism of the capital cost allowance system, which allows a certain percentage of the cost to be claimed each year, on a declining balance basis. The percentage varies with the type of property purchased. Capital cost allowance rules can be quite complex, since they deal with acquisition of new property, the sale of old property, and a variety of other contingencies.

Fiscal Year

Income and expenses from a business are calculated on a fiscal-year basis, which need not coincide with the calendar year. However, it is no longer possible to defer taxes on business income (except in the startup year) by choosing an off-calendar fiscal year. This is because a formula must be applied to estimate the income earned from the end of the fiscal year to the end of the calendar year, and this amount must be added to income and taxed in the current year. The following year, the extra income is subtracted from the actual fiscal period income, and a new amount for the stub period is calculated and included in income. The elimination of income deferral means that, unless you have compelling business reasons for doing so, it is usually no longer worth the bother to have an off-calendar fiscal year.

Back up your claims for business losses with a sound business plan

Sharing is one of the first things we are taught as youngsters. The same can also apply to the Canada Customs and Revenue Agency (CRA). When your business enjoys a profit, you must share part of it with the CRA in the form of income tax. By the same token, when your business shows a loss, the CRA shares in that loss, since you are ordinarily allowed to deduct the loss against other income, thus lowering the taxes you would otherwise pay.

But first you must meet the “reasonable expectation of profit” test. The CRA is only willing to share your losses if there is a reasonable expectation that there will be future profits to share as well. If not, your losses will be disallowed as simple personal losses.

This means that you cannot deduct losses arising from hobbies or similar activities if you do not ultimately expect them to be profitable. It also means that you cannot deduct losses if the size or scope of your business is such that your expectation of profit is simply not reasonable.

Because businesses are rarely profitable immediately, start-up losses are usually routinely allowed. However, if your business does not show a profit in a reasonable length of time, those losses may eventually be disallowed. Remember that the CRA can go back as far as three years (sometimes six years if a loss carryback claim has previously been filed) to disallow any losses previously claimed. If your losses were significant, the back taxes and interest can be substantial.

Since you cannot always know in advance whether your business will succeed or not, it is important to protect yourself in case you are not able to get your business “into the black” within a reasonable time. You can avoid having your bona-fide business losses disallowed by taking certain precautions, the most valuable of which is the five-year business plan. So, take the time, put in some effort and be fair to yourself!

For example, let’s say you love photography and have spent a lot of money on equipment. Your work is very good and occasionally you have sold some pictures. It occurs to you that, with a little effort, you could turn your hobby into a business. After all, it would be nice to write off all that equipment, wouldn’t it? Before you jump in, however, take some time to do your homework.

First, prepare a five-year business plan, showing projected income and expenses over that period. Estimate how much revenue you can realistically bring in each year. Then list all the expenses required to generate that income. Be sure to include all expenses that are deductible for tax purposes, including the cost of any personal items you intend to use in the business (for capital items, include depreciation only). Your business plan should also indicate who your intended customers are and how you intend to reach them. It should explain how and where you will obtain the necessary financing, what management skills and expertise you will contribute to the business, and what you must hire from others.

Now study your business plan. Do you have what it takes to run a small business? What are the projected profit/loss figures for the first five years? If your business plan indicates serious deficiencies, or projects persistent losses, you should either revamp your plan, or else continue your photography simply as a hobby, not a business. In other words, until you have a workable business plan, you should consider the losses to be the personal cost associated with a hobby and forget about trying to write them off on your tax return.

However, if your plan is sound, and the projected profit/loss statement shows an upward trend resulting in profitability after a reasonable length of time, you probably have a viable business, even if there are losses in the first few years. If you decide to proceed, use the business plan as your blueprint for building your business. Remember to save one copy of it for your files: it may come in handy if the CRA decides to look more closely at your business sometime down the road.

At the end of each year, compare your actual income and expenses to the projections in your business plan. If your losses were larger than you had projected, figure out why. Were your expenses higher because your business plan overlooked some regular, recurring expenses, or were there start-up costs you didn’t account for? Was your revenue lower than expected because you over-estimated the market or didn’t advertise enough? It is important to determine the cause of the discrepancy, and whether it is a one-time thing, or an on-going problem. Then make the necessary corrections and revise your business plan accordingly.

An Example

To illustrate the importance of the business plan, let’s assume you started your photography business without one. Let’s further assume that things did not go well at first, and you showed consistent losses of $3,000 in each of the first three years. You still think that it is a good business which will eventually make money, but the CRA, looking at your track record, decides to disallow your losses for all three years – all on the basis that you had no “reasonable expectation of profit.” Without a business plan, it is difficult to challenge that judgement. Thus, you could end up out of pocket, not just for the original $9,000 loss, but for the back taxes and interest on that amount of money as well!

How would a business plan help you? First, it would give you an objective, concrete basis for judging whether your business is likely to make a profit. After all, maybe the CRA is right; maybe you were just engaged in “wishful thinking.” A business plan would have indicated this to you much sooner and allowed you to cut your losses before they became too large.

On the other hand, maybe the CRA is wrong. Maybe your expectation of profit is entirely realistic. Maybe the losses were due to unusual circumstances, which have since been rectified, or were a necessary part of getting started in a cut-throat business. A sound business plan, adjusted yearly, will help you prove your case. It will enable you to counter the CRA’s perfect “hindsight” with facts and figures instead of unsubstantiated hopes and dreams.

Thus, instead of paying taxes on disallowed losses, you could invest that money in the business. Or better yet, spend it on something fun, like a well-earned vacation.

Ten Tips for Increasing Your Cash Flow

By Randall Orser | Small Business

Cash is king! That phrase is meant to mean that if the cash doesn’t flow into your business, then your business will die. Efficient cash flow management means you are predicting the cash you’ll need at a point in time, no you don’t have to be physic. You can forecast the trends in cash inflows and outflows to determine any potential surpluses or shortages that could occur. You need to maintain a firm control on inventory, how you extend lines of credit, and prudently manage accounts receivable, if you want a smooth cash flow, or would like to increase it. In this article, we’re going to look at the top ten efforts that’ll support you in the above.

Examine Your Pricing

When was your last price increase? Do you increase them a little every year? Is your pricing aligning with your increase costs? Are you afraid you will lose sales if you increase pricing? For the most part, consumers believe a company needs to implement small, regular price increases to counteract for the businesses rising costs. Are you checking out competitor pricing? You should. If you find your prices are lower than your competitors for similar products/services, then it may be time to hike prices.

In the end, that price hike may not be that big of a deal at all. When I was starting, I was working with a coach and he said to double my prices, which I gasped at as I thought I’d lose all my clients. I didn’t double but close to that. I lost one client, and the others were ‘it’s about time’.

Switch Your Customers to Retainer-Based or Value-Based Pricing

I’ll bet your working with your customers on a project basis, or even hourly. You may want to consider going to a retainer or value-based pricing model. With this model, each customer pays an assured amount of money each month in exchange for certain agreed-to-services that are specified in the scope of that agreement.

How do you get clients to switch to retainer or value-based pricing? You could offer a fee discount, state that prices are going up substantially for project-based or hourly projects, have a value add service that wouldn’t cost much anyhow, or some other incentive. This method may reduce your profit margin a bit, however, your cash flow will be much more foreseeable.

Lease Rather than Buy Equipment

You may want to consider leasing equipment rather than buying it outright or using your line of credit. Buying outright can hurt your cash flow, especially if it’s tight to begin with, and dipping into your line of credit may hurt your ability to cover day-to-day expenses. Yes, the cost of leasing is more expensive than just buying the equipment, however, it does allow you to keep more cash on hand. Leasing can be better than financing in many situations as financing may require a large down payment, that could hurt your immediate cash flow.

Reduce Your Inventory Levels

Having too much inventory on hand is a cash killer. You should be assessing your inventory turnover on a regular basis, and ensuring they’re within your industry’s norms. You need to determine your turnover ratio. You do that by dividing your costs of goods sold by the average value of your inventory. You take your inventory turnover ratio and compare that to your industry’s norm, and if it’s lower then you have weak sales.

Be careful of big discounts to get you to buy more inventory than you need. This kind of purchase just ties up cash, and leaves you at risk of having old or outdated stock. It’s best when you’re in that situation to defer any impending orders, and sell your existing stock. It may be wise to sell your inventory at cost, to improve your cash position.

Revamp Your Billing Practices

The faster you convert your accounts receivable to cash, the better your cash flow, and the more available funds are to grow your business. Accounting software allows you to make billing practices that will help you invoice your customers faster, and more regular until the account is paid in full. The software will also allow you to create a report, Aged Accounts Receivable, which shows your receivables outstanding classified by how old the receivable is. The older the receivable, the longer the customer is taking to pay, and the greater risk they become. Typical aging goes 30, 60, 90, 120+ days, anything not in the 30 day is outstanding and needs to be collected right away. Generally, anything over 120 days is usually not collected.

More and more small businesses are accepting credit cards, and getting away from having receivables entirely. You don’t need receivables unless you’re dealing with larger businesses, and even then many have expense accounts for the buyer to use.

Buy in Bulk to Save

The easiest thing here is to go to somewhere like Costco Wholesale and buy your supplies in bulk; many businesses even buy things to sell in their business at Costco. Of course, this only works if you have the space to store them. The dollar store also works for those office supplies that, in the end, don’t really matter if they’re cheap or not.

Another idea is to create a cooperative with some colleagues to buy items in bulk; you spend less cash on supplies. You can do this with office supplies, such as pens, paper, etc., and hand them out to the other members. This allows to perhaps qualify for a bulk purchasing discount you may not otherwise get.

Make Payments to Vendors on the Due Date

Do your vendors offer extended payment terms? Or a small product discount? It may be better in the end to take the extended payment terms. This way you can delay payments until they are due, and have the cash on hand until the last possible moment.

By pushing your payments out as much as 60 or 90 days, that’s comparable to an interest free loan with your supplier. By getting this delay, you now have lots of time to collect your receivables, and then use that cash to pay your vendors.

Reexamine, and Perhaps Renegotiate Your Long-Term Contracts.

Look at your current periodic business expenses, such as insurance or phone service, and for each get three quotes. How do these quotes compare to your current services? Are they comparable? This is the best way to determine if your current vendors are giving you the best value. You should be checking on those price sensitive services, such as internet, long distance and telephone (cellular) services, etc., and renegotiate when you can.

Have more than one vendor in your pocket

Are you buying all, or most, of your supplies from one company? If so, there’s no real incentive for them to lower their prices to you. The same goes for a long-term contract, there’s no real motivation for them to give you great service. However, if your supplier knows you could give the business to another one, your current supplier may be more receptive to your needs, or wants.

Take Advantage of Early Payment Discounts

Do your vendors give you terms such as, 2% net 15 or 4% net 30? If so, it may well be worth taking this discount. That two percent discount on a 30-day invoice could amount to an equivalent 24% profit on an investment. Check on your invoices to see if there is an early payment discount, and use it to your advantage. If not, request your vendors provide one. Some larger companies just take the 2% off anyway when the remit payment.

Cash flow management is there for you to standardize the flow into and out of your business. There are many ways to realize this goal, such as minimizing inventory levels, renegotiating supplier contracts, and joining or starting a buying cooperative.

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