Sales Tax Not Included

Don’t know if you live in a place with a back to school sales tax holiday, but if you do, enjoy it while it lasts, which is not likely to be long.  The state scramble to raise more funds is nowhere near slowing down.   A new study done by Aberdeen Research confirms what I’m seeing anecdotally – that states are more aggressively auditing companies to make sure they’re getting every penny of sales and use tax.  Last year 43% of their respondents reported increased audit activity, this year it was 63%.  While much of the discussion about taxation revolves around income taxes, the real money for states is in sales tax.  According to Aberdeen almost a third of state revenues are connected to sales and use tax.

Despite the strong interest on the part of the government, businesses tend not to be really focused on this topic. The net result of that is they are more vulnerable to missing changes in requirements.   A Thompson Reuters Study shows that for the first half of 2011 alone there were 16 county tax changes and 90 city changes.  The prognosis is that it’s only going to get worse.

Not every business is avoiding this topic.  The Don Quixote of sales tax growth is definitely Amazon.com.  The company has started a ballot initiative in California to avoid having to collect sales tax on items it sells in the state.  The state is fighting back proposing legislation that would make any referendum useless. Regardless of who wins, the issue for businesses once all the dust settles is then figuring out how to comply.  This is particularly difficult when you get to the issue of out of state sales and online sales. 

Despite Amazon’s aggressive stance, generally states are working diligently to expand the definition of nexus.  That means the rules that determine if your business activities in a state are subject to tax are heading in the direction of making it more likely that you will face some sort of tax.  The Aberdeen study and (I think) common sense suggest that this is an area where you should identify outside resources that can help your business understand specific risks.  Depending on the type of company you are involved with, it may pay to bulk up internally as well.  If most businesses are not watching out for this topic, you can bet it will be a competitive advantage to be proactive. 

Buddy Can You Spare a Dime?

With or without a double dip, Monday morning usually means the start of another work day for a small business.  This week in particular is a good time to review how effective your cash management strategy is, and if you don’t have a cash management strategy, a good time to implement one.   There’s a great Open Forum piece on this that lays out 3 areas to look at in your business to get a better handle on cash.  Their first piece of advice is to plan how you think cash flows will look for the year.  If you didn’t start the year with this, it’s never too late.  Their second point is to make sure you get paid.  Review when and how you bill, and then when and how you do collections.  Add to that, when and how you give credit.  A client who operates almost exclusively on credit told me he’s improved his credit granting process to the point where he doesn’t think about bad debt allowances.  He’s confident if the customer made it through the credit process, he’ll get paid.  Finally, the Open piece talks about the importance of benchmarking how cash is flowing vs. what you thought would happen.  Needless to say the two are not always the same. 

This brings us to the topic of Plan B.  While I am an advocate for and user of Plan B, I would also tell you to take extra steps in setting up Plan A, so Plan B is more of a safety net than a likely outcome.  As you look to manage cash flow, make sure you have someone with expertise to talk to, so both your time and money are being invested wisely.  If you can get a line of credit, do so now rather than when you need it.  That’s when it won’t be available.  If you can afford a cash reserve, set one up.

The other obvious, but not necessarily well used cash management tool is focus on cost management.  Angel Business Advisors put together some great practical tips for studying your costs.  I was taken by this list because if reflects things you can do even if you’ve already done cost cutting.  On the first round you cut what you can do without.  A next step is to think about lower cost or free substitutes, as well as reducing utilization.  Sometimes you can share resources and the cost. The same client I talked to about credit has also saved serious money by deferring capital purchases and renting instead.  While small businesses have difficulty accessing capital, interest rates for big companies are at historic lows.  Renting from a big firm can help you arbitrage the credit market.

The persistent economic uncertainty inevitably flows to small business as inconsistent access to credit.  There’s only one solution to that, and it involves cash.   

Time to Short Gloom

So after this last week, the one piece of data that came as no surprise is that we’re all depressed about the economy.   A McClatchy Marist poll says 68% of Americans think the worst is yet to come in terms of the economy.  Boy, I hope this is a time when the man on the street is wrong.   Small business owners are split according to an American Express poll in terms of their feeling that their business prospects are about to improve.  The Economist / Financial Times poll of executives at large companies finds less than a quarter of them expect things to get better. 

I mostly talk to small business owners these days.  While I don’t see a statistically significant group, I will tell you the folks I talk to are managing to keep their heads above water.  I guess if you’re still in business after the 2008 crash you’re either really lucky or really smart.  (OK maybe a little of both).  Still, the idea that keeps coming up that makes me relatively optimistic (not a hard spot to find right now) is the ongoing theme of innovation. 

Productivity is down, after having a long stretch of improving.  That means net net employers have to pay more to get output in this economy with lots of unemployment.  Sooner or later that has to translate into either hiring more, or doing things differently.  Which is just another of way of saying innovation.  A Financial Advisor Benchmarking survey shows assets under management by Registered Investment Advisors were up by 20% at the end of 2010.  Now it may be that all those gains are gone after this last week – but the fact is, these advisors can’t let their clients invest in Treasuries with negative yield forever.  The crowd that is stowing cash under the mattress clearly isn’t growing, so sooner or later that capital has to be put to work. 

I don’t want to be too much of a Pollyanna, but necessity is the mother of invention, and it seems the need to figure out a better way has to be at an all time high for most businesses.  That should mean better times are not far away.  I know this has been a long slog, but watching to see businesses that are doing things differently has to be a better use of time than picking where the VIX will be next week.

Loans R Us

While most of the news in the Wall Street Journal this week was pretty bleak, a small business feature on franchising opportunities talked about an innovative financing idea.  The gist of the piece is because small business lending is so hard to get now, franchising companies are including a service to help you get financing as part of their deal.  According to the article, assisting putting the right borrower with the right lender really makes a difference.  They cite an example of a home health care franchise that was finding less than 10% of their new franchisees could get financing.  Now that they have a program together, they are finding 75% of their applicants can get funding.

While this is good news, it also reminded me that people looking for opportunities beyond their current job (or unemployment) should make sure to consider the details of what it will really take.  I’m going to excerpt a wonderful example here from a blog called Flock Free Nation

Bob has a job where he earns $50,000 a year. He wants to be his own boss so he buys one of the smaller fast food franchises where he takes home $50,000 in profits every year. He is his own boss and he makes the same income as before. Sounds good right? Not so fast.

To have a business where he earns that same $50,000 he had to:

• Pay a franchise fee of approximately $25,000
• Pay $150,000 for equipment and leasehold improvements
• Pay $20,000 for inventory and working capital

The post goes on to point out that while Bob is financing all this, the point of leverage is supposed to be that it earns you a return.  He’s still working the same (let’s face it -- more) hours and he’s getting the same salary.  Now though, he’s got an increase in both risk and expenses.  That said, he’s presumably doing work he finds more rewarding.  The other possibility is that as he gets the hang of running the business, the math will improve.  My suggestion is to at least do this type of math up front, so you’re clear on what you’re really getting into.

My college roommate left a job to run her own company.  She’s doing really well given that it’s a new business and the economy is terrible. She is definitely engaged in a way that she never was in her old job.  However, even she admitted to me, “It’s like the difference between falling in love and being in the relationship.  Now I’m starting to see the flaws…”

Working Through the Crisis

In the spirit of focus on a solution, rather than the problem:

Here are my top five things a small business should prioritize in the coming week default or no.

• Know where you stand on important metrics.  (If you’re a QuickBooks User here are some thoughts on how to implement this advice.) When times are tough, it’s critical to understand how you are doing compared to plan.
  • Focus on collections, cash on hand and expenses. 

•  Know where your employees stand.  There’s been a lot of talk about how tough things are for small business owners, but it hasn’t been a picnic for employees either.  A new study by Met Life shows  44% of small business employees feel loyal to their employer – that’s down from 62% in 2008.  More than half of employers (54%) think their employees have a strong sense of loyalty to the firm.  A little more than a third of small business employees report they would rather be working somewhere else right now.

• What would you do if a critical person walked out the door? 

• Cash has been king for a while, but clearly it’s even more relevant than ever this week.  For capital intensive business it’s time to make sure you’re on top of either inventory or the lease / buy question.  Professional services want to monetize time.
  • If you don’t have a set of tasks that keep you apprised of key cash flow metrics (see #1) make sure that gets on your calendar ASAP.

•  Find out what other businesses are doing to cope.  There is no play book for this level of lingering economic stress combined with dynamic marketplace change.  If you have a circle of trusted advisors, continue to utilize that resource.  I’d also find out what you can about competitors, and consider giving some time to “hate-surfing”. 

• The whole idea is to find out perspectives that won’t naturally occur to you. 

•  Make sure your record keeping is where it should be.  If this year isn’t going to go as planned, knowing when you went off course is a big help.  If you think you don’t have time now, think how much less time you’ll have if you’re dealing with (insert name of unexpected crisis).