"C" Corporation vs. "S" Corporation

Corporations are taxed as separate entities from their stockholders. The corporation is taxed on its income and then individual stockholders are taxed on the income that is distributed through dividends. Many small corporations elect to become Subchapter "S" corporations.

Subchapter "S" corporations are defined by the Internal Revenue service as follows:

S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income. (www.irs.gov)

To qualify for S corporation status, the corporation must meet the following requirements:

·     Be a domestic corporation

·     Have only allowable shareholders

o  including individuals, certain trust, and estates and

o  may not include partnerships, corporations or non-resident alien shareholders

·     Have no more than 100 shareholders

·     Have one class of stock

·     Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders.

Corporate rates can be lower than personal so a "C" corporation may pay slightly less taxes. If profits are left in the corporation and not distributed this form of corporation may result in lower taxes until the stockholders try to take money out of the corporation.  Many owners of closely held corporations will try to take money out of the corporation in the form of salary or bonuses. There are IRS rules regarding unreasonable compensation that aim to prevent this practice. 

I am aware of a grocery store that was set up as a "C" corporation.  The company owned the real estate, the store and the land on which it was located. When the owner and sole stockholder retired he left the company to his children who continued to operate the store. Fifty years after the company purchase the real estate competition from large chain stores made operating a small grocery store unprofitable. The value in the company was in the real estate which was to be sold to a developer in the height of the development market. There was over a million dollars in capital gains.

Because the company owned the real estate it had to pay taxes on the income at capital gains rate. Then to distribute the profit to the individuals they had to pay taxes at rates as if the income was ordinary income. This resulted in double taxation.

Had this company been set up as a "S" corporation the profit from the store could have been passed on to the individuals and avoided double taxation.  For more info on "S" Corporations visit http://www.irs.gov/businesses/small/article/0,,id=203099,00.html

There can also be problems with an "S" selection. If the company makes a profit and choose to reinvest the profits in the company the income tax liability on the taxes still passes to the stockholders even though they see no cash.  

Most small businesses that I am familiar with have chosen to be "S" corporations. If that is your selection you need to file a "S" Corporation election which you can find here. http://www.irs.gov/pub/irs-pdf/f2553.pdf  Discuss your options with your accountant and attorney and chose the structure that fits your needs.

Corporations

Corporations are legal entities with rights and responsibilities just like individuals. They are created by articles of incorporation and can be dissolved by action of the board of directors or by failure of the corporation to renew its charter. Corporations are chartered by the states and laws vary slightly from state to state.

The biggest advantage of a corporation is to limit the liability of the investors to the amount of their investment. If the corporation goes bankrupt they lose the money they have invested but have no responsibility to invest additional assets to keep the corporation going. It can also protect the individual stockholders from legal liability resulting from law suits or legal action.   

The protection is substantial but not universal. A corporation cannot protect individuals from negligence, fraud, wrongful acts, omissions, misconduct, malpractice fraud or illegal acts. In a closely held corporation the owner (sole stockholder) cannot drain all the assets and fail to pay taxes.

There are number of different types of corporation in the US including Corporations, Limited Liability Corporations (LLC), Limit Partnerships, and Limited Liability Partnerships. Once a corporation is formed the corporation can choose to be taxed as a separate entity or pass on the tax liability to the stockholders who then pay taxes on the earning like any other income.

The State of Illinois defines the options for business structures as follows.

Sole Proprietorship and General Partnership
When a business name is different from the owner(s) full legal name(s), the Illinois Assumed Name Act requires sole proprietorships and general partnerships to register with their local county clerk's office for registration under the Assumed Name Act. Sole proprietors must have a Federal Employer Identification Number if they pay wages to one or more employees, or file any pension or excise tax returns including those of alcohol, tobacco or firearms.

Limited Partnership
A Limited Partnership is an organization made up of a GENERAL PARTNER, who manages a project, and limited partners, who invest money, but have limited liability and are not involved in day-to-day management. Typical limited partnerships are in real estate, oil and gas, and equipment leasing and family partnerships.

Limited Liability Company
A Limited Liability Company (LLC) is the non-corporate form of doing business that provides its owners with limited liability, flow-through tax treatment and operating flexibility through participation in management of the business. The LLC is well suited for every type of business venture, except banking and insurance which are prohibited by Statute. Examples of acceptable businesses are: farming, agricultural services, mining, construction, manufacturing, transportation, wholesale and retail trade, investment companies, insurance agents, real estate brokers, all types of real estate ventures, hotels, personal and business services, automotive sales and services, amusement and recreation, health services, accounting, architecture and other professions, just to name a few.

Limited Liability Partnership
If organized as a Limited Liability Partnership under a specific section of the General Partnership Act, partners are not liable for the debts, obligations and liabilities of, or chargeable to the partnership arising from negligence, wrongful acts, omissions, misconduct or malpractice committed while the partnership is a Limited Liability Partnership.

"C" Corporation
A corporation is a distinct legal entity and is the most complex form of organization. A corporation may sell shares of stock, which are certificates indicating ownership, to as many people as is desirable. The shareholders then elect a board of directors, which elects a president and other officers who run the company on a day-to-day basis. Among the advantages of corporate formation are limited liability of the shareholder and ease of transferring ownership. If the name of the business includes the word "Corporation," "Inc.", "Incorporated" or "Corp.", then the business must be incorporated.

"S" Corporation 
Electing S Corporation status is an option that must be made through the Internal Revenue Service (IRS) when starting a business. In general, an S Corporation passes through income and expenses to its shareholders, who then report them on their own income tax returns. To qualify for S Corp. status, a corporation must meet several requirements, one of which limits the number of shareholders.

In most cases a business will choose to incorporate. Choosing the correct form of corporation will impact the business for years including legal and tax liability. You should consult both your accountant and attorney before you make the decision. Do not be surprised if they give you different opinions. Listen to their reasons for selecting the form they recommend and make you selection carefully.  

Original Content copyright 2010 Thomas Robinson

Install Checks and Balances

I was positive all my employees were honest. I always made sure they were paid first and got a little extra at Christmas. I rarely changed employees and they all became friends. I was sure that all my employees guarded the company assets as they would their own.

My longest serving and most trusted employee was managing all the home construction for the company. He had hired a number of our regular subcontractors to work on the project and a several new ones. The project was well into construction when I received an anonymous letter in my mail box at home that said this employee was awarding contracts based on kick backs to sub.

The fact that the accusation was leveled at my most trusted employee and the fact that it was anonymous led me to put the letter in my drawer and I tried to ignore it.  But I did begin paying closer attention. When the employee went on vacation his assistant was doing most of his work and came to me with a question on the millwork contract. She wanted to know why we were not buying from the lowest bid.

Over the next week we discover three contracts that were not awarded to the low bidder. I then began to look harder and found an order for windows that would not fit in any of the homes we built. A drive by of the employee's home confirmed the windows were installed at his house. I found a set of tires on the company credit card that did not fit any of the company vehicles.

The Monday he returned from vacation I terminated him. A review of the contracts showed a number given to the subcontractor who was not the low bidder or had quality or paperwork problems.

After that experience we installed a system where at least two employees were involved in every purchase,  we created a expense record to record all use of the company credit cards and created other systems to keep employees honest. In another article I discussed having your checkbook sent to your home and having a different employee balance the checkbook than the employee who writes the checks. All of these things are checks and balances that you should establish to protect you company by that I mean establish accounting or auditing processes to avoid fraud or errors.

Any time company money is being spent there is chance of abuse including purchasing, using credit cards and ordering materials or services. It can also include use of company materials such as cell phone or automobiles. A written policy helps establish guidelines but you also need ways of enforcing the policy or at least checking that the guidelines are being followed.  

If you accept charge cards you should make sure an employee not involved in sales tracks all the charges and credits to legitimate transactions. Purchases and credits on credit cards can be particularly subject to fraudulent transactions between employees and accomplices.

Your inventory is another company asset that can be at risk. In our housing business we kept many of our materials on jobsites and not in a central warehouse so it was harder to keep track of all the parts and pieces. We believed we were losing a good deal of lumber either to trades people throwing a few extra pieces of lumber on their truck when they went home or to drive by theft.

Look into how you operate and how you can control you assets. Are there ways you can have multiple employees looking at financial transactions? You can try to look at everything that goes through your company personally but it is likely that it is impossible. Next time you talk with your accountant ask him about checks and balances that he may recommend. 

Original Content copyright 2010 Thomas Robinson

Warranty Policy

It is likely that your customers will expect a warranty. The warranty you offer will depend on the industry you are in, local laws and your competition.  There are two types of warrantees; express written warranty and implied warranty that are created by law, advertising claims or even normal and reasonable expectations of the typical consumer.    

If you are purchasing a product for resale the warranty may be provided by the manufacturer. If so you still need to be aware what your responsibilities are under the warranty. If a manufacturer offers to repair or replace defective product but requires that the product be shipped back to the factory will your customers expect to bring the product back to you making you responsible for returning the product. Read the third party warrantee and a make sure you understand your responsibility and liability.

If you are supplying the warrantee it is critical you make sure you create a written warranty with your attorney. When we were building homes we had a very detailed warranty including a disclaimer of an Illinois law that was printed in all capital letters.  I saw a number of smaller and less sophisticated builders who would sell their homes through real estate agents. They would provide a simple statement that the home would be free of defects for a year. Illinois had a "livability law" which in effect said that if the defect made the home unlivable it was covered by an implied warranty. Over the years case law in Illinois court has interpreted this clause to mean anything from the reasonable to the ridiculous.  If the buyer did not like the paint color they selected they could make a warranty claim. Our attorney helped us manage this unreasonable implied warranty.

Whether you have a written warrantee or not you still may create a warrantee with your advertising or even by statements made by your sales people. If you advertise all weather boots it is reasonable for a consumer to expect that the boots can be used in the rain. Whatever your written warrantee your advertising has created a warrantee. Even if you do not advertise the boots as all weather and your warrantee does not cover wet conditions if your sales people tell the consumer they are good for use in the rain a warranty may be created.

A warranty might also be created by the nature of the product. If you are selling food it is implied that the product is safe to eat.

Puffing which is an exaggeration or statement presented as opinion of a salesperson or even expressed in advertising does not create a warranty; most fashionable dress, best value automobile, longer lasting flavor gum.

You need to be aware of what you're customers expect, what you’re warranty is, who covers it, what is your responsibility if the warranty on your product is covered by someone else such as a manufactures, what warranties might be implied by the nature of your product and what is in your advertising or in the sales pitch your salespeople are using that may create warranty.

Original Content copyright 2010 Thomas Robinson

Locating Qualified Employees

Hiring a new employee is a difficult operation for the small business. It is a hard to find the right person, qualify them, convince them your company is the right place for them and arrive at fair compensation and benefits for you and the new employee.

Many small business owners look to their personal acquaintances for leads and referrals to new employees and avoid traditional channels of finding employees such as placing an ad in the newspaper or on one of the many job websites or even hiring a employment agency.  Referrals from acquaintances have two perceived advantages; it is cheaper – no advertising fees - and a personal recommendation.  While it may save an advertising fee it is likely that the recommending person more often has little or no knowledge of the person's professional abilities, they just like them. If they do have professional knowledge it is still more likely they will recommend a person on personality than professional abilities.

Hiring relatives is likely even a bigger mistake that is often made by family businesses. Managing family members has a whole host of difficulties and mixed dynamics. If you hire you own relatives it is nearly impossible not to mix family and business relationships. If you hire family members of employees and you need to discipline or even terminate one member of the family it will likely impact the relationship between the company and the other family members who are employees.

The problem with placing an ad particularly on one of the websites is particularly in the current job market you will get so many resumes that it will be difficult if not impossible to sort through them.  We placed and ad for a bookkeeper and within hours we pulled the ad because we received over two hundred resumes. One was from a guy working at a burger restaurant who was willing to learn the job and on was from a country that I could not even locate by continent. They would work cheap as long as we got them a work visa. We narrowed the list down to ten and set up interviews.   After interviews we had three that appeared more of less equally qualified.

An associate of mine recommended a on line personality test. I was skeptical but had the three potential employees complete the on line test my friend recommended. Remember this was a personality test not a skills test for a bookkeeper.  The results pointed clearly at one of the potential employees. The test her personality was best fitted to the job description. Whether it was the test or dumb luck she was indeed very well suited to the position. On line personality tests are a great tool to determine if an applicant if suited to the position.

Original Content copyright 2010 Thomas Robinson

Shop Your Competitor

Sports teams scout their opponents.  They have full time couches who watch the other teams games, break down films and try to predict not only what the opponents have done but what the opponents are likely to do when the team comes up against their own team.

In business you need to do similar things. You can shop the competition. If you are in the retail business it is easy to visit the competition or if they know who you are to send in a secret shopper to look at how they handle customers, what products they have, how is their pricing compared to yours, what is the value of their product, what advertising are they doing, are they having a sale, do they have loyalty programs etc.

If you are a wholesaler you can still shop you competitors on line or by phone. Look up their product. Buy samples if necessary and compare them to yours. Look at the quality of the product, the price and the service. When you compare them be careful you are doing so objectively. It is easy to be sold on your own product.

If the competitor has an advantage are there ways to overcome that advantage.  If the product is better what can you do to match the quality? If a competitor is getting an advantage because their warehouse is closer to the customer can you offer same day shipping to overcome the advantage? If the competition has better customer service what can you do to improve your customer service? It may be as simple as setting policies or training your customer service people. It may also be as simple as changing the people doing your customer service to people who enjoy working with customers. A pleasant voice and a good attitude go a long way to solving customer service issues.

If the competition is beating you with a lower price look at how they have created the product at a lower price. Is their product of equal quality? If the answer is no then you need to market the features or benefits that makes yours better. If you cannot compete at the price you need to maintain your quality, can you lower your standards to match the competition without damaging your company's reputation? I know of a window company that was at the top of the window industry.  To meet competition they produced a lower price line of windows but they used the same brand name. They lowered the value of their high end window when the brand began appearing on lower priced homes. The brand advantage only lasted for a short time because consumers quickly understood that the lower priced windows whatever the brand were not better than the competition and the high end consumers began to associate the brand with lower priced homes.  The window company lost both ends of the market.

There is always someone willing to sell a product like yours cheaper. Make sure you are shopping the right competition and making efforts to distinguish yourself for those price only companies.

Do not rely on your customers or worse you leads to tell you about the competition. They may have an agenda.  If they quote a price at which they are buying they may be trying to lead you to an unrealistic price. They may also be telling you they are buying at a lower price because it is easier than telling your sales person they do not like your product or even that they do not like the sales person. If they tell you they know your product is better but they cannot sell your quality to their customers or that "the customer does not care" can you give them sales materials to help them sell your quality? If the customer does not understand the value of your product, can you cost effectively do advertising to raise that awareness?

You need to scout the competition and understand what they are selling, at what price and what their services are so you can compete. Not necessarily match but compete.

Original Content copyright 2010 Thomas Robinson

Who Orders Office Supplies?

Your office supplies are likely a very small part of your overhead so it is easy to assign control of this small item to staff.   Sometimes this task does not even get assigned, someone just does it and because the cost is small it flies through the process and suddenly you have a supply closet full of colored pens, heavy duty paper clips, oversized hole punches….  Next come bulk order of copy paper and printer or copier toner.  I once worked for a company where a pool secretary (it was before secretaries became administrative assistants) took over ordering the supplies. No one noticed

One day the bookkeeper received a bill for copier paper.  It was from a new supplier although the invoice included a signed receipt from one of the company’s employees.  By luck it happened to be a slow day and our bookkeeper pulled previous orders. The price of the paper was twice the price from the other supplier.

This triggered a complete review of the office supplies.  The supply closet was fully stocked with not only frequently used items but over stocked with rarely used items. The secretary had begun ordering from a company where her daughter worked and after a good deal of investigation it turned out she was getting a “commission” from the office supply house. The prices were higher than the original supplier but not a lot, perhaps just enough to cover the commission.

So what does that have to do with the bulk paper shipment? It seems the supply house sold its customer list. This was before email and spam was the issue it is today. The supplier who bought the name simply called the contact and asked what type of copier the company used. This second supplier then shipped bulk orders of paper and toner unsolicited. The shipping ticket included an order form so accepting the shipment became an order.

This is a small hole in your profit picture but an easy one to plug. Look at who orders your supplies. Make sure at least two people are in the order chain and set inventory guidelines. Sometimes just letting people know you are looking will help.  

Original contant copyright 2010 Thomas Robinson

Decision Making – Satisficing

You are working at your desk when an employee enters. The Employee has an urgent problem that needs you attention. You distractedly listen to the problem and come up with the first solution that comes to mind that solves the problem and allows you to get back to the work on your desk. This is
Satisficing.

Wikipedia defines (a portmanteau of satisfy and suffice) satisficing as a decision-making strategy that attempts to meet criteria for adequacy, rather than to identify an optimal solution.

When the employee left they were probably satisfied because their problem was solved. You were satisfied because you got back to your work which in the moment was more important.  By solving a problem with the first solution that came to mind, you have created an unwritten policy in the mind of an employee.  A policy the employee will use in the future in similar situations. If it is adequate in the moment and not optimal then you have created a policy that costs you resources each time it is applied.

When you are presented with a problem you should ask yourself first is this an isolated incident or is it a problem that occurs frequently or likely to recur in the future. If the problem is isolated then your quick solution is likely fine. However, if the problem is frequent you should either put off the decision until you have more time to consider the options or take the time at the moment to consider the alternatives.

Make sure you understand the issue fully. Talk to the employee and have them describe in detail the issue. I have found putting it in writing helps because if you cannot write it down clearly them there is likely a misunderstanding of the problem somewhere. Make a list of possible solutions, yours and the employees. If necessary do additional research by either you or the customer talking to the customer to get more background. Explore the cost both in financially and non-financial such as customer relations. Pick the best solution not the first solution that comes to mind. If it is a frequent problem take steps to correct the issue and make a written policy to handle similar situations.

Original Content copyright 2010 Thomas Robinson

Business Model: Plan Not Habit

A business model is the way your business generates profit for example you can sell door to door, business to business or internet. You can buy wholesale and sell retail or you can manufacture your product and sell it wholesale. The business model for your company is often so ingrained in your company culture that you do not even notice it. It is just the way you do business.

In our home building business our basic business model was obtain buildable lots, pre-sell built to order homes and build the homes.  To obtain residential lots we would contract to buy vacant land, go through the entitlement process with the governmental authorities, subdivide the property and create our own lots. We believed this method of obtaining lots was the best for us because we controlled the entire subdivision and did not have competition from others builders within the project. It was also less expensive to bring the lots to market and either we made a larger margin or could use it as a price advantage.  It also had considerable risk. It was possible that we would spend money on approvals and design only to never get the project approved or approved with less lots or unfavorable conditions.   It also took a good deal more time than buying finished lots.

We always tried to pre-sell a home before we built it. This reduced the risk of holding a house built on speculation and paying interest and taxes until the home sold. Many other builders felt it was easier to build the house without the future home buyer watching you and making last minute or even past last minute changes to the design or materials. We did the sales with our sales people in most cases. Occasionally we would use a local real estate agent if the project was too small to set up our own sales.  

Even the methods of building the home changed at times. In the beginning we "stick built" our homes from dimensioned lumber (2X8, 2x12, etc.) During a labor shortage in the late 1990's we began to use factory built wall panels and roof trusses and wood I-beam floors. Not only did it allow us to use a less skilled labor force we discovered the method was better. We were able to build better homes with less call backs.

Whatever your business model is put it down on paper in detail so you can look at it and treat it like a manageable part of your company. Start with how you select your product and end with the warranty process. Then examine each step and ask your self can we do it better? You may just find that much of your business model is habit instead of the best way to achieve you goals.

Original Material copyright 2010 Thomas Robinson

There are two ways to price your product; cost plus and market pricing. Both have benefits and risks.

When we built homes we would do a cost estimate on the home then add a percentage (markup) that we had over time developed to cover overhead, sales and profit.  On homes that were custom designed for a specific client as long as we met budget and were able to justify the cost the cost plus method gave us a predictable return for our work effort.

When we built homes on speculation for sale after completion we estimated the home and added a percentage the same way but we also did a market pricing just like a real estate agent would price an existing home for sale.  If the market price was higher than the cost plus price we would put it on the market at the higher price.  The additional margin would compensate us for the added risk of not having the home presold and having to pay interest on the construction loan for an extended time.

If the cost plus price was higher we would reconsider the project to see if we could adjust the cost to match the market price, change models or make other corrections. If we could not get the cost plus pricing and the market price to balance we would market the lot and move on.

The danger of cost plus pricing only is that it if the product is not presold you can either leave money on the table or worse wind up with a product that you need to discount below your anticipate margin or even at a lose.

Marketing only pricing also has its risks. I knew an excavating contractor who would match any bid. His theory was that the market was setting the price and if another contractor could do the project at a given price so could he.  He wound up taking too many low or no margin projects and his business failed.

You should use both methods to determine your  sell price.

Original Content copyright 2010 Thomas Robinson

Business Plan

A business plan is a written summary of your business idea including the product, people, equipment, financing, competition, sales and marketing , cash flow and operations that are required. You will want to prepare a business plan not only for your new venture but also for new products or business models. If you need financing for your venture you will need a Business Plan to present the plan to venture capitalist, investors or your bank. Even if you are self financing the venture you should prepare a business plan as if you were going to present it to your bank. There is no one easier to lie to than yourself and no one easier to fool.

There is no magic formula for a Business Plan although I always found when presenting a plan to a bank the heavier  and longer it was the easier it was to get the banks approval. You plan should at a minimum include the following.

·         A detailed description of the product or line of products or services including target consumer and features and benefits of the product.

·         A statement of qualifications and experience of the person or persons who will lead and manage the venture.

·         A detailed plan of where and how the product will be manufactured or purchased. If it requires manufacturing where will you get the equipment, factory space, raw materials and skilled labor? If you are purchasing the product what are your supply lines? Do you have a purchasing agreement in place? How reliable is the source? Can you get alternate sources if necessary?

·         A marketing plan that details you unique selling propositions, market area, method of reaching your customer such as advertising or online marketing. How will you attract the right sales people? If you are planning on using a marketing firm provide details. If you are out sourcing sales such as to a real estate agent if you are building homes include information on the individual or firm you intend to use. If they provide a marketing plan include that in your business plan.

·         A cash flow plan detailing required cash resources and how long the cash will be required before the venture becomes cash positive.

·         A statement of required resources not listed above such as licenses, permits, insurance, testing and research, office space and associated equipment and furniture.

·         An organizational chart showing a plan for operating the business at inception and as it grows.

·         A list of  your key  advisors; accountant, attorney, insurance professional

·         Include a breakeven and profit analysis. How many units or dollars do you need to sell to break even and how many do you need to sell to provide a return to your investors? A bank will want to make sure they are going to get repaid. Investors will expect a return which well exceeds return they could get from safer investments such as saving accounts, money markets or bonds.  

Even if you do not need to reach out to investors and a bank and are going to be self financed prepare a business plan and present it to a bank or group of investors who do not have fallen in love with the idea like you have. If you cannot convince them to provide funding then you likely need to reexamine the plan.

Friends and relatives are not a good audience as they will either be too easily swayed by your enthusiasm or afraid to tell you what they really think. I once had a relative who I looked up to all my life. He was buying a franchise when he retired and he showed me the business plan. When I looked at the return on investment and the work required to produce that income I thought "this plan will never work." Because I had looked up to him so long I kept my opinion to myself. He spent almost ten years working too many hours trying to keep from losing his retirement savings. In the end only the long hours and a lot of resourcefulness helped him recoup his original investment.

Original Content copyright 2010 Thomas Robinson

Get Your Ego Out of the Way

An entrepreneur is someone who takes possession of a venture and assumes the risk.  Nowhere in that definition is the word ego but without a leader with at least a healthy ego and a lot of self confidence few new ventures will succeed.  That ego can get the company through the initial trials of starting the company but as the company begins to succeed that same ego can get in the way.

It is likely that the early success will lead to a feeling of infallibility and a feeling that all your ideas and long held beliefs are superior.

When I started the home building business I wrote the specification as if I were writing the specs for mu own house. I used cedar siding, aluminum clad windows with energy saving glass, heavy sculptured shingles and other items that were upgrades for other builders. My sales manager told me often that I was wasting my money because our customers did not understand the benefits and if they did understand they did not care. In my mind I knew I was right and ignored my employee. Finally the sales manager became frustrated by my ignoring him and he had the estimator price the homes on our newest project his way with vinyl siding and standard windows and roofing. He presented the proposed marketing material on our next subdivision with his specs and my specs as upgrades.  He also had market research showing what our competition was doing on homes in our price range. Homes his specs were selling just as quickly as our homes with the upgraded spec. In fact some of our customers perceived that wood siding was more maintenance than vinyl siding and therefore less desirable even though it was more expensive.

With my reluctant approval he began selling the homes in the eighteen unit project with his specs although he used the same sales pricing on the homes we had used with the higher specs. He offered my "standards" as upgrades at our cost.  The project sold as quickly as our previous project, at a higher margin and not a single home buyer selected any of the options that had been standards.

The point is if I got my ego out of the way a year earlier I would not have lost the opportunity for the increase margin on the previous project.

You have likely hand selected your employees and advisors. Listen to their ideas. You can still reject them after careful consideration but make sure your reason for rejecting the idea does not include the fact that it was not your idea. If you do not follow the employees ideas discuss your reason for not adapting the idea. It may be a teaching moment or perhaps your inability to articulate your reason for not following their advice will convince you should adapt their ideas.

Original content copyright 2010 Thomas Robinson

Retirement Plans

Retirement plan or pension plan is a method of providing future income for your employees. There are many plans from a simple 401K to a profit sharing plan. All these plan are complicated and require a good deal of complicated government paperwork to create and maintain.  The plans can also be very costly if not structured right from the beginning.

Establish your goals. Is the main purpose of the plan to provide for your retirement or is it intended to be a significant benefit to attract and maintain employees? Once you establish your goals discuss those goals with your account and other advisors. Do not jump into the first plan you come across. Make sure you understand the benefits and the costs to create the plan and to complete the annual paperwork.

For more information visit the Depart of Labor website HERE

Information on your retirement plan should be included in your Employee Manual.

Original Content copyright 2010 Thomas Robinson

Vacation Policy

In the US there is no Federal law requiring you to offer your employees paid vacation but if you have full time employees they will likely expect an annual vacation. You may also need to offer vacations to be competitive in attracting employees.

Some things to consider for your policy:

·         How much vacation time do you offer, for example 5 week after one year, 10 weeks after two years, 15 weeks after ten years

·         When is the vacation earned at the end of each calendar year or at the employee's anniversary date? If earned at end of year will you prorate the service into days for example if the employee works nine months do they earn 9/12ths of 5 days or 4 days? If the vacation is earned on December 31 and the employee leave before the end of the year do they lose accumulated vacation?

·         Do you want to allow employees to accumulate vacation time over several years or will unused vacation expire at the end of the calendar year or can the employee elect pay in lieu of vacation? Some states such as California do not allow "use it or lose it policies" however California allows you to pay the employee for unused vacation instead of giving time off.

·         Is there a minimum or maximum days in a row that employees can take at one time? Most companies require a minimum of 1 day increments.  I know a bank that required each employee to take two weeks consecutively because they believed that any fraud could be discovered if an employee was out of the office for two weeks. Many small businesses do not allow employees to take more than one week consecutively because there are fewer employees and less duplication of duties and skills.

·         You should require employees to schedule vacation in advance giving preference to the most senior employees.

·         If you shut down for maintenance at a designated time each year you may wish to require that employees take vacation at that time. You can also limit time off during busy seasons such as a retail store limiting vacations during Christmas selling season.

·         Do you give vacation to part time hourly employees? If so will the vacation pay be based on normal hours or average hours worked per week?

·         You can offer different packages to different classes of employees. You can decide to give part time employees no vacation time and more vacation time to executive employees. If you have employees with particularly stressful jobs they may need more time off to be more productive. I knew a computer programmer/analyst that worked for a software company that designed customer programs for large banks. He would work long hours and often go for weeks without a day off when there were issues with new software. He also received 8 weeks vacation a year in compensation.

Add the vacation policy to your Employee manual.   

Original Content copyright 2010 Thomas Robinson

Funeral and Bereavement Policy

A business owner told me the story about an employee who shortly after she was hired told her employer that she need a day off to attend the funeral of a "church member." He did not have a policy regarding funerals so he allowed her to go to the funeral and because of the paperwork involved in deducting a day's pay paid her for the day.  A month later she requested another day for another "church member's" funeral. The second time he asked a few more questions. It turned out the new employee was on a church committee that aided with funerals and she expected to be able to take time off whenever her turn to help with a funeral came up, every four to six weeks. 

I am aware of another employee who was so devastated by the loss of their mother that a three day funeral leave turned into weeks and finally the employer had to replace the employee.

Our home building company once had to shut down a house under for construction for nearly a month when the carpentry crew who were all related went back to Mexico when a grandfather died. 

Some things you may consider:

·         You may want to establish a base line number of days for close family members such as spouse, parents, mother or father-in-law, children or siblings such as three days to make funeral arrangements and attend funeral.

·         A different policy should be established for extended family or close friends such as cousins or aunts and uncles such as one day.

·         Will you pay for the days off?

·         The policy needs to be flexible enough to cover situations where travel is involved or unusual circumstances. I had an employee quit when I told her that my policy (unwritten at the time) was one day off for extended family members. Her aunt had died and she had requested a week. Turns out her aunt had raised her and the Aunt was more of a mother than and aunt.

·         You may want to establish a maximum time off after which you will need to replace the employee.

As a small business your employees are often as much friends as employees. A written policy will deflect anger and protect the company.

Original Contenr copyright 2010 Thomas Robinson

Military Reserve

The United States Military has relied more in recent years on the citizen solider not only as a deterrent but as an active part of the military. You need to be aware of the requirements and responsibilities you have to those in the military reserve.

The Uniform Services Employment and Reemployment Rights Act sets out specific responsibilities of employees and rights of the reservist. A listing of the rights can be found HERE.

Among the requirements is to inform those of your employees affected by the act of their rights by hanging a poster where other employee notices are posted (copy of poster)or by giving them rights individually.

Note there is no minimum employer size as there are for many other labor rights laws.  Some of the requirements for reemployment can have a significant impact on your company.

Quoting from the Department of Labor web page "The Uniformed Services Employment and Reemployment Rights Act (USERRA) protects the employment rights and ensures the reemployment of veterans, reservists and National Guard members after a period of active service and prohibits employment discrimination because of past, current, or future military obligations. It covers all employers, regardless of size, in the public and private sectors."  (http://www.dol.gov/vets/compassist/main.htm

You are not required to pay an employee while on training but many employers choose to pay the difference between the military pay and the employee's regular pay. Decide on your policy and record it in your Employee Manual. If you print the poster on regular paper and make it part of the Employee Manual that you provide to all employees that can serve as the required notice.

Original Content copyright 2010 Thomas Robinson

Smoking Policy

A smoking policy or more correctly a no smoking policy is one of those topics that can stir passions on both sides of the issue. There are laws in place in many locations and it is likely that these laws will continue to tip in favor of more restrictive conditions for the smokers. The American Lung Association (http://slati.lungusa.org/states.asp) has a website that lists the current laws by state.

It is best to establish a policy you can disclose when hiring employs rather than after a smoker is hired then finds out they need to smoke outside the building or a non smoker finds themselves working next to a smoker.

Decide if you allow smoking in the workplace. If you want to allow it only in a designated area define the area precisely.  Will you allow employees to smoke in their cars if on company property or do they need to leave the area. Setting up a designating smoking area does not give the employee permission to take extra breaks that setting up the area may imply so state if it is you policy that smoking breaks are to be taken only during designated break times if that is your policy.

You can state if you have a policy restricting or even forbidding smoking in the workplace when hiring but you cannot ask a potential employee if they smoke.

Original Content copyright 2010 Thomas Robinson

Annual Budget: Break Even Analysis

The point where your income revenue is equal to your cost is your breakeven point.   If you can accurately predict you costs and margin then you can determine what your revenues need to be to pay your costs. This type of analysis is particularly helpful for a new business to decide if the business model will succeed.  

You need to consider your fixed costs (those that do not change with volume) and variable costs (those that increase with volume.)

Your Fixed Costs include costs that do not vary significantly with a change in volume such as rent, insurance and office payroll.

Variable costs are costs that vary with volume such as cost of goods sold. If you are selling shoes the cost of shoes increases as you sell more units.

You need to determine what margin you need to make on gross sales (Margin not Markup.)

For Example if your fixed costs are $600,000 and you can maintain a margin of 30% then your volume needs to  be at least $600,000 / 30% = $2,000,000.

Your cost on $2,000,000 in sales is $2,000,000 - $600,000 = $1,400,000. You mark up needs to be $600,000 / $1,400,000 = 43%.

You break even point is $2,000,000 in sales provided you can mark up your costs by 43% and have zero drift (reduction in margin due unforeseen items.)

You can now determine if $2,000,000 in sales is realistic. Is a 43% markup realistic? What so you want to make? There is no reason to operate at a break even.  When you prepare you sales budget you need to budget sales to include not only breakeven but also profit. If the projections are unrealistic then you need to change fixed costs, productions cost or raise prices which may make the sales goals even harder to achieve.

Original Content copyright 2010 Thomas Robinson