The recent economic downturn has many businesses focused on not just making a profit, but simply surviving. Although ways to maintain or even increase revenues are a priority, finding the means to reduce or eliminate unnecessary expenses are also high on a manager’s list. A common cost-cutting measure being taken is the elimination or layoff of staff. Another is the delaying of planned projects, such as upgrading computer software and hardware.
Increasingly, businesses are finding themselves between the proverbial rock and a hard place. They realize specific IT projects need to be completed for the business to develop, but are unable to react lacking the necessary staff or the budget to do so. Lacking the ability to hire full-time staff or the capital necessary, they must look for affordable alternatives. One such option, particularly for smaller businesses, has been to outsource many of their IT needs.
Outsourcing continues to prove advantageous during both economic upswings and downturns. During an upswing, businesses can use outsourcing to improve performance. Conversely during an economic downturn, outsourcing can assist in keeping a business competitive while reducing operating costs.
Outsourcing remains an effective and popular tool for small and medium size businesses (SMEs) trying to control expenses. According to 600 small-business respondents in an oDesk.com survey released in March 2009, 41.9 percent indicated they planned to outsource more in the near future. The primary reasons included the inability to hire full-time staff (34.9%) and staff cuts (7%). Surprisingly even with a recession in full-swing, 28.5 percent planned to outsource projects they previously had not.
SMEs often do not have the luxury of hiring IT staff to handle their technology needs. However, they understand the need to carry out such activities as providing desktop training for employees and performing periodic computer repairs and upgrades. For these companies, outsourcing remains a cost-effective and controllable expense.
Drew Paras, CEO of Tech Hero, a computer consulting and repair business catering to SMEs, has seen an increase in the demand for IT outsourcing over the last year. “We have seen more interest in outsourcing IT needs, especially among smaller professional firms such as medical practices and CPAs,” he says. “The idea of not being locked in to maintaining a full-time staff or signing a long-term service contract is very attractive, especially given the current economy.”
Paras points out several advantages businesses should consider when deciding whether to outsource their IT needs. Outsourcing gives a business the ability to:
- Improve cost management controls by paying only for those services that are needed.
Reduce expenses associated with maintaining in-house staff, while still enjoying access to IT specialists knowledgeable in their field.
Access IT support 24/7 at a fraction of the cost associated with long-term service contracts.
Secure services and support on an a la carte basis.
Outsourcing is not always the best choice, if an SME has the capacity and budget to perform IT tasks internally. However, if they do not, and outsourcing allows a business to remain viable and competitive while controlling expenses, it may be an option that deserves a closer look.
The home office deduction is one of those deductions that can potentially get you in to a lot of trouble if not handled correctly. Therefore, the best place to start is by making sure your home office fits the definition of a home office per the IRS. You can claim this deduction for the business use of a part of your home only if “you use that part of your home regularly and exclusively (1) as your principal place of business for any trade or business OR (2) as a place to meet or deal with your patients, clients or customers in the normal course of your trade or business.”
Another important thing to keep in mind when dealing with the home office is that the burden of proving it is a home office — used solely and exclusively as a home office – will be on you if the IRS demands proof.
Now, here’s the good news. Your home office does not have to take up an entire room. The key is that it is a space devoted exclusively to your business. To figure out just how much space is deductible grab the tape measure. After you have measured your dedicated work space, divide that by the square footage of your home. That is the figure you will use to calculate your home office deduction.
Remember that your deduction will be limited if your gross income from your business is less than your total business expenses.
Next up….the social security deduction.
It’s that time of the year again. The time where we scramble to put our financial records in order, stock up on the Excedrin and say a special prayer to the tax gods to be kind to us. Given its that special time of year, it may be a good time to review a few important tips for small business owners. So, over the next week, we’ll discuss that which makes us grind our teeth, pull out our hair and grumble about watching all our hard earned profits being taken away. Taxes!For many of us, particularly during these hard economic times where we are pinching every penny and holding on by a thread, the “urge” to take every deduction out there is strong….really strong. However, I encourage you to fight the temptation! Absolutely, positively, take every legal deduction allowed to you, but don’t over reach and don’t invent.
The IRS has always audited more smaller companies than bigger ones, and all recent indications are that they are targeting even more smaller ones. In fact, word from Washington DC in February 2009 was that the IRS intended to decrease the number of corporate audits it performed and instead audit more small businesses this year. Now, don’t you feel special and all warm and tingly?
Ever been through an audit? Anyone who has would probably considers a run in with an army of fire ants a more pleasant experience. Therefore, if you can avoid one, do so. The best way to avoid one is to make sure you have written documentation for every deduction you are set to take.
Also, make sure that you have completely and accurately filled out the tax forms. That means no missing numbers and no math errors. Fortunately, tax software goes a long way in ensuring many of these potential errors are avoided, but take a few moments to carefully check that return before filing. This may help prevent your return from being kicked out of the automated process to be hand checked by an IRS employee.
Next up…the home office deduction.
Access to a steady cash flow is a must for any business. Without an adequate supply of capital, a business cannot pay its employees or conduct the basic tenants of business. With so many banks either yanking or severely restricting the credit lines of businesses across the country, the issue of maintaining an adequate cash flow has become dire for many.
Contrary to the reports of mainstream media, many banks argue that capital is still available to credit worthy businesses. And, if you are looking to tap into that capital, you will need to take a few important steps including:
- Determining your credit worthiness before applying for a loan. Avoid allowing your cash or liquidity position to diminish. This has an immediate negative effect on your credit reporting history and acts as a big red flag for banks.
- Reevaluating your business plan and ensuring it is strong and current. It is imperative to show that you have a realistic plan for the future as well as a plan to repay any monies borrowed.
- Plan for the worst. Lenders require that you provide a minimum of twelve months of financial projects laid out in a monthly format. The projections need to take into account three possible scenarios: the best, mid- and worst case scenarios. Forecasting prepares you to think strategically and helps lenders feel more comfortable in your ability to repay the loan regardless of the circumstances that may impact your business.
- Preparing a two year business look back. This shows lenders that you are financially strong and are not a fly-by-night operation.
- Taking control. Given the harsh economic environment, now is not the time to step back and turn over the control of your business to others (or to crawl into the fetal position and cry, tempting as it may be). You are ultimately responsible for the success of your business; therefore, if you need to pick up the phone or visit customers who are slow in paying their bills, then do it. Take a closer look at your products and/or services and determine if they are appropriate for the current marketplace, and as difficult as it may be, reevaluate your labor needs. Think long and hard on the decisions you make. Do not have a knee jerk reaction and begin cutting back wildly. Surprisingly, eliminating some expenses can often cause more harm than good.
There is money out there available to businesses, but it will take research and preparation to access it. Draw on whatever resources are available to you including your local banker, SBA and SCORE organizations. As cliché as it sounds, it’s important to leave no stone unturned.
Cutting back during these difficult times has become a must for consumers and businesses alike. Every expense is scrutinized and debated. Small businesses are also asking themselves hard questions and cutting back on all expenses, hoping to become a lean operating machine able to survive this frigid economic winter.
This is often more easily accomplished by larger businesses that likely have a little “fat” that always needs trimming. It’s a little more difficult for small businesses and sole proprietors who, in most cases, are already running a tight ship. It’s a little more challenging in those circumstances as there is little extra that can be cut. Thus, many necessary tools of doing business are often reviewed such as advertising, travel and office operating expenses.
Insurance, including liability and workers’ compensation is one such area being closely examined by businesses. Depending on the business, insurance can be quite costly to maintain, garnering the question, “Do I really need this?” While tempting to eliminate, you may want to think again.
Ask yourself a few hard questions:
- If you eliminate your liability insurance, what kind of risks are you potentially exposing your business to should there be an accident or a defective product or service that results in injury or death?
- Do you have the cash on hand to handle any potential exposure?
- Can you and your business survive the fallout from any resulting lawsuits and/or settlements?
If you can’t survive such an event, and most businesses and individuals can’t, cutting back on your insurance coverage is not the way to go.
You should however take the time to review your current policy and shop around. Often, we become complacent staying with the same insurance company or assume we are getting the best rate because we have been with that provider for a long period of time. This isn’t always necessarily the case.
There is likely a large gap between what you are required to carry by law, what you should carry and what you need to carry in terms of insurance coverage. Talk to your state insurance commission about what you are required to carry and then speak to a few insurance agents and brokers familiar with your type of business who can advise you as to what you should carry in regards to coverage.
This is one situation where if not handled correctly, the cost of cutting back could potentially outweigh any benefit you may receive from cutting back.
Just as the downturn in the economy is impacting the lives of the majority of private individuals in this country, so is it squeezing small businesses. Most small business owners can tell you they are no stranger to belt tightening and budget cuts. Many prefering to take that avenue before raising pricing, knowing how difficult it is to complete sometimes. Unfortunately, there are situations in which you have no other alternative than to raise your prices.
A recent survey by the Small Business Research Board (SBRB) found that of the 1,000 small business owners surveyed, over 65% had raised their prices. Another 23% were adding or increasing shipping/handling fees and 21% were working to reduce other operating costs. Renegotiating customer pricing agreements was another solution, as was negotiating long-term fixed cost supply contracts and reducing lead times.
As I stated earlier, I believe small business owners are quite creative and savvy when it comes to finding creative solutions in order to stay competitive during economic hard times. So to the readers of this blog, feel free to share with others what solutions you are implementing to stay competitive.
Typically during an economic downturn, many small business owners begin to look for ways to cut expenses. One type of expense that is often cut is advertising. However, that may not be the right thing to do. If anything, it is the one budget you might want to keep in tact.
You may need to review and determine if the advertising mix you are using is the best one at the moment to get optimum exposure, but fight the urge to really slash your advertising budget.
One avenue to explore may be the use of promotional products. According to the Promotional Products Association International (PPAI) and Staples, “compared to print, TV and other advertising methods, promotional products lead to higher advertiser recall, increased ROI and better overall impression among consumers.” A survey by PPAI found that using promotional products in your advertising mix can increase brand interest up to 69% and creates a good impression of the brand 84% of the time.
Other benefits of promotional products:
- Leads to more frequent or repeated exposure of your marketing message
- Long-term visibility – most of those individuals surveyed kept promotional products for more than a year
There are several cost-effective options such as proprietary apparel, calendars, post-its, key chains, letter openers and magnets available. Strong competition should ensure you get the best price available. An idea definitely worth taking a closer look at.
If you are a small business owner and are entertaining the idea of setting up a retirement plan for your employees, then take note of two important upcoming dates: Oct. 1 and 15th.
Oct. 1st is the deadline by which a business must set up a Savings Incentive Match Plan for Employees (SIMPLE). If you received an extension on filing your 2007 tax returns, and want to set up a new Simplified Employee Pension (SEP) and take a deduction for 2007, then that deadline is Oct. 15th. Owners who received an extension and want to make 2007 contributions to existing SIMPLEs and SEPs need to also do so by Oct. 15th.
SIMPLEs and SEPs are popular retirement plans geared to small businesses. They are easy to create and maintain. Under a SEP, a company can deduct up to $45,000 for the 2007 tax year and $46,000 for 2008 for contributions to an employee’s account.
Employers setting up a SIMPLE can match employee contributions in a similiar manner to a 401(k). There are however more restrictions placed on SIMPLEs than on SEPs by Uncle Sam. For instance, a SIMPLE can only be created by a company with 100 employees or less.
More information is available on the IRS and Labor Department websites:
IRS Publication 560, Retirement Plans for Small Business, on the IRS website, http://www.irs.gov
This Labor Department link explains the types of plans available, employer responsibilities, and annual paperwork requirements, an owner can expect for each type of plan. http://www.dol.gov/elaws/pwbaplan.htm
Many small businesses are set up as corporations and will often encounter the issue of stock while drafting the articles of incorporation. For some, figuring out how to structure your stock may be a little confusing. Below are a few main points you should keep in mind:
- The two primary types of stock often issued are common and preferred. Common gives no preference or priority over other classes of stock, and has rights of distribution, liquidation and voting. Preferred stock give specific benefits and rights to the holder over common shares including but not limited to priority during a liquidation or bankruptcy, special voting rights and protection against efforts to dilute the stock (i.e. stock splits, dividends, etc.).
- Decide whether to assign a par value (minimum dollar amount assigned to shares of stock) or non-par value (no value declared in articles of incorporation but set later by the Board of Directors when the value of the corporation goes up). Keep in mind that par value has nothing to do with market value and par value will not limit the cost of the shares. Check with state law regarding whether or not you are required to choose a par value amount when drafting your articles of incorporation and what amounts are recommended.
- You must issue a stock certificate and then record that issuances in a stock ledger which becomes part of your permanent records.
- Issuing stocks must comply with all federal and applicable state security laws. Be aware that you may also be required to file quarterly and annual reports with the SEC.
- Check with an attorney or tax advisor regarding specific laws that may additionally impact your individual situation.
On Friday, it was announced that the SEC has agreed to give small businesses a one year extension in order to company with the Sarbanes-Oxley Section 404(b) auditor attestation requirements. The extension will hopefully allow more time for businesses to find ways to deal with the higher costs of complying with the law’s requirements.
Section 404 of the law requires companies — even those with market capitalization below $75 million – to comply with auditing their financial controls over financial reporting. Furthermore, it mandates that a business hire external auditors to assess the management and its abilities to implement those financial controls.
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