Strategy and the Exploration for the Non-Customers

I met with one of my clients and friends, Armen Alajian, co-owner of Artobrick. Now Armen runs this business with his brother, Vod with the respect and tradition of a family business that has been passed down to younger generations.

However, one of the things that makes me proud to have them as a client is their  aggressiveness to continue to test new ground.  The latest is the “Ceramic Paintings” shown on this page.  They brought an artist into their game to paint original artistic works on ceramics that can cover any size of walls and floors.  Basically, Artobrick has merged the art world and the ceramics world.  But what they don’t realize is they have increased their market space to the “unexplored” non-customers. This is  a concept discussed in the Blue Ocean Strategy by Kim and Mauborgne.

Kim and Mauborgne lay out three tiers:

1st tier, “Soon-to-be” non-customers who are on the edge of your market waiting to to jump ship;

2nd tier, “Refusing” non-customers who consciously choose against your market;

3rd tier, “Unexplored” non-customers who are in markets distant from yours.

I would argue that these tiles will attract a 3rd tier customer who loves art.  These customers may not consider installing bricks, but may consider installing a Jackson Pollack-type tile just for the artistic addition to their home or business.  This attraction gives Artobrick a distinct advantage over other tile/brick manufacturers who cannot compete in this market space because they don’t have the strategy to see buyer needs.

The initial step for this to venture to be successful is for Artobrick to distinguish a buyer utility.  Some companies do surveys or venture into a new concept slowly gauging buyer and market response.  I don’t know if the brothers took this step, but assuming they did, the next step is to make a price easily accessible to buyers.   Third, at this price point, can they make money?  And lastly, what other hurdles can restrict the market roll out.

According to the Blue Ocean authors, if Armen and Vod get past these steps, then they can have a viable Blue Ocean idea where competition becomes irrelevant.  All small and medium-sized businesses should take this approach in their businesses by thinking about the non-customer.

 

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CPA Tax Tip: Late Payroll Taxes?

During my CPA career I have seen business owners shirking their responsibility to withhold and pay federal income taxes, too many times.  The taxes can be both federal and state. On the federal side, FICA (social security), Medicare, income taxes, and unemployment insurance (FUTA) can add up to large amounts that these employers cannot seem to part with when their business is in a bind.  Penalties and interest usually compound the problem.

Not only are the owners responsible, but any “responsible party.”  See The Consequences of willful failure to pay payroll taxes by Vani Murthy for a more comprehensive discussion on the responsible party.  There has been limitations on who these people are, but just because you delegate the duty does not mean you are off the hook. If you are the owner or officer, the responsibility may put your personal assets at risk.  Worse yet, in the most egregious cases, the IRS has imposed criminal penalties including jail time.

So, what can a business owner do to avoid falling into this situation?  And, if in it, what can they do?

  1. Manage your cash flow: This is always the first step.  Too many business owners look at payroll taxes as a necessary evil that can be placed on the back burner.  Instead, place this item at the top of your cash disbursements along with the payroll.  Pay them at the same time as your payroll, not the 15th of of the following month, or any time before that just because it is mandated by law.
  2. Defer your personal payroll to the next month:  As a small business owner, if you can personally afford paying yourself for a few weeks, defer your personal paycheck to the next month.  That can be only one day when you pay payroll on the last day of the month.  This could delay your payroll tax liability due date.
  3. Understand the danger signs: If you are using your business credit line to “make payroll,” then your business model is probably broken.  It could be for a number of reasons:  Uncollectible receivables, too low of a gross profit ratio, unproductive sales employees are just to name a few.  I have seen all of these sink businesses.
  4. Talk to the IRS: If you find your company without funds, rectify the problem as stated above but  also open a dialog with the IRS.  Keep the communication open and implement a payment plan for back taxes.  This may keep them from levying your bank account thus sabotaging any efforts to save your business.
  5. Take your head out of the sand: There is a type of business owner that I have come across that uses the ostrich method.  They just put business problems out of their mind and don’t plan on rectifying them.  When I would make recommendations they would delay until forgotten.  Please try to avoid this.

Meeting a challenge before it happens, and after it happens will usually be the best route to take with payroll taxes.  Since all situations are unique, please consult a tax adviser before making any decisions.

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IRS CIRCULAR 230 DISCLAIMER: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, (Firm) would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

 

 

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Business California Sales Tax: Why Pay More When Buying Equipment?

On July 1, 2014, a new law will allow manufacturers and certain research and developers obtain a partial exemption of sales and use tax on certain qualified equipment purchases and leases. You must meet all three requirements:

  1. “Qualified Person” : These are enterprises that are engaged in certain types of businesses.  A “qualified person” means a person who is primarily engaged (50 percent or more of the time) in those lines of business described in the North American Industry Classification System (NAICS).  These industries generally include those primarily engaged in the business of all forms of manufacturing, research and development in biotechnology, and research and development in the physical, engineering, and life sciences. (NAICS was developed under the auspices of the Office of Management and Budget (OMB), and adopted in 1997 to replace the Standard Industrial Classification (SIC) system. It was developed jointly by the U.S. Economic Classification Policy Committee (ECPC)Statistics Canada, and Mexico’s Instituto Nacional de Estadistica y Geografia , to allow for a high level of comparability in business statistics among the North American countries.)

To be primarily engaged as a legal entity or as an establishment you must, in the prior financial year, either derive 50 percent or more of gross revenue (including inter-company charges) from, or expend 50 percent or more of operating expenses in a qualifying line of business.  Alternatively, an establishment is primarily engaged if, in the prior financial year, it allocates, assigns or derives 50 percent or more of either of the following to a qualifying line of business: (1) employee salaries and wages, (2) value of production, or (3) number of employees based on a full-time equivalency.

2. “Qualified Properties”: Machinery, equipment, and tangible personal property.  However, look at the description because there are some exceptions.

3. Use Qualified personal property for uses (50% +) allowed by law:

  • Any stage of manufacturing, processing, refining, fabricating, or recycling.
  • Research and development
  • Maintaining  qualified personal and tangible property.
  • Contractor’s purchases of property  used in construction for a qualified person if that person uses it for a qualified purpose.

Make sure you understand the rules. These are explained on this site: http://www.boe.ca.gov/sutax/manufacturing_exemptions.htm#Qualifications

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

 

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Tax Records Advice:Early Preparation Can Save Headaches Later

Most people I know live at a very fast pace.  Planning ahead for a wedding, graduation, or a baby usually get priority in life.  Planning and organizing tax information usually doesn’t.  However, if you are one of those people who want to change your method of tax readiness before April, here are a few IRS tips with our comments:

  • What to keep – Individuals.  In most cases, keep records that support items on your tax return for at least three years after that tax return has been filed. Examples include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment and any other records to support deductions or credits claimed. You should typically keep records relating to property at least three years after you’ve sold or otherwise disposed of the property. Examples include a home purchase or improvement, stocks and other investments, Individual Retirement Account transactions and rental property records.  We believe one set of items that you should keep forever is the support for all improvements made to your home or any real estate.  When the time comes to sell your home, these improvements may reduce your capital gains tax.
  • What to keep – Small Business Owners. Typically, keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Also, keep records documenting gross receipts, proof of purchases, expenses and assets. Examples include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices, credit card charges and sales slips, Forms 1099-MISC, canceled checks, account statements, petty cash slips and real estate closing statements. Electronic records can include databases, saved files, e-mails, instant messages, faxes and voice messages.
  • How to keep them - Although the IRS generally does not require you to keep your records in any special manner, having a designated place for tax documents and receipts is a good idea. It will make preparing your return easier, and it may also remind you of relevant transactions. Good record-keeping will also help you prepare a response if you receive an IRS notice or need to substantiate items on your return if you are selected for an audit.  We find that digital copies of receipts and checks help organize and preserve your records.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

 

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Strategic Planning Taken to An Artistic Level

I was interviewed in the San Fernando Business Journal in their Hollywood Math article.  What the author thought was more interesting is our firm’s movement into the strategic planning area for artists.  It starts on page 11. My intent of this interview was to promote the concept that strategic planning principles exist in many contexts and industries.

 

 

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The Magic of Disney: Where Business Theory Does Not Have To Be Just Theoretical or Theatrical

Have you discussed something on a theoretical level with someone only to realize it was just mental calisthenics?  In other words, did that conversation deal with the REAL world?

I came across a Harvard Business Review article, What is the Theory of Your Firm? by Todd Zenger that put teeth into strategic planning.  His article discussed Walt Disney’s 1957 Theory of Value Creation in Entertainment (seen here).

As I studied this 1957 vision, I realized that it fit well into one of the major steps of strategic planning: the vision. As Zenger said, “It’s founder had a very clear theory about how his company created value, which  was captured in an image held in the company’s archives.”

As a small business owner or an artist, how you can integrate this into your strategic plan resulting in a single sentence that projects a 10-20 vision using horizontal or vertical integration?

Using Disney’s map as a template, it seems his original core were films.  However, I could have argued that the theme parks had risen as a second core.  In any event, they complimented each other.  Next Disney drew satellite profit centers like TV, music, merchandising, etc.

But the magic of Disney were the lines that connected the main core to the satellites.  They were his animated characters.  It is like the theatrical film was the heart, the satellite profit centers (or assets) the organs, and the connecting Disney characters the veins and arteries.

From this, Zenger imagined that Walt Disney’s theory (or vision) could have been, “Disney sustains value-creating growth by developing an unrivaled capability in family-friendly animated (and live-action) films and then assembling other entertainment assets that both support and draw value from the characters and images in those films.”

The interesting historical fact pointed out by Zenger is that the power of this theory was revealed within 15 years after Walt’s death when the core film machine shifted away from animation.  The whole empire slowed to a crawl.  In my words, the heart stopped pumping, anemia set in and the organs suffered.   Michael Eisner took charge in 1984 as the surgeon and rediscovered the theory generating film greats as The Little Mermaid, Beauty and the Beast, and The Lion King.

Zenger laid out three “sights” of strategy that compliment our strategic planning sessions:

  1. Foresight: Projects where the industry and customers are heading in 10-20 years. Our Opportunities step addresses these developments.
  2. Insight: Theory must be company specific so as to discourage copycats. The Threats step questions the competition’s abilities to steal market share.
  3. Cross-sight: The combining of assets and theory, or as I like to say, Praxis (marriage of theory and practice.) Many don’t see this, but accounting can play a large role in this implementation.

Many strategy books deal with similar concepts from different points of view. The important part is that without a vision (theory) a business just flounders hoping to fall into a lucky opportunity.

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Learn from the Big Shots When Designing Your Business Strategy

I recall reading Bill Gate’s book in the early  1990s about a device that will come to the market that you can use as a phone, a personal computer, a device to buy merchandise, and many other useful tools.  And, it would be the size of a pocket book.

I could not have imagined that an iPhone would be such a big part of my life in about 15 years.

Well, another harbinger may be here in Apple’s purchase of Beat according to Owen Thomas’s article, Apple Bought Beats because Music is Dying.  The article discussed Apple’s purchase of this steaming software as a growth mechanism.  Beats is trying to bring back the “album-like” experience, not the soup of individual songs.  Young people are not being moved by random song by song and are abandoning music as we once knew it.

This actually rang true for me yesterday when my 15 year old daughter discovered the Beatles and requested a phonograph player for her birthday so she can play our old albums.  She experienced a new concept, “the Beatles album” and the various messages the Beatles were trying to bring across in one tight two-sided package.

These concepts can help any business when conducting their business strategy.  Stop, trying for the home run and focus on winning the game. Regardless if you are an accountant or an artist, your customer should be feeling the message of what you are trying to get across.  Here are some suggestions:

  1. Always put yourself in the customer’s shoes.  You must be honest.  What are they feeling?  What attracts them to your industry? What are they missing from you and others in your industry?
  2. Don’t repeat history just for the sake of history.  We always did it this way is not a reason to keep a product or service.  The big shots in your industry may help you with their publicity.
  3. Discard services and products that don’t  meet the customer’s needs.
  4. Refine your short list of services or products.
  5. Project your company strategy and see if these decisions match.
  6. Project the financial needs to implement your strategy.

When a large player in your industry predicts a change, you should take note.  If you had told me thirty years ago that a coffee shop would be one of the leading “fast food” franchises, I would have laughed.  Little did I know that the public had a need to hang out with good coffee.

Learning for big shots can help you aim better with yours.

 

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“Where There’s Smoke, There’s Fire” (But What if You Can’t See the Smoke?)

As a kid riding through the southern Sierra Madre, my uncle Jim Smith used to point to a brush fire in the distance and say, “Where there’s smoke, there’s fire.”  Now to a kid, that seemed like stating the obvious, but as I grew older, I understood what he was trying to teach us.

That meaning of the adage was that sometimes you only see the effects of a problem and not the cause.  The smoke, which has a lethal threat of its own, only signaled a more serious problem that had to be addressed. Sure, if the wind changed directions, then the smoke would not be blowing across our path, problem solved…right?  Obviously not, the changing wind would just push the problem into another direction, maybe with more dire consequences.

Another type of signal may also indicate a good cause, or an opportunity.  For example, if the brush fire smoke turned white, you would assume that the fire crews were getting the upper hand.

A McKinsey Quarterly article, Tapping the power of hidden influencer’s by Duan, Sheeren, and Weiss discussed at tool that social scientists use to identify sex workers and drug users can also help senior executives find the people most likely to catalyze, or sabotage organizational-change efforts.

Now this lines up real nicely to Jim Collin’s concept of “getting the right people on the bus” to enable a company to move forward before the strategic plan is in place.

Duan posses the challenge of how company leaders can identify certain people beforehand to harness these individuals’ energy, creativity, and goodwill that will benefit the company.

The article stated that, “One way we’ve found is “snowball sampling,” a simple survey technique used originally by social scientists to study street gangs, drug users, and sex workers—hidden populations reluctant to participate in formal research. These brief surveys(two to three minutes) ask recipients to identify acquaintances who should also be asked to participate in the research. Thus, one name or group of names quickly snowballs into more, and trust is maintained, since referrals are made anonymously by acquaintances or peers rather than formal identification.”

This method lays out four principles to tap the power of hidden influencers:

1. Think broad, not deep.

2. Trust, but verify

3. Don’t dictate—cocreate

4. Connect the dots.

These are good points, but the challenge is to implement them.  Too many management level persons set a strategy in place, but delegate it to others to implement.  A detailed implementation plan must be designed with weekly communication and accountability.  Even though you know “where you are going,” you still have to steer the car and add fuel.  Stepping up as a leader is one thing, delegating and managing the tasks to the individuals you identified is another.

If you don’t execute your strategic plan with the right people, you will see smoke.  And that smoke could be a raging fire that can cripple the whole process.  This process discussed in article helps a manager to see the smoke of a fire that has not yet taken place.  However, once the project has begun, all those involved should be diligent to spot smoke from a distance.

 

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CPA Tip: Charitable Contributions and the World of Doing Good

It is never too early for tax planning, especially when it comes to charitable contributions.  This seems to be an area where clients come up short in April because they forget what they contributed during the year, or lack the proper documentation.

The IRS has provided some tips.

1. You must donate to a qualified charity if you want to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates.  Many times clients ask if they can deduct payments made to a family member that is struggling financially.

2. In order for you to deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.

3. If you get a benefit in return for your contribution, your deduction is limited. You can only deduct the amount of your gift that’s more than the value of what you got in return. Examples of such benefits include merchandise, meals, tickets to an event or other goods and services.  If you received any benefits from your contribution to a tax-exempt organization, you must compare that you paid.

4. If you give property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market.

5. Used clothing and household items generally must be in good condition to be deductible. Special rules apply to vehicle donations.

6. You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.

7. You must keep records to prove the amount of the contributions you make during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. It can be a cancelled check, a letter from the organization, or a bank or payroll statement. It should include the name of the charity, the date and the amount donated. A cell phone bill meets this requirement for text donations if it shows this same information.

8. To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift. I recommend that clients get documentation for all charitable deductions as a matter of discipline.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

 

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CPA Tax Tip: IRS Guidance on Medicare Taxes

A new Medicare tax kicked in back in 2013.  There is a lot of confusion, so here are some IRS guidelines that can help in tax planning:

1. The Additional Medicare Tax is 0.9 percent. It applies to the amount of your wages, self-employment income and railroad retirement (RRTA) compensation that is more than a threshold amount. The threshold amount that applies to you is based on your filing status. If you’re married and file a joint return, you must combine your spouse’s wages, compensation, or self-employment income with yours to determine if you exceed the “married filing jointly” threshold.

2. The threshold amounts are:

Filing Status Threshold Amount
Married filing jointly         $250,000
Married filing separately   $125,000
Single                            $200,000
Head of household          $200,000
Qualifying widow(er) with dependent child      $200,000

3. You must combine wages and self-employment income to determine if your income exceeds the threshold. You do not consider a loss from self-employment when you figure this tax. You must compare RRTA compensation separately to the threshold. See the instructions for Form 8959, Additional Medicare Tax, for examples.

4. Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year, without regard to your filing status, wages paid to you by another employer, or income that you may have from other sources. Your employer does not combine the wages for married couples to determine whether to withhold Additional Medicare Tax.

5. You may owe more tax than the amount withheld, depending on your filing status and other income. In that case, you should make estimated tax payments /or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate. If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty. For more on this topic, see Publication 505, Tax Withholding and Estimated Tax.

6. If you owe this tax, file Form 8959, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.

Your tax preparer will compute this on your tax return, but the real risk is not paying enough estimated taxes during the year.  You should have a proper tax projection prepared early in the tax year to know whether you are subject to such tax.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

 

 

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