Lessons from the GM Fiasco

April 10th, 2014

GM failed to install a part for its ignition switch and the result was as many as 29 fatalities, millions of recalls, a testy appearance by GM’s CEO, Mary Barra, before Congress on April 2, and other unfavorable consequences. The cost of the component is between $2 and $5; the cost to GM to address the claims of victims’ families and the recall of 2.6 million vehicles (6.3 million globally) will run in the billions.

Criminal charges may be filed against some GM personnel (the engineers knew of the faulty ignition switch more than a decade ago). And the cost to GM’s reputation and future sales is uncertain.

What can small business owners learn from this mess?

  • Pay attention to complaints. While there’s always some customer who’ll complain about nothing, usually there is a solid basis for customer grips. Follow what’s being said about your company in social media to discover potential problems. Take phone calls from disgruntled customers. Read your email and snail mail complaints.
  • Acknowledge problems as quickly as they are discovered. The longer you wait to fess up and fix the problem, the more ancillary problems (e.g., difficulties with customer retention and marketing to new customers) there are. And the cost for fixing the problem can, like credit card debt, skyrocket beyond the initial cost of a simple fix (as GM found out).
  • Spend the money to correct problems the right way. Don’t try to shortcut a resolution. Customers (at least the reasonable ones) know that errors are made; they just want things fixed, and in the right way.
  • Discover how the problem arose. Dig deep to uncover your practices that led to the problem. In this way you can change your practices and, hopefully, avoid similar problems arising in the future.

Are You Accepting Virtual Currency?

April 3rd, 2014

According to Bitpay.com, more than 20,000 businesses accept virtual currency as payment for their goods and services and charities accept it for donations. You can find merchants in Bitpay.com’s directory, CoinVoice, and at SpendBitcoins.com, which claims to be the largest directory for places accepting Bitcoins.

About virtual currency
Virtual currency, such as Bitcoin, is an Internet-based “digital” currency, the value of which fluctuates. Bitcoin is increasingly accepted as payment for goods and services, and there are even Bitcoin ATMs that exchange the virtual currency for cash.

There isn’t a single issuer of Bitcoin; there are numerous exchanges. A number of Bitcoin exchanges have gone under lately, raising a question about the overall stability of this virtual payment method. Things may change with the introduction of iMoney, a virtual currency from Apple (the patent for it was applied for last year); this digital currency has yet to debut.

Pros and cons for your business
While Bitcoin is accepted by some major companies, including Overstock.com and Zynga, there is growing popularity among small businesses as a payment method. Here are some good reasons to consider accepting Bitcoin, as well as some cautions:

Pros:

  • As a form of payment there are less processing fees than other methods, such as credit and debit cards or PayPal.
  • There are no chargebacks, as can occur with credit and debit cards or PayPal.
  • It can be used worldwide. Processing through Bitpay.com, for example, allows you to denominate payment to vendors in 150 currencies (the vendors must sign up with Bitpay.com to accept payment in this manner).
  • It can be a marketing tool to promote your business as being in the forefront of the digital world.

Cons:

  • The value of Bitcoin changes throughout the day and can be downright volatile. At one point it was trading at over $1,300; today it’s just over $500. There’s a simple Bitcoin (BTC) converter to U.S. dollars (USD) at Preev.
  • The federal government views it as property, not as currency (see Tax Implications, below). I listed this as a con, but in my view, it isn’t really a negative.

Tax implications
The IRS treats virtual currency as property. Thus, if you’re self-employed and accept payment for goods or services, it’s self-employment income. It’s also taken into account for self-employment tax purposes. If you’re incorporated, the business similarly includes payments in virtual currency in income.

The amount you report is based on the fair market value of the virtual currency on the date the payment is received. If the virtual currency is listed on an exchange where an exchange rate is established by supply and demand, then this rate can be used.

Payers must issue Form 1099-MISC to contractors when total payments for the year, including the value of the payments in Bitcoin or other virtual currency, are $600 or more. If you’re accepting Bitcoin through a processor and have more than 200 transactions totaling more than $20,000, the processor must issue you a Form 1099-K for your virtual currency transactions each year.

Conclusion
Whether you jump on the Bitcoin bandwagon depends on your business and your comfort level. As time goes on, transactions in virtual currency likely will become more common.

Follow more news about Bitcoin for your business at Arianna’s Bitcoin Blog (she’s a Bitcoin enthusiast so she’s a little bias but the news and readers’ comments may be interesting to you).

Planning for Personal Catastrophes

March 27th, 2014

Business owners know to plan for catastrophic events, like storms, fires, and prolonged power outages, that can temporarily put them out of operation. There are numerous resources to help with disaster and recovery planning for a business. But what about a personal catastrophe, such as a serious illness or accident, a divorce, or a death in the family? What would this mean to your business and how should you handle it?

A recent death in my family prompted me to consider this matter. I had business events scheduled that involved many other people. Sadness about the death and related responsibilities aside, what would or should you do about business activities—pending and prospective? Now, when you’re not dealing with any personal catastrophe, is a great time to think about what such an event would mean to your business and how you’d deal with things.

Here’s my take on planning for personal catastrophes.

  • Reschedule business appointments, meetings, and other activities that are conducive to alternate dates. People understand that things happen and usually are willing to accommodate your needs. Explain as much or as little about your personal catastrophe as you choose.
  • Meet business obligations that are difficult to reschedule (e.g., involved many different parties; have been publicized for a set date; have had considerable financial commitment) if you can. Sometimes this is impossible and you’ll have to make alternate plans despite the inconvenience and cost involved.
  • Do long-term planning for the possibility of any personal catastrophe because at some time or another, just about every business owner experiences a personal catastrophe. Have a backup person who can attend to routine business matters in your absence. Have an emergency fund that can provide money needed during a period in which you won’t be bringing in revenue.
  • Review your insurance coverage. For example, make sure you have disability coverage to protect you financially in case an occurrence prevents you from working in your business for some time. Learn more about insurance protection from The Hartford’s Business Owner’s Playbook.
  • Seek expert advice. Whether this is medical, legal, spiritual, or otherwise, don’t delay in getting the best guidance to see you through your personal issues.

And it helps to keep a positive attitude. Most personal catastrophes are temporary interruptions in your business life. Deal with the personal issues as quickly and efficiently as you can so you can get back to the business you love.

5 Things to Know About Estimated Taxes

March 20th, 2014

If you’re self-employed or own an S corporation, estimated taxes usually are the way in which you pay your federal income taxes. The deadline for 2014 is fast approaching, so get ready now.

1.    What are estimated taxes
Estimated taxes are not a separate tax levy, like a sales tax or excise tax. They’re merely a way to pay your taxes on a pay-as-you-go basis rather than waiting until you file your return. Essentially, estimated taxes on self-employment income and for certain other taxes are a substitute for income tax withholding on wages.

2.    When estimated taxes are due
Estimated taxes are referred to as quarterly payments, but in reality the payments don’t fall evenly throughout the year. Estimated tax payments for 2014 for individuals are due:

  • April 15, 2014
  • June 16, 2014
  • September 15, 2014
  • January 15, 2015

3.    What do estimated taxes cover
Estimated taxes include income taxes on your net earnings from self-employment, your share of profits from an S corporation, and on other personal sources of income that are not subject to withholding (e.g., capital gains and dividends on investments).

Estimated taxes also cover:

  • Self-employment tax. For 2014, the Social Security portion of this tax applies to the first $117,000 of net earnings from self-employment. The Medicare portion of the tax applies to all net earnings without limit.
  • Net investment income tax. This 3.8% additional Medicare tax is owed on the lesser of your modified adjusted gross income over a threshold amount ($250,000 for joint filers; $200,000 for singles; $125,000 for married filing jointly) or your net investment income. Net investment income includes income from a business in which you do not materially participate (you’re merely an investor).
  • Alternative minimum tax (AMT). If you’re able to reduce your regular income taxes through legitimate write-offs, you may find yourself subject to the AMT. This “other” tax is paid in place of your regular income tax if it’s more than the regular tax.
  • Household employment taxes. If you pay wages to a housekeeper or other domestic worker, you may owe employment taxes (FICA and federal unemployment tax); take these into account.

4.    Estimated taxes aren’t only for Uncle Sam
Unless you’re in a state that doesn’t have an income tax, you’ll likely have to figure and pay your state estimated taxes. Payment deadlines usually mirror the federal ones, but check with your state.

5.    What happens if you don’t pay enough
Your estimates don’t have to hit a bulls-eye but you have to come close or face a penalty. The good news: the penalty currently is very low (the IRS interest rate used to figure the penalty has remained at 3% since October 2011 and will stay at this rate at least through June 2014).

Here are some ways to avoid any penalty:

  • Regardless of your shortfall, peg your current payments to last year’s taxes. There’s no penalty if your 2014 estimated taxes are at least 100% of your 2013 tax bill (110% if your adjusted gross income in 2013 was over $150,000, or $75,000 if married filing separately).
  • There’s no penalty if your underpayment is less than $1,000 or your estimated tax payment is at least 90% of your final 2014 tax bill.
  • If you or your spouse has wages, increase your withholding (reduce your withholding allowances) so that the withholding will cover what you’d otherwise need to pay in estimated taxes.
  • Apply any 2013 refund toward 2014 estimated taxes rather than having the refund given back to you. This may not cover all of your estimated taxes for the year but may enable you to skip the first (or maybe even the second) estimated tax payment for this year.

Conclusion
Don’t be caught short by your estimated tax obligations. Make sure you have the cash on hand to pay your taxes. You can schedule and pay estimated taxes online at no charge using the Electronic Federal Tax Payment System.

Garage Entrepreneurs — The New Normal?

March 13th, 2014

It used to be that when a business started up, the first thing the owner did was rent commercial space in an office, a strip mall, or factory (depending on the type of business activity). Then it became fashionable, post-Apple’s founding, to start in a garage (hence the term “garage entrepreneur”).

Today because of technology and the way in which business is transacted (much online, much globally), a business can start anywhere. Is this really something new?

History of alternative launch locations
The garage, which was the birthplace not only for Apple and Amazon, but also for some companies that pre-date Apple: Harley-Davidson (1903), Walt Disney Company (1923), Wham-O (1948), Mattel (1945), Maglite (1955), Yankee Candle Company (1969), and HP (1939).

Other alternative locations:

  • Basement: UPS (1907)
  • Dorm room: Dell Computer (1984); Twitter (2004); WordPress (2002); Yahoo! (1994)
  • Kitchen table: Lillian Vernon (1951)

(Did Microsoft start in the Harvard dorm in 1975 or from a motel room in Albuquerque? Did Google start in the Stamford dorm room in 1998 or in someone’s garage?)

Scholars argue whether these were the “real” locations for the birth of businesses since the business ideas were formed (at least in part) and the owners’ skills were often honed in traditional business settings (see one 2005 Dartmouth article) .

The fact remains, however, that businesses are being launched from an alternative location.

Alternative locations today
Garages, basements, dorm rooms, and kitchen tables continue to be viable locations to start a business. Add to these locations spare bedrooms, business incubators (in commercial spaces and universities), and just about anywhere else.

According to the Dartmouth study mentioned earlier, about 25% of startups are in alternative locations. And the SBA says that 52% of all small businesses are home-based. So many businesses not only start from home but stay there.

What does this mean for business?
Using alternative locations can help nascent businesses try out their ideas and ramp up without costly overhead. In my opinion (without any research to back it up), I think home-based and alternative location businesses are wise to operate there and use the money they’d otherwise spend on rent and office-related costs on other things, such as marketing and employee compensation.

The next alternative business location? Maybe the ocean or space?

About the Idea of the Day®

March 6th, 2014

The Idea of the Day® is now 10 years old. It launched in 2004 as a way to help small business owners keep up-to-date on opportunities, changes, and issues vital to them. Since the start, I’ve managed to come up with more than 3,650 unique tips for you.

I thought you’d be interested in some of the back story, so I’ll interview myself.

Where do you get the ideas?
The ideas come from numerous sources. I’m on many email lists of government departments and agencies, such as the IRS, the SBA, and the Department of Labor. The government sends out periodic newsletter, alerts, and other communications about changes of note for small businesses.

I also hear from numerous public relations people around the country who share what their clients are doing. Some share news about new products or services that I think my readers want to know about. Others have surveys and reports of interest to small businesses.

And I read and hear about new things in newsletters, magazines, and the media. In this way I often find financial developments, pending legislation, trends, and new product ideas.

Finally, my husband and my assistant regularly find ideas for me and, on occasion, a reader passes on an idea to me that I share in my Idea of the Day®.

Do you repeat ideas?
I don’t use the same idea twice. However, some are necessarily repetitive, such as tax filing deadlines that recur on the same or similar dates each year. And I try to update ideas when there are developments, such as postal rate increases.

Do you try all of the products you mention?
No. I don’t try all of the apps or other products and services I discuss in my ideas. I do try to verify that the companies offering them are legitimate. In all these years, I only had one reader complain about a product that turned out to be shady (I can’t remember the details now).

Do you ever make mistakes?
Of course — I’m human. But I try to be very careful with the daily ideas to verify the links and the sources. My assistant does a double-check. Sometimes, however, links do break after an idea has been put into my queue for publication so that readers receive erroneous  links; we then try to fix the problem on my homepage.

Do you take idea suggestions from readers?
Yes. I welcome any ideas that you may have and will gladly give you attribution (e.g., a mention that the idea was suggested by you, with a link to your website).

Last word
With your continued support, I hope to keep bringing you more helpful daily ideas for years to come. Let me hear from you with idea suggestions as well as ways to improve my Idea of the Day®.

I was wrong!

February 27th, 2014

These are three little words that we don’t often hear from politicians. As business owners, we should be willing to say them when we make mistakes. I’ll confess a couple of mine:

  • I was sure that the price of gas at the pump was going to decline significantly in 2014, and I said so in Big Ideas for Small Business®, December 2013. The price of a barrel of crude oil is now over $100 and, given the demand for heating oil this winter, gas prices at the pump may not be coming down much, if at all, in the near future.
  • I was anticipating inflation to rise because of the federal government’s debt, and I said so in Big Ideas for Small Business®, February 2011. The Federal Reserve, however, has employed monetary strategies that effectively have kept inflation at historic lows.

It is more difficult now in the age of social media to walk away from mistakes; customers won’t let you. If you don’t admit your errors and correct them, the chatter likely will reflect poorly on you and your business, and could cost you money.

I found the following articles helpful; you may too:

Bottom line here:

Take responsibility and admit your mistakes; don’t blame others.

What mistakes have you made? Have you fessed up?

Lessons from the Winter of 2014

February 20th, 2014

John Lennon wasn’t a weather forecaster but could have been when he said:

“Life happens when you’re busy making other plans.”

This winter, with more than 75,000 flight cancellations thus far from storms, small business owners should recognize the importance of having a Plan B, or Plans C and D.

Scheduling flexibility

Road conditions, electrical outages, state-declared emergencies, and flight cancellations have combined this winter to disrupt meetings, appointments, and other scheduling.

What do to?

  • Anticipate scheduling difficulties and be willing to reschedule as necessary. Using automated calendars simplifies rescheduling, even when not in your usual business location.
  • Waive your normal cancellation fees. For the most part airlines have waived re-booking fees, and you should too. For example, if you normally charge a client a fee if an appointment is not cancelled more than 24 hours in advance, it’s common sense and good business practice to waive the fee if weather prevents the client from keeping the appointment.

Connecting without traveling

Technology makes it possible today to meet virtually with your customers, vendors, and other colleagues. Even if storms keep you from meeting in person, you can still continue your business conversations remotely.

In most cases, these communications tools are free (you can upgrade some tools for more options at a modest cost).

What to do? Consider using:

  • Facetime (if you and the person you’re communicating with have iPhones)
  • Skype
  • GoToMeeting

Budget flexibility

Bad weather conditions can cost your company more money. Snow plowing (if you pay by the storm), utility costs for heating, and other storm-related expenses can far exceed what you budgeted for. Recognize the need to adjust your budget as you go to account for these and other extra costs.

What’s more, the storm may not only have created added expenses, it may also have depressed your revenues. When customers and clients stay home, you lose money. Again, lower revenues than anticipated force you to make changes in your budget.

What to do?

You may have to cut some expenses, such as some travel and entertainment costs you’d been anticipating to incur. Be judicious in cuts; it’s probably not a good idea to penalize your staff by reducing what they were expecting in terms of bonuses and rewards for performance.

Share the pain

Anyone who’s traveling this winter probably has a great story to tell. Share yours on social media. It helps you vent your frustration or provide uplifting tales about fortuitous encounters, and may just help you connect with others who’ve had similar experiences.

Small Business Owners and the Top 1%

February 13th, 2014

Concerns and comments about income inequality have been ubiquitous in the media since the State of the Union Address. Who are the one-percenters? Where do small business owners stand?

According to Forbes, to be within this elite income group, a person needs annual income of about $394,000 from personal services or investments. According to the IRS, you need income of about $389,000 (based on figures from 2011 tax returns). This group reported 19% of all the taxable income in the U.S. and paid 35% of all federal income taxes for individuals.

Small business owners

Almost all of small businesses in the U.S. are set up in such a way—as sole proprietorships, partnerships, limited liability companies, or S corporations—that owners pay personal income taxes on their share of business profits. How many small business owners fall within the top one-percenters? It’s difficult to tell. Here are some clues:

  • From IRS statistics, of the more than 8 million owners who had Schedule K-1 income from partnerships (including LLCs that report as partnerships) and S corporations, they had income of $425,384,000,000. This works out to about $53,000 of income per owner, which is a far cry from the approximately $390,000 of income needed to fall within the top 1%. But these are averages, so some may well have income from businesses and other sources putting them in the top 1%.
  • According to the Urban Brookings Tax Policy Center, of the income reported by the top 1%, 24% came from business income.
  • Payscale reports that the median salary for small business owners is $77,180; this would be something limited to S corporation owner-employees and does not take into account owners’ share of profits.

Top 5%
Even if only a handful of small business owners fall within the top 1%, many probably find themselves in the top 5% of individuals.

The U.S. Census Bureau fixes the threshold for the 5% group at household income of $232,000. And it is within this group that many of the federal tax limitations, surtaxes, and other restrictions begin to apply (see my article in SmallBizTrends).

So what does this mean?
Are small business owners considered to be in the elite? If so, are we going to be objectified by some in the media as being insensitive to income inequality? I’m not sure.

What I do know is that small business owners need to stand up and be heard on the issues that concern us, such as onerous government regulations and taxes. It’s only by making our businesses profitable despite regulations and taxes that we can stay in business and create jobs, which helps up remain or get into the elite income group. And, after all, isn’t that what for-profit businesses and their owners are all about?

Keeping Up with New Terminology

February 6th, 2014

Is it more challenging to read a Shakespeare play in old English or a Tweet? For me it’s a tossup.

We’ve all heard about some new words that made it big last year, including “selfie” (Oxford’s Dictionary word of the year) and twerk. There were more than 500 words, phrases, and senses added in 2013.

Here are some new business-related words that you may come across now. Knowing their meaning can help you in business.

  • Bitcoin—a digital currency. The National Taxpayer Advocate advised the IRS to create guidance on what the use of a bitcoin means for taxation.
  • BYOD—“bring your own device,” which is the practice of allowing employees to use their own smartphones, tablets, etc. Should you allow BYOD? Depends on your security concerns.
  • Click and collect—customers buy online and pick up their items at local brick-and-mortar stores.
  • Emoji—a digital icon or image used to express an emotion (the derivation of the word is Japanese).
  • Onshoring (or re-shoring)—the opposition of offshoring. It’s a growing phenomenon of manufacturers that are now finding it more cost effective to make things within the U.S. (because of reduced energy costs, savings on shipping costs, and the continuing equalization of labor costs between domestic and foreign employees).
  • Phablet—a smartphone that has a screen sized between a typical smartphone and a tablet computer.
  • TL;DR—“too long, don’t read,” which is used to introduce a summary of a lengthy post or a dismissive response to a lengthy post.
  • Unlike—withdrawing approval or “like” of a site, person, or other posting, on social media. Facebook now allows this; find instructions here.

Other new words can be found from the American Heritage Dictionary and the Oxford Dictionary.

Please share new words you come across.