Business Tip of the Month

April 2012

How important is location to business success?

For years, real estate developers have recited the mantra of "location, location, location," and start-up businesses do well to take heed. Location is often the single most important determinant of a company's success or failure. Place your brick-and-mortar building in a prime locale and, other things being equal, the firm will have a greater chance of accomplishing its objectives. Set it down in the wrong place, and the business may struggle for years.

What factors should you consider when deciding where to locate your fledgling business?

Type of company. If you're starting a roofing business that plans to provide services at clients' homes, location may not be as important as, say, a barbershop that takes walk-in customers. The same might be true of a company that deals mainly with suppliers and vendors (a wholesaler, for example) versus a firm that generates revenue from drive-by traffic.

Demographics. A careful study of your customer base should factor into the location decision. A child care service that caters to busy professionals will need a location that makes drop-off and pick-up easy and secure. A store that sells geriatric supplies to senior citizens may want to make easy access a priority. If your customers are mostly teenagers, a mall setting may fit the bill.

Competitors. Ever notice how fast-food restaurants are often clustered along the same highways or near the same malls? Hotels and motels often locate near each other as well, in close proximity to airports and freeways. It may seem counter-intuitive, but placing your storefront close to your competition is often a wise choice. You can take advantage of your competitor's marketing, and customer traffic they've generated may spill over to your store. If Home Depot doesn't stock that widget, your specialty hardware store is just around the corner.

Affordability. Be realistic and find a location you can afford. A spot in an upscale mall might be great for snagging boutique customers, but if those clients don't bring in substantial revenue, rental costs may eat your business alive. You might be better off locating on a busy street near your target demographic. By renting a more affordable space, you'll ensure that more of your income stays in the company.

Above all, remember: There's no substitute for doing your homework — before you put down roots.

March 2012

How to deal with obsolete inventory

Walk through most commercial warehouses and you'll find products that have been collecting dust for months, even years. Tires that no one wants to buy, raw materials that are no longer used, tubes of caulking that are good for nothing but the dumpster, textbooks that college professors revised two years ago — all may be considered obsolete inventory.

What makes inventory obsolete?

For one thing, alternative products may arrive in the marketplace at lower costs to the consumer. You might sell refrigerators that, two years ago, were a great value because they offered a "frost-free" feature. Now, however, your competitors (even your own stores in other locations) may begin selling similar models with digital enhancements — at the same or lower prices. This change in product features will often adversely affect the value of your existing inventory.

Many firms have learned that technology advances are a double-edged sword. (Ask any computer retailer.) Perhaps your company makes custom-designed widgets. If demand for such products dries up, you may need to retool and modify your existing product line. Your need for certain expensive raw materials — stuff that's sitting on your warehouse shelves — may dwindle.

Carrying obsolete products in your warehouse or retail store tends to increase operating costs without generating profit. Besides the cost of storing and insuring such items, you may be forced to incur labor expense to move the products to new locations and account for them. In addition, your financial reports may overstate business assets, especially if inventory is a major item on your balance sheet. Even your tax bill may be affected. Failing to recognize the expense of obsolete inventory may overstate net income.

How can you reduce the cost of excess inventory?

Define "obsolescence" for your major product lines; then be proactive. For example, if an item hasn't sold in a certain number of months or is being phased out by suppliers, start moving that item by offering sales discounts.

Be willing to write off products or raw materials that are unlikely to generate profit. Don't wait until escalating storage costs or an auditor's findings shine a spotlight on obsolete inventory.

Establish a regular schedule for reviewing inventory. Many firms count their goods at the end of the year. That's great. But knowing where you stand with inventory should be a year-round process.

For help with this or other business problems, give us a call.

February 2012

How to be "audit ready"

No one likes to see a policeman's flashing lights in the rearview mirror, and no one likes to receive a phone call or letter from the dreaded auditor. But if you operate a business or your organization receives federal or state grants, at some point you may find auditors making that contact. And while it's true that only a small percentage of individual taxpayers suffer through an IRS audit in any given year, it makes sense to be prepared—just in case. One key to being ready is knowing how auditors think.

Why can't they just take my word for it? Auditors are trained to be skeptical. In fact, they're required by professional standards to maintain questioning minds while performing their duties. They don't necessarily assume that you're dishonest, but they won't put much stock in your honest face and sparkling personality either. If you claim a deduction for charitable contributions, for example, an auditor doesn't really care whether or not you're a generous person. He or she will want to see proof that you actually donated the amount of money that's listed on your tax return. If your business says it incurred certain expenses while entertaining clients, the auditor may need to examine actual restaurant receipts. To an experienced auditor, skepticism is second nature. Don't take it personally.

Show me the documents. Auditors love documentation. It makes their job easier. When you can put your hands on an invoice that exactly matches the amount claimed on your federal form, you may actually bring a smile to an auditor's face. On the other hand, if he or she asks for supporting documents and you hem and haw and search for hours, be prepared for trouble. They're not mad at you. They just have a job to do, and the burden of proof is on you. The best way to prepare for an audit is to maintain good records throughout the year. Stay organized. Know how to find your documents and be ready to support every number claimed.

Having good records and thinking like an auditor can make actually going through an audit much easier. If you need assistance at any point, contact our office.

January 2012

Keys to getting a small business loan

Before a start-up company can begin producing revenue, it often needs an infusion of cash that exceeds owner contributions. Even long-established firms sometimes must borrow to purchase inventory, buy real estate, expand operations, meet payroll, or keep the lights on. When business owners turn to banks and other financial institutions for help, some are offered loans; others walk away empty handed.

Why the difference? If you've read the financial press in recent years, you know that many banks have been burned. Some with lax underwriting practices extended credit to companies that went bankrupt. Even some strong institutions failed when large loans weren't repaid. Those that survived may be licking their wounds and rethinking their lending practices. As a result, your bank may be reticent to extend credit to a company that lacks a proven track record or that's otherwise perceived as a bad risk.

But even if your bank is willing to extend credit, don't sabotage your efforts by failing to prepare adequately. Increase your chances of getting a business loan by following these suggestions:

Show that you have a detailed business plan. Putting your ideas, projections, and assumptions on paper can uncover gaps in your logic and flaws in your research. Your business plan should lay out market research, financial projections, start-up costs (if applicable), and assumptions. Show how you're going to spend every dollar of the loan proceeds to generate revenue. Consider the plan from the other side of the table. Would you lend money to a company that lacks a credible strategy?

Show that you're capable. Lenders must have confidence in you. Convince them. Show that the combination of your management team's education, skills, and work ethic will lead to success. To demonstrate your ability to repay the loan, you may be asked to share your credit report and tax returns. If you've struggled to meet prior obligations, be ready with explanations, including evidence of extenuating circumstances.

Show that you're invested. Lenders often look kindly on business partners who have pumped a substantial amount of their own savings into a company. Before applying for a business loan, plan to document that at least 25% of the firm's equity has come from the personal assets of its owners and investors. From a lender's perspective, such an investment demonstrates a commitment to see the company through hard times — and to pay back the loan.