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Take These Steps to Help Prevent Fraud in Your Business

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How can you prevent employee fraud in your business? Here are four suggestions.

  • Screen job applicants. Check work references, criminal records, and professional recommendations. By instituting a screening policy, you may save a lot of cash and grief. Just remember to treat every applicant equally, and get written permission for background checks.
  • Reconcile bank accounts. A standard and simple internal control is to separate employees who pay bills and make deposits from those who reconcile accounts. As an owner, making time to personally review deposits and disbursements on a regular basis can deter fraudulent billing or cash skimming schemes.
  • Secure inventory and supplies. This can be as simple as regularly changing combinations on warehouse doors or locking supply cabinets. Laptop computers are especially vulnerable to theft, so make a priority of securing them.
  • Get a cash control review. Having a trained set of eyes inspect your books, records, and operations can pay for itself many times over. Skilled auditors can ferret out scams and help your business develop stronger controls against criminals, both inside and out.

If you’d like assistance with this or any of your business concerns, give us a call.

For Business Profitability, Understand the Law of the Vital Few

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How well do you know your customers? Which ones are the most profitable? Which ones take most of your time? Finding the answers to these questions can be worthwhile, because you may discover that the 80-20 rule, also known as the law of the vital few, applies to your business. The rule is a shorthand way of saying 80% of your profits come from 20% of your customers.

If you can identify that top 20%, you can focus your efforts to make sure this group remains satisfied customers. Sometimes all it takes is an appreciative phone call or a little special attention. Also, by understanding what makes this group profitable, you can work to bring other customers into that category.

Keep in mind that it’s not always profits alone that make a good customer. Other factors, such as frequency of orders, reliability of the business, speed of payment, and joy to deal with are important too. Ask your accounting staff and your sales staff. You’ll soon come up with a list of top customers.

There’s another way in which the 80-20 rule applies to your business. Very likely, 80% of your problems and complaints come from 20% or fewer of your customers. If you identify those problem customers, you can change the way you do business with them to reduce the problems. Consider changing your pricing for those customers so you’re being paid for the extra time and effort they require. Sometimes the only solution is to tell these customers that you no longer wish to do business with them.

The bottom line is that understanding your customers better will improve your business.

Accountable Plans Are a Win-Win Business Idea

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Are you looking for a way to give your employees a tax-free benefit that is also tax-deductible for your business? Consider an accountable plan. These arrangements let you reimburse your employees for expenses incurred on behalf of your company, such as driving to the post office or office supply store. With a properly administered plan, you can deduct the reimbursements on your business tax return, yet the payments are not considered income to your employees.

How can you make sure your plan qualifies? Here are three requirements.

  • The reimbursements must be for allowable business expenses. For instance, you can repay employees for hotel and other travel expenses when traveling to a trade convention.
  • Your employees need to keep records of the expenses, and provide those records to you.
  • If you pay or advance your employees more than the actual amounts spent on business items, the excess must be returned to you. Amounts not returned are income to your employee, and are subject to payroll taxes.

Contact us to discuss your policies for repaying employees’ business expenses. We’ll help you make your plan accountable.

Follow These Suggestions for Better Pricing Decisions

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The prices you set for your products and services affect every aspect of your business, including long-term viability, short-term profits, market share, and customer loyalty. While the guidebook or financial guru who can provide the perfect answer to this important decision doesn’t exist, tried-and-true principles can help. Here are three suggestions to arrive at reasonable pricing for your market and industry.

Cover costs. The price you charge for a particular product must at least equal the cost of producing that product. Depending on your industry, production costs might include raw materials, storage, salaries, advertising, delivery, rent, equipment, taxes, and insurance. Some of these will be categorized on your income statement as “cost of goods sold.” Others will be overhead. Some, such as rent and utilities, are relatively fixed. Others are variable, such as shipping and stocking fees. Adding the amount of profit you want to earn as a percentage (called the cost-plus pricing method) is one way to arrive at an appropriate price.

Know your market. Some businesses hire research firms to develop detailed reports on competitors, markets, and forecasts for a particular region or industry. But you may be able to get a handle on your market by using surveys and other methods of ferreting out customer perceptions about your product and service quality, the effectiveness of your advertising, and the reasonableness of your prices as compared to your competition.

Monitor regularly. Product pricing is not a one-time event. Instead, you’ll want to monitor the impact of price fluctuations on sales revenue over time. Overpricing – charging more than a reasonable buyer can be expected to pay – may limit sales. Underpricing may create the perception of poor quality or lead to unsustainably low profit margins.

Improve Productivity With Happy Employees

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Happy employees can have a positive impact on your operations, customer support, and profit level. Here are suggestions for keeping your workforce upbeat.

Lead by example. Demonstrate the personal discipline and commitment you hope to instill in your workers by showing up every day with a positive attitude.

Emphasize the link between attendance and productivity. Absenteeism is a symptom of unhappy employees. Help your employees understand the importance of the role they play in the success of the business.

Learn what motivates your employees. Conduct an online survey to learn if money, recognition, promotion, or time off drives your employees.

Enrich skill sets. Cross-training and job rotation can improve appreciation for overall business operations and mitigate boredom and dissatisfaction.

Create a time-off bank. Modify the traditional offering of vacation, personal, and sick days. Give your employees the responsibility and ability to balance work and home obligations by empowering them to manage total available paid time off.

Other suggestions for a healthy working environment and happy employees include celebrations and team building. While these “soft” methods may seem a distraction from everyday business, your employees will appreciate the effort and your business will profit from the resulting improvements in performance.

When Disaster Strikes, Will Your Business Be Prepared?

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Disaster preparedness involves answering the question: How would a disaster affect your business? If you’re not sure, it’s time to start planning. Here’s a quick look at how you can prepare beforehand, and what relief might be available afterward.

  • BEFORE DISASTER STRIKES

Identify key issues. Bring together managers of key areas and brainstorm on the critical steps needed to recover from a disaster. Consider at least two scenarios: a company-specific event such as a fire that affects only your business, and a regional disaster that affects the whole area. Since you can’t anticipate every need, your goal is to identify key issues and make basic preparations.

Establish a communications protocol. Think about how you’ll communicate with employees, vendors, and customers. At a minimum, each manager should have a contact list for key employees. Include phone numbers and personal email addresses.

Backup company records. Identify essential company records and know how you’ll access them. Make sure backups of your electronic information are stored in a safe location off-site. You may also need paper backups of certain key information in case of a power blackout. Create a master list of federal, state, and city tax information, bank account passwords, account number and login information, and insurance policy numbers.

Review your insurance. Meet with your agent and review the scope and dollar limits of your coverage. Discuss business interruption insurance. Make sure you understand your coverage.

  • AFTER DISASTER STRIKES

Apply for relief assistance. Know the steps required to apply for insurance reimbursements and federal disaster loans or grants.

Take advantage of tax breaks. Your business may qualify for a casualty loss deduction. If you’re in a Presidentially declared disaster area, you have the option of claiming the deduction against your prior year’s taxes for a faster refund.

Other tax benefits include extended due dates and penalty relief. Contact us for tax advice on your specific situation.

Is Your Business Adequately Diversified?

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Is your business adequately diversified? Relying on too few customers, vendors, or key employees can leave you open to risks that can be catastrophic. Here’s what to consider.

Customers. Do you depend on just a few customers for the majority of your sales? What will happen to your business if your largest customer requests a major price reduction, starts buying from your competitor, or is bought out? Even if your company sells to many customers, you aren’t adequately diversified if most of them are in the same industry. This is known as concentration risk. Reduce it by targeting customers in different industries.

Vendors. How many suppliers do you rely on for the smooth operation of your business? Do you have a backup option if a key vendor raises prices, can’t provide enough product, or goes out of business?

Employees. Do you count on the skills and reliability of one key second-in-command person? What would happen if that individual suffered a family emergency and had to leave unexpectedly? Sharing information and allocating responsibilities among employees can keep the work flowing.

When your business is new, diversification may be difficult. But putting a plan in place to reduce your vulnerability to manageable risks is essential for your long-term success.

Sunk Costs Could Lead to Bad Business Decisions

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Do you think pulling the plug on a failed contract would be “wasting all the money” your business has spent to date?

If so, you may be making the choice based on emotion and “sunk costs.” Sunk costs are past expenses that are irrelevant to current decisions – such as those spent on non-performing contracts. Why are they irrelevant? Because that money is already spent and generally cannot be recovered.

While admitting mistakes may be difficult and ego-bruising, staunching the flow of cash and changing course by abandoning a failed contract can be a wise decision. That’s because the only relevant costs are those that influence your company’s current and future operations.

For example, say your firm hires a new sales representative. You spend thousands of dollars sending the rep to training seminars. You assign mentors who take time from their busy schedules to provide on-the-job coaching and oversight. But despite your best efforts, the new hire isn’t working out. The rep doesn’t fit your firm’s culture, doesn’t grasp the company’s goals and procedures and doesn’t generate adequate revenues for the business.

As a manager, what should you do? At some point, you may need to terminate the employee and start over with someone else. But what about all that time and money you spent on training and mentoring? Those are sunk costs. Acknowledge that you can’t get them back, cut your losses, and start anew. Throwing good money after bad won’t salvage a poor business investment – or a poor business decision.

Complaints Can Be Opportunities

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When a customer complains, think of it as three opportunities in one.

  • An opportunity to get feedback on something that’s not working right in your organization.
  • An opportunity to convert a disgruntled customer into a loyal customer.
  • An opportunity to head off negative publicity.

Here are four steps to take to convert a complaint into a positive outcome.

  1. The initial response. Be respectful and helpful. Avoid becoming defensive or saying “it’s not our fault.”
  2. Understand the complaint. What’s the true complaint? It may not be easy to stay calm when faced with an angry rant, but making sure your customer knows you’re listening can defuse hostility and ill will. Gathering the facts provides valuable feedback to help you pinpoint the problem and find out what went wrong.
  3. Fix the problem. Have established procedures so your employees know who has the responsibility and the authority to correct a problem. Do employees need managerial approval to compensate a customer for inconvenience with an upgrade or refund? What actions can your employee take to remedy the customer’s immediate concern?
  4. Follow up. A phone call or letter within a reasonable time can ensure the problem has been resolved and turn the customer from “disgruntled” to “loyal.”

Corporate Minutes Support Tax Deductions

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Well-documented corporate minutes can provide valuable supporting evidence if the IRS questions choices you make on your tax returns. Minutes are especially important when related-party transactions are involved, such as payments, loans, or distributions between the company and you or other owners. For example, the IRS may challenge the amount of your compensation. Corporate minutes that document the factors considered by the board in approving the compensation can be a defense against this type of challenge.

Another area to consider is the amount of earnings your business retains instead of distributing the funds as taxable dividends. A penalty can apply to retained earnings over a certain limit unless the needs of your business justify the amount. Corporate minutes can help by spelling out the reasons your company needs to retain funds – for example, to purchase assets or for working capital.

Does your company have a tax-qualified retirement or a stock option plan? The minutes should show decisions by the board when adopting or modifying the plan. Other information to include: annual decisions on the contribution percentage made to profit-sharing plans and the amount of fringe benefits, such as medical reimbursement accounts.

If your corporate minutes need updating, we suggest you contact your attorney.