Tips to Help You Claim a Home-Office Deduction .

Posted on January 30, 2012 by The Pres.

By BARBARA WELTMAN

About 52% of all businesses are run from home. The number of teleworkers is growing annually.

It’s good to know that some tax savings can result from this work arrangement.

A portion of personal expenses for your home can be turned into a business deduction — if you meet certain rules.

To claim a home-office deduction, you must use the space in your residence as a principal place of business, as a place to meet or deal with customers on a regular basis, or as a separate structure used for the business.

You also must do the above regularly and exclusively for business.

If you’re an employee, you must use the space for your employer’s convenience and not for your own preference. Working after hours at home rather than staying late at the office is probably your own choice and not for your employer’s convenience.

Usually, “employer’s convenience” means that the employer does not have space for you on the company’s premises.

But while the home-office deduction rules are written in black and white, there are some uncertainties that could affect your home office deduction. Think of them as gray areas.

One is the meaning of exclusive use. Clearly, the space must be available 24/7 for business and cannot be used by you or your family for personal reasons at any time during the day or night. Thus, if you use a TV room as an office during the day and your family watches TV there in the evening, you fail the exclusive-use test.

But what about walking through a room? The Tax Court has said that even occasional use of space, such as using a bathroom by family or guests, means your business use is not exclusive. However, the court has also said that incidental use of space, such as family members walking through the office to get to another part of the home, is minimal and won’t cause you to fail the exclusive use test.

What’s the difference between occasional and incidental use?

This is a gray area, but it seems that passing through is not equivalent to using the space.

Storage of some personal items in a space claimed as a home office won’t violate the exclusive-use test. The court has allowed a home office deduction for a garage in which some personal items were kept. So, people, no. Things, yes.

A common belief is that claiming a home office deduction is a red flag to the IRS, practically inviting an audit. There is no IRS data to support this belief and, unfortunately, the belief may be responsible for some taxpayers forgoing the deduction needlessly even though they are otherwise eligible for it.

The best course of action is to talk over your personal situation with a tax advisor to make sure you meet the home office deduction rules.

Keep good records of all expenses related to the home office, and take a photo of the space used as a home office. The photo can help in case the IRS questions your return after you’ve stopped using the space for business.

To learn more about the home-office deduction rules, see IRS Publication 587, Business Use of Your Home.

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Hiding Income? Look Out, Here Comes the 1099-K

Posted on January 30, 2012 by The Pres.

By

Starting this month, business owners will begin getting new tax forms issued by their credit-card and online-payment processors and intended to keep businesses from hiding income. The form, called 1099-K, will document all 2011 transactions processed for sellers with more than 200 transactions and $20,000 in annual gross receipts. The IRS estimates that 53 million forms will be issued by such processors as eBay, PayPal, and Amazon as well as credit-card companies, says Steven Aldrich, chief executive officer of Outright.com, which makes online bookkeeping applications for self-employed people and small business owners. Aldrich spoke with Smart Answers columnist Karen E. Klein about how small business owners should handle the new forms. Edited excerpts of their conversation follow.

The new 1099-K requirement was signed into law by President George W. Bush in 2008 but is just now taking effect. Why is the government mandating this?

Electronic payments are a growing part of our economy, but up to now they have not been officially reported to the IRS. People were on their scout’s honor to report this income. This new form is designed to help close the gap between what businesses and individuals owe the IRS and what they actually pay. It is expected to bring about $9.5 billion into the U.S. Treasury over 10 years by taxing revenue flowing through electronic networks.

That’s a big number.

It is a big number, but our concern is keeping the burden on small business low enough so they don’t lose their competitiveness and don’t have a big burden of extra time they have to put into dealing with this. All businesses will get these, not just small businesses, but larger businesses have got tax teams and people to handle these matters and small business people usually do not. Our concern is that small business owners could be distracted and worried when they get this form and not know what to do with it.

This is going out for the first time to individuals such as eBay and Etsy online sellers. Have they gotten any notice about the form?

The payment processors were required to obtain sellers’ tax identification numbers for these forms, so many of them sent out notices last year when they were verifying the information and making sure the right people got the right form.

What information will the form list?

It’s actually very simple. At the top is a box with your total gross revenue for the year, processed by PayPal or whichever payment processor you use. Beneath that box is a breakdown of revenue month by month.

How is that number going to be compared with what’s reported on an individual’s tax return?

The IRS will look at the gross sales amount reported on the 1099-K and compare it with the total gross receipts reported on an individual’s Schedule C. The amount on the tax return has to be at least as much as what’s reported on the 1099-K.

The interesting thing is that these amounts reported to the IRS are gross sales numbers. But businesses never actually make their gross sales because of refunds, frauds, exchanges, and returns. But none of those expenses are taken out of the gross sales amount.

And business owners don’t pay taxes on gross income, but on net income.

Exactly. So it will be incumbent on the business owner to take the gross amount reported on the 1099-K and capture all the transaction fees, charges, and returns, in addition to the other expenses of running their business, in their tax reporting.

Is that going to be a big burden for micro-businesses?

It’s not going to be a big deal if you have good record keeping. The problem is that most small business owners are still using paper and pencil and spreadsheets to track their business data. This reporting is really a clarion call to move those people into the digital age. Certainly, if you’re taking electronic payments, you need to move to a digital form of keeping your books.

Are there other pitfalls related to the 1099-K?

For service providers, like consultants, who are taking advantage of electronic payment systems, they might get a 1099-MISC for some part of their consulting revenue. But that income would also show up on the 1099-K if it was processed electronically. That could result in double counting that income, so that’s something to be very careful about, especially as more people in the service industry are starting to use services such as PayPal or mobile credit-card readers instead of taking cash or check payments.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Posted in Tax Issues | Leave a comment

Still Don’t Get Social Media? Here’s What To Do About It

Posted on December 9, 2011 by The Pres.

Ivana Taylor, Marketing Strategist, DIY Marketers,  November 28, 2011

Do you stay quiet on social media because if you admit that you don’t get it, social media experts look at you like you have three heads? You are not alone.

A lot of business owners feel that this marketing tool is beyond their understanding and will remain so. If you secretly feel hopeless or stupid about social media marketing, read on. You’ll find a strategy and a day-to-day plan that will get results.

Focus on objectives, purpose and brand

First, stop worrying about individual social media applications and tools, and get clear on the purpose of your business and your brand.

  • What does your business do for customers?
  • What is your brand promise?
  • What do you want to be known for?

Don’t over-think these questions, just jot down a few notes and thoughts. They will become your talking points as you step into the Twitter, Facebook, LinkedIn and Google+ worlds.

Think of social media applications as rooms

Once you’re clear on your message and your talking points, imagine each social media application as a room at an event. Walking into any social media space is like walking into a bar.

When you walk into a bar, you might join a group of friends and chat with them. TVs tuned to the news have a newsfeed running across the bottom. (The links that people share on social media sites are like that newsfeed.) You might also hear tidbits of conversations from the people around you. You may leave one conversation for another, or just listen to several conversations.

When you think about it this way, it’s obvious what your behavior on social media sites should be and what kind of information you might want to share with people. You wouldn’t think about blatantly selling anything at a bar because a bar is not a retail outlet. But you would share your experience with a product or service. You should be active in social media to interact, learn and inform others—casually.

Give your business or your brand a voice

Maybe you’re used to relating to marketing communications as a company instead of as a person. In the past, we’ve been conditioned to separate our personal lives from our business lives. But social media marketing emphasizes personal voices inside brands.

Every social media platform was originally designed for individual communication—for people, not companies. Think about what it is that you have to share that supports your business and your brand.

One of my favorite examples is Shashi Bellamkonda, director of social media at Network Solutions (@ShashiB). He is committed both personally and professionally to small business and its participation online. His personal expertise and experience fully support that of the larger Network Solutions brand. Visit his Twitter profile and notice how comfortable he is in this room.

Focus on your marketing objectives and results

Many small business owners try to use social media to achieve sales objectives instead of marketing objectives. Selling on social media is not only ineffective, it’s a sure way to put people off instead of attracting them to your brand.

From a marketing perspective, what are you trying to achieve, and who are you trying to attract?

Suggestions by business type

  • Business-to-consumer or retail: Build relationships with your local community to attract local people. Use Twitter and Facebook to communicate what’s going on at your location.
  • Professional: Build your credibility and expertise by sharing information and educating your target audience. Participate in LinkedIn groups and Facebook groups and pages in your vertical markets. Build your focused network across regions if that’s appropriate for your business.
  • Business-to-business: Build relationships with relevant people in your networks. Use LinkedIn to find and connect with decision-makers and influencers inside the companies you work with and in your customers’ companies. Create lists on Twitter that include experts in your industry and conversations about the industry topics that you’re interested in. Google indexes Twitter conversations, so have those keyword-rich conversations there. Google+ is the latest social media tool that combines the benefits of Facebook and Twitter and makes it possible to collaborate and work in a social media environment.

Create a place for conversations to land and expand

You may not be successful with social media because you don’t have a clear place for these conversation to “land.” It’s hard to get any traction from social media when you don’t have an offer or an internet representation of what you’re talking about.

Don’t just link to your home page—that’s confusing for your audience. Write blog articles that clearly communicate your brand and your offer in a way that is useful, engaging and educational. Start conversations. You can capture people from the online world and add them to your own sales and marketing database by creating landing pages that have offers such as downloadable reports, e-courses, white papers, videos and templates.

Focus on a few key social media spaces and let go of the rest. If you do everything I’ve outlined here, you’ll come up with a few key sites that support your marketing strategies. Participate more fully in the areas that you’ve targeted based on your goals and objectives.

Base your social media policy on your marketing strategy

Writing a policy doesn’t have to be a big, scary, official thing. It’s a set of rules that you follow on social media that supports your goals and objectives. It keeps you focused on what you’ve decided to work on as you navigate social media spaces.

Have fun

Focus on your marketing objectives and then use social media marketing to engage with your audience in a way that generates interest and, ultimately, new customers. Use social media to build a community that is engaged in your brand because you are engaged in helping them understand and use your brand.

You’ll experience the satisfaction that comes from having access to your customers and influence in your market.

Posted in Making Improvements | Leave a comment

Ten Common Marketing Mistakes

Posted on October 21, 2011 by The Pres.

By Steve McKee

I can’t tell you how many times I’ve heard this refrain, or a variation of it: “We tried _____ marketing tactic. It doesn’t work.” While it may be true that a given approach is ill-suited for a particular industry, audience, or situation, in my experience the tactic is less often to blame than the implementation of it. In fact, many companies make mistake after mistake based on gaps in their understanding of how marketing really works. Here’s a quick review of 10 of the most common errors to help you avoid the worst of them.

Aiming at everyone. No company can be all things to all people; as much of a cliché as that is, it’s true. Companies paint themselves into a corner because of a misplaced fear that by targeting one group they’ll be turning away others. But aiming at everyone is an oxymoron; the best marketers understand that by narrowing their target audience they can increase the intensity of their brand’s appeal, piquing interest and driving margins. You’re better off being the first choice of 10 percent of the population than being one of 10 options for everyone.

Betting on rationality. This mistake is subtle, but dangerous. Marketing planning is often a left-brain effort, where rational exercises like determining budgets and plotting strategy take place. But consumers don’t make decisions where logic and argument reside; research suggests that emotion not only influences most purchase decisions, it tends to trump reason along the way. Don’t try to convince your prospects; connect with them. They’re depending on their gut more than you realize.

Letting market research trump everything. Too many marketers invoke data as if information had mystical qualities. To say market research has its limitations is to understate the point; some of it can be flat-out misleading. Consumers don’t always realize how they feel, what they think, or why they do what they do, and even when they’re well aware they won’t always tell you the truth. Research is a valuable tool in a marketer’s shed, but used improperly it can cost you a finger (and perhaps your head).

Getting seduced by the new. We live in fast-paced, exciting times, with new marketing and media options sprouting up every day. While they’re all worth a look, none is worth upending your efforts for. It’s easy to be seduced by the siren songs of new tactics, but wisdom says to stick to what works while you evaluate what might. Some company has to be first to give something a shot, but it should rarely (if ever) be yours.

Advertising your aspirations. We all aspire to make quality job No. 1, offer uncompromising service, and demonstrate amazing results, but no company can fully achieve any of these. Advertising your aspirations only invites people to catch you failing to achieve them, and these days it’s easier than ever for them to spread the word. Aspirations are, by definition, promises that can’t be fully kept. Don’t announce them, just try to live by them—use them within the walls to rally your troops but don’t let them escape to rouse the ire of your customers.

Following the leader. Competition is awesome in the abstract. When it gets concrete it’s just plain hard, especially if your competitors are pounding the market with claims you think you can match or beat. It’s tempting to try and one-up the other guys, especially if they’re the market leader. Do so, however, and you may reinforce their strengths and derail your differentiation. Don’t try to be better. Just be different.

Seeking approval by committee. If you can’t agree with your family on what type of pie to serve at Thanksgiving, how can you expect a roomful of managers to agree on something as subjective as marketing communications? Everyone’s taste is unique, and the fewer people involved in the creative approval chain, the better. If you try to please everyone, you’ll end up with a gooey mess that nobody wants to eat. The best committee is a committee of one.

Starving the budget. An anemic marketing budget may save bucks but it will cost business. If you don’t have a line item on your profit and loss statement with a reasonable percentage allocated to marketing, you’re not a real business. Notice I said marketing, not advertising—paid media may very well not be right for your situation, but every company must somehow get its message out. Find the way and spend the money. And keep in mind that most do-it-yourself marketers shouldn’t be doing it themselves. Pay for professional help.

Anticipating customers will act very quickly. When was the last time you leapt out of your recliner to do exactly as an ad instructed? Marketing doesn’t work that way, and as consumers we all understand that. Yet when we slip into our desk chairs we somehow expect marketing to show immediate results. It takes time to seed a message, and credibility grows through consistency. Plan your efforts well, and stick with them. As obvious as it sounds, every time you start over, you’re starting over.

Chickening out. Plans are terrific, but plans are just words on paper. It’s amazing how much time and money companies spend getting their acts together, only to succumb to stage fright when it’s time for the curtain to rise. It’s easy to come up with reasons not to do something, surrendering to fear of the unknown. But just as writers aren’t writers unless they write, marketers aren’t marketers unless they market. Not everything you do will work, but with each mistake you’ll be learning and growing.

There you go. Ten tips that can save you time, money, and a lot of frustration as you learn from the mistakes of others. Now you’re free to make new mistakes of your own (when you do, I’d love to hear about them).

Steve McKee is president of McKee Wallwork Cleveland and author of When Growth Stalls: How It Happens, Why You’re Stuck, and What to Do About It. Find him on Twitter and LinkedIn.

Posted in Making Improvements | Leave a comment

8 Reasons Your Employees Don’t Care

Posted on September 8, 2011 by The Pres.

By Jeff Haden | September 6, 2011

Pay only goes so far. Higher salaries are like the bigger house syndrome: Move into a bigger house and initially it feels roomier, but after awhile larger becomes the new normal.

Employees don’t automatically perform at higher levels if wages are higher because commitment, dedication, and motivation are not based on pay. No matter how high the salary, if you treat employees poorly they won’t care — about their jobs or your business.

Here are eight reasons employees don’t care:

1.No freedom. Best practices are definitely important, but not every task deserves a best practice or micro-managed approach. Autonomy breeds engagement and satisfaction. Autonomy also breeds innovation. Even manufacturing and heavily process-oriented positions have room for different approaches or paths. Decide which process battles are worth fighting; otherwise, let employees have some amount of freedom to work they way they work best.

2.No targets. Goals are fun. (I’ve never met anyone who wasn’t at least a little bit competitive.) Targets create a sense of purpose and add meaning to even the most repetitive tasks. Without a goal to shoot for, work is just work.

3.No sense of mission. We all like to feel a part of something bigger. Striving to be worthy of words like “best” or “largest” or “fastest” or “highest quality” provides a sense of purpose. Let employees know what you want the business to achieve; how can they care about your dreams if they don’t know your dreams?

4.No clear expectations. While every job should include decision-making latitude, every job also has basic expectations regarding the way certain situations should be handled. Criticize an employee for providing a refund today even though last week refunds were standard procedure and you’ve lost the employee. (How can I do a good job when I don’t know what doing a good job means?) When standards change, always communicate those changes first — then stick with them. And when you don’t, explain why this particular situation is different.

5.No input. Everyone wants to be smart. How do I show I’m smart? By offering suggestions and ideas. (Otherwise no matter how hard I work I just feel like a robot.) Deny me the opportunity to make suggestions, or shoot my suggestions down without consideration, and I’m just a robot — and robots don’t care. Make it easy for employees to present ideas and when an idea doesn’t have merit take the time to explain why. You can’t implement every idea, but you can make employees feel good every time they make a suggestion.

6.No connection. The company provides the paycheck, but employees work for people. A kind word, a short discussion about family, a brief check-in to see if they need anything… person-to-person moments are much more important than meetings or formal evaluations. Employees want to be seen as people, not numbers. Numbers don’t care. People care — especially when you care about them first.

7.No consistency. Most employees can deal with a boss who is demanding and quick to criticize… as long as she treats every employee the same way. (Think of it as the Vince Lombardi effect.) While it’s okay — in fact necessary — to treat employees differently, all employees must be treated fairly. Similar achievements should result in similar praise and rewards. Similar offenses should result in similar disciplinary actions. The key to maintaining consistency is to communicate; the more employees understand why a decision was made, the less likely they are to assume favoritism or unfair treatment.

8.No future. Every job should have the potential to lead to something better, either within or outside the company. I worked my way through college at a manufacturing plant. I had no future with the company because everyone understood I would only stay until I graduated. One day my boss said, “Hey, let me show you how we set up the job scheduling board.” I looked at him oddly; why show me instead of someone else? In response he said, “Some day, somewhere, you’ll be in charge of production. Might as well start learning now.” Take the time to develop employees for jobs they hope to fill — even if those positions are outside your company. They will care about your business because they know you care about them.

Posted in Employment | Leave a comment

Selling for a Small Company: 8 Rules

Posted on August 18, 2011 by The Pres.

By | August 15, 2011

Selling for a small firm presents challenges even for top sales professionals. Because your company is small, your prospects probably don’t know much about it. Money is tight, which means that you don’t have luxury of spending lavishly to develop an account. Your firm probably lack the sales support that reps in big firms take for granted. And so forth.

Even so, there are tremendous advantages to selling for a small firm… if you know the rules.  Here they are:

RULE #1: Never Apologize. Man sales reps in smaller firms scuttle their credibility by taking on an apologetic air, trying to explain away the inexperience or size of their firm, and then practically begging for the business. Savvy customers smell that kind of fear a mile away and are often more than willing to use it to their advantage by demanding steep discounts or even amusing themselves by making the hapless rep jump through meaningless hoops. Don’t let that happen to you.

RULE #2: Consider Yourself the Customer’s Equal.Rather than being apologetic, you must convince yourself of the value of what you and your firm has to offer. Rather than dwelling on your inexperience, constantly emphasize the unique value of a truly new approach to the customer’s problems. And rather than begging for business, be hard-nosed and ready to walk out the door. And as for jumping through hoops, your company is business not a dog and pony show.

RULE #3: Treat “Weaknesses” as Strengths. Customers may not know anything about your firm, but they don’t have any negative preconceptions, either. Money may be tight but customers are often negatively impressed when they see sales reps overspending. Support may be scarce in your firm, but that’s an opportunity to get creative and more independent.  Remember: many decision-makers who won’t talk to cookie-cutter sales reps from established firms will take the time to talk with somebody with original ideas and a new approach.

RULE #4: YOU Are the Brand. It’s a truism that customers buy from people they trust. When you’re selling for a small firm, YOU are the brand name, the reputation, the trust-ability, and the reliability that the customer is buying.  A sales rep working for, say, IBM needs only the label on a business card to create credibility. With a smaller firm, that trust and credibility must come from the person that you are and the way you present yourself to the business world.

RULE #5: Be an Entrepreneur. Because your firm lacks the support infrastructure of a larger firm, in most cases the only person you can really count on to get things done is yourself.  You’ll need to be extremely careful about your time and resources, and constantly finding creative ways to get things done quickly and easily. Remember: “activity” multiplied by “hours spent” must equal “sales results.” Make certain that everything you do leads towards the results that you seek.

RULE #6: Match Each Request with a Counter-Request. Insist that anything the customer asks you to do give you the right to ask the customer to do something comparable in return. That policy not only ensures that you’ll not be taken advantage of, but also gives you frequent opportunities to strengthen your competitive position and move the sales process forward. For example, if a customer asks you to provide them with an RFP based upon 35 pages of detailed questions, explain that you’ll only do so if you’re guaranteed a meeting with decision-makers to present your solution.

RULE #7: Be Willing to Say No. Never give in to a customer who’s being unreasonable or demanding things that don’t make sense for your company. Your larger competitor can perhaps afford to kowtow to get the business. You, however, don’t have the luxury of being anything less than the best – and the best in any industry NEVER truckle. That doesn’t mean that you shouldn’t be cooperative, but in all your dealings be aware of your worth and the worth of your company to the customer.

RULE #8: Never be afraid to bail. Don’t let wishful thinking propel you into wasted effort. If it becomes clear that the deal doesn’t make sense for your company or will take to much time and effort to close, it’s not worth pursuing. For example, if you’re being told you can’t meet with the decision-maker, you aren’t going to get the business. Period. So move on, without regrets.

The above is based on a conversation with sales trainer Bob Beck, who (unfortunately) has a track record of borrowing material from other sales trainers.  As a result, I don’t really know the ultimate origin of these rules.  They smack, however, of common sense, so that’s why I’m posting them anyway.

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What’s deductible when working from home?

Posted on August 18, 2011 by The Pres.

By Cyndia Zwahlen | August 15, 2011

Small-business owners who work at home might not have to worry about a commute, but figuring out their taxes could make the 405 Freeway at rush hour seem like a piece of cake.

Rules concerning home office deductions are hazy, experts said. For example, does a stereo or television in a home office qualify as a business-tax deduction? What about artwork on the walls, rugs on the floor or fresh flowers on the desk? What if the business owner lives and works on a boat?

 “People are so unclear about these issues,” said Jan Zobel, an Oakland tax preparer and author of “Minding Her Own Business: The Self-Employed Woman’s Essential Guide to Taxes and Financial Records.”

The Internal Revenue Service doesn’t publish black-and-white rules on every aspect of the topic. Instead it’s up to the small-business owner — and his or her tax preparer — to be able to make the case to the IRS as to whether something is a legitimate home-business expense and to what extent.

To be deductible, a home office space “has to be used on a regular basis and exclusively” for the business, said Sam Jarrar, a certified public accountant in Marina del Rey.

Even a corner of a room can meet that test and be deducted, he said. But no working on the family finances in the home office, not matter what size it is.

The deduction is based on what share of the total space in a dwelling the home office takes up. If it’s, say, 20%, then the business owner could deduct that portion of a number of indirect costs — such as utilities or real estate taxes — as a business expense. A renter could deduct that percentage of the rent payment.

If the home office deduction is taken, direct costs related only to the space, including repairs or wallpaper, can also be deducted.

When Denise Abdun-Nur set up an office in a spare room of her house for her Amazing Grace Organizing service in Ventura, she was able to deduct the cost of direct expenses for the room, such as new window blinds and paint for the walls.

She relied on a trusted accountant to make the calls as to what was tax deductible for her small business, and advised other business owners to do the same.

“That’s not my area of expertise, and I would rather pay for their service now than pay fines later,” Abdun-Nur said. “If you listen to other people, like friends and other business owners, you get a lot of different information.”

Even if the home office itself is deductible, not everything in it necessarily is.

“In order to deduct an expense, it needs to be necessary in order to bring the business owner more profit, and ordinary, in the sense that other business owners would have the same expense,” Zobel said “I didn’t deduct the TV or iPod I have in my exclusively used home office, but someone who’s more aggressive might have.”

If a business owner is using just a corner of a room, then something like a stereo or television is probably not a deductible business expense because it’s probably not used exclusively for the business. Zobel said that fresh flowers for the area probably wouldn’t be deductible, either.

Colleen Wainwright, who runs her social media consulting business, Communicatrix, out of her former dining room in Los Angeles, bought a small money tree for her space.

It’s supposed to be good for career success, she said, but Wainwright didn’t deduct the $4 cost.

“I am very fond of being conservative with the IRS,” she said. “Why invite trouble? It comes too often on its own.”

Posted in Tax Issues | Leave a comment

Tip Credits: Dept. of Labor Sued Over New Rule

Posted on July 27, 2011 by The Pres.

By Cynthia Hsu on July 22, 2011 5:43 AM


As a small business owner, what do you know about tip credit rates for your tipped employees?
What about the tip credit rule, set down by the Department of Labor and recently affirmed by the 8th Circuit Court of Appeals?

If you’re unsure about tip credits and how they function for your business, you may want to read on. And, even if you’re sure you know the rules about tip credits, maybe you should think again – the Department of Labor recently revamped them.

Being informed on the rules may end up saving you money in the end. Skimping out on pay for tipped employees that you might not think you need to pay because of their tip income may land you in hot legal water down the road.

Tip credits generally work by offsetting the amount of minimum wage a business is required to pay tipped employees. Employees need to be notified and informed of tip credit before they can be applied, amongst other requirements under the Fair Labor Standards Act.

And, the new rules make it so that tipped workers who spend more than 20% of their time working on non-tip jobs like inventory or stock will need to be paid minimum wage for those non-tip hours. No tip credit can be taken during these non-tip duty hours.

Needless to say, business owners and restaurant franchises like Applebee’s were none too happy with the new rules. They filed suit against the regulations, but lost trial court. The 8th Circuit affirmed the trial court’s decision, according to the written opinion.

Small business owners, especially those with employees that receive tip income, should be aware of the new rules. Reading up on the rules and the notice requirements would likely be a good first step to avoid potential legal messes or wage and hour suits.

Since tipped workers who spend more than 20% of their time on non-tipped duties will need to be paid minimum wage, as no tip credits can be applied, employers should also take care to keep track of employees and their duties so as to not violate the new tip credit rules.

Posted in Employment | Leave a comment

The Surprising Power of Promotional Products

Posted on July 21, 2011 by The Pres.

July 18, 2011, By MP MUELLER

When my grandparents moved into a retirement center, I helped with the garage sale. My cousin Claire and I were joking about how best to display the odds and ends from their 60 years together when I stumbled upon a gift from the gods of high kitsch. It was a letter opener, but this was not your typical letter opener.

In the clear acrylic handle floated a mini uterus with two pills strategically placed where ovaries normally reside, alongside the drug’s name, Hormonin. This promotional product was a gift from a drug company representative to my granddad, a doctor in Laredo, Tex. I tried to imagine how this token must have been received by the taciturn Dr. Puig. “Thanks Hal, I’ll put this next to my collection of kidney stones.” Or, “Do you have that on a T-shirt in an extra large?” Highly doubtful. He probably focused on its utility and kept it right there on his desktop. Which is probably what the drug company’s marketing department was counting on.

Promotional products are, some say, the oldest form of advertising. American businesses spend $20 billion a year giving away stuff with logos, according to Jerry McLaughlin, president of Branders, one of the largest sellers of promotional products online. Which is pretty good evidence that it works. Mr. McLaughlin credits the effectiveness of promotional products to centuries old cultural norms around the rule of reciprocity. “If you give something, the recipient is honor bound to give something back,” he said. “In every language and culture, research has found there are really pejorative words for people who get and don’t give back. We humans are hard wired to respond if we get something.”

Are we really that easy? When you get that survey in the mail with a crisp dollar bill attached, do you fill the survey out or pocket the money and relegate the envelope’s contents to the circular file? I visited with Dr. Robert Cialdini, professor emeritus of psychology and marketing at Arizona State University. Dr. Cialdini, who has written a book on the topic, “Influence: The Psychology of Persuasion,” became interested in studying the rule of reciprocity out of self-defense. “All my life I’ve been a sucker,” he said.

Dr. Cialdini observed Hare Krishna Society members in airports, watching them foist paper flowers upon travelers. As soon as travelers accepted the flowers, they became more likely to reach into their pocketbooks and reciprocate with a donation. Sociologists and anthropologists have found, he said, that there is not a single society in the world that doesn’t train its people from childhood to this rule. “Marketers take advantage of this all the time,” he said. “Tupperware parties — one of the things that happen very early on — they play games so every one at the party wins a prize from the Tupperware representative. And they feel very obligated to give something back in return.”

A well-known veterans’ nonprofit group, the Disabled American Veterans, is a case in point. When the group sends a mailing for contributions, Dr. Cialdini said, it gets an 18-percent response rate. When the same letter is sent with personalized address labels, which cost about eight cents, the response rate goes up to 35 percent. “For the cost of the address labels they get almost a doubling of return,” he said. “It’s very powerful rule and very small things can trigger it.”

How do companies find the right promotional item? Here are four suggestions:

• Give items that members of your target audience will use in the environment where they make decisions about using your product or service. If you go after executives in corporations, give them something they will use in their offices, around their desktop so your company can be top of mind when they make decisions. Golf-related items are exceptions because lots of business happens on the golf course.

• Have it underscore your marketing message and differentiate your company. Mr. McLaughlin recounts a computer software client who makes antivirus software. The client put its logo on boxes of condoms and sent them to information technology types with the message, “Protect yourself, protect your computers.” Results? “Most I.T. people are male,” said Mr. McLaughlin, “and don’t really have girlfriends so that’s particularly titillating. They believe they got pretty good results.” A bit edgy for most companies, but you get the idea.

•Personalize them. While we are fond of our company logos, customers really like to use items that have their names on them. “People like seeing their own name above all else, said Mike Linderman, president of Express Pens, and former chairman of the Promotional Products Association International. His company makes pens in small quantities that can be imprinted with both your company’s logo and your client’s name.

• Skip the logoed water bottles and other items that will be quickly used and tossed. Make your promotional products investment something that will have a shelf life.

Some of the most popular promotional items these days are thumb drives, aluminum sports bottles, reusable grocery bags, and anything green or American made. But will this stuff really replace the calendars with alluring young women? “I don’t know who the folks were who figured out that men would look at pretty girls and if you put your tools, software or cars next to it, they will look at it. I don’t think that trend is going away,” Mr. McLaughin said.

Did receiving the uterus-enhanced letter opener prompt my granddad to write more Hormonin scripts for menopausal patients? Can’t say, but this promotional product made it 40 years without seeing a trash bin. And it’s now in a prominent place on my desk, right next to a Charlie the Tuna desk lamp.

MP Mueller is the founder of Door Number 3, a boutique advertising agency in Austin, Tex. Follow Door Number 3 on Facebook

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The Price of Bad Pricing

Posted on July 8, 2011 by The Pres.

July 6, 2011, 12:00 pm  By JAY GOLTZ

If there is an aspect of running a small business that doesn’t get enough attention, I think it’s pricing. Unfortunately, there’s a good reason for that: pricing is hard to do and easy to ignore. But that’s especially dangerous right now when there’s a good chance your own expenses are changing.

With most management decisions, your goals are pretty straight forward. Most of the time, you simply want to be the best at whatever you do. You want to have the best staff, the best service, the best marketing. But pricing is more complicated. You may say you want to offer the best price. But what does that mean? The lowest price for the customer? The price that will provide the best value for the customer? The price that will result in the highest profit for your company? The price that will result in the most sales for your company?

It can get even more complicated. To figure out the relationship between the price you charge and the profitability that results, you have to do some cost accounting. For instance, if you are manufacturing a product, you have to take into consideration reject rates, machine maintenance, insurance, rent, utilities and inventory carrying costs, just to name a few expenses. Maybe you own an auto parts store that specializes in carrying parts for older cars. You pride yourself on having the alternator for almost every car built since 1960. Surely that would suggest that you could charge a premium. But how much? What is the carrying cost of your huge inventory?

Even figuring out that inventory cost is not simple. If you finance the inventory with borrowed funds, is the carrying cost the interest you are charged? Or do you have to consider the other things you might have done with that money? What if you are at your borrowing limit and you could have spent the borrowed funds on something more profitable? What about the fact that some of those parts are never going to sell? That is called obsolete inventory, which will probably be calculated when you — or your descendants — sell your inventory during a liquidation sale, for pennies on the dollar.

Every business has costs that are related to making a sale, whether those costs are charge card transaction fees or packaging costs. They all need to be figured in, as well. There are also fixed costs that can be connected to the activity of selling a particular product. Maybe you could reduce overhead by getting rid of a particular product or service. But business does not operate in a vacuum. Your competition is vying for the same customers. Winning market share is a common goal, but at what cost? This is where an understanding of price elasticity becomes important. The higher the price, the less you will sell. Usually! I have seen and heard numerous examples of sales going up when the price of a product — a bottle of wine, say — is increased. Some products and services are clearly more elastic than others, meaning that price changes have a greater impact on sales. (Here is a small-business guide with some examples of how other business owners have handled their pricing.)

From my experience, many business owners do not do an analysis to calculate the effect a price increase might have on their bottom lines — again, for good reason. It is very difficult if not impossible to do. It’s more like guessing, perhaps an educated guess. I cannot tell you how to do it, but I can tell you what not to do. Do not rely on just your salespeople! Most will tell you that the sky will fall if you raise prices. They will tell you that customers are already complaining.

Salespeople mean well, but their job is to sell more product. It is the boss’s job to make sure the company makes money. That requires doing a break-even analysis on any potential price increases. If the company is not making money anyway, you may not have a lot to lose. Suppose you have a 35 percent gross margin, but that margin does not leave enough money to cover the overhead and provide a profit. If you increase prices 2 percent, you would have to lose more than 5 percent of your sales to lose money on the change. If you lose only 2 percent of sales, you will have about the same revenue but your cost of goods sold will fall 2 percent, as well. That might allow you to start making money. It will also mean that you will have less work to do because you will have fewer transactions. Obviously some industries are more price-sensitive than others, but it is worth doing the math, especially if you are in a low margin business.

Here’s the math: if you sell 100 widgets a week at $100 apiece and they cost you $65 apiece, you have a gross profit of $35 a widget or $3,500 a week. But because your fixed expenses have been rising and these are really good widgets, you decide you can charge $102 and still provide a good value to your customer. If you now sell only 95 widgets a week, you will have a gross profit of 95 x $37, or $3,515. But if you manage to sell 98, you will make $3,626. The point is that sales have to fall quite a bit for you not to come out ahead.

There is one other factor to consider. Price can be a very effective way to control volume. How are some lawyers and house painters able to charge double what other people charge? They have more customers than they can personally handle, so it is profitable for them to charge more and lose some business — rather than lose business by being overwhelmed.

Pricing is as important as any business decision, but frequently it is treated as if it were no decision at all. Business owners just keep doing whatever they have always done, for better or worse. They do this because they fear they will — as they’ve been told a thousand times — price themselves out of the market.

No one ever warns them not to underprice themselves out of business. But I think that happens far more often.

Jay Goltz owns five small businesses in Chicago.

Posted in How to Manage Your Prices | Leave a comment