Less paper, better records.

I am enthusiastically committed to the goal of reducing paper and the headaches associated with keeping track of it, organizing it, destroying it and generally moving it from one stack to another. In our office we do not create any paper file file folders for new or existing clients. We do not retain paper copies of clients original documents and we do not retain paper copies of old tax returns. Instead we use scanners and imaging software to digitize all of these documents and archive them. This results in greater ease of retrieval, indexing and filing.

A great bi-product of this system is its propensity to  safeguard against data loss. Our data is currently mirrored, synchronized or backed up on four different electronic media. All this helps me sleep a lot better at night. During the most recent hurricane season we only had one marginal scare when we didn't know where Wilma was going to end up. Before leaving our waterfront office building for the weekend we packed up an external hard drive, removed the last backup tape from the server and synchronized a laptop to the server. That was it. If something would have happened I was only a wall outlet and an Internet connection away from being back in business.

When it comes to dealing with our own records we are just as committed to doing away with paper. We scan everything we possibly can and destroy the paper copies if feasible. Expense receipts are a huge part of this and absent the occasional rebate receipt we have found there is little reason to retain the paper copies. This is especially true for receipts generated by thermal printers (which most are). If these are not scanned or photocopied the original eventually fades to the point of being unreadable. We use the same high capacity, redundant systems for this that we use for client documents but I think most businesses and homes could benefit just as much with a simpler, less costly system. One solution I came across recently is NeatReceipts. We have not used it but it looks like just the ticket to move a newcomer into the paperless world. Their site also has a great page featuring IRS positions on digital record keeping and document retention.

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Another year of ES coupons…gone.

Today was the deadline for the last quarerly estimated tax payment of 2005. We stayed pretty busy tweaking tax estimates and advising clients with questions about how much to send in with their last payment. Today was also the deadline for employers to deposit December FICA and withholding taxes. However, when making tax payments witholding and ES payments are not created equal.

Estimated tax payments are credited when paid meaning that if you wait until the last quarter to pay all four payments you will be underpaid for three quarters and penalized accordingly. But if you wait until the last pay period to pay all of your withholding it is treated as being paid equally throughout the year.

So why not pay yourself a bonus at the end of year and have it all withheld to avoid underpayment penalties? Becuase wages are subject to FICA tax. Waiting until the end of the year to withhold a large amount could cost you 15.3% in additional payroll taxes, all to avoid underpayment penalties of 4%-5% in 2005.

The best solution is to develop a strategy that uses ES payments as necessary but also takes advantage of withholding's flexibility to make up any shortfall at the end of the year thereby minimizing unnecessary payroll taxes and underpayment penalties. If you're unclear on how underpayment penalties are calculated or whether you may be subject to them make sure you ask during your next appointment with your CPA.

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A better way to read blogs

If you're reading this you may be pretty familar with blogs and the best ways to keep up with what's happening in them. If not check out this article. It was immensly helpful to me and made blogs less a curiosity and more an efficient way to keep up with new information.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).

Due diligence for ordinary folk

If you've heard of due diligence before it probably conjures up images of horrendous legal and accounting bills, months of arduous research and haggling and multi-million (or billion) dollar mergers. Forget all that. Think of due diligence as someone looking over your shoulder to help you evaluate a potential deal. That's it. But the key word is "potential." Due diligence done after the fact isn't due diligence, it's damage control (or more appropriately "loss control").

Most times due diligence is done to help a buyer evaluate the profit potential and any hidden issues in a business purchase. But it can also be used to help entrepreneurs decide whether or not to start a new business from scratch, or to evaluate rental properties to see if they will turn a profit. Banks are also big due diligence clients when it comes to making loans (if they do it in house instead of hiring a CPA or attorney they call it underwriting).

So why don't people perform more due diligence. The simple answer is money. It's not cheap to pay someone to slog through business records, invoices, insurance policies and financial statements. But consider this. You are thinking of buying a retail establishment. The current owners claim average sales of $50,000 per month with gross margins of 30%. You pay a CPA $5,000 to evaluate the seller's books and verify their claims of profitability. Among other things the CPA finds out margins are 28% instead of 30% meaning the bottom line profit is $12,000 per year less than the sellers claim. If the asking price is based on a 3 year earnings multiple the price just dropped $36,000. Not a bad return for your $5,000 investment in due diligence.

But due diligence should also ask some pragmatic questions that help protect you from surprises after sale. For instance, will suppliers give you the same terms and prices as the previous owner or will they require you to go COD with fewer price breaks and comps? Was the previous owner's insurance adequate or were they cutting costs with a greater risk tolerance than you are comfortable with? Was the previous owner's debt or corporate structure such that they were able to avoid costs that you cannot, costs that could make the difference between a profit or a loss?

The point of my little sermon here is that if you are thinking about spending money to buy a business, to purchase a rental property or to start a new venture it really is smart to have someone in your corner asking tough questions and approaching the subject with dispassionate objectivity.

One final note...if a business broker tells you there's no need for due diligence run, don't walk, to your CPA's office. They might be nice, they might be 'good people' but business brokers get paid to sell businesses. Enough said, I'm off the soap box now.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).

What the heck is a Long Tail?

We work with a lot of startups and often part of our role is helping founders and managers pitch their ideas to investors and banks. When I did this for tech and dot com companies in the late 90's there were several buzzwords woven into every powerpoint presentation. If an executive or pitch man didn't talk about "viral marketing" or "click-through rates" he was dismissed as out of touch.

In 2006 "Long Tail" may very well be the new venture capital buzz word. But there is an interesting concept behind this wierd phrase. It turns out a regular demand curve can be split into two segments. A mainstream segment (highlighted in red) and a niche segment (in yellow). Traditionally retailers and marketers have focused on selling products in the red segment. This makes sense when you have limited shelf space and you need to choose those few products with the greatest sales potential (the red area). But the internet has allowed purveyors of niche content to access a ready market for their goods and services (the yellow area). 

The interesting thing about the niche market is that it has many, many more product possibilities than the mass market, hence the yellow area takes up more of the x-axis than the red area. This is what has become so attractive to the VC market, and that is why this mundane little demand curve that's been around since Adam Smith now finds itself bisected into a "short head" and a "long tail."

The problem with "Long Tail" salesmen is that few of them understand how the concept makes their proposed business any money. As an accountant I tend to see things in terms of "cash in" and "cash out." If not enough cash comes in the business doesn't last very long, no matter how good the sales pitch. Now the contributers at Venture Blog have laid out a compelling case for finding money in the Long Tail.

If you want a more detailed discussion of the Long Tail concept check out Chris Anderson's Long Tail FAQ. Chris is editor of Wired Magazine and is writing a book on the Long Tail.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).