June 19, 2013

Where the Money Goes in Growing Small Businesses - Small Business Week

Small businesses have several phases they go through in their early years much like a puppy or a child.  Each of these phases present different challenges and a different understanding of the numbers as they happen.  I am assuming a successful business startup here; success does not mean Easy Street, it simply means we have a product / service to sell that actually does sell at more than it costs and the business has cash flow.

The first feeling in a successful business startup (remember my definition of  "successful business startup") is truly amazing - the selling - the making of 'all the money' - the satisfaction of  'doing something good' and making the world a better place (seriously).  We feel 'in-the-money' as we are making money for each of the process elements of the product / service.  We feel the 'Magic' and want to do it more - the same feelings we get when we win at a casino (except you are betting on yourself) - you can taste winning.!.  Welcome, you are now an Entrepreneur.

Then the business grows - we have a product that people want and we can sell it.  The results though are not quite what we expect - twice the sales do not generate twice the personal income.  Additionally, we hit some stumbling blocks - all of a sudden we have employee issues, sick days, differences in throughput and a lower commitment than we ourselves have as owners - don't try to pretend this does not exist but also don't let this consume all your time and focus.  Sometimes we think we need to adjust prices to compensate for the additional costs - in reality there are no additional costs - those costs are simply not going to the entrepreneur anymore.

Remember: Price has nothing to do with costs
except that it must be higher than cost to be in an ongoing business.

Assuming we can get beyond making a lower percentage on sales (maybe even less money), we then run into the next entrepreneurial stumbling block - hiring sales people.  They will never be as good as you and they are motivated by money, not your businesses success (normally).  This is the point where the entrepreneur must become more of a manager then entrepreneur.  This is difficult as the business is the entrepreneur's child.  Success here has more to do with building an asset and creating wealth than making more money.  What I tell business owners that reach this point is that they will now feel forever broke as they continue to build the asset (the business).  This is one of the most difficult things to comprehend in small business.  They ask, "when I did one, I made $110K/year; now that I am doing 15 why am I only making $140K/year?"

What the entrepreneur fails to realize is, if they stepped back from the business, they would still make $110K/year as they now have an asset generating cash flow and profits.


June 18, 2013

Why a House to Live in is Always a Good Investment.

Another off topic article, but good information for equating personal finance and business financial decisions.

Our homes are typically our largest purchases in our lives.  I try here to add a little business thought to the process.

To understand and project a return-on-investment, the investment must be looked at from and with a business mindset.  This is true whether we are in business or making personal investments.  This is not a simple process when our home is the investment - there are intangibles and emotions to consider (which I won't here).  There are also location and demographic considerations (big ones).  These complications are compounded by the fact that the economic environment is different and more volatile than in anytime I know of in modern history.  Subsequent articles will utilize this information to determine whether real estate, be it commercial or residential, is a good business to be in beyond the home you live in. I will make several assumptions in these articles and will identify them so you can use your own assumptions. A final note - buying a home is not this complicated; being in the real estate investing and/or the property management business is far more complicated.

The first thing that needs to be determined is a baseline number - that being the cost of a place to live - it's a requirement.  This is a major factor in making owning the home you live in an attractive investment.  Let's say the cost for you to rent a place to live is $1500 per month; this is your baseline number.

Assumption One: We have the 20% down payment for the house we can afford (No PMI) and $0 closing costs.
Assumption Two: We intend to be in the house for 15 years.
Assumption Three: An average of 6% inflation and a opportunity cost of money of 4.25%.  These two items traditionally track each other pretty closely and it's better to assume this than predict why they may not in the future.
Assumption Four: We are in a 25% incremental tax bracket.

We are purchasing a $350,000 home, putting 20% down and paying a fixed 4.25% on a 30 year mortgage.  This equates to a $1,872 monthly mortgage payment including taxes and insurance.

Assumption Five: approximately $8,600 in interest and $7,500 in property taxes per year (note: interest is not straight line and taxes are different everywhere).

This is a $16,100 deduction and in a 25% tax bracket this represents $4,025 reduced tax bill.or approximately a $335 savings per month.

The net difference between renting and buying is $1,872 less the tax benefit of $335 less out baseline cost of $1,500 equaling a net difference of $37 (seems close).  Lets add $300 per month for maintenance and repairs (roofs, water heaters, furnaces, etc over 15 years). total difference is $337 per month (this is really really rough).  The present value of $337 over 15 years (using the assumptions above) is approximately $44,800.

At this point we can project our total investment $114,800 for our $350,000 home ($70,000 Down payment plus the $44,800).

At 6% inflation, the future value of the home will be approximately $839,000 after 15 years (super oversimplified - many other factors including and especially location).

The return = The $839,000 value less the total investment of $114,800 (for the $350,000 home) equaling $724,200 or a 14.2% annualized return over the 15 years - not bad for a very conservative investment (this is not the way you calculate your capital gain nor is it the way the IRS thinks as maintenance costs generally do not go back into your basis, but they would be considered in a businesses P&L).

Just note, that my article last week on gold prices predicts both high inflation and high interest rates in our near future.  This volatility increases the risk in any investment (as well as the reward if you guess right).

A forthcoming article(s) will consider the additional elements of real estate / property management as a business (income, depreciation and capital gains taxes).


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June 14, 2013

The SEO - Twitter Secret That SEO Service Sellers Don't Talk About ( Because they don't know it !! )

One of the largest ways to improve your website's organic search position is to demonstrate relevance to the search engine's BOTs.  I have been amazed that SEO people, who sell SEO don't know the best way to do this.  People who have something to sell, and sell heavily online do know it and don't talk about it or share it.  Why?  If you knew the winning lottery ticket numbers, would you share it?

Not much has changed since I originally wrote about this 10 months ago: Search Engine Optimization (SEO)

You now have the answer - you only lack the questions and the why.

Bob Leonard
561-371-4113 (Call My Cell)
512-593-8830 (in Austin)

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June 12, 2013

Where Gold is Going and Why is this "Up or Down" So Different.

Everyone needs to do a little research on some basic economic principles because our next economy is going to be very unique - unique in that what could occur will be unique, not only to my life, but in modern history.

What defines today's economic environment:
Low Interest Rates (3.25% Prime)
Low Inflation (1.72% annualized in April 2013)
High Corporate / Business Profit
High National Unemployment (7.6%)
Ridiculously High (and still growing) National Debt 

What I think the future brings us in the next 10 years.
Higher Interest Rates (duh). Yea, yea, but try to remember the 80s where good mortgage rates were 13% - 16% (think about what that would do to your monthly mortgage payment).  Prime rates exceeded 20% (21.5% on December 19, 1980).  So what will cause rates to go up?  Demand for capital and inflation.

Higher Inflation.  No one likes to talk about this one much but there is definitely the buzz  of borrow today (or yesterday) and pay back at and with tomorrow's dollars.  Can our government (the controllers of our M1) do anything else?  With a 100% inflation over a 10 year period (this is not a lot nor hyper) paying back the national debt will be only half as costly.  Think about that... and then consider that inflation could be as high as 250% in the next 10 years.  Back in 1980 inflation went as high at 14.7%; 1980 was a very interesting year.!  It takes only 7.2% inflation to double the cost of living in 10 years (rule of 72).  In a time of record corporate profits and stagnate wages, we can expect our wages to increase because of new and higher demand for labor and profit potential from that labor.

Corporate profits will, likely change hands and most likely drop from their current levels - but not much.  What does this mean?  Stocks are not necessarily the best investment.  Corporate balance sheets will also change from very high cash positions to lower, more normal, positions.

Unemployment can only go one direction and that is down.  This drop in unemployment will be a part of the fuel to drive inflation (again, remember the 80s and Reagen's 84 classic speech repeating what he said in 1980, "are you better off now or then you were 4 years ago".  In addition, there is a "feel good" to big raises even if they are only to keep up with inflation.

National debt is, like said above. The government will address this with tomorrow's less valuable dollar rather than today's more expensive dollar.

The title of this article is "Where Gold is Going and Why is this "Up or Down" So Different".  So where do you think it will be in 10 years?  A better question to ask is why (based on the information above) is the price dropping over the last several months.  My prediction: $8K to $10K per ounce before 2020.  Hmmm, consider contra-investing.! and ask why some pros are buying.


Personal Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 30 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.

June 10, 2013

An Internet Sales Tax - A Good Idea.?. - Terrible Political Execution.!.

This use to be an engineering joke, but fit many of our government bureaucratic proposals - like the Market Place Fairness Act..

I am going to be going off topic for my next 3 blog entries not writing about the standard Local / Printing / Advertising theme (saving the world one community at a time theme).  It's been a couple months since writing my last blog and there is a bunch in my head that needs to come out (a friend asked me recently, "when I shake my head, does it look like a snow globe").  "Internet Sales Tax" is the subject that just jumped out first.

The Internet sales tax - the way it is being proposed by the "Marketplace Fairness Act", is a bad idea and bad for business - all business.  Let it be known that I am not against an Internet Sales Tax, I am just against the way it is being proposed.  What bureaucrat, or lobbyist, could have proposed this method? And the free, easy to use automatic software? None are free - the best I have found has transaction based fees. And automatic (??#>@#) - please...  I was in the automation software business and, unless I am selling it ( :) ), automatic is never free, or easy. 

This is not about the Overstocks", "Amazons", NewEggs or Dells. Its about the 15-100 employee company that is being singled out and burdened.  Remember, I am Pro-Internet sales tax. As I have said before, the states currently do not collect anything (very little from personal use-tax) now in "cross-state-border" commerce. The states are not losing anything (as I also believe they won't be gaining anything from this). I believe that there should be NO MINIMUM (see I am pro) and the making of a federal sales tax form that accounts for interstate sales tax only (of course, only for states where the company does not have an office). A five line form ('Sales' minus 'sales where tax was collected for any municipality' minus 'tax exempt sales' = interstate taxable sales). I don't care where the money goes.... redistribute it back to the states as a windfall (this is not about the 'how' and 'who' of the gift horse - I would rather see our one federal government rather than 20 million businesses have to address this distribution) -or- let the feds keep it (makes more sense to me as as it crosses state lines - Kinda like the FBI). Think about the enforcement !! if it is even possible... Last quarter one of my businesses would have had to report to 17 different local municipalities with an average sales tax collection of $3.25 (if it met the $$ minimum qualifications)... Does anyone see the problem with this? Not the guy that has the "use-based-fees" free automatic software - I hope I am not the only one laughing now....

Very simply, under the new proposed regulations, if a business ships to a different state other than where they are located (or have a location), they will have to do a sales tax return for that state.  Sure, they exclude businesses under a certain size (why, I don't know), but the issue is creating a need to create 46 new returns (at a minimum) for a $1MM business - that's not a big company (10-12 people in most cases).  Oh yea, there is "free" software that handles this "automatically" -

If this is passed, business will ignore it - much as people ignore the current "use tax" which people are supposed to pay when they buy something that is shipped from out-of-state and no tax was collected.  Both of these are ridiculous and unenforceable (Montana is not going to send someone to your business's door in Florida to collect the $10.50 you did not send them).

I also disagree with the other side; E-Bays approach.  They are obviously against an Internet sales tax suggesting at least a raise in the "exempt business size".  In the email they blasted out to their user base (that is just about everyone I think) E-Bay (CEO John Donahoe) stated "Congress can instead support small businesses by making a simple modification to the current bill: exempt small businesses with less than 50 employees or less than $10 million in out-of-state sales".  E-Bay suggests you send this letter to your congressman which they conveniently pre-wrote and provided a link. (Feel free to use and express your opinion).

There are good alternatives as well - like this writer who simply proposes all sales taxes be collected at "point-of-sale" rather than "point-of consumption".  Not my approach, but much better than what is being proposed around congress currently: reason.com/archives/2013/05/01/are-online-sales-taxes-only-fair