Sunday, December 5, 2010

5 Tools to save your business time & money

You wake up in the morning, get ready for the million things you have to do today and before you know it, the sun has set and your to-do list has gotten longer.

One of the top challenges for small business owners is time management. In the recent past, several online companies have popped up with fabulous innovative tools to help you manage your time more efficiently. Here are a few:


1. NeatReceipts
http://www.neatco.com/.

Ever wish you no more had to sort through the pile of receipts in shoe boxes? NetReceipts allows you just that. You can scan your receipts with your mobile phone or a scanner and the software will index, categorize and file your receipts for you. For a small investment ($199), you no more have to dread that meeting with your tax accountant since all your receipts will be digitally filed and categorized.

2. EverNote
http://www.evernote.com/

What use is information if you cannot access it when you need it? Whether it was an inspirational idea you jot down on a post-it or an image you saved on your desktop, EverNote makes that information easy to find at any time from any device. You can capture business cards, jot down ideas, save trip information direct from the internet or through your scribbled notes, and the software will organize, index and make the information searchable for you either on your PDA or your desktop, accessible from any device at anytime.

3. LastPassword
http://www.lastpass.com/

The old adage used to be to use the same password for all your log-ins. Unfortunately, that is no longer possible with websites increasing password scrutiny and requiring/disallowing the use of special characters, small caps, large caps, etc. If you are tired of the dozen variations of your password to access websites, LastPassword can save you that headache. It is a password management tool, which is easy to use and above all, is free. All you have to remember is ONE password for you lastpassword account and the software will manage the rest for you. Above all, if you kept all your passwords on post-its attached to your monitor, it will help increase password security by no longer needing to parade your passwords openly.


4. Virtual Assistant
http://www.yourdailytask.com/
http://www.bpovia.com/

If your business is not large enough to hire a full-time assistant, or wish you could hire one person with many skills, think about renting one virtually. Websites like YourDailyTask.com and Bpovia.com help you offload tasks ranging from word processing, email management, to product research. You tell them the task you need to be completed and they match you up with a virtual assistant for you. Not only you can keep costs down, but you can tap into specialized knowledge.

5. Freedom
http://www.macfreedom.com/

Many of us are guilty of falling prey to the information web of the internet. If you feel you get distracted by the internet and are constantly tempted to be online to check the latest news, or research any word that pops into your head, Freedom.com can come to your rescue. It locks you off the internet for up to eight hours at a time, helping you stay focused.

These are my Top 5 tools. If you like to share yours, post your comments.

Thursday, October 28, 2010

Do you really need a $100MM idea to get venture funding?

The early stage capital wisdom has attracted the love for the $100MM dollar valuation. With each economic boom, start-up valuations have kept on creeping upwards. Every start-up, which I have advised, has felt the pressure of “valuation management”. Creative forecasting and overly ambitious assumptions have been utilized to bump up valuations to $100MM.

In recent history, the start-up community has been captivated by venture capitalists. Unfortunately, to get the attention of most venture funds, you need to have a base of $100MM valuation. But that leaves out of the equation the role of the Small Business Administration (“SBA”), whose sole purpose is to serve small businesses with net worth less than $18MM.

The SBA, through its venture arm “SBIC,” has provided over $50 billion in seed funding for small companies. The program has been in existence since 1958, however, it has not been as well advertised as the SBA loan program. In 2009 alone, SBIC funded over 200 companies in existence for less than a year. And, average investment size varies from $250,000 to $5,000,000.

The beautiful aspect of the program is that it does not limit funding to equity. You may qualify for a combination of debt + equity, equity alone, or debt alone. This flexibility of funding shifts the power to the entrepreneur, without having to worry about handing over control and equity.The program works through a network of investment firms who receive low-cost funding from the SBA to provide equity financing to small businesses. You can find a list of participating firms on the SBA website.

This program is in addition to the various grant programs that SBA provides. If your business is located in rural or low-income areas you may qualify for additional funding from the SBA.

If you are a start-up and:
• your valuation is less than $18 million?
• your investing need is between $250,000-$5 million?
• you prefer flexibility in financing types (equity alone, debt+equity, debt alone)
then,
think about the SBIC as the alternative financing source for your business needs.

For more general information or financing statistic visit the SBA website.

Monday, September 27, 2010

Are you worried about an IRS audit?

With a 0.5% IRS audit rate, it may seem rather unlikely that your small business will get audited. But, that is the exact problem of looking at averages. Although, on average that has been IRS’s audit rate, there are a few criteria that most start-ups meet, exposing them to a higher risk of an IRS audit. The question is what to do to minimize the impact on your business of such audit?

As most start-ups meet the following 3 criteria, the odds of an IRS audit are significantly higher.

First, being a small business subjects you to a higher audit rate. Small businesses in general have a higher likelihood of being audited as they pose a higher risk of tax evasion. IRS knows that deducting personal expenses as business can be very tempting to entrepreneurs. Let’s face it, how many of us have never been tempted to classify a “dinner with friends” as a business expense?

Second, most small businesses do not report income in their early years. IRS looks suspiciously at businesses that show little or no taxable earnings and have high levels of expense deductions. One statistic cites the audit rate to be as high as 2.15% when no taxable income is reported.

Third, simply being a “C” corporation increases the audit rate. A “C” corp. is twice as likely to get audited compared to an “S” corporation or a Partnership.

Most entrepreneurs are less concerned with bookkeeping than with creating breakthrough products. However, an audit by the IRS will consume so much of your resources in time and money. Most likely, grey area items will be contested. Will you have the time to gather the documentation and pull up the resources to fight the IRS?

The following few IRS secrets may save yourself a lot of trouble. There are 3 accounts that trigger an audit. These are Meals & Entertainment, Home Office and Automobile logs. Be extra careful when making those deduction choices and, if you are expecting a net loss for the year, be more diligent in keeping documentation. Those dinner receipts should clearly indicate the names and the nature of business discussion. And, if you are deducting the entire auto lease as business expense, the IRS will certainly want proof of the existence of a second personal car.

In addition, 2 general ledger accounts capture the IRS agent’s fancy: Repairs & Maintenance and Miscellaneous. When faced with grey area expenses, try to avoid categorizing them as Repairs & Maintenance or Miscellaneous expense. During an audit, those two accounts are heavily scrutinized by the IRS agent. Many tax evasion scams have utilized these accounts to park ineligible deductions and thus the IRS loves digging extra deep into them.

Although painful, keeping good documentation can save you a great deal of trouble during an IRS audit. Especially when your business is still in the growth phase with little or no earnings. Regardless of your accountant’s advice, avoid using “Repairs & Maintenance” or “Miscellaneous” expense categories as a catch-all, parking your grey area expenses. If you follow these advices, you will have the peace of mind if your business becomes the victim of an IRS audit.

Thursday, August 12, 2010

Does C Corp really protect you from Liability? Think Twice!

One of the key reasons behind forming a corporation is to shield the personal assets of the shareholders from the debts and actions of the corporation. However, this is not an automatic protection. If you are a small business there are many pitfalls to observe, otherwise, you will still be held liable, even in the event of bankruptcy of your small business. What are they?

There is a legal term “Piercing the Corporate Veil”, which exposes you to liability. You will be held personally liable to pay all the debts of your company. Although, this may apply to any corporation, piercing the corporate veil typically is most effective with smaller privately held business entities (closed corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result.

There is a long list of factors that courts often consider; however, a few are common pitfalls that small businesses tend to fall into.

Commingling of personal and corporate assets: If you pay for your BMW lease with company checks, or if you transfer funds between your personal and company bank accounts without signing loan agreements or promissory notes, then most likely you have violated this factor.

Undercapitalization of the C Corporation: Many small business owners set up very small equity, and take out most of the corporate earnings in terms of salaries or dividends. If courts find that your business is insufficiently capitalized compared to industry standards, you face the risk of personal liability in the event of bankruptcy.

Failure to observe corporate formalities in terms of behavior and documentation: Do you keep corporate minutes? Do you conduct shareholder meetings? Regardless of how small your company is, courts may still consider violating this standard as a basis to get to your personal assets.

Regardless how tempting it is to shift as many personal expenses to your company, even if you get through the IRS, you may fall victim to the “Piercing of Corporate Veil” when trying to protect your personal assets from the liabilities of your corporation. Remember that simply paying the fee to register your company as a C Corporation does not automatically protect you from liability. It is best to seek professional advice if you suspect your personal assets may not be shielded.

For additional resources and case examples click here.

Sunday, July 11, 2010

Get patents cheaply and don’t worry about quality: A good strategy?

In response to my earlier blog, I received several comments suggesting to “get patents as cheaply as possible” and to not “worry about the quality.” The comments were based on the assumption that holding a patent, although has little protection for a small company, still offers great value to fend off potential suits, and increase a company’s appeal to potential acquirers. Although I agree with the assumptions, however, I have to warn my readers about the dangers of their conclusion.

Often amateur valuation specialists overlook the strength of a patent and simply assume all patents, regardless of quality, contribute equally to business value generation. However, that is not the case.

The key test I employ when considering the value of a patent is its contribution to the true business value of a company. Will your company be worth more when you file for a patent? That’s when quality plays a key role.

A patent that has been litigated and has been sustained in court is more valuable than a patent that has not. That is because many patents are found to be invalid by the courts. An invalid patent, not only is useless, but harmful. It is harmful because when filing for patent protection, you disclosed to the world your technology; an invalid patent will allow your competitors to legally copy your technology, and compete for market share.

A poorly written patent, even when held valid by the courts, may still offer you no value enhancement. When key design elements are omitted, or worded poorly, it may render your patent useless. Whether in an acquisition or a potential lawsuit, experienced patent attorneys are hired to provide the due diligence on your patent portfolio. If of poor quality, potential acquirers will back away when your patent is the centerpiece of your business. The quality of the patent will also influence the decision to proceed with potential lawsuits by your competitors, as your negotiating chip will be eroded by a poorly written patent.

The quality of the patent influences the probability of negative outcomes. A weak patent will have higher probability of being subjected to litigation by competitors, and lower probability of finding an acquirer. Both of these negatively influence your business value. For those with valuation background, these probability of events will increase the discount rate applied to a business’s earnings potential, thus depressing its value.

This all assumes that the USPTO will grant you a patent on a poorly written application. Many applications have to be resubmitted several times, costing the entrepreneur time and money.

It may be worth investing in your patent application. After all, if patent attorneys did not add value, there would not be so many of them. However, it is important to have a careful strategy to optimize the value your investment. For more information see When Is It A Good Idea to Patent Your Invention?

Tuesday, July 6, 2010

When is it a good idea to patent your invention?

Most entrepreneurs rush to the USPTO office to patent their inventions with little regard to the value of their patent. With the proliferation of patent applications and the fast speed of inventions, it is worth to ponder whether it is worth to spend thousands of dollars to obtain a patent.

A patent gives the holder the exclusive right to the invention for 20 years. However, enforceability is a key issue to consider. Simply holding a patent does not stop your competitor from using your patent. Applications are often so vague that parties may disagree whether one is infringing or not. To enforce your rights, you may need to take legal action. It is estimated that a typical patent infringement lawsuit costs approximately $1M. Unless you have the funds to back your patent rights, merely holding a patent may not be useful.

Although it is possible to retain legal counsel on contingency, the market value of your patent should at least exceed the anticipated legal costs. If it would cost you$1M to defend a patent with market value of $250,000, it is a net loss situation.

Five questions to ask:

1. How easy it is to design around the patent?
If a competitor can easily design around the patent, then the existence of your patent does not add to the value of your business.

2. What is the product lifecycle?
Whether you are a life science or a technology company influences how valuable your patent is. When lifecycles are short, such as in technology companies, your enjoyment of patent protection is limited to the lifecycle of the technology usefulness.

3. Do I have the funds to protect my patent?
If not, consider getting insurance.

4. What is the market size of the product using my patent?
Even when your patent is infringed, how much value you can recover from the infringer is limited to the units sold of the infringed product. That, of course is limited by how large the potential market is.

5. Are you targeting venture funding?
Venture funds often require patenting your invention. That is because to obtain venture funding there is an implicit assumption that your idea will be worth at least $100M. With that kind of optimism, it would be unwise not to patent your invention.

This is all good for the United States. But how about global protection? Check out “Is My Patent Valid in the World?”

Is my patent valid in the world?

When you obtain a patent, your invention is protected only in the United States, unless you apply for protection in foreign countries. To obtain worldwide protection, you need to apply in each country, separately. The cost can run in hundreds of thousands to obtain such protection.

However, there is another danger to patenting to consider. When you file for patent protection, you will have to publicize and disclose to the world details about your invention. If you only patent in the U.S., nothing will stop a foreign competitor to copy your invention in China and Europe, as long as they do not import the “infringing product” into the U.S. In a sense, by patenting your invention, you may allow your competitor to legally “steal” your invention.

Therefore, it is crucial to give careful consideration to your patent strategy. Here are a few questions to ask:

1. Who is my competitor?
Whether you are competing globally or targeting a niche U.S. market, may determine whether worldwide protection is necessary.

2. What is the size of the worldwide market?

3. Where are some strategic markets you see expanding your product in the next few years?
Consider patenting in select few countries that matter to your business strategy. That way, you can control patenting costs.

4. How is enforceability in other countries?
You hit a sore topic for discussion. Not all countries have same attitude towards patents. Even when enforced, you may recover a token amount. Who will pay for your legal fees?

The value of the patent is another important element to consider. Read "When Is It A Good Idea To Patent Your Invention?" for more information.

Before you run out spending valuable cash on patent attorneys, assess your patent value and the level of business protection from such patent.

Saturday, July 3, 2010

How to Test for Credit Card Numbers?

Ever wonder if there is a method to the madness of credit card numbers? In fact, the series of digits are arranged in a way that makes validation quite simple.

Most major credit cards in the U.S. follow what is known as the Luhn algorithm. Starting from the right, multiply every odd digit by 1, and every even digit by 2. If any of the products is greater than 9, subtract 9 to arrive at a single digit number. Then sum all the digits. The result should yield a multiple of 10.

Let’s test this:

Next time you are handed a credit card number simply follow the Luhn’s formula. If you get a multiple of 10, the card is valid.

Thursday, July 1, 2010

5 Tips to Help Prevent Bank Fraud

With the proliferation of online banking, fraudsters have devised clever ways to harvest userID and password information. My prior blog Watch out SMBs for NEW banking fraud!explains how this is done. It is virtually impossible to defend against such malware. However, a few and simple measures can prevent your company from being a fraud victim.

The simplest approach is to train employees not to open suspicious emails. But, how often have we all been tempted to click on that unbelievable offer, or have simply trusted the source. Some of us still remember the “Anna Kournikova” contaminated email that many fell prey to. With the advance of computing tricks, it is likely that sophisticated fraudsters can send you emails using your friend’s addresses.

Here are 5 tips to help you safeguard against such criminals:
1. Designate a computer to access your bank account. Disallow email access and internet surfing on that computer.
2. Check banking activity DAILY, rather than month-end, and reconcile against legitimate disbursements.
3. Ask your bank to set up “dual controls” so that transactions require the approval of 2 people.
4. Use a less common web browser, such as Opera. The less popular a web browser, the less attention it attracts from fraudsters.
5. Establish a daily limit on how much money can be transferred out of your account. This can help protect against sudden large withdrawals.

It is key to remember that NOT all banks offer fraud protection. If you shop with a small regional bank, ask about fraud protection policies. You may consider purchasing insurance coverage for fraud losses.

Remember, it is better to be safe than sorry!

Watch out SMBs for NEW banking fraud!

I recently was contacted by a friend warning me of a new fraud scheme perpetrated on his bank account. Over the past 9 months several unauthorized charges had gone unnoticed for a total of $1200 missing from his account.

Of course, this is NOT an unusual story. However, as a forensic accountant I dug a little deeper into his loss to discover the classic Spear-Fishing E-mail Scam.
Unfortunately, small to medium size businesses are the usual target for these scams as they tend to rely on smaller regional banks that lack the resources to institute proper safeguards and firewalls.

With the advent of online information sharing, such frauds have become easier to perpetrate. To pull off this scam, the fraudster needs the email address of an individual within an organization who handles financial transactions online. Often, businesses publish organization charts, and /or contact information of their staff on their website. Once the fraudster identifies the target, he will send out contaminated e-mail attachments or links to infected websites. When the attachment is opened or website visited the fraudster will install the malware “banking Trojan” that will harvest the bank access userID and password. This is, however, only half of the equation.

The second half is how the funds are transferred out without causing any red flags. For this, fraudsters use many unsuspecting individuals recruited to serve as “money mules”. Most of these individuals are recruited via advertisements or legitimate jobsites, such as Monster.com. Craiglist.com. They are hired to work from home to “process payments” and to direct the funds to the fraudster account via wire transfers or Western Union. They believe they work for legitimate businesses. One fraud scheme can utilize 100s of such “money mules” to cover up their tracks and make the fraud harder to identify.

Therefore, 100s of unauthorized payments from a victim’s account can go missing, starting in small increments and increasing gradually, causing small businesses to-date to lose over $100M, according to the Association of Certified Fraud Examiners.

To safeguard agains such frauds read my next blog "5 Tips to Help Prevent Bank Fraud"