Protect Your Business Speech

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Ten Ways to Protect Your Business

[SLIDE 1]
There are no certainties when it comes to business cycles, and no amount of guesswork can
protect business owners from the ups and downs of a changing economy. There are, however,
fundamental steps you as a business owner can take to minimize disruptions from increasing
costs, changing consumer habits, growing operating risks, competition and fraud.

Your business may have been up and running smoothly for some time, but as in any
business, changes will occur, and it’s important to recognize the potential warning signs
early and respond accordingly. For example, be alert for such things as slight
decreases in sales, a decline in the number of potential clients or customers who
respond to your promotions and new market developments that could adversely affect
the business.

The bottom line is to identify the key issues facing your business and take the right
actions to minimize the downsides and maximize the opportunities. That’s what I’d like
to cover today—the ten ways to protect and grow your business.

[SLIDE 2]
#1: Create and Stick to Your Business Plan

© 2010 American Institute of Certified Public Accountants. All rights reserved.

Let’s start with a well-developed business plan. A business plan reflects both the goals
of your company and the action steps necessary to accomplish them. Simply put, the
plan describes where your company is today, where you want it to be tomorrow, and
how you plan to get it there.

The plan also should include a well-defined statement about the market need for your
product or service, a description of your roles and the roles of your partners and staff,
as applicable, and a detailed outline of your operations. Be sure to list existing assets
and liabilities, along with historical financial results, projections and a statement of cash
flow. Besides the numerical data, also include your organizational structure, personnel
policies, a description of reporting processes and other internal management plans.

Putting together a business plan is a critical step as it forces you to step back to gauge
your market, its potential size, the competition, and the marketing and advertising
strategies you will need to implement. When you look at your competitors, ask yourself
these questions: How does their share in the market compare to mine? What are they
doing that I should consider? What sort of marketing strategy should I pursue?

[SLIDE 3]
#2: Consider All Financial Aspects
As you’re developing your business plan, you’ll also need to consider the financial
aspects…another component I’d like to discuss. The single most pressing concern for
any business is its financial health. It’s likely that some of you started your business
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© 2010 American Institute of Certified Public Accountants. All rights reserved.

using personal resources—and possibly loans from family members or friends. While
this helps to get you over the initial hump, it can prevent you from establishing a credit
history early on.

[SLIDE 4]
Financial Sources
Fortunately, there are a number of financing sources, including angel investors, venture
capital firms, local banks and the Small Business Administration (SBA). When applying
for financing, be sure you have a business proposal that clearly outlines your plans for
growth. Keep in mind that the SBA is a government agency and generally requires
more documentation than banks. At a minimum, include a balance sheet, income
statement and a statement of cash flows from the most recent period. However, if your
business is a start up, you’ll need to put together a balance sheet reflecting personal
assets and liabilities.

Determine ahead of time the loan schedule that best fits your business needs, the cash
flow you’ll need to repay the loan, and the collateral you may need to get the loan. Also,
make sure your financial records are in order by reconciling bank statements, tracking
purchases and payments, and operating your business, at a minimum, as effectively as
other businesses in the same industry.

[SLIDE 5]
Debt and Equity Financing
–3–
© 2010 American Institute of Certified Public Accountants. All rights reserved.

There are two major types of financing: debt financing and equity financing. With debt
financing, the loans must be repaid. Sources include commercial, savings banks, and
credit unions if you belong to a company or labor group. Other sources include
consumer-financing companies, which charge higher rates than banks, and commercial
finance companies that make loans for business purposes, such as for the purchase of
inventory and equipment.

Equity financing essentially involves selling all or part of your business or control of it to
others. Venture capital firms provide funds to finance growth, and in return, get to own
part of your business, while you keep control and decision-making authority. Other
alternatives include employee stock ownership plans, where employees generally work
for smaller pay and benefits in return for part ownership; or joint venture or licensing
agreements involving a partial or complete purchase of your company.

[SLIDE 6]
Cash Flow
Another major consideration for maintaining your business’s financial health is
managing cash flow. Effective cash management not only enables you to increase cash
inflow, but also allows you to put your money to work as you invest idle funds in higher
yielding vehicles. Working with your CPA, you can employ a variety of cash
management practices simply by reviewing your financial statements and the key
underlying ratios, such as accounts receivable turnover, inventory turnover, net profits
on sales and outstanding accounts receivable as a percentage of total revenue.
–4–
© 2010 American Institute of Certified Public Accountants. All rights reserved.

One simple way to improve cash flow is to bill your customers at the time of the
transaction, rather than waiting until the end of the month. If your policy is to allow 30
days to pay, you are placing an almost two-month gap between the sale and any
collection of money owed to you. Also, consider offering discounts for early payment of
invoices, if applicable.

[SLIDE 7]
Annual Budget
Lastly, it’s important to create an annual budget and periodically review it, assessing
your overall operations and identifying factors that are either helping or hurting the
business. A budget also allows you to compare actual performance against your
projections and isolate the differences so you can identify the problem and take the
appropriate steps to correct it. Finally, a budget enables you to communicate to your
employees expectations for the year as well as inform your lender about your
objectives.

[SLIDE 8]
#3: Market Your Services
Let’s now consider marketing…an essential consideration for the health and prosperity
of any business. What does a punch card from a coffee shop and a discount card on
your next book purchase have in common? If you said “customer loyalty,” you would be

–5–
© 2010 American Institute of Certified Public Accountants. All rights reserved.

100 percent right! Customer loyalty is a proven approach for retaining the customer
base you worked so hard to attract.

To build your business, there are a number of promotional efforts you can undertake to
raise your visibility. One approach is to identify new niche markets you can serve and
customize your advertising to appeal to the special needs of prospects in each niche.
For example, an office supply business may want to tailor its advertising to people who
run businesses out of their homes.

One simple approach is to identify and respond to emerging trends. For example, if you
see local businesses advertising through the Internet, consider moving in this direction if
it’s appropriate for your business and a good way to reach your target audience.
Another approach is to set up joint promotions. This involves identifying the
characteristics and activities of your most profitable customers. Look for a noncompeting business that is already reaching them. Then think of ideas to jointly
promote your products and services. For example, an ophthalmologist may want to run
a joint promotion with an optician.

Other ideas include becoming involved with local business associations, such as the
Chamber of Commerce or the Rotary Club, and giving speeches in your community or
target market area at local banks, libraries or community centers.

[SLIDE 9]
–6–
© 2010 American Institute of Certified Public Accountants. All rights reserved.

#4: Select the Proper Legal Structure
Selecting the appropriate legal structure for your business is also crucial to protect
your business and minimize your taxes. The basic forms of business structures are
sole proprietorship, partnership—either general or limited—a limited liability company, or
a C or S corporation.

[SLIDE 10]
Sole Proprietorship v. Partnership
If you’re considering starting a business or have been operating one, it’s important to
know which structure provides the best legal and tax advantages for you. A sole
proprietorship is simply that—a one-person business that is not registered with the state
as a partnership, limited liability company or a corporation. You don’t have to do
anything special or file any papers to set up a sole proprietorship. Legally, the sole
proprietorship, and you as its owner, are one and the same. All business income and
losses are reported on your personal income tax return, and you are personally liable
for any business obligations such as debts and court judgments.

From a tax standpoint, a partnership is similar to a sole proprietorship; the only real
difference is that a partnership is owned by two or more people. In a partnership, you
as a partner pay tax on your share of the business income on your personal income tax
return. You and your partner are each personally liable for the entire amount of any
business debts or legal claims. When forming a partnership, be sure an attorney sets
up a partnership agreement describing the role of each partner, the money that is
–7–
© 2010 American Institute of Certified Public Accountants. All rights reserved.

involved, the property and skills to be contributed by each partner, profit splits, and the
terms under which the partnership can be dissolved.

A limited partnership tends not to be a good option for most small business owners.
Under this structure, there is at least one limited partner and one general partner. The
limited partner has minimal control over daily business decisions and operations and, in
exchange, is not responsible for business debts or claims. The general partner, in
contrast, is responsible for the daily business operations and is personally liable for
business debts. This structure also can be costly and complicated to set up and
operate. Some states require general partnerships to be registered and limited
partnerships must be registered as LLPs—limited liability partnerships.

[SLIDE 11]
LLC v. Corporation
Limited liability companies, or LLCs, on the other hand, can be a good option. As with
corporations, this structure provides for limited personal liability for business debts and
claims. When it comes to taxes, however, LLCs are more like partnerships. The
owners of an LLC pay taxes on their share of the business income on their personal tax
returns.

So when does an LLC make sense? If you as a business owner potentially could be
sued by customers or clients or end up piling up a lot of business debt, an LLC will
serve to protect your personal assets from creditors.
–8–
© 2010 American Institute of Certified Public Accountants. All rights reserved.

A corporation, unlike the other structures, results in the formation of a completely
independent legal and tax entity. A corporation is considered separate from the people
who own, control and manage it. With an S Corporation, stockholders pay income
taxes on the business income on their personal tax returns the same as sole
proprietorships or partnerships. In a regular corporation—known as a C corporation,
the company itself is taxed on business profits. You and the other owners pay individual
income tax only on money paid out of the corporation as a salary, bonus or dividends. It
is important, however, to check with the state tax division to make absolutely sure how
S corporations are taxed since some states, instead of taxing the business profits on the
shareholder’s personal returns, will tax an S corporation like a regular corporation.

[SLIDE 12]
#5: Assess Your Risk Tolerance
Let’s now focus on managing business risk, which involves determining your
business’s exposure to the likelihood of a loss or less-than-expected return and how
you can best protect against such exposure.

A tool typically used to manage a business’ risk is insurance. There are different types
of insurance you may want to consider, such as group life and health, casualty and
theft, disability, workman’s compensation, “key man,” liability and automobile insurance.
Work with your insurance adviser to establish a plan that best fits your needs and
budget. Also, consider working with an insurance broker instead of an agent, since a
–9–
© 2010 American Institute of Certified Public Accountants. All rights reserved.

broker represents many insurance companies and can be more objective in offering
recommendations. But be aware that some insurers offer larger commissions and
broker incentives.

Generally the more assets you have, the greater your potential for suffering a loss.
Given that, it is critical to have your business periodically appraised; a service a CPA
skilled in this area can provide you with.

[SLIDE 13]
#6: Manage Your Workforce Effectively
Managing your workforce effectively is also critical to business success. In a
changing economy like ours, there will be periods of expansion and contraction in the
workforce and issues surrounding hiring or terminating employees. Also, because of
the unknown factor when hiring someone, it’s crucial to apply appropriate screening and
employment practices.

After you have determined the need for adding a position but BEFORE you advertise it,
carefully analyze the important facts about the job so you can attract those with the
appropriate skill levels. Keep in mind that you must also follow federal and state hiring
guidelines to avoid violating discrimination laws. Where you advertise for a position is
also key in attracting a broad audience.

– 10 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

When writing a job description, focus on such things as the purpose and responsibilities
of the job; the tasks involved and the methods used to complete them; the qualifications
needed for the job; and the relationship the job has to other areas of the company.
Keep in mind that the job description will be the tool you use for subsequent
performance evaluations as well as the basis for creating job-training programs.

Believe it or not, even in the 21st century, racial and other forms of discrimination still
exist in the hiring practices of some companies. We have read about the consequences
companies have suffered for discriminating against individuals. What is your
responsibility as a business owner? First, you must establish a philosophy and practice,
and clearly communicate it to your employees. There are a number of basic protocols
to follow to help ensure you are not accused of employment discrimination.

Monitor your employees’ performance and provide regular evaluations to put any
employee on notice about his or her performance if it is less than desired. Be sure to
document your discussion, so if legal action is taken against you, you will have the
necessary paper trail to support your actions.

If you must terminate an employee, make sure your reasons to dismiss are legitimate
and justifiable and you have carefully documented them. Whether it’s dishonesty, poor
performance, violating a company policy, harassment, or repeated failure to follow
directions, be sure you’re on solid footing, perhaps consulting with your attorney before
taking action.
– 11 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

Another good practice is to communicate with your employees on a regular basis
through an open door policy. In other words, don’t punish the employee who brings you
information about harassment, unsafe practices or improper actions, such as theft by
another employee. We hear so much today about whistle blowing. If you have created
an environment of trust, employees should not be hesitant about coming to you.

[SLIDE 14]
#7: Use Technology to Your Advantage
I’d like to spend a few minutes talking about effectively using technology. Today,
processing capabilities are measured in fractions of seconds. We have instantaneous
communications with vendors, suppliers, lenders and service providers. Moore’s Law
predicts that processing speed will double every 18 months. That tells us that we need
to consistently monitor whether the technology we have in place is serving the needs of
the business and customers. The costs of technology continue to decrease as does the
size and weight of hardware. And you have hundreds of technology options available to
you, your staff and your business—laptops, smartphones, printers and tablets such as
the iPad. It’s more affordable than ever to find the right equipment to suit your needs.

If you have limited capital and are concerned about what to buy and when because of
the rapid change of technology, you may want to consider leasing. Leasing technology
equipment allows you to expense the equipment rather than purchase a depreciable

– 12 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

asset, while freeing up your capital to purchase additional PCs or other assets critical to
your business.

Employing cloud computing resources is another way you can save money on
technology and protect your business in the process. Cloud computing utilizes internetbased computer resources to share software and data across multiple computers and
office locations—even client locations—much like an electricity grid.

Finally, you want to consider how to protect your business using technology. Because of
the risk of hackers, spammers, phishers and others who are able to manipulate
technology and take advantage of you or your customers, you want to make sure you’re
protecting your computer systems, and your website with the proper security—antivirus, password protections, even basic laptop locks. Enlist your staff in this process by
creating and enforcing a security policy for your office.

In this same vein, if you keep social media assets to promote your business (such as a
Facebook fan page, or LinkedIn Group) and/or if your staff enjoys using social media to
communicate with friends and family, you want to create a social media policy to ensure
your business is not discussed in a negative light by staff in social media outlets.
Additionally, you want to be prepared to see—and possibly address—comments about
your business from customers who use your social media assets. It’s not always
appropriate to respond to negative comments from customers unless they are sent to
you directly, but you want to make sure you’ve considered multiple scenarios and
– 13 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

responses when negative comments do arise through social media sites. Don’t respond
rashly. Instead, consider the consequences of your response (or no response at all).
When you do respond, do so deferentially with the mindset that the customer is always
right.

[SLIDE 15]
#8: Create a Succession Plan
Let’s now turn to succession planning, another consideration in protecting your
business’ continuity. Consider this startling fact: more than 70 percent of family-owned
businesses don’t survive the transition from founder to second generation. In most
cases, the "killers" are estate taxes, management or family discord; issues covered in a
good succession plan.

My advice is to plan well in advance so you can determine whether there is any interest
on the part of family members to continue the business, and if not, identify a strategy
for passing the business to another owner. Succession planning should begin at least
five years before you plan to leave your business.

Tax savings strategies are an integral part of a succession plan since a business
owner’s assets tend to be a major part of his or her estate. Your goal is to minimize
taxes upon your death and avoid forcing your children or heirs to sell the business to
pay estate taxes. With appropriate planning, you can restructure your company's legal

– 14 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

form, spin off certain assets or arrange for special long-term payment plans for the
estate taxes.

Life insurance is an important planning tool for ensuring the continuity of your business.
Estate taxes are generally due within nine months from the date of death and payable
only in cash. If the business owner makes no provision to pay these taxes upon his or
her death, the heirs may be forced to liquidate the business to cover the costs. Since
life insurance pays out a cash settlement upon death, it can cover the taxes that are
owed.

Retaining key employees also should not be overlooked since their departure from your
company could mean a reduction in business or a change in its quality. You should
consider some incentives to retain these employees, such as a strong compensation
package, possibly with retention incentives over the period of purchase, or perhaps with
the potential for future ownership.

CPAs who specialize in business succession planning can provide invaluable advice
about various tax strategies. So to be certain that your hard work does not go to waste,
make sure you have a solid plan of action that can be implemented.

[SLIDE 16]
#9: Beware the Possibility of Fraud

– 15 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

My next topic for discussion is fraud. Resulting from the increasing use of technology,
businesses now more than ever need to take steps to protect against fraudulent activity
ranging from identity theft—such as stolen bank account numbers—to the illegal
generation of documents such as sales invoices, purchase orders and bank statements.
There are a number of ways to reduce your exposure, and although some may sound
obvious, it’s amazing how many owners overlook these as they focus on growing their
business.

Be sure to conduct periodic audits of your operations and processes to help uncover
irregularities. An area that cannot be emphasized enough is to separate your various
recordkeeping functions, such as having your cash receipts and cash deposit functions
performed by two different people. How many times have we heard about schemes
involving fictitious vendors created by a bookkeeper to divert company funds into his or
her personal account? Even worse is that many times these schemes go undetected
for a considerable period of time.

Should you discover a discrepancy, what should you do? First, call your bank. Your
bank can examine the case and take immediate measures, especially if an
unauthorized payment due to document alteration, counterfeiting or forgery is involved.
Make sure you—or someone you absolutely trust — has control over documents, such
as checks, invoices and purchase orders, and the equipment used to generate those
documents – such as signing machines. Also, check your credit report every six months
to see if there are any early warning signs.
– 16 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

Regarding your computer system, be sure you have the proper firewalls, virus
protection and encryption in place, and that you limit access to sensitive computer
systems and records through the use of passwords and door locks. Other steps to take
to protect you against fraud include: screening all new hires by conducting background
checks; shredding all unnecessary financial documents, especially pre-approved credit
card offers; and protecting all key documents, such as tax returns.

[SLIDE 17]
#10: Seek Advice from a Professional
Last, but certainly not least, in considering your business’ well being is using
professional advisers effectively. Small businesses usually don’t have the necessary
capital to hire full-time experts to assist with all areas of their business. You will likely
need to hire professionals with business and legal expertise, such as a CPA and an
attorney. CPA specialists in business valuation or financial planning may also be helpful
to you in achieving your business goals.

CPAs are widely used by companies of all types and sizes for their expertise; not only in
financial recordkeeping and reporting, but also for their knowledge of how businesses
can best be managed profitably and positioned for growth.

How can you find a CPA if you don’t already have one? First, start by asking business
associates, friends or other professional and business owners in the area. Another
– 17 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

good resource is your industry association, local chamber of commerce, or a
professional association like your state CPA society. Here, the {STATE NAME} Society
of Certified Public Accountants provides a referral service, you can use. {INSERT
INFO}.

Most likely, you’ll also need guidance concerning the legal structure, contractual
arrangements with suppliers and distributors, leases, litigation protection, etc. And, of
course, if a partnership ends in a less-than-friendly manner, you’ll need the advice of an
attorney to resolve disputed issues. Your state bar association may have a referral
service to help you identify lawyers in your area with the necessary expertise.

Whether you’re seeking a CPA, an attorney or other specialized professional, you’ll
want to screen and verify their expertise, just as you would when hiring employees. Ask
how long they have been practicing; what references they can provide; his or her
experience level with your type of business; and how fees are determined. A good way
to determine if a CPA or lawyer is right for you is to conduct an in-person interview.

Consider what you want your CPA or lawyer to do with respect to your business needs.
This way you can make an intelligent decision. This is critical especially for the new
business owner or one whose products or services are unique.

When arranging for the services of professional advisers, ask for a written proposal
outlining the objective and scope of the assignment. Be sure the proposal outlines the
– 18 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

adviser’s responsibilities, as well as your own, and what will be done jointly. Also make
sure the proposal includes the anticipated cost of the project—both fees and expenses
and the terms of payment and cancellation fees.

[SLIDE 18]
In summary, as a business owner, you face internal and external challenges each day
that can impact the success of your operations. You may at some point face challenges
related to issues such as cash flow, getting the necessary financing, uncovering
fraudulent activities, the effective use of technology, and passing your business on to
the next owner. Consider selecting a CPA as your business adviser—a CPA who
understands how to help you create, maintain and grow your business—and who can
help you realize your dreams of business success.

Thank you. I would be happy to answer any questions now.

© AICPA 2004

– 19 –
© 2010 American Institute of Certified Public Accountants. All rights reserved.

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