Monthly Archives: September 2011

It’s becoming a common trend. In our poor economy, employers are downsizing. Former employees are turning a negative situation around for their benefit, and operating as self-employed entrepreneurs. What we see more and more is a continued relationship between ex-employee and employer, with the ex-employee providing services for the previous employers on a subcontractor basis.

This relationship can have benefits for both parties. The employer can reduce financial commitments to things like a fixed payroll, vacation pay, worker safety insurance, and severance. This can substantially reduce the overall payroll burden. There are also downsides, such as a lack of a stable workforce.

For the previous employee, the biggest perk is paying less tax. There are lots of deductions only applicable to the self-employed. These include cars, promotion, Internet, cell phone, part of housing costs, travel and more. They can also employ their spouse and children and pay them. The major downside to being self-employed is the lack of certainty of income. Entrepreneurs may have trouble replacing contracts as they expire and maintaining consistent income—especially in a tough economy.

While this arrangement offers benefits to both parties, we often see situations where someone calls themselves a subcontractor, but really carries on all the activities they did previously as an employee. Canada Revenue Agency will challenge these relationships, and often is successful at proving the relationship is one of an employer/employee rather than business/subcontractor.

If this happens, there are serious implications. The employer will be assessed Canada Pension Plan and unemployment insurance costs, together with interest and penalties for as many as three years for each person deemed an employee. That bill could be as high as $5,000 per employee per year assessed.

If the subcontractor is found to be an employee, everything deducted as valid business expenses could be disallowed. That translates into significant reassessments for three years plus interest, which means a big tax bill.

So how do you know if you’re legitimately self-employed?  The CRA has issued the information booklet RC 4110, which describes how they see it. The first thing you need to look at is the intent when the working arrangement was set-up. The best way to document that intent is to create a written arrangement at the start.

The next step is to ensure the intent of the parties is reflected in the facts of the relationship. The CRA has a big toolbox on its side. It will look at the level of control the payer has over the worker, whether or not the worker provides tools and equipment, whether the worker can subcontract work or hire assistants, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker and the worker’s opportunity for profit and loss. All these factors must be considered as a whole.

While being a subcontractor can be very beneficial, it’s essential to document and organize the relationship correctly in order to meet the goal: paying the least amount of taxes possible.

Hearing the names Archie, Betty, Veronica and Jughead remind most of us of Riverdale, U.S.A. Many grew up with the cast of characters at Riverdale High. The stories about life among teenagers living in simpler times have resonated since 1941.

A recent article in Fortune Magazine describes a problem – not for high school kids, but for the owners of the comic empire. Archie Comics Publications, Inc. has been owned and managed by the two founding families through all these decades. Management rested in the hands of two second-generation children…until they happened to die within 10 months of each other.

Under a makeshift team the company began foundering. Revenues declined due to the void at the top. The widow of one of the owners, who had never worked in the business, was asked to step in. She became co-CEO with the son of the other owner.

The article explains how the widow learned to run the business and turn it around successfully. A major strategy was to engage customers in every way possible to find out what readers want. This included trusting an idea from a seven-year-old fan.  The result? The fan’s idea was a hit, but overall, there were several new, unique and profitable markets that helped them blossom. (Or, Blossom with a capital B for Riverdale fans.)

In this success story, the existing owners never thought seriously about who could run the business if they weren’t there. Positive cases like these are unfortunately the exception rather than the norm when a small business owner is unexpectedly unable to continue working.

Most often, the family of the deceased is forced to sell the business at a substantial discount if they are able to sell it at all. Often large amounts of money need to be injected into the company to keep it going and to find replacement management.

The risk of unexpected illness or death can be mitigated with insurance that gives the company a lump sum in the circumstances of catastrophic illness or death. This cash would be used to find an appropriate replacement and fund any operating losses.

This issue is also relevant when the business owner wants to sell. If the business can’t operate without the owner, then the owner doesn’t have a business – the owner has a job. This means a much lower potential selling price as the pool of people who may be interested in buying existing business is limited to those with the same skill sets as the current owner.

The optimal solution is to build your business with systems and people with appropriate skills, training and responsibilities who could manage the business if the owner is absent for an extended period of time. This requires planning with a clear vision of what the business will look like when you finish building it.

Building a business that operates just as well without you is a vital in creating and maximizing your business’s selling value.

Here we are, at the end of my top ten list for business success. We’ve talked about business strategy planning, building the business, finding the right customers and the right employees.

Finally, let’s talk about looking back … to look forward. You might be offended if I suggested your business is backwards. Yet chances are you follow practices that send you in the wrong direction.

Most businesses review annual financial statements to assess annual profits. Based on the review, changes may be made to business operations management and marketing to boost performance for the next year. Then a business will review monthly financial statements, to see if the changes made a difference.

There are a few problems here. First, as you know, financial statements are historical. Managers are looking at what already happened and may not be able to fix problems…because they already happened. This approach ignores what’s happening today, and therefore ignores shifts that may influence what happens tomorrow.

Focusing on “bottom line” results is a one-dimensional approach. Financial operators alone are a few wrenches short of a decision-making toolbox. They can also lead managers to focus on short-term results, forgetting about long-term wealth building and financial viability.

So let’s look forwards, not backwards. There are many non-financial measurements to consider. While all businesses are different, there are a few common areas where non-financial indicators can help improve business performance. My magic three are:

• Customer satisfaction

• Employee satisfaction

• Internal business operations

Customer satisfaction relates to the overall customer experience: price, quality, delivery, service and warranty. Don’t forget your primary business objective: making customers happy. Real-time performance measures determining customer satisfaction are invaluable.

Employee satisfaction measures human capital development for the organization. A key corporate objective is always to foster an environment that encourages innovation, trust and teamwork. Measuring employee satisfaction assesses how well employee behaviour aligns with business plans.

Last: internal business operations measures the information given to employees, helping them understand their operational role, and helping them use the info to improve their own performance. It lets the employee know how their specific function fits in the overall success of the big picture.

By boiling down the large volume of data all business owners face into a few key indicators, you can create a dashboard of information, with real-time reactivity. And that can actually help you improve business performance … without looking to the history books.

It can be argued nothing in recent Canadian history has brought people together like the death of Jack Layton. Tributes nationwide, the words of his last letter to Canadians and his moving and carefully planned state funeral – a very uncommon thing in our country.

Now, some of the dust has settled. The crowds outside City Hall have shrunk. The talk about who will fill Jack’s shoes has grown. Politics, like any good show, must go on.

But the Canadians who came out in droves to remember and honour Jack were united in another way, too. They all pledged to “do better,” to move forward keeping his ideals and legacy in mind – and make Canada a better place.

I admire that most about Jack. I respect him as a man, and I respect his passion and devotion to politics, and to driving home a progressive political agenda for Canada. He worked tirelessly to bridge gaps and improve quality of life.

While I agree and support his objectives, our political stripes clash when it comes to strategy for implementation. I don’t agree with his strategy to raise taxes on businesses to pay for the NDP agenda. This would ultimately lower the gross national product, which would in turn reduce resources available for his social programs.

I believe politicians need to start talking about building a social contract among Canadians. We need to agree that it is essential to invest in our population as a means of ultimately increasing everyone’s wealth. In this contract, the population must be willing to pay more personal and commodity taxes, which we need to fund social programs. Without the nation agreeing governments will continually be elected that are committed to lower taxes and social spending. As a result we will never be able to fund the investment required in social programs, which are so necessary for Canada’s future.

That’s exactly why the recent referendum in British Columbia is such an important case study. By striking the Harmonised Sales Tax, voters chose short-term tax savings, but will be paying a long-term economic price. The effects are already being felt, with some small businesses choosing to pack up and leave the province. They feel they can’t grow in the same way with the HST, and in some cases, the old PST and GST system was too cumbersome and confusing.

The HST is only one example of the electorate moving towards increasingly lower taxes. Look at Rob Ford’s win here at home, and the advancement of the Tea Party in the United States.  But we simply can’t have lower taxes across the board. We need a social contract among voters who agree to pay more personal and commodity taxes in order to increase investment in our research, education and infrastructure. Otherwise, Canada’s ability to compete in the global economy will be eroded and everyone’s standard of living will be reduced.

A social contract means coming together and putting aside partisan motives to construct a plan that will benefit the whole country. And perhaps doing it around the kitchen table, as Jack was so fond of saying.

It happens every year, and every year it takes us by surprise.The summer starts (by June, if we Canadians are lucky)…and before you know it, the CNE opens and it’s back to packing backpacks and lunches and hitting the books.

Back to school season has its perks…especially if you’re a retailer.

A new Bank of Montreal study says retail sales in Canada will grow by two per cent in August and September. That’s about the same as those two months last year. For school supply stores like Staples, this is Christmas. In their own catchy ad’s jingle, it’s “the most wonderful time of the year.” That same BMO study also says on average, Canadians plan to spend $319 on back to school items. When you add up the kids in one family, and add in extras like technology, that’s a big chunk of cash.

In order to avoid being overwhelmed and breaking the bank at this time of year, you can use the same tools I offer any small business looking to get started, or embarking on a major change. The first step is always to have a strategic plan.

When shopping, that translates into a list. A list – especially one children help with – will keep everyone focused, cut down on impulse buys and most importantly, give you a sense of “where you’re going” before you get there. If you know you already have 45 markers and two pairs of scissors at home, but you’re out of glue and pencil crayons, you save time and money at the store. You’re looking for and buying what you need. Not to mention teaching your kids the benefits of re-using.

Those same list-making benefits apply to your business’s financial goals and journey. Obviously pens and backpacks aren’t as important or as involved as things like setting up a line of credit and tracking your annual net worth. But the importance of mapping out a journey is equally important.

We have a financial planning checklist on our website. While it won’t map our your specific path, it will give you a sense of all the things you should consider, and get your brain churning about what else should be included for your situation.

As it’s already the first week in September, I would recommend getting that back to school shopping out of the way as soon as you can…and then heading to our website to focus on your business.