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5 Fundamental Principles of Good Business Planning

By Tim Berry, Guest Blogger
Published: May 21, 2013

I’ve just finished a two-month period in which I’ve read more than 50 business plans as part of my role as judge of several major national business plan competitions and as managing investor of my local angel investment group. And I like reading business plans, so it wasn’t a sacrifice. But it did remind me that every so often, it’s good to go back to the five important fundamental principles of good business planning.

1. Form follows function

You’d think it would be obvious, but the business plan is supposed to be whatever it needs to be to solve the business purpose. For example, only very few business plans ever have to be documents – well formatted and carefully presented – to back up an investment pitch or loan application. While those uses exist, the vast majority of business plans need to be not pretty documents, but rather specific collections of lists, such as objectives, focus, tactics, specific activities, specific responsibilities, deadlines, performance expectations and so forth. They can exist in different formats and live on a computer, or a network, where multiple people can access, use and contribute to them.

The plan itself is what’s supposed to happen, and why, and how much of this and that and when things are supposed to happen. The document, the pitch, the elevator speech, and the summary memo aren’t the plan; they are outputs, or summaries, of the plan.

So why do we write it down? So we can review it every month, see what went right and what went wrong, and make course corrections. You can’t review the results of your plan if you didn’t write it somewhere. But don’t waste time making it pretty. Business plans are perishable, like food. Their shelf life is just a few weeks.

2. The beauty is in the results, not the plan

What makes a good plan? Not the writing, editing or formatting. Not even the ideas, the details, the strategy, the analysis or research. What distinguishes a good plan from a bad plan are the results. I’m quoting some of my books here, but the quotes apply:

  • A plan is worth the decisions it causes.
  • A good plan is nine parts execution for every one part strategy.

3. Accountability = metrics + management

In a business landscape changing rapidly because of new technology, the business planning is more needed than ever before because the traditional means of management and accountability are crumbling. It wasn’t that long ago that we could measure productivity by how warm the chair was, meaning how many hours so-and-so spent in the office. Now, with the world splintering and physical presence not so important, we measure with metrics, numbers – actual performance. And for that, we need planning to establish the expected measurement numbers and then to review the results and see what comes next. Planning is the key to accountability.

4. Planning thrives on change

Why should I plan, people ask? “Things are just going to change,” they say, “there’s no point in planning because things move too rapidly.”

The people who say that are missing the point. Planning is a process that manages change. The plan establishes expectations and the plan review analyzes results and creates revised expectations, in a step-by-step process that is something like steering, lots of small course corrections.

5. Planning is not accounting

The basic numbers included in a business plan – projections of sales, costs, expenses, profits, salaries, assets, liabilities, capital and cash flow – look like the reports we see in bookkeeping and accounting, but they are very different.

Accounting starts today and goes backward in time in ever increasing detail.

Planning, on the other hand, starts today and goes forward in time in ever increasing aggregation. We can’t project the future in detail; it’s a waste of time because the level of uncertainty is too deep. So we project a year in months and then the next two years on an annual basis, and that’s enough.

The good news is that this makes planning easier than a lot of people think. Just make sure, if you work with an accountant on planning, that he or she understands that 1) this is educated guessing; and 2) nobody is going to blame the accountant if it’s wrong.

Conclusion: All five of these basic principles are essential. And each of them makes planning easier, more practical, more important, and better managed.

About the Author:

Tim Berry
Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 46 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including his latest, 'Lean Business Planning,' 2015, Motivational Press. Contents of that book are available for web browsing free at leanplan.com .

5 Tips for Hiring and Managing a Summer Intern

By Caron_Beesley, Contributor
Published: May 15, 2013 Updated: September 27, 2016

Is your small business looking to hire an intern this summer? You’re not alone! According to a December 2012 survey by Internships.com, 53 percent of the 300 companies surveyed plan to hire more interns in 2013 than they did in 2012.

In fact, internships are becoming increasingly important to both students and business owners. The difficult economic climate means that new graduates face unprecedented challenges as they try to enter the job market. Internships give them a vital foot in the door and also provide employers with nurtured and eager talent to help them grow their business.

Just look at the data:

  • 47 percent of employers have a structured internship program
  • 39 percent of small businesses made full time job offers to interns in 2012
  • 85 percent of employers say hiring an intern was a positive experience

If you want new ideas and the opportunity to nurture a potential future employee – at a low cost – read these five tips for hiring and managing an intern (within the law).

Assess your Needs

Interns will be looking for the right kind of experience, so it’s important to evaluate your needs and create a job description that is appealing for both parties. Think about how an intern can help you achieve your business goals? Do you have enough work to support an intern? Who will supervise, train and mentor this individual? What about resources – like office space or a computer?

Think about potential workload that you can hand-off in terms of short and long term assignments and be sure to plan well in advance (hiring takes time)!

Should you Offer a Paid or Un-Paid Internship?

Should you pay your interns? Interestingly, most students state that compensation is the least important factor when considering an internship. And according to Internships.com, one third of businesses surveyed chose not to pay their summer interns (choosing to offer college credits, company perks or travel stipends instead).

If you want to attract right talent and take your investment seriously, then it’s worth compensating your intern(s) appropriately. (The average hourly rate for a bachelor’s degree-level intern is $16.21, according to the National Association of Colleges and Employers.)

Why not get an un-paid intern? Perhaps the biggest rationale for paying interns is that the U.S. Department of Labor puts limits on the work un-paid interns can perform under the Fair Labor Standards Act. For example, your business can’t be seen to derive any benefit from the intern. Essentially, the following applies:

  • Unpaid interns cannot do any work that contributes to a company's operations. This includes any tasks that help you run your business, like documenting inventory, filing papers, or answering emails.
  • Unpaid interns can shadow other employees and perform duties that don't have a business need. For example, a bakery may allow an apprentice/intern to decorate a tray of cookies that will not be sold to customers. Because the task was only a training exercise for the apprentice/intern and the bakery did not receive any benefit from that work, the bakery would not have to pay that student worker for that time. 

Clearly, a paid internship program will give both your business and your intern(s) more flexibility.

The Hiring Process

This process isn’t a whole lot different than hiring a regular employee. You’ll need to write a job description – be sure to state whether the internship is paid or un-paid, your objectives for the position, responsibilities and assignments of the job, and specific experience that the intern can expect to gain.

Where should you look for interns? In addition to posting the opportunity to your website and online job boards, approach local colleges and schools and register with their career services office. Many of these candidates are screened and motivated. Another option is the Department of Labor’s Summer Jobs+ Bank, a Presidential initiative designed to connect youth with employment and internship opportunities. Post your listing here

Managing Interns – Considerations to Remember as an Employer

Perhaps the most important thing to remember is that this is a learning experience for your intern, not a traditional “summer job”.  Consider the following:

  • Expose them to Real World Experiences and Tasks - There’s no harm in giving your intern mundane, tactical tasks to complete, but be sure to mix it up and give them real business experience as well.   Have your intern sit in on meetings and sales calls. Give them the opportunity to take a first stab at a project, guide and mentor them through it, don’t be afraid to let go of the reins a little, and step in when you need to.
  • Mentor – An intern is used to feedback (college tutors provide it all the time), so be prepared to coach and provide honest feedback about what they are doing well on a particular project and where there’s room for improvement.
  • Set Parameters and Guidelines – This may not be something you are used to doing with your regular employees, but expectations need to be set about appearance, business attire, work hours, and acceptable internet/social media use.
  • Set Expectations Among Other Employees – If you choose to delegate mentoring to another employee, be sure that employee is aware of your expectations. Likewise, set expectations across your staff so that the intern doesn’t find him or herself being taken advantage of or assigned tasks that are not within their job description.

Workplace and Labor Laws

Many of the labor laws that apply to employees, such as workplace discrimination laws, also apply to interns. You must also ensure you comply with workplace health and safety laws. Some states also require that you carry workers’ compensation insurance for interns.  

Related Resources

 

 

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

7 Ways to Protect Your Small Business from Fraud and Cybercrime

By Caron_Beesley, Contributor
Published: May 8, 2013 Updated: September 14, 2016

How secure are your small business assets from fraud, identity theft and cybercrime?

According to the Association of Certified Fraud Examiners (ACFE), companies with less than 100 employees lose approximately $155,000 as a result of fraud each year. Small businesses also have a higher fraud rate than larger companies and non-business owners. One of the most frequent sources of fraud is credit card abuse – largely due to the fact that few business owners actually take the time to go through every line item on their bill or choose to mingle business and personal accounts.

Other sources of fraud stem from an overall lack of security across the business – such as inadequate network and computer security and a lack of background checks when hiring employees.

Don’t be a victim! Here are some tips you can take to better protect your business from some common forms of fraud and cybercrime.

Protect Your Credit Cards and Bank Accounts

Since this is a common area of fraud for everyone from sole proprietors to employee-based firms, this one goes at the top of the list. Start by separating your personal banking and credit cards from your business accounts – this will ensure fraudsters don’t get their hands on ALL your money. Separating your accounts will also make it easier to track your business expenses and report deductions on your tax return.

Next, make sure you use your card wisely. Don’t hand over your plastic or your card number to employees or companies with which you don’t have a familiar relationship. Switch to online bill pay or make sure you store paper bills securely. Likewise, use a secure mailbox for receiving and sending bills. If you don’t have one, deposit your mail directly at the post office (this goes for any mail that contains sensitive information – you don’t want to leave it lying around in an unsecured mailbox).

Lastly, be sure to check your online banking every day for suspicious activity.

Secure Your IT Infrastructure

Every business owner should invest in a firewall as well as anti-virus, malware and spyware detection software. Backing-up is also a must and will make it a lot easier for you to continue working in the event of a cyber attack. This blog offers more advice on what to look out for and digs deeper into your options: 4 Ways to Safeguard and Protect Your Small Business Data.

Use a Dedicated Computer for Banking

This is a great idea from Forbes magazine’s 5 Ways Small Businesses Can Protect Against Cybercrime.  Use a dedicated computer for all your online financial transactions and, ideally, make sure it’s one that isn’t used for other online activity such as social media, email and web-surfing which can open up the machine to vulnerabilities. Avoid mobile banking if you can.

Have a Password Policy

Another easy step you can take to protect your IT systems is to institute a password policy. 

  • Make sure you and your employees change them regularly (every 60 to 90 days is good rule)
  • Set rules that ensure passwords are complex (i.e. contain one upper case letter, one number and must be a minimum of eight characters)
  • Use different passwords for different online and system accounts

Educate Your Staff

Employees are perhaps your biggest point of vulnerability when it comes to fraud, but they are also your first line of defense. Hold regular training sessions on basic security threats (online and off) and prevention measures – both for new hires and seasoned staff. Enforce the training by instituting policies that guide employees on the proper use and handling of company confidential information, including financial data, personnel and customer information.

For ideas on what to include in your training, check out the resources offered by small business groups like your local Small Business Development Center or Women’s Business Center (find one near you here), you could also look out for free online webinars from security organizations and businesses.

Consider Employee Background Checks

One of the first steps to preventing fraudulent employee behavior is to make the right hiring decision. Basic pre-employment background checks are a good business practice for any employer, especially for those employees who will be handling cash, high-value merchandise, or have access to sensitive customer or financial data. This blog offers tips on which background checks you can legally pursue and some tips for doing your own detective work: Conducting Employee Background Checks – Why Do It and What the Law Allows.

Insure Your Business

Fraud and cybercrime does happen; however, you can still seek to cover your damages by purchasing an insurance policy that protects you against any losses that you may incur from crime or fraud. Likewise, find out what your bank is willing to do to help you out if your credit card or business account is compromised.

How do you protect your business against fraud and cybercrime? Leave a comment below!

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

8 Ways Your Business Can Get Ready for the 2013 Tourist Season

By Caron_Beesley, Contributor
Published: May 2, 2013 Updated: September 26, 2016

While the U.S. economy continues to see positive signs of growth, consumer spending in one sector is booming – tourism.

Consider the facts – spending by international travelers to and within the U.S. increased 10.5 percent in 2012 (source: U.S Travel Association). Travel also continues to lead export growth, accounting for a 23 percent rise in U.S. exports. Home grown tourism is also experiencing a surge, with more and more Americans opting to take “staycations” – enjoying recreational and entertainment options closer to home – as opposed to hitting the roads and skies.

The forecast is good too. The Department of Commerce predicts that the U.S. can expect a 3.6 to 4.3 percent average annual growth in travel and tourism over the next four years.

To further spur tourism in the U.S., the federal government has set a goal of increasing American jobs by attracting and welcoming 100 million international visitors annually by the end of 2021, bringing an estimated $250 billion per year into the U.S. (read the National Tourism and Travel Strategy for more information).  

This all represents a unique opportunity for the U.S. tourist industry and the businesses that underpin it. So what can your small business do to take advantage of this uptick in tourism? Here are eight marketing and management tips to help you get ready for the 2013 tourist season!

1. Make it Easy for Tourists to Come Back to Their Favorite Spots

Start with a plan to reach your low hanging fruit – repeat visitors. The best way to do this is to stay in touch with them all year round with special offers, email marketing and social media updates. Let them know what plans you have for the tourist season this year, any upgrades you’ve made to your business and so on. If the summer is your peak season, then fall, winter and even early spring should be your busiest marketing seasons.  

These articles offer some useful tips for staying in touch with customers:

2. Staycationers –  How to Attract These Lucrative Tourists

Just as you want to reach out to travelers and tourists from out of town, don’t forget to focus some of your marketing and advertising efforts closer to home. Be persuasive in your benefit statements. For example:

  • Explain what differentiates you – Are you family/pet friendly? Do you stock/grow local products? How easy is it to get to you?  Do repeat visitors receive any special discounts?
  • Source local – Even if you don’t grow or produce your own products, look for ways to integrate local produce into your business so that customers get a real flavor of what your community offers and the dollars stay local. Ask fellow businesses to reciprocate too.
  • Team up with complementary businesses to cross-promote and market your businesses – with something for everyone, tourists might be more likely to make the trip to your community and stay for a while! Get some tips for doing this in this blog from Rieva Lesonsky:  Forget Competition it’s Time for Co-Opetition.
  • Cash in on what your region has to offer – Is your region known for its wine or green credentials? Are there certain certifications that you can seek out to help promote your business?
  • Develop messages and advertising that targets larger groups – Can you handle bus tours or school field trips? Any incentives or package deals for larger groups or families?
  • Remind visitors that they will save money on gas, lodging, airfare and even time by vacationing near home.
  • Get Involved in Local Events/Festivals – Community fairs, farmers markets, sponsored sports events and concerts offer great opportunities to reach locals and tourists alike. Read guest blogger Rieva Lesonsky’s: Marketing Your Business with Events and Sponsoring or Hosting an Event – 6 Ways to Maximize your Return.

3. Use Location-Based Services to Attract Passersby

Don’t forget to take advantage of mobile technology. Promoting your small business to tourists who might be passing by using mobile apps isn’t that difficult. Groupon, Living Social, FourSquare and ThinkNear, among others, let you post information about your latest offers and limited-time deals to consumers within a certain distance of your business. You can also schedule deals so they get delivered during key hours. Keep your Google, Yelp, Yellow Pages and other online listings up to date too.

4. Take Your Business on the Road

If the best way to reach tourists is to take your business on the road, a concession stand or a booth at a craft or community fair is a great opportunity to bring in extra dollars and spread the word. These articles offer some advice:

5. Become a National Park Concession Business

Did you know there are opportunities for small businesses in national parks? Food, lodging, tours, whitewater rafting, boating, and many other recreational activities and amenities in more than 100 national parks are managed by private businesses under contract to the National Park Service. The services, provided by more than 600 concessioners, gross more than $1 billion every year and provide jobs for more than 25,000 people peak season. Every year, the Park Service issues prospectuses that detail these business opportunities; it also publishes notices at www.fedbizopps.gov. Many of these opportunities are smaller operations featuring unique recreation activities.

6. Need Short-Term Capital?

Seasonal businesses often have to pour capital into business improvements, marketing, inventory and staff long before they can expect to make a profit. If you don’t have sufficient cash flow or funds to prepare your business for the 2013 tourist season, you may want to consider a short-term loan or line of credit. SBA’s CAPLines Program, for example, provides advances against inventory needs and accounts receivable to help you weather seasonal sales. Read more and talk to your regional SBA Office for more information.

7. Plan Your Seasonal Work Force

If your business counts on the summer season or tourist trade, then start planning your seasonal workforce now. If you’re new to this process or have questions about hiring and compensating seasonal workers (for example, do you need to pay unemployment taxes for seasonal workers?), check out this blog – 5 Things to Know Now about Hiring Temporary or Seasonal Workers – for tips on hiring and working with seasonal workers within the law.

8. Partner with Local Business Groups

Reach out to your local Chamber of Commerce and local tourism associations or sector organizations that promote clusters of businesses in the same business sector such as hotels, restaurants, tour operators, B&B’s, camp grounds and so on. Many of these offer small businesses an opportunity to participate in their targeted and collective approach to seasonal marketing.

What are you going to do to boost your revenues this tourist season? Leave a comment below!

 

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Does Your Website or Online App Target Kids? Stricter COPPA Rules Go into Effect Soon

By Caron_Beesley, Contributor
Published: May 1, 2013 Updated: September 20, 2016

Do you target children or a youth demographic online? Perhaps you’ve developed or are marketing a mobile app that appeals to a youth market? If so, you should be aware of the Children’s Online Privacy Protection Act (COPPA) – a federal ruling enforced by the Federal Trade Commission (FTC) that gives parents control over what personal information websites can collect from children under the age of 13.

The COPPA Rule recently underwent an important overhaul of which online marketers need to be aware. The revised rule (which goes into effect in July 2013) put additional protections in place and streamlines other procedures that companies covered by the rule must follow.

If you run a website or mobile app designed for children or collect any kind of information from someone you know is under 13, here’s what you need to know about the revisions to COPPA:

Key COPPA principles remain unchanged

Most of the key requirements of COPPA haven’t changed. You must still give notice to parents and get their verifiable consent before collecting, using or disclosing personal information from children under 13. You must keep collected data secure and you can’t request that a child disclose more information than is reasonably necessary in exchange for participation in an activity.

Expansion of who is covered by COPPA – Plug-Ins and advertising come under the spotlight

If you operate a child-directed website and you allow outside services—including plug-ins (like YouTube videos) or advertising networks—to collect personal information from visitors, you will be required to comply with COPPA. This means you will need to provide notice and get parental consent for any user that identifies themselves as under 13, before the third party can collect the child’s information. In effect, as the site owner or operator, the FTC will now hold you liable for any personal information requests made by these third parties.

According to the FTC, this “close(s) a loophole that allowed kid-directed apps and websites to permit third parties to collect personal information from children through plug-ins without parental notice and consent.

In addition, plug-in or ad network operators who have actual knowledge that they are collecting personal information through a child-directed website or service must also comply with COPPA.

What constitutes personal information has changed

Under the new Rule, the types of personal information that cannot be collected from children under 13 (without parental consent) has expanded to include geolocation information, as well as photos, video and audio that contain a child’s image.

In addition, persistent identifiers (such as cookies, IP addresses and mobile IDs) that can be used to recognize a user over time and across different websites or online services are also now considered personal information and parental consent must be obtained before collecting this data. If, however, you use persistent identifiers solely to support the internal operations of your site or service, rather than for marketing purposes, parental consent is not required.

Certain information collection is now permitted in “support for internal operations”

COPPA now allows businesses to apply for formal approval to collect certain information if it is used in “support for internal operations.” Permitted activities include contextual advertising, frequency capping, site analysis and more. However, you can’t use the information collected to contact a specific person through behavioral advertising or to amass a profile on that person for any other purpose – without parental consent.

Changes to how businesses get parental consent

COPPA has always required that parental consent must be requested via email or postal mail. The new Rule requires that key information (such as how the information will be used) is displayed up front in that notice so that parents can get the details they need quickly.

The new Rule also offers more ways for businesses to get the “OK” from parents (for more details of what was previously acceptable read the Direct Notice to Parents section of the FTC’s How to Comply with COPPA). These include scans of parental consent forms, videoconferencing, use of a government-issued ID and more.

Stronger provisions to keep kids info secure and confidential

Before releasing information to service providers and third parties, site operators must take reasonable steps to make sure these companies are capable of maintaining the confidentiality, security and integrity of that information – with assurances that they’ll follow through. In addition, you are now only allowed to retain kids’ personal information for as long as is reasonably necessary, and must ensure that it is disposed of securely.

Safe harbor programs to get more oversight

COPPA previously allowed industry groups to create self-regulatory programs that governed member-compliance with COPPA. The new Rule strengthens the FTC’s oversight of these programs with new auditing capabilities.

More Information

For more information about all these changes, read the FTC’s December, 2012 press release and refer to the site’s Child Privacy Guide for more tips and insights.

It is highly recommended that you discuss any concerns you have about COPPA compliance with a lawyer. The new rules are complex and have consequences beyond the content that you create or originate on your business website of online service. In addition, you can also email your questions to CoppaHotLine@ftc.gov.

Check out these related article too:

 

About the Author:

Caron_Beesley
Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Getting Stiffed: What Can You Do?

By BarbaraWeltman, Guest Blogger
Published: April 25, 2013

In business, it’s inevitable that sooner or later you won’t get paid for the goods you shipped or services you performed. Or you may have lent money to an employee or your business, but won’t be repaid. Being passive about the whole thing doesn’t help. Learn what you can do to get your money!

Collections
If a customer or someone else owes you money, it’s up to you to diligently try to collect. Invoices aren’t like fine wine -- they don’t get better with age. The longer you wait to collect, the less likely it becomes that you will collect all or even some of what you’re owed.

Collection efforts include:

  • In-house efforts. You or someone in your firm should contact the non-payer. Maybe the invoice was misplaced. Maybe the person just needs more time to settle up. Maybe you can work out terms to help the person pay what’s owed.
  • Sue in small claims court. If the amount outstanding is below the small claims limit in your area, you can quickly and easily proceed against the non-payer. Usually, you don’t need an attorney and the small claims court process is relatively inexpensive. For example, say you are a photographer who took pictures at a wedding but have not been paid because the couple didn’t like them. As long as you fulfilled your contract to take a certain number of pictures and they aren’t blurry or otherwise “bad,” you’ll likely win your claim when you present your case to the judge.
  • Attorneys. When your efforts fail to produce results, you can have an attorney help you. The attorney can send a letter to the non-payer, asking for prompt payment and stating that nonpayment can lead to your pursuing the claim to the fullest extent of the law.
  • Collection agencies. Instead of using an attorney, you might turn to a collection agency. Doing this means you won’t ever see the full amount you’re owed (the agency typically takes a percentage of between 25% and 40% of what it collects). For instance, say you’re owed $1,000 and agree to pay the agency 25% of anything it collects. After some time, it collects $600. You’ll only receive $450 ($600 - 25% fee). But something is better than nothing and leaving collection to professionals frees your time for other business matters. Check with your *Better Business Bureau when engaging a collection agency to see that they are reputable.

Tax write-offs
If you can’t collect what you’re owed, you may be able to at least take a tax deduction for your loss. Business bad debts are deducted on your business return as an ordinary write-off. For example, say you weren’t paid for a shipment of goods. After all collection activities have been used and you know that the funds are uncollectible (e.g., you shipped them to a company that has since gone out of business), you can deduct your loss.

When you lend money and are not repaid, determine whether it’s a business bad debt or a non-business bad debt. Clearly, if your company lends money to an employee who cannot repay the loan (e.g., he’s gone bankrupt), it’s a business bad debt. It gets tricky when you lend money to your corporation that doesn’t repay:

  • If you lent the money to protect your job, it’s a business bad debt and you can deduct whatever is not repaid as an ordinary business loss.
  • If you lent the money to protect your investment, it’s a nonbusiness bad debt. This is deductible only if the debt is wholly worthless. It is treated as a short-term capital loss (regardless of how long the debt was outstanding).

Caution: If you are on the cash method of accounting and are not paid for your services, too bad. Unfortunately, you can’t take a tax deduction for your lost time and effect.

Tax rules on deducting bad debts are in IRS Publication 535.

Lessons for the future
If collecting from tardy or delinquent customers has been a painful experience, don’t let it happen again. Change your payment arrangements so you are no longer in the position of having to collect after you’ve completed your job (e.g., shipped the goods; fulfilled the contract for services).

Get paid up front. This can be done by offering customers a wide range of payment options, such as cash, check, credit/debit card, or electronic payment (e.g., PayPal; AmazonPayments). Accept electronic payments on the spot using attachments from Square, Intuit, and others that turn your mobile devices into processors.

If you absolutely, positively must invoice, then adopt smart invoicing policies. Send them electronically and follow up if payment isn’t received promptly.

*denotes a non-government website
 

About the Author:

BarbaraWeltman
Barbara Weltman

Guest Blogger

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BigIdeas4SB or at www.BigIdeasforSmallBusiness.com

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