How Much Savings Justify a Supplier Change?

A member in a recent Chief Executive Boards International meeting was wrestling with a tough question. "I have a good supplier, but someone else has proposed a cost savings. How much savings would make it worth the change?"

Another member really simplified the question. He said, "I use a 20% rule. If a new supplier doesn't come in the door at 20% under an incumbent, I don't even waste the time. New suppliers are a big risk, and there are always unanticipated switching costs. If I don't think I'm going to save at least 20%, I don't look any further."

"Even then", he added, "it's not automatic, even if they present a substantial savings. We've learned over time that switching suppliers for cost savings has lots of unintended consequences. It has to be really serious money for us to make a switch."

If you have rules of thumb you use for supplier changes, please click "Comments" below and share them with others.

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

Natual Consequences Employee Misbehavior

I've heard this question a hundred times. "What do we do about someone who's a good employee, but regularly misbehaves, like not turning in complete documentation with an order? They never fill the form out completely. What's the penalty for that?"

Of course you could try fining them - dock their pay. You might run into wage and hour problems with that, and you'd probably be surprised at how high the penalty would have to be to get their attention.

Here's a brilliant consequence that a member brought to a Chief Executive Boards International meeting.

Call him into your office. He'll quickly figure out this is not trivial. Say, "Jack, it seems you've again turned in an order without the configuration form completed." Jack will give you his traditional litany of excuses. You say, "Well, Jack, we know if we try to process an order without the configuration form completed, it causes delays, mistakes and diving catches when we find out what the customer really wanted.

"So, Jack, you and I are going to fill out the form together." Jack will be stunned. This is important enough that you'll take the time to do it with him? Jack says, "I'll get the information together and get back to you." He's hoping you'll forget about it.

"No", you say, "Jack, I'm going to be waiting here while you go get the information you need to complete the configuration form. If you can't get it together by the end of the day, I'll be here waiting for you tomorrow." Now Jack gets it. This is important.

As you can imagine, this only has to happen to Jack a couple of times -- consistency is critically important -- the same thing happens to him the next time he turns in an incomplete order. He'll either get tired of being your new best friend or he'll get his orders documented before he turns them in.

This is a form of employee "tough love". Don't let them off the hook. Set up very uncomfortable consequences, whether monetary or not, for behaviors you want to change. Their behavior will change.  

If you have an example of consequences for employee misbehavior that have worked for you, please click on "Comments" below and share them with others.      

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

6 Essentials in Your Company's Heirarchy of Needs

Your company has 6 essential needs that are critical for success, in hierarchical order (one must be met before the next, and so forth). People have similar needs, as proposed by Abraham Maslow in his 1943 paper "A Theory of Human Motivation".

Let's first examine Maslow's view of human needs:

• Physiological needs -- Basic requirements for survival
• Safety needs -- Security, and confidence in the future
• Love/Belonging needs -- A sense of belonging and acceptance by others -- you are not alone
• Esteem needs -- Self-respect and the respect of others -- "I count for something"
• Self-Actualization needs -- Opportunity to achieve your full potential of creativity, contribution and influence

These needs are indeed hierachical -- the lower level needs are the prerequisites for the higher.  People who don't feel safe and don't feel they belong to a society are incapable of achieving either self-respect or self-actualization.

Companies have needs, as well. Interestingly, I believe those are also hierarchical.  Here's a model for your consideration:

Let's look at those needs from the bottom up:

• Operations -- The day-to-day running of the company. Getting orders, manufacturing, delivering services, billing, collecting. Ordinary stuff every company has to do to make money - but you have to do them well. 
• Stewardship -- Doing the right thing with the money. Reinvesting in fixed assets and working capital. Returning some distributions to owners/investors. Ensuring the collectability of Accounts Receivable.
• Strategy -- Plans to take the company to greater strength, market share, profitability and customer satisfaction
• Sustainability -- Plans for what happens to the company following the current owner/CEO's tenure. Will the company be sustainable when the current leadership has moved on?
• Shareholder Value -- Growing the value of the business for current and future shareholders.  More current earnings, more future value if sold or passed on to heirs. 
• CEO (Owner) Satisfaction -- At the end of the day, a happy CEO is a happy company. A surprising number of CEOs are not satisfied with their businesses. I believe that's generally because the hierarchical needs below this level haven't been met -- there's something wrong with Operations, Strategy, Sustainability, etc.

Have a look at the diagram below, and run a quick checklist on your company. How are you doing against the company's hierarchy of needs? What do you need to fix to achieve more satisfaction as a CEO?

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TerryWeaver@ChiefExecutiveBoards.com

5 Ways to Move up to $80,000 a year into Tax-Advantaged Investments

Most Americans and many business owners fail to take full advantage if the array of tax-advantaged investment choices available to them. Sure, people know about IRAs and 401(k)s, but few actually take full advantage of even those. Here's a checklist of tax-advantaged investment options available to most business owners. How many of these are you using?

1. 401(k) -- The 2013 maximum employee contribution is $17,000, with a "catch-up" provision of an additional $5,500 for those over 50 -- a total of $22,500 annually. Perhaps your contributions have been limited by "top heavy" provisions in your plan -- here's an article on some ideas to fix that.
   
   Additionally, your own contributions are eligible for a pretax company "match", which could be worth several thousand dollars more in tax-free (and payroll tax-free) investments. Consider also the Roth 401(k) option - instead of rolling up a future tax bill from tax deferral now, you can choose tax-free for life.
   
   Potential benefit - up to $25,000 in tax-advantaged savings ($50,000 for a working couple), including the company match.
      
2. Roth IRA -- Most business owners' higher income limits or eliminates their eligibility for a Roth IRA -- or does it?  If you (or your spouse) do not have a self-directed or rollover conventional (pretax) IRA, here's a strategy for converting up to $13,000 per year between you (if you're over 50) to a tax-free investment for not only your lifetime, but the lifetimes of your heirs, as well. It's now being referred to as the "Back Door Roth IRA": http://www.chiefexecutiveboards.com/briefings/briefing297.htm
   
   Potential benefit -- up to $13,000 per year, tax free for decades.
     
3. HSA Health Care Plans -- Many companies have chosen health care cost reduction strategies that include Health Savings Accounts (HSAs). This is just a "freebie" waiting for you to do the paperwork. By taking maximum advantage of these plans, you can avoid both State and Federal Income taxes on $6,450 of income for a family -- $7,450 if you're over 50. You can spend this tax free money on any health care expense, including deductibles, Dental, Orthodontia, Optometry, and a host of other costs not covered by your health insurance. And you can roll over that money for years, if you don't use it right away. HSA Bank and others offer long-term investment options just like an IRA.
       
   Potential benefit - $7,450 off the top of both Federal and State income.
    
4. 529 College Savings Plans -- Actually, they're educational savings plans - you can use the money for anyone's educational expenses, including yourself or your spouse. In most states, your contribution is deductible from your state tax return. That's an immediate ROI of the state tax rate (up to 7%) in year 1, and the investment growth and income is tax free, as long as it's eventually used for educational expenses.
   
   Some states limit that deduction. Ohio is particularly interesting - limiting the state tax deduction to $2,000 per year per beneficiary. Yes, that means you could set up accounts for all your kids, nieces, nephews and neighbor kids and take a $2,000 deduction for each. Later, you could re-name the beneficiaries of those accounts to anyone you want (you own the accounts). Peculiar, but that's the game Ohio set up.
     
   Potential Benefit -- Unlimited, depending on state tax deduction rules. Say, at least $10,000 per year in state tax deductions, practically.
       
5. Private Pension Plans -- The strategies above allow you to move a lot of money into tax-advantaged plans every year. Potentially:
    
   • $50,000 ($25,000 each) for yourself and your spouse to a 401(k), including the company match.
   • $13,000 ($6,500 each) into a Roth IRA.
   • $7,450 into an HSA.
   • At least $10,000 into some combination of 529 plans (unlimited state tax deduction in some states).
     .
   So, if $80,000 or so a year isn't enough, you can set up a Private Pension Plan within your company that greatly favors yourself. Now we're talking some meaningful expense, but if your income warrants it, Google "Private Pension Plan" and read up on the idea

One strategy you didn't see mentioned above?   Cash-Value Insurance or Annuities -- Ask anyone who's seen the back side of one of these products (tried to get the money back out), and they'll tell you these are very expensive, illiquid products constructed for the benefit of the company and the agent selling the products.   If you need life insurance, buy term insurance. 

Building wealth is not only figuring out how to earn a lot of money. It's about figuring out how to keep most of it out of the hands of tax collectors - legally. If you have some additional tax-advantaged investment strategies, click on "Comments" below and share them with others.


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CEO

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TerryWeaver@ChiefExecutiveBoards.com

2 Huge Reasons to Build an Investment Portfolio outside Your Business

It made my day in a recent Chief Executive Boards International meeting when a younger member said, "I'd like to know a lot more about investing outside my business."   I could have hugged the guy.  He's on exactly the right track, and has decades to apply that knowledge to growing his own wealth. 

I'm greatly concerned about how few business owners (CEBI members included) have most of their net worth tied up in their businesses and almost no wealth accumulated in their own portfolios. 

There are 2 huge problems with that:    

• Risk -- Business owners as a group are unrealistic about the risks their companies face - particularly in the case of circumstances beyond their control.   Your company is only one stroke, one heartbeat, one employee harassment suit or one product liability lawsuit away from extinction. These are just a few of the events that have wiped out the value of closely-held companies.   In most companies, if the owner is suddenly and irrevocably out of the picture, the value of the company plummets, leaving the caregivers or heirs dependent entirely on assets accumulated outside the business.
  
  No sane investor would put all his money in a single publicly-traded company's stock.  It's just as risky to have all your assets tied up in your own company's stock.  
     
  As a CPA friend of mine is fond of saying, "You set up a Corporation for a reason - to protect your assets and your family from bad things that might happen in or to your business.  Why don't you use that protection, by getting some assets outside that corporate veil?"  
    
• Retirement -- By the time you're ready to leave your business, say, sometime in your 60's, you'll probably have another 25-30 years of life expectancy.  Robert Kiosaki's book, Cash Flow Quadrant makes a good point.  No matter how you've earned money during your work life -- whether as an Employee, a Self Employed person or a Business Owner, financial freedom is the domain of the Investor -- the quadrant where you don't have to work at all -- your money works for you.
     
  Now, think of how much time, study, practice and experience you've put into earning money through work. Realizing that by the time you're 60-70 years old you'll still need income for the next 20 or 30 years, what's your plan? It has to be income from successful investing, doesn't it? That's potentially 1/3 of your life. If it was worth all that time learning to earn it, isn't it worth some time learning to invest it?

So, it was really refreshing to hear a 30-something business owner talking about learning how to invest in other businesses, such as the stocks of major corporations, usually through mutual funds or exchange traded funds.  He has 30 years to learn how to do that, while he's continuing to learn how his business can provide more cash flow to fund that portfolio.   

My suggestion to him was an extraordinary resource I discovered a couple of years ago -- Money Magazine. This is one of the few real "how-to" laymen's guides to personal investing. Nothing flashy -- no hedge funds, derivatives, complicated or exotic strategies. Just simple, bread-and-butter saving and investing strategies that work and have worked (despite headlines to the contrary) for decades. Try it -- risk $15 on a year on this resource: http://www.amazon.com/Money-1-year-auto-renewal/dp/B002PXVZ40/ref=sr_1_1?ie=UTF8&qid=1296925222&sr=8-1

Perhaps your investment acumen is far above this "retail investor" guide. Consider giving your kids a subscription instead. You never know, they might read it and start saving and investing for their future retirement early -- the key to success in accumulating net worth.

And, finally, once you start accumulating substantial assets outside your company, find a fee-only investment advisor -- someone who doesn't sell any products or take any commissions -- who can help you make informed decisions about where and how to invest your portfolio.  
 
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TerryWeaver@ChiefExecutiveBoards.com

 

Measure Intentional Activities, not Outcome

I had just left a conversation with a volunteer group about attracting more members. We were talking about a more intentional, rather than accidental process of creating a prospect list.

Minutes later, I heard an NPR broadcast about how some pro basketball teams are tracking a new "non-official" statistic, "deflections". For those of you like me to whom this is a new term, a deflection is any time a player does something defensively to change the course of the basketball. It's a not-yet-official statistic that's not a turnover, not a rebound, assist or steal. It's just an indication of defensive engagement and pressure on the offense that may or may not result in an outcome.

The commentator said, "If a pro basketball team has 35 deflections in a game, they have a 95% chance of winning that game." Pretty good odds, and easy to explain to the players what you want them to do.

I was talking with a sales pro later at lunch, and related this to him. He said, "You know, I saw a sales person one time who finally stopped focusing on his sales revenue and just focused on activities that generate sales. Suddenly he found all kinds of sales opportunities beyond the core products he was trying so hard to sell.

Sometimes it's best to measure activities people can control, especially if they're known to drive the desired outcome. Number of appointment-setting calls. Number of new prospect appointments. Number of face-to-face demonstrations.

Of course, you want to make sure the activities you're measuring actually have a known connection to the outcome (in this case, orders). And you want to have some checks and balances in place to prevent padding the numbers with non-contributory activities.

Have a look at your metrics and see if you have enough focus on success-generating activities that lead to the ultimate outcome you want. Perhaps you're not getting the results you want because your team isn't doing enough of the things that eventually produce results.

 
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TerryWeaver@ChiefExecutiveBoards.com

Check Your Phone at the Door

Mobile phones, smart phones and tablets in the workplace have moved from convenience and luxury to productivity killers, security threats and liability creators. Companies are beginning to enact significant restrictions on use of smart phones at work, with one Chief Executive Boards International company deciding that employees' phones be kept in their lockers during work hours.

Why?  Well, the productivity, distraction and safety impacts are irrefutable. Employees aren't producing when they're making personal calls, checking personal email, web surfing, making or reading Facebook posts. Arguably, these distractions can cause process failures and, at the worst, accidents. An hour a day of lost productivity is conservative.  Mobile devices that bridge outside and corporate networks pose data security risks that are almost impossible to assess - a mobile device could become an open conduit to your network without the user's knowledge.

Beyond that, however, smart phones have the ability to record photographs, video or audio of workplace activities that could be a significant security or competitive threat. A disgruntled employee could easily find things to photograph or record that could later become a problem in an employment dispute. Confidential or trade secret information is at far greater risk if it can be photographed and electronically transmitted beyond your office or plant.

Think about it. Can your company afford an "anything goes" policy with respect to handheld devices? Would it be better to establish a policy where if someone needs to contact an employee, they do so through the switchboard, and employees leave their phones in their cars, lockers or purses? Perhaps you might want to establish a job grade cutoff for such a policy, if you need your managers to have phones where they can be reached throughout the building.

Here's an article on how some companies are coping with this new threat to productivity, confidenitality and data security: http://am22tech.com/s/22/Blogs/post/2011/08/03/SmartPhones-Are-Eating-the-Productivity-At-WorkPlace.aspx


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CEBI Exemplary Customer Service Award

The CEBI Exemplary Customer Service award goes to Suzanne Via, Area General Manager for Hyatt Place in North Carolina.

Every now and then, someone steps forward with impressive initiative, judgment and representation of a large company's brand. An extraordinary example of that happened last week in Charlotte, NC.

Pam and I were in a hotel in Charlotte, conducting a CEBI Leadership Workshop for business owners and senior managers. About 7:15 am the fire alarm went off. That's not something we haven't experienced in hotels before. What was different was that it not only didn't stop, but the hotel staff was knocking on doors, advising us to evacuate. Pulling on some clothes and picking up a couple of essential items, we went down a back fire exit. Coming around the side of the building, we got a front-row seat through a side exit door as 6 firefighters in full gear pulled open an electrical closet door and smoke billowed out.

Around the front of the building, guests were outside in the cold, many without jackets. The spectacle of 12 fire engines on the scene kept people from noticing the cold for awhile.  Noticing a Hyatt Place hotel next door, several of us went over to warm up in the lobby. That's where we met Suzanne. She had heard what happened, and her response was instinctive and perfect.

She welcomed all the refugees from next door to the Hyatt Place lobby, and announced "If you're from our neighboring hotel, we're putting out some coffee and some fruit that's complimentary. If you'd like to have breakfast with us, you can do that for $5.00". Just like that.

I'm pretty much guessing the operations manual didn't have a page for "hotel next door is on fire." Suzanne was empowered to do the right thing, and decided what that was on the fly. She bought a lot of brand equity that morning at the cost of a couple pots of coffee and some bananas. It got better. When Pam tried to pay for her breakfast, Suzanne said, "You just had oatmeal? Don't worry about it."

Hyatt Place is perhaps my favorite business travel brand. Their product is just right for the business traveler and their people are all top notch. Suzanne just took that impression to a new level.

Oh, yes, about the hotel fire. The Charlotte Fire Department located the overheating fan motor, extinguished the fire, and then made certain nothing else was involved. We were able to get back into our rooms, and started our workshop only 1 hour late. No one harmed and nothing damaged except the failed fan motor. Their performance was exemplary, as well, but what you would have expected, since the situation they were called for is what they train for every day.

Jim Collins talks about having the "right people on the bus." I hope that's the case for your company, as it is for Hyatt Place in North Carolina. 

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3 Ways to Accelerate Cash Collections

A member lamented in a recent Chief Executive Boards International meeting, "I have huge customers who hold onto my payments for 60 or 90 days. What can I do about that?" As always, other members had some good ideas. Here are some of those:

1. Become the squeaky wheel -- Your terms are net 30. You expect payment 30 days after you bill. So what's the matter with calling the person responsible for paying the bill (you will have to figure out who that person is) 15 days after the billing date to make sure he or she has received the bill and scheduled it for payment? At the same time, you can ask when that will be. If it's outside your 30-day terms, ask, "What can you do to move that date up?"
       
2. Become more squeaky -- If you don't receive payment at 30 days (or, say, 40 days), call again. Being firmly polite, you can ask again what the person can do to get your bill paid more promptly. Call weekly thereafter.  The member who uses this process says that the typical A/P clerk doesn't like getting these calls and after she figures out that you'll call every month she'll make sure your bill gets paid, whether others do or not. Again, the most important part of this strategy is polite persistence -- a businesslike, non-threatening call, simply asking for her help getting the bill paid more promptly.
       
3. Go to the top -- A business owner once told me he got so frustrated with a multi-billion dollar customer using him for a bank, he called the CEO and said, "Hello, my name is Mike and my small company supplies yours with IT services. My invoices wouldn't make the roundoff error in your cash accounts, but they're being held 90 days by the Accounts Payable department to conserve cash. I'm very happy to be an IT Services provider, but I have a problem with being used as a bank. My employees expect to be paid every two weeks, and I'm hoping you can do something to get my invoices paid in 30 days, per our contract terms." He said the results were amazing. When the CEO's assistant calls A/P and says, "Please make sure Mike's invoices get paid on time" it solves the problem. Again, politeness and a businesslike approach will usually work.

Here are a couple of other not-so-good ideas that were suggested and discussed:

1. Prompt Payment Discounts -- A discount of 2% for payment in 10 days sounds reasonable -- or does it? Let's do the math. Say the customer typically pays at 60 days, and your discount gets him to actually pay in 10-15 days (note that customers will regularly take the 10-day discount and then not pay within 10 days). So, you get the money 45 days early for which you paid 2% (think of it as borrowing the money back from the customer until when he would have normally paid you). What's the interest rate on that money? 365/45 times 2% equals 16%. That's why you have a bank and a line of credit. If you have big, creditworthy customers, your bank should be willing to loan you, say, 75% of your AR at decent interest rate of prime plus 0%, 1% or 2%. That's about a 5% rate right now, and you can go in and out of it only when you need it. If you haven't increased your line of credit recently, now would be a good time to do that.
      
2. Accounts Receivable Factoring -- One financial commentator called this the Crack Cocaine of Business Capital. It's easy to get on, and hard to get off.  This is a very expensive solution, suitable only for a last resort. In factoring, you discount all your invoices to the factor provider, they pay you and then they collect them. Their returns are handsome, ranging usually from 18% - 24%. Of course, that return represents your actual cost (as an interest rate).

If you have ways to accelerate cash collection that have worked for you, please click Comments below and share them with others.

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Total Cash Conversion Cycle Time

We were talking about time compression in a recent Chief Executive Boards International meeting, and a member gave a big-picture view of compressing cycle time when he described his idea of Total Cash Conversion Cycle Time. Briefly, cycle time is the entire duration (elapsed days) that it takes to complete a business process. Not the actual "do" time or process time, which may be in minutes or hours, but the total duration of the process from beginning to end.

This idea of a Total Cash Conversion Cycle Time is a big idea. There's a highly-technical accounting calculation called the Cash Conversion Cycle that takes into account the time between when you spend money and when you get it back. This is a bigger picture than that. What's the total number of elapsed days between the day you get an order and the day you get the cash?

Let's imagine the incremental pieces in your Total Cash Conversion Cycle Time:

Elapsed Days	Process
0	Order Received (by Sales or Order Entry)
	Order Entered
	All documentation received (specs, drawings, etc.)
	Release to Production received from customer (shop drawing approval, etc.)
	Tooling ordered, received and checked out or pulled from tool room
	Material Ordered or pulled from inventory
	Order released to production
	Manufacturing complete
	Shipped
	Billed
	Collected

Be honest -- print this page and write in the number of days you think elapse between the completion of each of these steps - the wait time plus the process time (add in other steps in your process that I omitted). Then go take a look and see how long it really takes. Follow the paperwork on an order through your business. Note how many days it sits still while nothing is happening to get you closer to collecting the money.

What if you just took one day out of each of those steps? Are there places where you could take 3 or 4 or 10 days out?   How much variability did you find?   Are there some types of orders where there's more time compression opportunity? 

If you find some big delays in your Cash Conversion Cycle Time and figure out how to fix them, please click Comments" below and share them with others.   By the way, you'll be surprised that when you reduce cycle time you'll also improve quality and reduce cost. 

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The Last Stage in Your Selling Process - Farming

What's the essential business process you have to own in order to grow your business?   A selling system.  A documented, explainable process that keeps your pipeline full of suspects, prospects, proposals and closed orders.   In my experience fewer than 25% of businesses have one. For the rest, each month's revenue is a surprise -- some ok, most below target.   

Here’s an overview of a selling system.   Last month, we explored Proposal and Closing – the process that should happen only after you're nearly sure an order is at hand (not in hopes you can persuade a prospect to buy, based on your stellar proposal).

Today we’re talking about a stage that happens after a prospect says "not now" -- Farming.  If a prospect doesn’t buy, forget him, right? Wrong.

Not everyone buys on the first pass through your selling system. That doesn’t mean they won’t ever buy. If your prospecting and qualification processes are working right, you’ll have a list of prospects who may have the prerequisites for a sale – money, authority, and need – sometime in the future. They may really want what you have and just can’t afford it. They may really like what you have and just don’t need it right now.

That’s where your farming process pays off. Most companies don’t have this critical piece of their selling system working well, which means they spend the time and money creating lead flow, then miss a big piece of the return on that lead generation investment.

Real farmers cultivate, then harvest. That’s you want to do with your qualified leads who didn’t buy yet. You need a cultivation process that keeps your message in front of a prospect. You have no idea when they might have either the money or the need, so this process needs to be frequent enough that they don’t forget you. Most businesses think that’s perhaps once a month. Twice a month probably isn’t too often. Quarterly is not often enough.

What you want is your brand and your message in front of the prospect, somehow. In today’s world, the simplest and cheapest is an Email broadcast, usually of something like an E-newsletter. The key to that piece is that it’s not promotional -- rather, that it's informative and brings them ideas they can use. They’ll get the commercial message part by themselves. Stories and case studies help bring your message through while meeting the “informative and useful” test. For example, “Here’s what we did for a customer who needed…..”

There are other ways of cultivating prospects. You can call them. You can visit them. Both of those have limitations of time, distance and cost. It’s hard to call or visit hundreds or thousands of prospects a month. You can also mail them. I have a friend who swears by a paper newsletter, sent once a month. He says it’s hard to take an email newsletter to the bathroom (and he’s right).

This doesn’t have to be that hard. I have a business coaching client who dipped his toe into this water several years ago with a quarterly E-newsletter. He’s now up to every other month. His newsletter has almost no original content. What he does is write a short “message from the founder”, usually 5-6 sentences. Then he creates “teaser” paragraphs that hyperlink to articles in industry journals, newsletters, blogs and magazines. His newsletter really qualifies as a digest – something a busy prospect in his target market can use to keep himself current, without reading 5-6 trade magazines a month.

You’ll be amazed at how this works. It has changed my business. We send out an email newsletter each month, and every single month a prospect responds with a renewed interest, says it’s now the right time, or, in some cases just emails and says, “I think it’s time I joined your organization.” Can’t beat that – fish jumping into your boat!

Chief Executive Boards International members are experimenting with other ways of keeping their message in front of prospects.   LinkedIn discussion groups, blogs and other Emarketing strategies can become ways your prospects regularly hear about you.

Examine your Farming process. Does it touch all your prospects, at least once a month? Don’t hesitate to contact me if you have more questions about your prospect farming process. It’s your most important strategy to get the full value you paid for from the leads you’ve generated.
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TerryWeaver@ChiefExecutiveBoards.com

Routine Will Set You Free

In the recent CEBI Strategic Planning Workshop, facilitator David Rippe said, "Routine will set you free." Counterintuitive, perhaps. What he meant was that any part of your business you can turn into a routine business process that operates pretty much on auto-pilot completely frees you from supervision, followup, decision-making and intervention. Those are four of the things that keep many business owners "too busy" to work on their businesses -- they're too busy as the "go-to" guy or being the decision-making bottleneck in their day-to-day operations. If you want more time away from the business, or more time to work on improving the business, your first priority should be business process definition.

It's like Groundhog Day, where Bill Murray is "having the worst day of his life ... over, and over".  Ever feel like that in your business?  It's self-inflicted -- a spiral you've set up for yourself due to your unwillingness to step back, get a team together and create business processes that have built-in checks, balances, metrics and exception reporting for when they (hopefully seldom) go off track.  Or perhaps it's your emotional attachment to being the "go-to-guy".   "My employees won't make decisions themselves", you say?  Probably of your own making, as well. See: Want Your Employees to be Independent Thinkers?

There's a huge difference between 5 years of experience and 1 year of experience repeated 5 times. 

Business processes that are well-defined, thorough, current and disciplined make day-to-day operations routine, reliable, productive and profitable.  A "boring operation" that consistently generates cash.  Isn't that what you want?  If you're serious about that, the answer is creating a Process Culture -- a company culture where the way the business works, the way sales are generated, the way orders are handled and the way problems are handled is a routine, well-defined, well-oiled machine.  Routine (well-documented and practiced business processes) will, indeed, set you free.

If you're ready to start this journey to freedom, here are 7 Steps Toward a Process Culture....
 

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

2 Final Selling Stages - Proposal and Closing

What's the essential business process you have to own in order to grow your business?   A selling system.  A documented, explainable process that keeps your pipeline full of suspects, prospects, proposals and closed orders.   In my experience fewer than 25% of businesses have one. For the rest, each month's revenue is a surprise -- some ok, most below target.   

Here’s an overview of a selling system.   Last month, we explored Qualification – sorting out the “best few” prospects from the many you might spend time chasing.

Today we’re talking about two final stages in a completed selling cycle – Proposal and Closing.

The fact is, the proposal itself may not be all that important, particularly if you don’t get there too early in the game. Inexperience creates many more proposals than necessary, as inexperienced sales people tend to think they propose first, then “sell” the prospect on the contents of the proposal.

Try turning that around. Do all the selling first. Make sure you’ve uncovered the pain or what’s missing in the prospect’s ambitions. Then make sure you’ve addressed all those wants in your conversations with your prospects. Agree in advance what he needs and, more importantly, what he wants.

Probe for any objections. Look hard for a reason the prospect might balk. Trial closes are important.  “Is the budget number I gave you within your budget?” “Is there anyone else who needs to OK this purchase?” “Are you ready to go ahead with this?”

“So, if I bring you a proposal that summarizes our conversations, are we set to do business?” That’s when you rev up your proposal machine. The proposal is just documentation of everything you’ve already agreed upon with the buyer, including his agreement to buy what you’re proposing.

The last step is closing, which is all but done – it’s a review of your proposal and a final approval. You start that conversation with a restatement of everything you’ve agreed upon, and use confirming probes to make sure you’re still in agreement. “That’s what we agreed upon, right?” Then you open up the proposal and read it to the prospect. Yes, read it to him. Put a copy in front of him and follow the text with your ballpoint pen, making sure he’s staying on track with you.

Every now and then, stop and confirm, “That’s what you wanted, right?” or “Sound OK?” When you get to the end, it’s pretty much time for him to act. Then, make it easy for him.  Don't say, "Sign here".  That's frightening.  Instead, say, "If you'll just OK this for me, we can get started."  Curiously enough, that’s when the balk may set in – when it’s time to actually give you the order.

Then it’s back to discovery.  Ask, “So, what’s getting in the way?” Review your points of agreement along the way – has anything changed?

The balk should be the exception – if you’ve done the selling first, then proposed on already-agreed-upon products, services, pricing, terms and conditions, you likely have an order.  More next month on Farming those prospects who aren't ready to buy right now. 
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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com

2013 Tax Rates - Another Kick of the Can

Chief Executive Boards International members have anxiously awaited resolution of the "Fiscal Cliff".  As some of us expected, Congress has kicked the can down the road another couple of months, slightly tinkering with a cumbersome and flawed tax code.   So, what is the result? 

I saw an email newsletter from Cincinnati-based CPAs Flynn and Company that's the most succinct article I've seen, particularly relative to small business.  Here's the article in its entirety:  

American Taxpayer Relief Act of 2012

On 1/2/13, President Obama signed the new legislation into effect which helped taxpayers by extending tax cuts that were set to expire, thereby preventing the fiscal cliff from occurring. The following is a summary of the important provisions of the new law.

INDIVIDUAL INCOME TAX PROVISIONS
Individual Income Tax Rates

• The American Taxpayer Relief Act of 2012 makes permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers, $425,000 for heads of households). Income above these levels will be taxed at a 39.6 % rate.

• The American Taxpayer Relief Act raises the top rate for capital gains and dividends to 20 percent, up from the Bush-era maximum 15 percent rate. That top rate will apply to the extent that a taxpayer's income exceeds the thresholds set for the 39.6 percent rate ($400,000 for single filers; $450,000 for joint filers and $425,000 for heads of households).

• All other taxpayers will continue to enjoy a capital gains and dividends tax at a maximum rate of 15 percent. A zero percent rate will also continue to apply to capital gains and dividends to the extent income falls below the top of the 15 percent income tax bracket—projected for 2013 to be $72,500 for joint filers and $36,250 for singles). Qualified dividends for all taxpayers continue to be taxed at capital gains rates, rather than ordinary income tax rates as prior to 2003.

• Installment payments received after 2012 are subject to the tax rates for the year of the payment, not the year of the sale. Thus, the capital gains portion of payments made in 2013 and later is now taxed at the 20 percent rate for higher-income taxpayers.

3.8% Tax on Net Investment Income

• Starting in 2013, under the Patient Protection and Affordable Care Act (PPACA), higher income taxpayers must also start paying a 3.8 percent additional tax on Net Investment Income (NII) to the extent certain threshold amounts of income are exceeded ($200,000 for single filers, $250,000 for joint returns and surviving spouses, $125,000 for married taxpayers filing separately). Those threshold amounts stand, despite higher thresholds now set for the 20 percent capital gain rate that previously had been proposed by President Obama to start at the same levels. The NII surtax thresholds are not affected by the American Taxpayer Relief Act. Starting in 2013, therefore, taxpayers within the NII surtax range must pay the additional 3.8 percent on capital gain, whether long-term or short-term. The effective top rate for net capital gains for many "higher-income" taxpayers thus becomes 23.8 percent for long term gain and 43.4 percent for short-term capital gains starting in 2013.

Alternative Minimum Tax

• The American Taxpayer Relief Act "patches" the AMT for 2012 and subsequent years by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the individuals regular tax and AMT. Additionally, the American Taxpayer Relief Act provides for an annual inflation adjustment to the exemption amounts for years beginning after 2012.

New Limitations

• The American Taxpayer Relief Act officially revives the "Pease" limitation on itemized deductions, which was eliminated by EGTRRA as extended by the 2010 Tax Relief Act. However, higher "applicable threshold" levels apply under the new law:
  o  $300,000 for married couples and surviving spouses;
  o  $275,000 for heads of households;
  o  $250,000 for unmarried taxpayers; and
  o  $150,000 for married taxpayers filing separately.

The Pease limitation reduces the total amount of a higher-income taxpayer's otherwise allowable itemized deductions by three percent of the amount by which the taxpayer's adjusted gross income exceeds an applicable threshold. However, the amount of itemized deductions is not reduced by more than 80 percent. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded.

• The American Taxpayer Relief Act also officially revives the personal exemption phase-out rules, but at applicable income threshold levels slightly higher than in the past:
  o  $300,000 for married couples and surviving spouses;
  o  $275,000 for heads of households;
  o  $250,000 for unmarried taxpayers; and
  o  $150,000 for married taxpayers filing separately.

Under the phase-out, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer's adjusted gross income exceeds the applicable threshold level.

Child Credits

• The American Taxpayer Relief Act extends permanently the $1,000 child tax credit. Certain enhancements to the credit under Bush-era legislation and subsequent legislation are also made permanent.

• The American Taxpayer Relief Act extends permanently Bush-era enhancements to the child and dependent care credit. The current 35 percent credit rate is made permanent along with the $3,000 cap on expenses for one qualifying individual and the $6,000 cap on expenses for two or more qualifying individuals.

Education

• The American Taxpayer Relief Act extends through 2017 the American Opportunity Tax Credit (AOTC). The AOTC is an enhanced, but temporary, version of the permanent HOPE education tax credit.
• The AOTC rewards qualified taxpayers with a tax credit of 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a total maximum credit of $2,500 per eligible student. Additionally, the AOTC applies to the first four years of a student's post-secondary education.
• The American Taxpayer Relief Act makes permanent or extends a number of enhancements to tax incentives designed to promote education. Many of these enhancements were made in Bush-era legislation, extended by subsequent legislation and are scheduled to expire after 2012. Some enhancements, notably the American Opportunity Tax Credit, had been made in President Obama's first term.
• Deduction for Qualified Tuition and Related Expenses-The American Taxpayer Relief Act extends until December 31, 2013 the above-the-line deduction for qualified tuition and related expenses. The bill also extends the deduction retroactively for the 2012 tax year.
• Student Loan Interest Deduction- The American Taxpayer Relief Act also expands the modified adjusted gross income range for phase-out of the deduction permanently and repeals the restriction that makes voluntary payments of interest nondeductible permanently.
• Employer-Provided Education Assistance-The American Taxpayer Relief Act extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250.

More Individual Tax Extenders

• Teachers' Classroom Expense Deduction-The American Taxpayer Relief Act extends through 2013 the teacher's classroom expense deduction. The deduction, which expired after 2011, allows primary and secondary education professionals to deduct (above-the-line) qualified expenses up to $250 paid out-of-pocket during the year.
• Exclusion of Cancellation of Indebtedness on Principal Residence-Cancellation of indebtedness income is includible in income, unless a particular exclusion applies. This provision excludes from income cancellation of mortgage debt on a principal residence of up $2 million. The American Taxpayer Relief Act extends the provision for one year, through 2013.
• Mortgage Insurance Premiums-This provision treats mortgage insurance premiums as deductible interest that is qualified residence interest. The American Taxpayer Relief Act extends this provision through December 31, 2013. The provision originally expired after 2011.
• IRA Distributions to Charity-The American Tax Relief Act extends for two years, through December 31, 2013, the provision allowing tax-free distributions from individual retirement accounts to public charities, by individuals age 701/2 or older, up to a maximum of $100,000 per taxpayer per year. The Act provides special transition rules. One rule allows taxpayers to recharacterize distributions made in January 2013 as made on December 31, 2012. The other rule permits taxpayers to treat a distribution from the IRA to the taxpayer made in December 2012 as a charitable distribution, if transferred to charity before February 1, 2013.

BUSINESS TAX PROVISIONS

Code Section 179 Expensing and Bonus Depreciation

• Small Business Expensing-The American Taxpayer Relief Act extends through 2013 enhanced Code Section 179 small business expensing. The dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit. The rule allowing off-the shelf computer software is also extended.
• The American Taxpayer Relief Act extends 50 percent bonus depreciation through 2013. Some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014.
• Bonus depreciation also relates to the vehicle depreciation dollar limits under Code Section 280F which imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile in service within a business, and for each succeeding year.  

Research Tax Credit

• The American Taxpayer Relief Act extends through 2013 the Code Section 41 research tax credit, which expired after 2011. The incentive rewards taxpayers that engage in qualified research activities with a tax credit.
• Commonly called the research or research and development credit, the incremental research credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The credit applies to excess of qualified research expenditures for the tax year over the average annual qualified research expenditures measured over the four preceding years.

FEDERAL ESTATE AND GIFT TAX PROVISIONS

• The American Taxpayer Relief Act permanently provides for a maximum federal estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion for estates of decedents dying after December 31, 2012.
• The maximum estate tax rate for estates of decedents dying after December 31, 2010 and before January 1, 2013 is 35 percent with a $5 million exclusion (indexed for inflation for 2012 at $5.12 million). Effective January 1, 2013, the maximum federal estate tax rate was scheduled to revert to 55 percent with an applicable exclusion amount of $1 million (not indexed for inflation), its levels before enactment of estate tax reform in 2001 and subsequent legislation.
• The American Taxpayer Relief Act makes permanent "portability" between spouses. Prior to the permanent extension, portability was only available to the estates of decedents dying after December 31, 2010 and before January 1, 2013.

Portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent's unused exclusion (the deceased spousal unused exclusion amount (DSUE)) to the surviving spouse's own transfers during life and at death.

• The American Taxpayer Relief Act provides a 40 percent tax rate and a unified estate and gift tax exemption of $5 million (inflation adjusted) for gifts made after 2012.
• The 2010 Tax Relief Act provided that for gifts made after December 31, 2010, the gift tax was reunified with the estate tax, with a tax rate through 2012 of 35 percent and an applicable lifetime unified exclusion amount of $5 million (adjusted annually for inflation).



Thanks to Flynn and Co. for this well-written and timely guest article. 

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Terry Weaver

CEO

Chief Executive Boards International
http://www.chiefexecutiveboards.com/

TerryWeaver@ChiefExecutiveBoards.com