Sunday, April 21, 2013

Performing Market Research is Key to the Development of a New Product or Invention

imageThis article was written by John Rau, SCORE Orange County Business Mentor

The major focus of market research is to “do your homework” before moving forward with your idea for a new product or invention. Generally speaking, you wouldn’t buy a car, a house or other products without doing some basic research; therefore, you should approach the development of your idea or invention in the same manner. However, to accomplish this you need a plan that addresses what you are looking for.

You should start out with an initial market research plan that “gets you going”. It should be flexible as the plan may change over time depending on the results of your search. To develop such a plan, basic suggested steps are as follows:

Step 1 Identify and list what types of information/data you need, that is, the questions you need to get answers to. For example, what like or similar products (if any) are already in the marketplace and what are the characteristics of these like or similar products in terms of their features, price and who manufactures them.

Step 2 For each item listed in Step 1, identify the potential sources of information/data such as trade associations, published reports, etc. A “matrix type of approach” might be helpful here where you list as rows the specific types of information/data that you need and list as column headings the potential source. Then place an “X” in the appropriate cell. The advantage of this approach is that it will reveal for you the fact that some sources may meet more than one of your information/data needs. For example, trade association publications typically provide sales trends and information regarding companies involved in your market area and published market research reports typically provide market assessments, past and future, as well as a discussion of potential competitors. One column heading should be “Visit Stores and Walk the Aisles” whereby doing so you can get some idea as to what like or similar products may already be in the market place. Another similar and related column heading would be “Trade Shows” where by attending and again “walking the aisles” you can get further insight as to what like or similar products might be “out there”. (Note: One should be careful here in the sense that just because you didn’t find any like or similar products when you “walked the aisles”, that doesn’t necessarily mean that there aren’t any. You just may not have found them!)

Step 3 For each potential information/data source listed, identify how to “access” it. Going to stores and trade shows is obvious, but you may need librarian type assistance as to how to find secondary sources of information. Key word or phrase research on the internet is always worth doing. Never rely solely (if ever) on the “singing Sirens” associated with the “dial 1-800” television company advertisements that claim to have “manufacturers waiting and ready to buy your idea and to make you a multi-millionaire” as a source of market information.

Step 4 Develop a timetable/master schedule outlining the time-phased steps for implementing your market research plan. Build in check points and milestones to enable you to assess where you are and, in particular, whether or not it makes any sense to go any further. At some point in time, you may find that you already have enough information/data to make a meaningful decision as to how to proceed.

Step 5 Implement your plan in the sense of gathering the information/data that you have identified as needed in order for you to proceed with your invention idea.

Step 6 Analyze the information/data obtained to assess whether or not you have been able to gather all that you need. If not, then identify the “holes” and go back and fill them.

Step 7 Based on the results obtained in Step 6, make a decision as to moving forward with your invention or moving on to another idea.

I strongly recommend that inventors always implement some type of market research plan as outlined in the above 7-step process at least initially (perhaps not to the level of detail described) before moving forward and filing for a patent. The obvious rationale is that it makes no sense to pay an attorney and filing fees if your initial research indicates that your idea or invention doesn’t have a reasonable chance of making money.

We're All in the Customer Service Business

imageThis article was written by Harvey Mackay, from Minneapolis Star-Tribune, March 3, 2013, reprinted by permission

When I went into business many years ago, I told people I owned an envelope company. I had business cards printed that identified me as an “envelope salesman.” I described myself as an entrepreneur.

All of those facts are still true, but incomplete. What I and our company really do is provide customer service.

Well sure, Harvey, you say. But isn’t that just a part of the whole operation?

Absolutely, positively, irrefutably, NO. I am in the service business, regardless of the product I make and sell. If my service is lacking, my business will be sent packing.

To validate my thinking, I recently visited with John Tschohl, president of the Service Quality Institute. John has spent 33 years focused on customer service. He has written hundreds of articles, as well as seven books on the topic. You’ve probably heard him interviewed on television or radio. He has been called the “guru of customer service” by USA Today and Time and Entrepreneur magazines.

Even the most successful companies are in constant competition for business. What sets them apart often boils down to one factor: outstanding customer service. John offered up some stellar advice for creating a service culture, no matter what business you’re in.

First, you’ve got to understand you’re in the service business. “Most companies think they are in manufacturing and retail; airlines don’t know they are in the service business,” he said. “Southwest Airlines is successful because they understand they’re a customer service company — they just happen to be an airline.”

Second, you have to look at all the policies, procedures and systems you have in place “that make life miserable for customers,” John said. “You could have the nicest people in the world, but you could have stupid hours, stupid rules, stupid procedures, that just burn the customer.” When you make it that difficult for customers to patronize you, they find someone else who is more accommodating.

Third, you have to have empowerment. “Every single person has to be able to make fast power decisions on the spot, and it better be in favor of the customer,” John said.

Fourth, you have to be more careful about whom you hire. “The service leaders hire one person out of 50 interviewed, sometimes one out of 100, but they’re very, very, very careful,” he said. “Look for the cream, the A players, instead of bringing on B and C players.”

Fifth, educate and train the entire staff on the art of customer service with something new and fresh every four to six months. “Let’s say you want to create the service culture. No matter if you have a hundred or a thousand or a hundred thousand employees, you better have something new and fresh, so it’s constantly in front of them,” John said. “So when they wake up every day and they go to work, they say, ‘Fantastic, I’m taking care of customers!’ ”

Finally, measure the results financially so that you know the impact it’s making on revenue, sales, profit and market share.

Everything you do, according to John, should be built around the concept of creating an incredible customer experience.

Perhaps the simplest way of creating a service culture is a variation of the golden rule: Treat your customers as you wish to be treated.

Make your customers excited that you’re in business. Make them grateful that they have the opportunity to buy your services or products. Make them feel like each one is your most important client. Make your service so outstanding that they wouldn’t think of doing business with anyone else.

And then find a way to make your service even better!

Mackay’s Moral: Customer service is not a department; it’s everyone’s job.

A Few Ways You Can Maintain a Healthy Brain at Work

This article was written by David Rock, Fortune Magazine, March 2013, reprinted by permission

When cars first became popular 100 years ago, there were no road rules or speed limits to begin with. Inspired by the freedom of their speedy new toys, drivers zoomed around as fast as they could. Crashes were a constant.

Today's speedy new toys, the smartphone and tablet, help people work when, where, and how they want. Excited by their newfound freedom, people are staying connected 24/7, working as fast as they can. The crashes this time are less obvious but still producing pain.

A creative team that used to debrief with their client by video once a week from the office is now on video daily from their tablets. A software project that took six people a few months to complete is now broken into hundreds of parts for micro developers to finish in a week. While these ideas may sound enticing, there are implications to moving this fast, as HP (HPQ) discovered with tablets and Apple (AAPL) with maps.

Traveling at the speed of confusion

Perhaps the biggest implication of our new speed is what this is doing to our lives, and in particular to our brains. Recently, I was in the boardroom of a government organization outside the U.S. that was in charge of regulating what should be a slow-moving industry. They were decades old, with around 10,000 employees and mountains of money. Their biggest challenge? "Our people are so overwhelmed, no one has any time to think, it's all too much," their executives explained.

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The fire hose of information was driving folks more than a little crazy. This was a wake-up call for me. I often hear firms, including my own, fantasizing how much better life would be once they had years to get organized, better systems, the right number of employees, or plenty of capital. Yet here was a firm with all that and more, with the same chaos I see at startups.

Ironically, the biggest casualty of everyone being so connected is productivity. No one is getting much done at the office. One survey of 6,000 workers by the NeuroLeadership Institute found only 10% of people do their best thinking at work. "I have to go home and work at night to get anything done" is a phrase I hear all too often. Working nights and weekends leads to less time with families and friends and even less sleep, with 30% of Americans not getting the sleep they need today.

We won't let people work 20-hour factory shifts anymore, but we're okay to let them respond to emails 24/7. We organize workplaces to minimize physical injuries, yet we expect people to process huge volumes of data for hours on end. We mandate that people have vacations, yet more people are connected on vacation than ever. We are not respecting the needs of the brain largely because they are not obvious. Maybe it is time we made them more so.

In a recent edition of the NeuroLeadership Journal, UCLA psychiatrist Dan Siegel and I, along with Jessica Payne and Stephen Poelmans, outlined the deeper science behind the "Healthy Mind Platter" that Siegel and I launched in 2011. The "platter" outlines seven types of mental activities the brain needs for optimal healthy functioning.

Shutting down

One activity we all need is sufficient down time, when the brain is refreshed through being non-goal focused. Like other organs, our neural circuits benefit from a period of recovery after being stretched. Down time is also a critical component for complex problem solving. The incessant beeping of mobile devices raises our ambient neural activity too high to notice the quieter, non-conscious brain providing a solution to everyday (or really big) problems. With the "buzz" always on, we drown out the so-called eureka moments in the morning shower, on the walk to work, or the drive home. We should be making it okay for people to disconnect for blocks of time. If folks are not good at switching off (just as we are not good at driving at sensible speeds), perhaps we need to install some limits here. Volkswagen in Germany has started switching off their Blackberry email servers for 12 hours a day to let people rest. Other firms are experimenting with similar ideas, including minimizing or even banning internal emails.

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For real down time, people need vacations where they fully switch off. This may require changing how we think about annual leave. Instead of expecting people to take long vacations, we can encourage a shorter annual break, with an extra-long weekend each month to enable recovery. Four days offline can be truly restful. Whereas a two-week break can be two weeks of hellish preparation, two weeks of rest, followed by two stressful weeks digging out from under 2,000 emails. Maybe we need a rule that requires total down time every few months for a minimum of a few days.


Another ingredient of the "Healthy Mind Platter" is focus time. This is when we focus intensely on a single task, making deeper connections across the brain. Focus time is important for long-term memory as well as overall brain health. We need to design workspaces where people can focus, totally undisturbed, for blocks of time as needed.

My research shows that people have one to two peak performing hours a day at best. What if those hours involve being bombarded with constant distractions? As well as having fewer insights and not being able to go deeply into an idea, the task switching exhausts our brains. Recently, I was pleased to notice some private, quiet working rooms at a large company's offices, before I noticed a sign saying "for conference calls only." As if talking to others is more important than focusing. Do we need a rule to make being able to focus at work a basic workplace right, like physical safety?

Two other critical ingredients of the "Healthy Mind Platter" are connecting time, when we be social with others, and playtime, where we make novel connections in the brain. Having connecting time turns out to be more important to our well-being than even maintaining a good diet. By helping people get their work done at work, people can have more social time and playtime outside work, not to mention get more sleep.

We have some fast and shiny new machines that are speeding up everything about how we work. Travelling at this new speed has dangers that may not be obvious at first. Maybe now is the time to build in some limits and boundaries for our hyper-connected lives, to reduce the number of accidents along our information superhighways.

Growth Noted in Orange County Business For Sale Deals, But Activity Still Lags Behind

This article was written by Peter Siegle, from his blog, April 3, 2013 reprinted by permission

The 434 deals for Orange County’s small and mid-sized business for sale offerings during the three months of 2013 represents the highest first quarter volume of business transfers for the county in five years. And the statewide total was 4,006 sales during the quarter, also a five-year record. But the figures still lag far behind pre-recession totals, according to business transfer figures collected from California Government records and other sources and reported by the BizBen Index.

"While the increase in the number of small business sales in the county and the state is a positive sign, it’s a mistake to believe we’re about to experience full recovery of the marketplace where California businesses are bought and sold. In other words, don’t expect activity in this market soon will return to ‘normal’," said Peter Siegel, MBA, Founder and President of, parent of the BizBen Index. "The combination of more baby boomer owners trying to retire, and an increase in the numbers of people trying to buy businesses as an alternative to the disappointing job market, should result in substantial increases in transactions. But California's small business buyers and sellers are just like participants in most other economic sectors who are trying to succeed in the  ‘New Economy.’ It’s an economy in which many of our familiar methods of achieving our objectives are not as effective as they used to be.

Behind by 29%

Siegel noted that the first quarter figure of sold California businesses is up almost ten percent from the 3,652 transactions completed during the first three months of 2012. "But look at where we are, with four thousand deals, compared to the total of 5,643 transactions successfully closed during the first quarter of 2008! We still are behind where we were five years ago by 29%.
"This suggests that over the past five years, 29% of the growing population of baby boomer owners who wanted to sell their businesses have been unable to do so. And 29% of the increasing number of Californians unable to find secure and suitable employment--people who may have been able to take over those businesses--still are working for someone else or are among the 9.6% of the state’s workers who are unemployed."

Orange County Results

The BizBen Index reported 54 Anaheim business sales escrows were completed in the first quarter this year, and there were 39 transactions in Santa Ana, 35 deals in Irvine and 31 in Huntington Beach.  Year to date totals for Orange County, found at are as follows:

Anaheim: 54, Brea: 11, Buena Park: 17, Costa Mesa: 22, Dana Point: 3, Fullerton: 35, Garden Grove: 27, Huntington Beach: 31, Irvine: 35, La Habra: 14, Laguna Beach: 10, Lake Forest: 13, Mission Viejo: 8, Newport Beach: 14, Orange: 20, Placentia: 3, San Clemente: 16, Santa Ana: 39, Tustin: 15, Westminster: 13, Aliso Viejo: 1, Balboa: 1, Cypress: 5, Fountain Valley: 4, La Palma: 4, Laguna Hills: 1, Laguna Niguel: 4, Stanton: 4, Yorba Linda: 3, Foothill Ranch: 1, Rancho Santa Margarita: 3, San Juan Capistrano: 3

Overcoming Problems

"The good news is that more and more entrepreneurs are learning how to overcome some of the problems that have stalled business sales," said Siegel. "Smart buyers are dealing with what has been one of the major issues—access to capital needed to complete deals—by leveraging the rising value of their homes. Either they convert growing home equity directly into cash or use it as security to support bank, or seller ‘carry back’ loans.

"And a number of buyers are learning to draw on their retirement accounts for purchase funds or working capital without triggering a taxable event. But this is not a DYI project. The rollover of funds from a tax deferred account and used to buy a business needs to be done correctly in order to avoid taxes and penalties."

More details about this and many other strategies helpful in buying businesses in this challenging market are covered in Siegel’s just-released ebook, "Buying a California Business in the New Economy." It offers advice for buyers determined to find and buy a good business, and seeking useful information and ideas to help achieve that goal.

BizBen Index Sales Stats

For the just completed month, California sales total by county, found at, are:

Alameda: 101, Amador: 1, Butte: 3, Contra Costa: 26, El Dorado: 18, Fresno: 47, Glenn: 4, Humboldt: 2, Kern: 23, Lake: 3, Los Angeles: 389, Marin: 1, Mendocino: 5, Merced: 12, Monterey: 9, Nevada: 5, Orange: 177, Placer: 12, Riverside: 84, Sacramento: 33, San Benito: 1, San Bernardino: 99, San Diego: 157, San Francisco: 96, San Joaquin: 16, San Luis Obispo: 37, San Mateo: 34, Santa Barbara: 12, Santa Clara: 61, Shasta: 7, Solano: 14, Sonoma: 18, Stanislaus: 28, Sutter: 13, Tulare: 10, Ventura: 18, Yolo: 4.

Sales statistics by city and county throughout the state for the past four years are accessed at:

Keeping Your Business Safe From Fraud

clip_image002This article was written by Mike Capsuto, SCORE Orange County Business Mentor

Fraud is the crime of obtaining money or some other benefit by deliberate deception. Fraud ranges from corruption, misappropriation of company assets, to falsifying financial statements.

Small businesses are particularly vulnerable to fraud. Management's primary focus on sales and profits leaves them with little time for being involved in day to day operations. Furthermore, most small businesses are developed around a concept of a "trusted family" of employees. Placing trusted employees in positions without proper monitoring does not seem to be an unreasonable staffing approach to owners of a small businesses.

According to the Association of Certified Fraud Examiners (ACFE) 2012 Report to the Nations, of the 1,388 cases studied, small businesses had the highest reported frequency of fraud at 31.8%. Compare this to businesses with 100 to 999 employees, 19.5%; 1,000 to 9,999 employees; 28.1%; and 10,000 plus employees, 20.6 %. Estimated median loss from fraud for small businesses with less than 100 employees was $147,000. The median time before fraud was discovered was 18 months.

The frequency of fraud for small businesses is likely higher. Many incidents are not reported. Common reasons are: the individual involved was a relative, a long time “trusted” employee, an owner, the fear of bad publicity, or lack of time to pursue the perpetrator.

The following are the most common fraud schemes according to the ACFE report along with examples. The percentage is the frequency of reported cases in each of the categories committed in businesses of less than 100 employees.

1. Billing (32.2%):

  •   Employee creates a fictitious company and bills employer for nonexistent services.

2. Corruption (27.9%): Corruption is further categorized:

  • Conflict of Interest: An employee owns an undisclosed interest in a supplier. The employee negotiates a contract between his employer and the supplier, purchasing materials at an inflated price.
  • Bribery: An employee processes a supplier's invoices with inflated prices. In return the employee receives a percentage of the price as a kickback.
  • Illegal Gratuities: An official negotiates an agreement with a contractor, and in appreciation the contractor provides the official with an expensive gift such as a free vacation.
  • Extortion: An employee refuses to purchase goods or services from a vendor unless the vendor hires one of the employee’s relatives.

3. Check Tampering (22.4%):

  • Employee steals blank company checks, makes them out to himself/herself or an accomplice.

4. Skimming (20.7%):

  •       Employee accepts payment from a customer but does not record the sale.

5. Expense Reimbursement (17.2%).

  • Employee files a fraudulent expense report, claiming business travel, hotels and meals.

6. Cash Larceny (16.6%):

  • Employee steals cash and checks from daily receipts before they can be deposited in the bank.

7. Payroll (14.2%):

  • Employee claims overtime for fictitious hours.

The majority of frauds (64%) are committed by non-management employees. But frauds committed by managers or executives are three-and-a-half times more costly. The greater the management role, the more they are entrusted with company assets. Most people who committed fraud were first-time offenders. Only 3% of perpetrators had been convicted of a previous crime involving fraud.

Three factors that must be present for a person to commit fraud.

1. Pressure - Common pressures are:

  • Unable to pay personal bills.
  • Desire to obtain luxury items.
  • Drug, alcohol or gambling addiction.

2. Rationalization - Rationalizations may include,

  • I’ll pay the money back.
  • They will never miss the funds.
  • They don’t pay me enough.

3. Opportunity - The person committing the fraud sees an internal weakness and begins the fraud with a small amount of money. If no one notices, the amount will usually grow larger.

Discovery usually comes from:

  • Tips or by accident.
  • The perpetrator gets greedy and creates suspicion.
  • After the individual has absconded with the funds and can no longer be located.

The Small Business Administration (SBA) website ( has published six tips for preventing and managing employee fraud which should serve as a guideline for all employers.

1. Use Pre-Employment Background Checks

The first step to preventing fraudulent employee behavior is to make the right hiring decision. Basic pre-employment background checks are a good business practice especially for those employees who will be handling cash, high-value merchandise, or have access to sensitive customer or financial data. outlines the types of information that you can use as part of a pre-employment check. However, always consult with an attorney. Laws vary from state to state.

2. Check Candidate References

Few employers check candidate references' assuming that a reference will never be anything but glowing. However, it’s good practice to check references' particularly those of former employers or supervisors. If your candidate has a history of fraudulent behavior then you will want to know about it, before you hand them a job offer.

3. Proactively Communicate Conduct Guidelines

Every business needs an employee code of ethics and conduct. While it won't prevent criminal or fraudulent behavior, the standards it outlines will set a clear benchmark for employee behavior and guidelines on how to do business based on a series of principles that promote ethical and lawful conduct. The code of conduct should be documented and agreed to by all employees. Then, revisit the code each year and be sure to add any new considerations that may have materialized - for example, if you do business with certain suppliers, contractors, or government agencies who require you and your employers to agree to new codes of conduct as part of your business relationship.

4. Don't be Afraid to Audit

As a rule of thumb, identify high risk areas for your business and audit for violations on a 6-12 month basis - these could include business expense reports, cash and sales reconciliation, vacation and sick day reports, violations of email/social media or Web-use policies.

5. Recognize the Signs

Some potential red flags to look out for include:

  • Not taking vacations - many violations are discovered while the perpetrator is on vacation
  • Being overly-protective or exclusive about their workspace
  • Prefers to be unsupervised by working after hours or taking work home
  • Financial records sometimes disappearing
  • Unexplained debt
  • Unexpected change in behavior

6. Set the Right Management Tone

One of the best techniques for preventing and combating employee theft or fraud is to create and communicate a business climate that shows that you take it seriously. Here are some simple steps:

  • Reconcile statements on regular basis for fraudulent activity
  • Hold regular one-on-one review meetings with employees
  • Offer to assist employees who are experiencing stress or difficult times
  • Encourage open-door policies giving employees the opportunity to speak freely and share their concerns about potential violations.
  • Create strong internal controls.
  • Require employees to take vacations..
  • Treat unusual transactions with suspicion.
  • Trust your instincts.

Whether you are a large or small business, management must take aggressive actions against the conditions that perpetrate fraud with a clear plan of internal control that limits the opportunity for fraud and minimizes the impact when fraud does occur. Most accounting firms will help set up a reasonable system of controls. But at their core, fraud involves a violation of trust. It is this violation, that makes such crimes so harmful, perhaps even more than the resulting financial loss.

Wednesday, April 3, 2013

How to Kill Your Negotiation Advantage

This article was written by Jim Camp on February 22nd, 2013, reprinted by permission

One of the most fundamental rules of effective negotiating is to maintain emotional neutrality. Being emotionally neutral means emptying your mind of all past or future thoughts, and simply and calmly trying to stay present in the moment.

Emotions have no place in a system of negotiation that’s based on gaining as much information as possible about the other side, before and during the meeting, and then creating a vision that positions you and your proposal as the best solution to their problem.

Being in the present moment enables you to ask smart questions and really listen to their answers and observe them. If you are preoccupied with emotions based in the past (“I failed the last time I tried this” or “My last client loved this approach”) or in the future (“What if they don’t go for this?” or “This is going to be such a triumph!”), then you’ll be unable to effectively see and hear and respond to the other party in real time and to build your case based on real information you’re gathering right now. Instead, you vision will be clouded by emotions.

Granted, advanced meditation masters spend years learning how to “be here now.” It’s not an easy state to be in all the time. But for the purposes of navigating through any type of business transaction — whether it’s trying to land a big contract, win over a new client or persuade employees to adopt a new change strategy — it’s important to learn how to be unemotional.

The emotion that’s most problematic in business negotiations is neediness. That’s because neediness is the Mr. Potato Head of emotions. It has a way of camouflaging itself behind a variety of different behaviors and identities. But once we learn to recognize this insidious advantage killer, we get better at quickly returning to a state of equilibrium. What’s needed in any negotiation is a state of calmness characterized by a simple mantra: I don’t need this.

And you really don’t. You need food and water. You don’t need this sale or agreement. The sooner you learn how to completely let go of need, the better you’ll be at winning the best deal for your side.

Here are eight behaviors neediness hides behind to sabotage your advantage:


You may think you’re persuading, but what you’re really doing is begging. Pleading for just 10 minutes of their time or asking if they’d listen to one more idea merely signals to the other party that you’re not in the driver’s seat. They are.

Being formal

Some people use formal address ostensibly as a sign of courtesy, but it has a way of making you seem aloof, even slightly superior. The other party will interpret this as insecurity. Calling someone “Mr.” after he’s already given you his first name, for example, takes you down a notch in the power hierarchy, even if you meant it respectfully.

Spilling the beans

Disclosing too much information prematurely and talking too much or at an inappropriate time shows need. The winner in negotiations lets the other party talk more and answers questions with questions — who, what, when, where, why or how.

Being too upbeat

We all like positive people, but in a business setting, an overly enthusiastic and excited person has the same dulling effect on the other party as a pushy salesman. When you express excitement, you give the party across the table the advantage. The winner is the one who stays calm and remains focused and present in every moment.

Prepping them before meeting

Leaving a voice mail message with a large amount of important information is a sign of severe need — likewise with mail or e-mail. The subconscious message when we dump critical information without a meeting first is: “I’m desperate for this meeting.”

Making up your mind

Another sign of need is pretending to hear what the other party is saying when that little voice inside your head has already made up your mind. Close-mindedness is caused when we unconsciously lack confidence in our position and feel the need to and defend it. Set aside biases and preconceived notions about the other party and their position; keep your mind open and genuinely curious.

Tricking them into closing

Trying to tie up loose ends prematurely or get the other party to agree with you is a behavior that shows need more quickly and decisively and catastrophically than any other behavior. You can’t force a decision. If you are negotiating correctly, the other party will invite you to close.

Talking loud, fast and high

When emotions run hot and heavy in negotiations, speaking too loudly, too quickly and in a high-pitched voice is a sure sign of need. While needy negotiators raise their voices, negotiators who simply “want” lower theirs.

Is It A Gift, A Loan, or an Investment? (The Need for Documentation)

imageThis article was written by Mike Capsuto, SCORE Orange County Business Mentor

Accountants when working with small businesses often find an influx of cash that cannot be explained by increased sales. In most cases there is no backup documentation. This is usually true when the cash came from friends or relatives. The question arises was it a gift, a loan or an investment?

A gift has no expectation of being paid back. A loan should be documented and have the principal amount, a due date, the method of payment, and the interest rate. An investment indicates one or more new shareholders, members or partners depending on the form of the business. Each one of these situations can have a financial impact on both parties. Finding the basis for this cash places the accountant in a quandary as illustrated by the following scenario.

Jack who is single was a designer of exclusive women dresses for a large manufacturer. About a year ago he decided to quit his job and become an entrepreneur. Jack formed a Limited Liability Company with himself as the only member and opened a boutique shop selling custom and semi-custom dresses for special occasions. Jack underestimated his start-up and operating costs and was quickly running out of cash. He had no assets that could be used for a loan collateral, so he solicited friends and relatives for money. The following abbreviated conversation occurred between Jack and Mike C., Jack's accountant.

Mike C. Jack, I noticed an influx of $50,000 cash into the business. Where did the cash come from?

Jack: I got it from “Uncle Bob”.

Mike C. Was it a gift, a loan or an investment?

Jack: It was a loan.

Mike C. Do you have the loan documents?

Jack: No, we shook hands, I thanked him and gave him a big hug.

Mike C. To whom was the check made out?

Jack: It was made out to me and I immediately deposited it into my business checking account..

Mike C: You know that this influx of cash now represents more than 80% of your working capital. Are you sure it was not a gift or investment. If it was a gift there might be some gift tax implications for Uncle Bob. If it was a loan you now have a creditor that might make it more difficult for you to obtain future loans. On the other hand, if it was an investment you now have a partner.

Jack: Call “Uncle Bob”. He will clarify it for you.

Mike C. Hello, “Uncle Bob”. This is Mike C., Jack's accountant. You gave Jack a substantial amount of money. What was the purpose of it?

Uncle Bob: Jack is my deceased sister's only child. He needed the money and since I am also his “Godfather” I have a moral obligation to help him.

Mike C. Was it a gift, a loan or an investment. (A short explanation was given similar to Jack's about the implications of gifts, loans and investments.)

Uncle Bob: It was a loan. Jack said he would be able to pay some of it by the end of the year. I told him not to worry about paying me back. I also said that since I have started several successful businesses I would help him build up his business.

Mike C. (More frustrated than ever.) Thank you “Uncle Bob”.

The above scenario is not atypical. When dealing with friends and family, documentation is just as important as when dealing with outside investors and creditors. In this case, there seems to be a meeting of the minds that this transaction was a loan. There was a promise to pay on the part of Jack. But “Uncle Bob” said not to worry. It appears that “Uncle Bob” has no expectation of being paid back. Does this make it a gift? On the other hand, the money represents 80% of Jack's working capital and “Uncle Bob” said he would help build the business. Does this make it an investment?

If you were Jack’s accountant what position would you take? Was it a gift, a loan or an investment? What position do you think the IRS, Franchise Tax Board and Board of Equalization would take? For example, the California Board of Equalization is currently targeting businesses in various geographical areas for sales tax compliance. A procedure they use compares the inflow of cash into the business financial and banking accounts against the reported amount of taxable sales. Any discrepancies are viewed as unreported sales. In Jack's case they could take the position that the $50,000 came from unrecorded sales and assess Jack for unpaid sales tax plus interest and penalties. The burden to proving otherwise is up to Jack.

The purpose of this article is not to present a solution to Jack's problem. The purpose is to show the need for understanding the possible implications of not having documentation. When in doubt always consult with your accountant or attorney. Time spent on justifying a transaction to the authorities is time not spent on operating and expanding your business. For a small business, time is a most precious commodity.

California First to Set Standard for Health Benefits

This article was written by Judy Lin, Associated Press, Wednesday, February 13, 2013, reprinted by permission

SACRAMENTO, Calif. (AP) — California's health benefits exchange became the first in the nation Wednesday to set a standard benefits design to help people comparison shop for insurance under the federal health care overhaul.

The move will help consumers more easily determine what kind of coverage they want to buy, said Peter Lee, executive director of Covered California.

"We're changing the focus of health insurance from being a shell game — hiding from consumers what's covered and what's not covered — to being about health insurance providing the best care possible, to help people stay healthy, get care when they need it and lower costs," Lee said during a news conference at the exchange's headquarters in the state capital.

Under the Affordable Care Act, each state is setting up its own marketplace where individuals and families can purchase private health plans resembling what workers at major companies already get.

While the federal law requires health plans to offer comprehensive benefits such as emergency services and maternity care, California is one of the few states requiring participating health plans to follow a uniform benefits structure to help consumers make a choice.

The state intends to allow health plans to propose alternatives.

While low-income people will be referred to safety-net programs, the federal government will help many middle-class households pay their insurance premiums.

State officials estimate that about 2.6 million Californians will be eligible for federal subsidies. With California's standard benefits, those people will be able to figure out their monthly premiums and out-of-pocket expenses before insurance companies submit their bids later this year to the exchange.

For example, individuals earning between $11,490 and $17,235 a year can expect to pay as little $4 to see their primary care physician, while those making $17,235 to $22,980 would have a co-pay of $20.

Under the Affordable Care Act, Californians eligible for assistance will pay only a certain percentage of their income, with the federal government paying the rest. Insurers must submit bids that detail their rates to be listed on the exchange.

Anthony Wright, executive director of Health Access California, a group that advocates for low-income families, applauded the marketplace design as a crucial improvement for individuals and small businesses.

"Consumers trying to buy health coverage today face a complex and confusing experience, facing fear of the fine print," Wright said in a statement. "The standardization of benefit designs will make it easier for consumers to compare health plans. It will force insurers to compete on cost and quality and customer service, rather than consumer confusion."

Patrick Johnston, president and CEO of the California Health Plans Association, which represents health insurers, said it's too soon to tell how the design will impact premium prices.

"By requiring the same benefits and deductibles for each category of coverage, Covered California may reduce confusion among consumers about the differences in pricing among plans but may also increase premiums," Johnston said in a statement.

Covered California officials say the state learned from the experience in Massachusetts, which provided the model for President Barack Obama's health reforms. That state launched its health insurance exchange without standardizing benefits but has since switched.

Drug Testing

clip_image002Drug testing, which is legally required for many public employers, has become widespread in the private sector over the past few years. In a 2006 HR survey it was found that 84% of employers required new hires to pass drug screening, and 39% randomly test employees that were hired. The purpose of testing is to lessen drug abuse in the work place that directly reflects into tardiness, absenteeism, turnover, attitude problems, theft, decreased productivity, crime and violence. The US Department of Labor estimates that drug use in the workplace costs employers $145 + billion dollars annually in lost time, accidents, health care and workers compensation costs. Over 65% of all accidents on the job are related to drug or alcohol and substance abusers utilize 17 times as many health care benefits and are 7 times more likely to file workers compensation claims then non-abusers.


Most drug-testing programs are not implemented without first establishing policies and procedures. The most common type of testing is pre-employment. Courts have consistently upheld the legality of requiring a pre-employment drug test as a condition of employment. To be safe you should obtain the employee consent and clearly indicate drug testing is a requirement for employment. Post-employment testing includes random testing (for safety sensitive positions), individualized suspicion testing, post-accident testing, and testing that are legally required in certain industries, for example truck drivers.


Most drug testing is done by sending an applicant to a collection site or lab, where a urine sample is obtained for analysis. Results are normally known with 24-48 hours. Most labs utilize the five-panel test of “street drugs” consisting of Marijuana (THC), Cocaine, PCP, Opiates (such as codeine and morphine) and Amphetamines (including methamphetamine). Although each drug and person is different, most drugs will stay in the system for 2-4 days. For chronic users of certain drugs, such as marijuana or PCP, results can be detected for up to 14 days or longer. Sedatives such as Valium may stay in the system for up to 30 days. When the more expensive hair testing method is used, drugs can be detected for a 90 day period. Some employers have the potential new employee pay the cost ($50-$75) and with the understanding that they will be to reimbursed after their 90 day probation period.


Nearly all testing labs have extensive procedures to re-confirm a positive test before reporting. Most drug testing programs also utilize the services of an independent physician called a Medical Review Officer (MRO) to review all test results. In the event of positive results, the MRO will normally contact the subject to determine if there is a medical explanation for the positive results. There can also be tests that are “negative” but show an abnormal result such as a “low creatine level,” which can indicate an applicant attempted to dilute the sample by excessive drinking of water or some other form of alteration. The MRO would also examine these samplings.

On pre-screening applicants it is not recommended to allow them a 2nd test as many chemicals may leave the blood stream before the 2nd test is conducted.


Pre-employment drug testing can be set up with a minimal amount of effort. Firms that operate from a local location can usually find a close-by medical clinic for tests.

Most employers find that a drug-testing program will eliminate people with a problem and not good applicants. Compared to the cost related to drug use to administer this program is far cheaper and safer than operating without one. Many insurance companies may offer the employer discounts for having a drug-testing program in place.