Monday, November 21, 2011

I just got laid off. How can I make more money?

That question is the holy grail of society. Substantial sums of money, it seems, is equated to a successful life, although the philosophical debate continues about that. I don’t think there is a person alive that hasn’t asked themselves that question at one time or another. Of course, there are unspoken extensions to that question. One or more of these adverbs could or must be added depending on the questioner’s circumstances; easily, passively, without high input costs, legally, quickly, and so on.

Primarily for me the answer lies in asking a supplementary question of context; “Where does the money come from”? I was listening to a tape of Tony Robbins and he said “Your income is in direct proportion to your contribution”. That should inspire you to say “If I contribute a lot I should earn a lot”.

Some people suggest; do what you love and the money will follow. In some respects that works. However, I don't necessarily think it is the passion for some specific idea, concept, service or product that is essential. I'm not particularly passionate about some of the problems I'm solving for my customers… I just know I can do it effectively. I think it is more about embracing a philosophy of what you're doing to contribute.

By extension of logic then the following becomes true. Since I'm not thinking about "my" issues (and for most people asking this question, "my" issue is financial), then the business focus truly is on the customer. My marketing does not need to pressure them and is more sincere. My problem solving efforts are to make the business run more effectively to help customers even more. With that approach my customers can sense the sincerity. Consequently, sales just keep growing. The growing sales have the collateral result of putting more money in my pocket. It's like an upward spiral.

I have a consulting practice, two web based service businesses, a product manufacturing/wholesale business and a real estate investment business. They are the end result of answering that question by figuring out how to contribute more.

This question usually comes up when you hit the wall. Your company just laid you off in the middle of a recession. I don't want to sound patronizing but as an employee I have been laid off in the middle of recessions… numerous times, and sometimes for a long time. I had nothing with which to start a new venture. The pressure is on and I felt so incapable of getting ahead. The only thing I can offer immediately is the knowledge that the recession will end. You will survive and you will struggle back up again.

When I was in that situation, my way out was to realize I had to start preparing for the next recession right then. I eventually got another regular employee job to put bread on the table; you will too. But the key step at that point is... immediately I started getting my first business (IT consulting) organized. Although it was fully functional for the next recession, it was still only able to partially pay me a decent living through that second recession. So then I started the second business in 2005 (an Internet based service company). This 2009 - 2011 recession hasn't impacted me at all. In fact, I've added the last two businesses (real estate business and another web service company) in 2007-2009 right into the face of a recession!

So, to answer the topic question, in order of increasing ease & cost of set-up, my suggestion for businesses fall in these categories:

1/ A website selling a service is cheap and fast - no inventory, very limited fixed assets, scaleable with additional clerical staff. You just need a superior website, intelligent advertising and solid service delivery. You can compete globally with international conglomerates if your service is a better mousetrap. My first service website was pretty rudimentary when I look back now. I am amazed that within 2 years it was doing over a million in revenue. Before you get too excited that is revenue; the net earnings were still small.

2/ For a consulting practice, you just need your educational credentials, excellent service skills and what I think is the key ingredient... the savvy to run it like a business instead of a high priced employee job. Some, and I'd say perhaps even lots of, people can convert their existing job into a consulting practice with some concerted effort. I get ecstatic when someone says their employer wants them to become a contractor. And I sigh with resignation when they don’t recognize a golden opportunity dropped in their laps. The revenue for consulting starts flowing almost immediately depending on the time lag of your invoices getting issued and paid. I’ve been doing this the longest because to move from employment to consulting is not a major contextual leap. In other words it was simple to grasp and start the additional revenue coming in. I posted earlier about why I still think this is the best first step.

3/ A product based business - This is definitely harder to do, more risk and more activities to manage. The profit margins are thinner but potential scaled-up volume can put you in the big leagues if you have designed a better mousetrap. I'd say purchasing a small one that is already operating is the practical way to get started in learning this type of business.

4/ The last and IMHO the hardest is definitely the one that attracts most people as a simple & easy solution; investing. It is a high input cost activity – both cash and brain power. I’ve traded various types of securities for 30 years, I’m an ex-stock broker, have been involved in investment clubs and taken formal courses in all sorts of sophisticated trading strategies. In the beginning it isn’t a simple passive activity. And, it requires serious money to be put in before any serious money comes out. It wasn’t until I got the earlier businesses stabilized that I had the real money to fund this stage. Many people want to jump to this stage and take on the world alone. I’ve come to the conclusion the only reliable way to get serious cash is either long term savings or creating businesses that generate good cash flow. Savings is a concept seemingly lost by today’s governments, and citizens. Everybody seems to be running a deficit. So thinking you can get ahead consistently by shuffling paper assets around is a forlorn hope. So that leaves operating a business.

In summary, my advice is to keep your eyes open; look around to see what problems people are having. Most people are incessantly complaining about something, so there is no shortage of potential ideas. If you can address just one of their problems, your whole business venture and financial outcome just falls into place. I'm not religious but I heard a biblical quote from Jim Rohn that is appropriate... "find a way to serve the many, for service to many leads to greatness".

Tuesday, November 8, 2011

Rental Cars – A Good News Post

As entrepreneurs, we are oftentimes required to travel. Depending on how often you have to do it, where you go, and your travel companion circumstances it can either be considered a benefit or a chore. Of course, as the owner of the business, ensuring it is tax deductible is a necessary and serious responsibility, but that conversation is for another post. The two key components of travel bookings are accommodation, and transportation. This post is a about a specific component of transportation; namely rental cars.

I use National/Alamo/Europcar but I’m not a zealot about it. If one of the other providers has something more convenient, available or priced better I will switch at the drop of a hat. I would never recommend permanent loyalty to a provider of any service. We need to keep all our vendors on their toes all the time so they continually earn and deserve our business. You lose out if they get lazy and expect your guaranteed business without any effort.

There is a reason businesses want you to bundle your affairs with them and offer a discount for doing so. We’re all in business here (that is my assumption if you are reading my blog!). In our own businesses we offer discounts & incentives to get our customers to do things that are in the best interests of our businesses… such as buy more or buy sooner. These incentives are not necessarily in the best interest of our customers! So remember that when you are a consumer.

Sorry for the tangent… That being said, I enrolled in National’s frequent renter program; “Emerald Club” and it works well. I can provide, in advance, my credit card numbers, driver’s license, contact info and preferred options and rental vehicles. It does speed up the booking and the counter process. But then again I signed up with other provider loyalty programs for the same reasons so I’m not that loyal!! Back to the real story…

Car rentals are actually a thrifty expense item. I make a number of short 1-2 day trips around Canada for marketing and in my IT consulting business I have had a few assignements where I've rented cars for the day to visit client sites. The cost of a rental car for a few days is often under a $100. The collision damage waiver (CDW), however, is an item on which rental firms make a lot of money on top of the modest rental fee. It is expensive at $20-$50 a day. The counter agents are trained to encourage you to get this coverage with a line like, “It covers you in case you get in an accident when you could be responsible for the entire cost of the vehicle”.

Instead, I recommend you get a credit card that includes covering you for the collision damage waiver. Most are called Platinum cards but they are available without a fee. You can then simply decline the CDW when you pick up the car.

I have a serious phobia about paying a bank, additional money for an annual fee on a credit card on which they also charge the merchant when I use it! I’ve had heated debates with people who pay an annual fee for a credit card just to get loyalty points!!

Personally, I have 3 no-fee Royal Bank VISA platinum cards, and each has CDW coverage included. There are no special requirements or thresholds to get this card… any mallet-head with dubious credit can get one. They aren’t status symbols after all! Just apply for one or more during an economic boom when credit is easy to get. They come with very large limits but you never have to use them so they cost nothing. CIBC is the only bank that ever unilaterally cut my limits of cards for non-use. The rest of the major banks will leave you alone, once you have the card (and maintain your creditworthiness, of course)

And I have a particularly good anecdote about Royal Visa Platinum CDW coverage and this arrangement I’m recommending. I was in Nottingham earlier this year and had a rental vehicle. I had rented it on my Royal Visa Platinum card. As always, Murphy will show up at the worst time. We were backing into a parking space and the passenger side scraped into a low brick wall about a foot high. It seriously gouged both the passenger door and the front quarter panel. I figured “Oh crap, this is going to cost me! Foreign customer, inflated rates, no CDW and so on”.

However, I was pleasantly surprised. The Europcar agent in Manchester took the vehicle back without any problem. He did not want a second mortgage on the spot, he just gave me some paperwork and I was on my merry way.

When I got back to my office in Canada, I had a few conversations with RBC insurance and FAXed all the paperwork to them. They said they would look after it. That was in early May. Fast forward to late June, I get a package from Europcar with a breakout of the repair details. Good news; it was only $2,300 CAD and not any different than if I had done similar damage to one of our own cars here in Canada.

Then I noticed they just put the charge on my Royal Visa Platinum card. OK, not great, but at least it wasn’t inflated. Being the insurance skeptic, I figured … OK now I’ll have to fight for years with Royal Bank Visa to get anything back. I FAXed the Europcar claim to RBC Insurance (the insurance carrier for Royal Visa). Then the really good news; I was overwhelmed when RBC Insurance put a corresponding payout credit on my card in about 2 weeks.

I have to give high five kudos to Royal Visa, RBC Insurance and Europcar. I will continue to use my Royal Visa Platinum cards for CDW coverage with absolute comfort & confidence anywhere in the world as long as they provide that kind of customer service.

Another little tidbit on rental cars: Most consumer vehicle renters are on a limited budget so they will always book out the low-end cars. I’ve found that booking a popular consumer vehicle is a good choice even when I need or want something larger. In a number of cases, although I order a modest car, upon arrival, they are all booked out. In compensation, I am offered a substantially better or larger vehicle for the same price. Case-in-point: I was in Winnipeg last week and arrived very late in the evening. I was stuck with the only car on the lot, a Lincoln Town Car instead of my traditional modest vehicle. The fallback is if I don’t get what I want with that trick I can always pay a few dollars to upgrade to a larger vehicle on-the-spot. The moral of the story is the unconventional thinker will order a modest vehicle and often gets something much better.

The one last tip is something I learned from my experience with software. Some and perhaps most rental firms use demand-based pricing. This means the rental vehicle cost will go up if it is a popular time for booking. Unfortunately, some online web booking software is written to treat enquiries as demand. You can try this test to see if your preferred agency uses this kind of software. Go online and book a specific vehicle, for a specific location during a specific time. You don’t need to finalize the booking; just make the enquiry and close out. Repeat the enquiry & close out a few times to see if the daily rate increases. I got caught with this a few times by my own fault. I would start booking a car and then realize I hadn’t got some detail confirmed. In the time I went off to confirm the detail and got back the booking had timed out. Upon re-entering the booking, naturally, the price was higher.

It should teach all of us to pull together every piece of information required for the booking beforehand. Then book your car rental in a single clean transaction. Don’t allow it to timeout so you have to re-enter the enquiry. And don't keep checking for deals hoping you will get a lower price!

Thursday, November 3, 2011

Dividends Again

What about the tax considerations of paying yourself with a dividend, rather than salary?
a) Would CRA allow you to pay out all the corporate profits in dividends?
b) Does it matter if it is a one person corporation?
c) Can the earnings just be retained in the company and take them out later?

Yes dividends have a big advantage over salary because you can split the income amongst all your family members and utilize everyone's personal tax credits to the fullest each year. Initially, there is very little need to pay any salary at all.

The biggest advantage is avoiding the requirement to make periodic payroll deductions and submissions to CRA once you set up a payroll. My biggest beef is this extra paperwork and administration comes at a time you really need to be focused on management, sales & growth of your business. The payment of unnecessary payroll taxes is the icing on the cake.

The downside is without a T4 slip showing earnings, you won’t qualify for loans for a stick of gum, let alone a house, car or capital loan for business expansion. This is still an issue for me to this day, despite corporate revenues well on the way to 8 figures. My wife wanted a new car last week and qualifying for a new lease still took some serious arm-twisting.

Another downside of dividends-only compensation which I learned from my Private Health Services Plan (PHSP) business is the necessity of an “employee” in the family to qualify for operating a PHSP. Of course, accountants can show you other ways around that. Generally a PHSP should be opened early on but not necessarily used for claims. You should wait until your business startup period with its large deductible expenses is behind you. Then you will get greater value from the health benefit deductions.

a. Yes you can withdraw all your funds through dividends. Later once your business is making so much that you can afford the payroll taxes and you have administrative employees to do it for you, then you can set up your payroll.

b. It doesn't matter. From a business structure point-of-view (and that reflects on the tax point-of-view) a small incorporated business enjoys most, if not all, of the benefits of major corporations including the declaration of dividends.

c. Yes, you only need to take out what you want by dividends. They are more flexible than the tedious periodic reporting of fixed payroll amounts and administration of the corresponding withholding taxes. Alternatively, keeping your money inside the company is a viable tax planning strategy. When the business earns the money in the first place, the earnings are taxed corporately on the taxable income balance. In a typical small business situation (making use of the small small business tax credit) it will pay well below 20% corporate tax on this. Many people argue, by using the salary method you would avoid paying any corporate tax on it. However you would then be taxed on that same money at the personal rate (well above 20%) in the same year it was drawn out... i.e. this year - no choice. So that argument just doesn’t fly with me. For funds held back inside the corporation, you can utilize those funds as you see fit. If you decide to pay any of it out to you or your family, it will be taxed again at the personal level when the shareholders receive the funds. The key, in my mind of course, is to remember that you can now determine what year it will be paid out to yourself & your family! If, as you suggested, you build up your "pile of retirement cash" inside your corporation, then you can dribble it out to yourself over many years of retirement and pay essentially no tax on a significant part of it each year (again maximizing the use of those personal non-refundable tax credits!). Think of it as a better version of your own private RRSP.