Good debt vs Bad debt

From an article in our local newspaper -
"Interest rates come to 3 per cent to 4 per cent for housing loans, about 6 per cent for car loans and about 8 per cent for renovation loans. You pay about 20 per cent for GE Money EzyCash and 24 per cent for credit cards"

"Instead of using his savings to pay off his housing loan as quickly as possible, he channels his cash into higher-yielding investments such as shares, land banking and traded endowment plans."

In this comparison, it would seem that taking on loans for housing is considered to be BETTER. But is it?

I will NOT disagree with this person's financial strategy, but this is NOT a strategy for anyone who does NOT understand debt.

Why?

Debt whether good or bad depends on whether you can afford it. A good debt taken at valuations that is not reasonable will lead to trouble, no matter how good or bad.

I've come to know of properties bought during the 1998-99. It was purchased at $820,000 and now almost 10 years later the property valuations are still languishing at least $100,000 BELOW when it was purchased.

Now in the year 2007, people are bullish again and feeling "proud" of their investment strategy in properties.

My personal advice? There is NO FIX STRATEGY or a blanket "sure win" way to wealth and financial freedom.

There is NO GOOD DEBT.

But there are debt that you HAVE to take, like an affordable mortgage. Or a student loan, maybe even a debt to pay off another debt (transfer balance)..etc.

At the end of the day, having no debt is better than having debt.

In general a mortgage for a property is cheaper than say, a credit card debt, but does that mean you got to "max out" the loan available to you? No!

So, remember, "good" is relative.

Cheerio!

ETFs vs Unit Trusts

Alot of people DO NOT know the difference in fees charged for ETFs and unit trusts.

Aberdeen China Opportunities Fund is a Unit Trust.

Click on the picture to see LARGER image.

Profit Accounting

See PDF file

Marketing Gods Make Software Kings - Part One

Marketing Gods Make Software Kings

Part one

Software is a technical business, but the fate of a software company (Enterprise or product) largely depends on

marketing.

One rule suggested: For each new developer, there should be two new sales and marketing people.

In a successful company, a revealing statistic:

41% of employees were in marketing/sales - Successful company

31% of employees were in marketing/sales - UNsuccessful company

Being ONE of the top players in a product segment is NOT enough - it is CRUCIAL to be the TOP.

WHY?

- Recover massive R&D costss
- Law of increasing returns (see chapter one)

**************************************************

How can software product companies build market leadership with marketing efforts, either as a start-up company or

as an established player with a new kind of software product?

Building Market Leadership

Case study - INTUIT QUICKEN

1983 - Scott Cook's wife commented about how much time it took to manage their personal finance.
He and his friend Tom Proulx created Quicken.

They were the 43rd personal finance software package in the market.

1997 - Revenues of $600 MILLION with a 70% market share

How did they do it?

It was NOT because solely by the technological sophistication of the program; it was by CREATING A COMPELLING VALUE

PROPOSITION.

While its competitors were heavily focused on promoting technical software features, Intuit focused on SOLUTIONS AND

A CLEAR VALUE PROPOSITION.

Scott (the founder) had a fixation on WHAT THE BENEFIT of the software product was, NOT WHAT IT DID!

Example,

Competitor ad - "Automate your banking"

Intuit - "End your financial hassles"

*************************************************

Building the product portfolio

- The key to a good value proposition is a product marketing story.

- Breeding new products inside the Company.

- Buying businesses to create the winning product portfolio

*************************************************

Being FIRST does not always mean being the best.

Superior marketing players often eclipse the earliest movers.


**************************************************

Highly focused customer selection

Failure model:

Midsized software company - 14 product lines. Target group NOT clearly defined. Any potential customer with a

request simply received the "best-fitting" product.

Successful model:

They clustered its potential customers in specifically designed matrices that listed the customer's needs and other

criteria.

They targeted a customer group with sales potential large enough to recover their massive R&D costs - but kept the

target group SMALL ENOUGH to FULLY SATISFY the needs of the group.

Why?

Becuase of the "bowling alley market development" approach.

Making into the target group would lead to other "knock over" products to sell to that group.

****************************************************

How to make themselves known?

Creating "Self-fulfilling" Successes - announcing that the new product is on its way to market leadership BEFORE it

has taken off!

PR
Top managers of the successful software companies spent up to 35% of their total time on general conferences, public

appearances, media contacts and interviews which involve no direct sales activities.

Obtain favourable product reviews
Create technology evangelists to "preach to the world".

Aggressive advertising
7% of revenues spent on advertising rather than 3% for less successful companies.

Advertising the BRAND, NOT the technology
"Many software companies share this problem. Heavily technological driven, they tend to focus their communication on

product features. We have found however, that the greatest success from advertising is reached by marketing Company

BRAND NAMES, NOT product features.

The successful companies we surveryed spent 78% of their advertising budget on the company NAME and just 22% on

specific product features.

LESS SUCCESSFUL COMPANIES DID IT EXACTLY THE OTHER WAY AROUND"

***************************************************

The advantage of Company Brands

Brands hold the value propositions in the minds of the customers even if the products change or are discontinued.

Value propositions are key to building market leadership.

Brands also help in recruitment because they have the ability to convey positive images of the company and its

culture.



Marketing business value propositions
It makes sense to market the business value propositon of the products TOGETHER with the brand. Especially for

enterprise software.

SAP's example -
"SAP - We don't just make better software. We make better companies"

Bann
"Baan - Simply Better Business"

****************************************************

Making customers try out the product - demo products

Fixed costs converted to variable costs -
a. IBM charges developers for development tool ONLY when they make money - Software AS a service

b. Usage based pricing

c. Usage fees based on volume

Fixed Price Guaranteed
- SAP - they fixed a price for implementations for biz less than $130million in annual revenues. The package

includes, software licence, hardware, installation and a range of services.

Piracy
It is the costliest way to market leadership

A concerted multichannel effort to reach target customers
- Flooding retail stores
- Involving system integrators as multipliers
- Preinstallations

Aggressive Sales Force

Sales people of successful software companies earned on average 38% of their total compensation through a variable share.

In less successful companies the figure was 20% or even less.

End of Part One

Software development

Chapter 5

Software development

One thing in common: FAILURE

84% of all software projects DO NOT finish on time, on budget and with all features installed according to a survey by the Standish Group which covered 8,000 software projects in the US in 1995.

30% of all projects were CANCELLED before completion!

What does all this mean?

The chance of FAILURE is HIGHER than that of success.

*****************************************************

Why is software development so prone to failure?

1. Extreme complexity involved
Simply put -> Close to 100% of a software program has to be accurate to work even somewhat correctly!

We all know how many bugs Windows 95 has right? But have we considered that Win95 has 11 million lines of codes?
And how many OTHER million lines of codes interact with it?

If you build a car, if a nut came off, you may not even notice it.

With a software program, a bug is highly disruptive and will most likely give you an error result!

2. Extreme uncertainties from the outset - Why?

a. Unclear customer requirements - what would the system be used for? who will be using it? will it be changed? will it need to be upgraded constantly?

b. Design not entirely predictable - structure of the software may be wrongly decided on. Should we use VB.net? ASP.net? Php 4/5? Mysql?...each design is different.

c. Changing requirements - Yahoo! made 3 changes THREE TIMES before lanching MyYahoo! Enough said!

d. Changing technology - php 4 today php 5 tomorrow! Win XP today Win Vista tomorrow??


*****************************************************

HOW software projects commonly fail

a. Overly optimistic developers
Adding people to a project does not mean a shorten schedule. This is a common mistake. Interdependencies require certain task to be done sequentially.
For e.g. Can you come up with the Invoicing module of an accounting program if your Customer database has not been setup?

Fred brooks put it "It takes nine months to bear a child, no matter how many women are assigned"!!

b. Underestimating the efforts required to make products out of projects.

Professional services firm follows a common failure pattern. They try to develop a standard product after they have developed similar systems for various clients.

Mass-market software is designed MORE BROADLY. Meaning, you have to take into consideration 1000 users instead of just one.

Enterprise software - with enterprise software, the environment, the user, the requirements are more or less made known early on. For the mass market product, different operating systems would cause problems.

Fred Brooks estimates that the effort to create a successful product is three times as high as for a comparable individual system.

c. External pressure from marketing, customers and management

Martketing department try hard to shorten schedules.
Management has unrealistic expectations.
Wishful thinking can be attributed to the marketing and management dept.


d. Feature creep

A quote that says it all "Nobody would force a builder to rebuild the basement after having put on the roof, but in the software industry, that's common practice."


*****************************************************

HOW TO COMPLETE THE IMPOSSIBLE MISSION?

1. Prepare for uncertainty, rather than ignoring it.

2. Establish flexibility - use this system

i. Must-do features (basic features and to make the system run)

ii. Should-do features (implement IF time is left)

iii. Could-do features (normally delayed till next release)

3. Adapt to the upstream-downstream

i. Phase 1 - Creativity phase

ii. Phase 2 - Implementation of phase 1 ideas NO OTHER DISTRACTIONS permitted.

4. Spend time to save time

Late fixes to software design costs an astonishing 50 to 200 times the effort of an immediate fix. A superior product architecture bears many advantages in terms of expandability, scalability, and maintainability of the later product and can thus be a real competitive advantage.

Leaders of successful software firms emphasized that problems should be resolved in the EARLY phases of the development project.

5. Stongly invest in people

6. Creating powerful team structures

7. Holding on to top talent

8. Invest in process for higher performance and more more freedom

9. Involve project stakeholders extensively

10. Marketing experts married to development managers. (Prevent future feature creep)

11. Frequent project reviews with all stakeholders.

12. Have daily builds - test and debug daily. This means the WHOLE system.


IS THERE A SILVER BULLET? NO, THERE ISN'T.

But follow closely the above, and you won't go far wrong.

Read the book Secrets of Software Success for more.

Exceptional software leaders are the rule

Chapter three - from the book Secrets of Software Success

Stephan Schmbach's story -

a. Aspiring to the virtually impossible

b. Recruiting the top programmers

c. Finding the funding

d. Meeting the press

e. Internationalising almost overnight

Result? In 1998, Intershop went public on the German stock exchange Neuer Markt with an IPO valued at about $300 million.

Essential characteristics of software leaders

- must be technology visionaries

- be extreme risk takers and hope for immense returns
(note: risk = challenges taken up. They are NOT crazy. They DO NOT bet on ONE opportunity; instead, they take multiple risks that yield multiple options for success.)

They bet on multiple options to prepare for all uncertainties. Examples:

Microsoft did NOT bet on the success on the Windows PC OS only. They developed an operating system TOGETHER with IBM for a DIFFERENT operating system.

SAP prefers to ADAPT than SHAPE standards. Investing in several standards simultaneously.

- Be ready to fail, "fail quickly" than avoid mistakes
The key thing in this business is to make mistakes quickly and correct them EVEN FASTER.

- Must aim high

Flip Filipowski founded Platinum Technology, gave himself 10 years to reach a BILLION in revenues...he took ELEVEN (11).

Bill Gates took 15 (Fifteen) years to reach a billion in revenues.

Intel, Oracle and SAP took LONGER than 10 years.

"In our global survey, we found an extremely strong correlation between high aspiration level and company success. Of the successful companies, 93 percent had a CLEAR and AMBITIOUS vision, whereas only 25% of the less successful companies had that same aspiration level".

- They are builders of highly dynamic organisations

Intel Grove of Intel describes it, "You need to plan the way a fire department plans. It cannot anticipate WHERE the next fire will be, so it has to shape an energetic and efficient team that is capable of responding to the unanticipated as well as to any ordinary event".

- They build extremely flat , team based organisations

- They create a culture that attracts and retains talent

- They have TEAMS at the TOP
Many of today's start up companies - and even the software giants - are NOT led by a single leader. Rather, many companies are led by leadership TEAMS.

Examples,

Concurrent Computer Corporation - $340million business with 3,500 employees
Jim Sims - Company visionary Chairman and CEO
Toscanini - Analytical, with realistic views, firm grasp of financial figures. VP and Controller

SAP
Dietmar Hopp - Chairman - down to earth, fact-driven leadership style, with an emphasis on planning and control.

Plattner - co chairman and CEO, takes "technology visionary role".

Oracle
Larry Ellision - Oracle's public face and conveyor of its vision.
Ray Lane - Ensures Oracle delivers

- They must grow or go

- They must have the mindset to WIN the race

A New Business Called "Software"

Chapter Two

Types of software businesses - differentiated by 5 eras:

1. Independent programming services
2. Software products
3. Enterprise solutions
4. Packaged software for the masses
5. Internet and value-added services

Differences between Enterprise solutions and Packaged software:

1. Enterprise solutions always need customisation.
2. Substantial time and effort to get it up and running.
3. ERP software cost - 30% on licence 70% on professional services to implement product
4. ERP sell far fewer copies

Business Dynamics - Case study

CUC started offering software products in addition to individual programming services, it also entered into the hardware market.

1 year later it lost $430k.

In 1985, CUC posted $2.4M in LOSSES on $1.5M in revenues.

Why did CUC fail?

Because CUC failed to address the differences in managing software SERVICES and managing software PRODUCTS.

What are the differences?

a. cost structure
b. demand volume
c. competition intensity
d. geographic presence
e. relationship management

Enterprise solutions firms must address the above continuously as both the product and services are linked to product installation.

Product business - Business Dynamics

a. Low barrier to entry
b. Low capital investments

In software product companies, most of the cost of software is in the design and coding of it. Including marketing and sales costs too. While variable costs are low, there is a LARGE upfront fixed costs for development of the product.

Therefore, in the case of Microsoft, Microsoft must sell millions of $209 operating systems to recover its billion-dollar investment in cost of development.



Dosmetic markets even the size of the United States may be too small to reach such high sales volume.



Case study:


Intershop a German software start up moved to the U.S. just two years of its founding.



MANY SOFTWARE PRODUCT FIRMS KNOW ONLY ONE TARGET: THE WORLD!



Only a tiny fraction will succeed in that market.



Important to note: LAW OF INCREASING RETURNS



The law states that a product that advances in market share tends to get even FURTHER ahead and sell even MORE copies, while the one that falls behind tends to fall even further BEHIND. Advantage and disadvantages tend to magnify rapidly. This law leads to a very high market concentration after a short time, leaving FEW WINNERS and many losers.

Why?

1. The ability of programs to operate together and exchange information is critical; thus people buy the same software as the people usually communicate with. Users enjoy "increasing returns" from their software as other users also begin to use it.

2. Once users are trained on certain software products, they are less likely to switch to others because they would have to be retrained.

3. Since software products are often difficult to evaluate objectively, decision makers often buy whatever is most popular.

How to achieve it?

It is crucial to reach more than 40% market share within a certain niche within 12 to 18 months.If your competitor is well behind, word of mouth in the marketplace starts spreading the message that you are the market leader and once that happens, market share can be expected to increase beyond 50% of the following 12 months' sales.

So, you have to move with speed with carefully laid out plans!



Business dynamics - Professional services business



The law of increasing returns DOES NOT exist in the service business.



But it shares similar traits of a product business.


- Low entry barriers
- Constant threat of new entrants
- High pace of innovation



However, the service firm business model is radically different.



Case study:



A 1996 McKinsey analysis of 22 companies showed that the cost of revenue is MORE THAN 4 TIMES as high at software services firms than at product companies.



Why?



If Anderson Consulting builds a custom made software solution for a customer today, and a similar one for another customer tomorrow, the cost of both of them is NOT radically different.

It is quite different from the radical cost for the second CD-ROM copy in the product business.



Market leadership


There is NO RACE for market leadership. Since every product is custom made, the customer's desire to remain with a market leader is not as strong as with software products.

For these reasons, smaller local professional services providers can be very successful.

Case in point: Andersen Consulting with revenues of $6.6 billion in 1997 reached a global market share of LESS THAN 6%.

Challenge of managing the two business types simultaneously


The enterprise solution companies CANNOT address these issues by coping with ONLY ONE business type. Organisational separation and different marketing approaches for EACH business within the company must help solve the problem.

Case study:

ADV Orga a leading enterprise solution company in Germany in the early 1980s with more than 500 employees failed to do cope.

There were NO CLEAR ORGANISATIONAL separation between their product and service businesses.

Whenever there were many service projects, developers were pulled off the product business to support those projects. As a result, product development was often put on hold and market launches were delayed.

Furthermore, marketing was handled similarly for both products and services.

In 1989 ADV Orga was sold with heavy losses. Their main competitor SAP addressed those differences mainly via partnering in professional services and rose to global market leadership.

Leadership is important - leaders must accept the uncertainty AND thrive on it. Leadership is one of the most important ingredient in software success.

- read the book for more details.

It's like riding a bull

This is a book review / with excerpts from the book "Secrets of Software Success"

Chapter one

Software is nothing but pure knowledge in codified form. Software makes hard cash and software companies make millionaires out of programmers, assistants and receptions...and of course the marketing and sales people.

So everyone should jump in and make money? Yeah...apparently so because ANYONE can start a software company. The big question is "What happens hereafter?"

70% - yes SEVENTY percent of the computer industry's revenues were from products that did not exist 2 years ago, according to The Economists in 1996.

Summary? - CTO of Microsoft Nathan Myhrvold sums it best -
"No matter how good your product is - you are ALWAYS EXACTLY 18 MONTHS AWAY FROM FAILURE."

Many can start a software company, very few can run it.

Victims?
Wordperfect
Lotus
DBase

So what makes the difference?

Simple answer, according to the book.
The product must be good, BUT the key difference is the COMPANY'S MANAGEMENT.

I quote from the book "the management of software firms is a balancing act. Success depends on simultaneously striking the balance within and between key management areas, from internal areas such as LEADERSHIP, PEOPLE MANAGEMENT and PRODUCT DEVELOPMENT to more EXTERNAL areas like MARKETING AND PARTNERING."

Although some software companies spend more of the budget on marketing than McDonalds, only few spend it wisely.

The firms that succeeds does the following:

1. Communicating a CLEAR VALUE proposition to customers.
2. Do not advertise product FEATURES
3. Advertise company BRANDS
4. Introduce new products TWICE a year
5. Apply creative software entry-pricing techniques to build customer base
6. Innovative approaches to PR
7. Let partners pay for extravagant promotions
8. Establish and communicate completely new platforms
9. Build marketing alliances
10. Preinstall software - to reach, sustain, or take over the pole position to become the "category killers"

It is growing their partners that makes software companies grow themselves

There is NO growth without partnering activities in the software industry. Alliances are NOT a convenience; in most cases they are a matter of survival.

Most of the successful companies GIVE AWAY 80% of the total revenues created WITH their partners.

These partnership are often informal and few written contracts confirm them. They move in and out of what they term "Partner Webs".

Conclusion:
John F. Keane founder of the $1 billion professional software service firm says "It's also like riding a bull. You really have to be aware of the bull's movements. Because every time you think you succeeded, you are thrown off the bull".

Profit is NOT cash

Your profit and loss statement tells you how your company has performed during the financial period. It also includes NON CASH items, aka expenses or income not spent or received yet.

You can therefore make a profit and NOT have any cash!

To have better cash flow management, you have to speed up your working capital cycle. How?

- Minimising stocks
- Getting debtors to pay up quickly and more regularly

Examples of NON CASH items -
a. Depreciation
b. Accrued charges
c. Accrued income
d. Translation gains/losses of foreign currencies
e. Profit/Loss on disposal of fixed assets

Where do you stand? Financially.

Many years ago, I read this book How to Grow Rich by Frank Newman and Dr. Muriel Newman. I thought that I could "beat" the odds and attain wealth earlier.

I guess most of us tend to "follow" this graph trend, although the $ in value would differ and the perception of whether you are wealthy or not is quite relative.

To see where you stand, I would cite the "wealth ruler" based on Robert Kiyosaki's book "Retire Young Retire Rich"

On page 102, he states:

Upon retirement at age sixty-five, the income WITHOUT working falls into these categories:

Poor $25,000 or less per year
Middle class $25,000 - $100,000 per year
Affluent $100,000 - $1M per year
Rich $1M or more per year
Ultra-rich $1M or more PER MONTH

So, where do you stand today?

Too Much Profit - Part Two

That is to say, look at the cash flow aspect of the transaction.

Billing your customers for products/services not delivered yet.

For services, you should only recognise the percentage of job completed. You should also accrue for costs (%) that has not been incurred directly related to the job.

In accounting, you should only invoice your customers when you have delivered your products. However, a lot of businesses invoice their customers before delivery because the invoice acts as a confirmation of sorts or a "notice" to get customers to pay before delivery.

This leads to uncertainty to the profitability of the transaction.

1. What if the customer doesn't pay?
2. What if the customer changes its mind and either cancel the order or amend (downwards) the amount billed?
3. What if the cost of the supplying the product goes up and is no longer profitable?

So what should you do?

1. Only invoice a customer backed by a purchase order or a signed agreement.

2. Remember to accrue for the cost, even though your supplier has yet to invoice you.

3. Remember to hedge against any foreign currency fluctuations.

4. Any disagreement in regard to the transaction should trigger a provision for doubtful or bad debt.

5. Go through your customer statements and identify bad pay masters, issue credit notes for returned goods, damaged goods or discounts that you have to give.

End of Part Two

Too Much Profit? Part One

Too Much Profit?

What sort of business doesn't want to show a huge profit at the end of the year?

A business that doesn't want to pay taxes? A business that doesn't want to pay its shareholders? A business that doesn't want to pay out a bonus?

Well, the list goes on...but like everything else, we are missing the KEY reason why a large profit isn't so platable to management or its owners.

A large (or significant) profit does not necessarily mean a healthy business. It could just be the following:

1. More orders in the last month of the year
2. Fixed assets has been fully depreciated
3. A large inventory at the end of the year
4. Exchange gains during year end translation
5. Waiver of amounts due to directors/other creditors

That just means PROFIT IS NOT EQUAL to GOOD POSITIVE CASH FLOWS.

However come tax reporting you are being taxed on your profit cash items or otherwise.

It is therefore important to look at the accounts and see if you are booking in profits that are either non-existent or uncertain.

End of part one

Private Car - Part Two

Employee claim

Can you expense off petrol claims made by your employees as a tax deduction? Answer is NO.

How do you structure these claims?

1. Pay a fixed transportation allowance: IRAS will allow this tax deduction, however, you have to pay CPF on this allowance. Your employee will be taxed on this allowance.

2. Get your staff to take a public transport.

3. You can purchase a business vehicle - G plated vehicles. Why?

a. You can claim petrol, repairs and other related expenses. (except for fines & summons)
b. You are given a capital allowance deduction.
c. You can advertise your company on your business vehicle
d. You need not pay CPF and your employee is not taxed for using the vehicle.

4. Contract out a chauffeur position.

a. Save you the driving, gives you more time to prepare for your sales meeting.
b. Expense off this service received and get a tax deduction.
c. Move the maintenance of a car and driver to another person.

Leave the car in the garage/car park

IRAS clearly states that ALL expenses for S-plated vehicles are NOT tax-deductible. That means no deduction for petrol, repairs, parking etc.

You MAY claim petrol expenses from your company, it is allowed, it is however NOT allowed for income tax deduction.

For example,

Net loss (S$6,000) (Out of which $8,000 is for your car)

Add back:
Upkeep of motor vehicles S$8,000

Adjusted profit S$2,000

Tax approximately S$200

Therefore, it is tax wise better to take a taxi, as you are able to claim every single cent.

Again, this has to depend on your overall expenditure on your vehicle (hire purchase instalments, petrol, repairs, parking, depreciation....)

See Part two to deal with employee claims.

Director's fee

Many auditors and tax agents advise Director's to accrue for directors' fee to reduce the profit that is to be taxed at corporate rates.

There are several considerations before using this technique.

1. You have to know your personal income OTHER than those from your company. What is your effective tax rate?

Example,

Corporate tax rate: 20% BUT for the first $100,000, the effective tax rate is about 10% So any other personal income HIGHER than 10% , directors' fee should NOT be declared.

2. Should you declare bonuses before declaring directors' fee?

Example,

Assume that your have $50,000 to be distributed and you DO NOT want to pay taxes at corporate tax rates.

If you declare $50,000 as director's fee - tax is S$1,750
(Assuming no other income and without calculating for tax relief)

If you declare $50,000 as a bonus - tax is S$900

You save - S$850!! Why?

When you pay bonuses, you will be given a relief for the 20% CPF that is deducted from your bonus.

Therefore,

Income - S$50,000
Less:
CPF - S$10,000 (20%)

Chargeable income - S$40,000

First S$30,000 S$350
Next S$10,000 S$550
Total S$900

This example does not take in the consideration that CPF is payable for the bonus by the Company. This will reduce the corporate profit FURTHER.

Plus, it will increase your NON-taxable income (CPF of 20% and 13%)

Capital Allowance - Part Two

Newly incorporated Companies in Singapore enjoy no tax for the first $100,000 of chargeable income.

So how does capital allowances come into the picture?

Example,

Net profit $40,000

Add back:
Depreciation $20,000

Adjusted profit $60,000 (before capital allowances)

If you have capital allowances available for NEW assets, should you start claiming them?

Let's assume you have capital allowance of $15,000.

If you claim, your tax free chargeable income is $45,000 ($60k-$15k).

Assume this happens for 3 years. You have paid no tax but you have wiltered away your capital allowances of $45k ($15k x 3).

In year 4, we will see the what happens.

Net profit $40,000

Add back:
Depreciation $0 (assume fully depreciated)

Adjusted profit $40,000 (before capital allowances)

Less:
Capital allowances $0 (all claimed previously)

Chargeable income $40,000

Less: Tax exemption
First $10,000 ($7,500)
Next $30,000 ($15,000)

Chargeable income $17,500

Tax payable $3,500
*********************************
Compared with,

Net profit $40,000

Add back:
Depreciation $0 (assume fully depreciated)

Adjusted profit $40,000 (before capital allowances)

Less:
Capital allowances ($15,000) (first year claim)

Chargeable income $25,000

Less: Tax exemption
First $10,000 ($7,500)
Next $15,000 ($7,500)

Chargeable income $10,000

Tax payable $2,000

*******************************
How much do you save?

First example - $3,500 tax
2nd example - $2,000 tax

You save $1,500!

Assume this scenario plays out for the next 3 years, you would save $4,500 ($1.5k x 3).

*******************************
If we assume that your 4th year profit exceeds $100k, and anything above $100k is tax at a full 20%.

$15,000 x 20% = $3,000 saved
$3,000 x 3 years = $9,000 saved!

******************************
This is a very legal tax strategy and yet very few companies utilise it. Are you one of them?

Cost of financing a small business

Many entrepreneurs fall prey to easy loans and cheap loans. They forget about the true costs of such easy financing.

Easy financing means HIGH exhorbitant interest rates. 24% per annum mostly.

Should young new entrepreneurs resort to using credit cards and unsecured bank overdraft facilities to finance? What other alternatives do they have?

One simple rule they should follow:

Finance A TRANSACTION

Never finance an operation.

What does that mean??

You can use your credit card when you want to purchase something to RE-SELL for profit.

For example,
Tom wants to sell PDA accessories in Singapore. He uses his credit card to purchase $5000 worth of PDA goods from Ebay and freight them into Singapore.

He again uses his Credit card to pay for freight by UPS or Fedex.

2 weeks later, the stock arrives and he sells it off at his retail shop or a shopping cart in a shopping centre.

In 30 days, he sold all his accessories $5000 worth of them. I always assume that NO entrepreneur will order MORE goods than he could reasonably sell.

His credit card bill arrives later, and he makes FULL payment. No interest, no finance cost, no harm done.

The bank is sad, Tom is happy.

This is called Financing a Transaction.

If you use your credit card or bank overdraft to pay rent, payroll, utilities because you are short of cash, then I am afraid to say that you are in deep trouble!

A company that uses overdraft facilities to pay for overheads is a company that is unprofitable!

Remember, always sell at a price to cover your FIXED and VARIABLE overheads.

To know how to price your products, make sure that you can:

1. Sell enough of it
2. Follow this common sense:

Breakeven = ( Fixed overheads + Variable overheads )/ gross margin per unit

For e.g.

Rental for one month = $3,000
Staff cost including yourself = $3,000
Telephone + Other expenses = $2,000

Total: $8,000

You buy PDA accessories for $25 and can resell it for $50 your margin = 50% (25/50) for ALL goods

So, how much sales you gotta make?

$8,000/(0.5) = $16,000

How does it work out?


Sales = $16,000

Less: Cost of sales (purchases + freight) = ($8,000)


Gross Profit = $8,000

Less: All expenses = ($8,000)

Net profit = $0



If on average one item sells for $50, you would need to sell $16,000/$50 = 320 units

Hope this helps.

Working with others

Most small businessmen have to work with associates as they will not be able to afford a full time team of staff to provide a full range of services to their clients.

It is NOT rocket science to know that failure is just around the corner. Most of these associates are loosely based and basically have no intention of making their associates rich in order to make themselves rich.

It is the ME syndrome.

I come first. I want my cut. I want my commissions. I want my share of profits.

I, I and more I.

I have yet to find associates working in tandem towards a common goal.

Do I have a solution for them? Not really except for the fact that having a network of associates is good as a temporary solution.

Your aim is to work towards building your OWN team right in your office.

Strive hard and you will get there!

Is Sunday ever a rest day?

For an entrepreneur, his/her mind is always on the business. Cash flow, sales, payroll...everything is so troubling to the small business owner.

So a rest day is to take the mind away from all the troubles, but can he/she do it?

I seriously doubt it.

A lot of entrepreneurs feel guilty of resting, of not doing anything to enhance or improve his/her business. They look for ways to be productive even on a rest day. They call old acquaintances for possible deals, they look up their name card rolodexes.

If they can't do much, a business magazine is always there, or maybe a book on better cash flow management?

Yes, entrepreneurs will be seen at country clubs and restaurants...but their mind is always thinking thinking thinking.

Personally, I think that it is important for a person to stop the machine (the brain) sometimes and relax. To play with the kids and have some time with the wife and don't feel guilty for wasting time.

Maybe a fishing trip every weekend? Or a stroll in the park, some leisure reading of comic books or just old fashion chit chatting with the wife.

Is Sunday ever a rest day? Well, it can be...hopefully.

Work the plan ummm...what's the plan anyway?

It never surprises me that clients never have biz plans...nor does it faze me when clients say 'plans are just plans, we have our plans, but it ain't practical.'

So why the maxim? If you fail to plan, you'll plan to fail? Since many entrepreneurs tend to agree that plans are a non essential part of business, they must be right, right?

Well, I certainly KNOW that they are wrong. Why? Because many small businesses stay small and die out within the first five years.

Reasons given are always, the government, short of cash, lousy staff...yada yada yada.

I always ask clients if they have plans before they started and if they have plans to take them to the next level...the answer is still a resounding...NO. We are NOT so and so company...we will stay small.

Why don't small businesses take time to work plans out? I have a few answers:
1. Most biz are started in HOPE.

2. Small biz are started to wreck revenge on former companies...stealg clients along the way.

3. Small biz are mainly financed by credit and founder's funds...hardly an environment to encourage periodic financial reporting.

4. Small biz owners tend to think that their plans are IN their head. THEY know.

5. Small biz owners deem themselves as creative ppl, planning takes the joy out of self-employment.

So what do I say to them? Nothing...they are my boss and customer and the customer is always right (even if they are wrong).

Ironic isn't it?

I am NOT interested in my accounting and financial results!!!

Well, most won't admit it, but financial reporting is the last thing on the mind of most biz owners.

Why the belittling of doing up the accounts, implementing accounting policies, doing tax planning and reporting to the government?

I really don't know?? Or do I?

Most accountants spend years in school in order to graduate and be of service to business people, and yet, business man believe wholeheartedly that they can be accountants because they know how to use MYOB or Accpac.

I don't blame software vendors to use the tagline "DIY accounting", "get rid of your bookkeepers forever".

But for business owners to take that in hook, line and sinker amazes me.

90% of businesses fail in the first 5 years mainly due to the lack of keeping track of their finances properly. Many end up broke, some bankrupt and many going back to getting a job.

They blame everyone else but themselves for not treating their financial statements as report cards of their business.

Why do schools give you a report card after an academic period?

It is so that the report card will tell you to either buck up or keep it up. Without a report card, nobody knows where he or she stands!

By avoiding or having a nonchalant attitude towards your financial statements, it is akin to telling your teacher that you couldn't care less if you passed or failed.

We all know what happened to the kid who did not bother about his report cards right?

Should you pay yourself a salary?

Most entrepreneurs have the habit of not paying themselves a fixed salary every month. I don't blame them and fully sympathise with their reasoning.

For example,
If you invested $100,000 in your own company and start paying yourself a S$2,000 salary, you would be taxed on this $2000 salary. Which is quite idiotic becos, the S$100K investment was already taxed once!

The other reason is, entrepreneurs can find tons of ways to use the money. Rather than pay their own salary, they should in fact use the money to purchase assets or pay for operating costs.

I am more often than not guilty of advising clients to pay themselves a salary. But why do I do so?

Aim of a business
Why do you set up a business?
To work yourself to death? To find a job for yourself, because you are too old to be hired?
No! Your ultimate aim is to breathe life into the business, thus earning you passive income.

Do I jest? No.

Differentiate the director from the shareholder

When you are a director of a company, you are essentially an employee. You are directly responsible for the day to day running of the company. You are paid a Directors' fee.

As an investor/businessmen, your aim is to one day relinquish the position of director to someone else. Yes, legally you can remain the director, but the "real" director will be a true employee.

A shareholder earns his income from the net profits of a company. Since companies issue dividends to its shareholders. The shareholder does not work for the company and yet gets paid for his investment.


Ultimately, a REAL businessman will collect his dues for his past efforts and the present efforts of his employees in the form of dividends.

So what are your considerations:

- Don't take a salary if,

1. If your salary is paid out of investment money
2. You cannot afford to pay your mandatory pension plan (CPF)
3. Your job is merely selling and NOT managing.
4. You don't need to pay Corporate tax (http://www.accountingbpo.com/taxnews.php)

- Do take a salary if,

1. You are doing more administrative matters OTHER than selling. In time, you will realise that the money is better spent outsourcing the admin work to a full timer or part-timer. You would rather PAY SOMEONE ELSE than do the admin work yourself!

2. You need to establish some sort of credit worthiness for yourself.

3. You are starting to manage and has gotten sales staff to do the selling.

4. When you have sufficient cash flow and can start "returning" your investment back to yourself.

*******************************************************

The main reason why a salary must be budgeted even though you do not intend to pay out these salaries is due to the fact that you have to KNOW what is the REAL cost of doing your business.

If you intend to build your company's portfolio of customers and clients, you CANNOT remain a one-man operation unit, you have to start employing.

Rather than NOT KNOW your true cost when pricing your products and services, which is a mistake alot of entrepreneurs make, it is better to buffer for an eventual hire of staff.

For example,

You are an IT programmer and your charge up rate is $30 per hour.

You can quote a project at lower than $30 if you are doing everything yourself. You have only one brain and a pair of hands, assuming that you will be occupied for a FULL MONTH, what would you do if 2 projects came by?

Assuming you take on the two extra jobs and subcontract it to your friends, they charging you $28 per hour (that's the market rate). Leaving you with a $2 profit per hour charged.

Have you made a profit? You will make an immediate loss IF you had not counted:

1. Management cost for the project
2. Incidental expenses
3. Interest costs - You may have to borrow to pay your subcontractors in advance first

You need to MAKE A PROFIT! So remember, always find out the "true" cost of running your business and bill accordingly and NOT according to the cost of a One man operation unit.

Getting out of the rut

How many of us work so hard for long periods and then suddenly feel that we can't go on working like that anymore?

Our brains go from overdrive to a standstill!

There is no immediate cure except for a good old fashion thing call REST!

Make sure you rest and go AWAY from what you have been doing for the past two or three months or weeks. Set your eyes on something different.

Go to the beach, off the mobile phone. Bring the kids for a short cruise or holiday...

It might take you two days, three days or even a week! But it is all for the better, why?

Because, remember that you have and are going to work those long hours. Remember, being self employed means working harder than the ordinary employee.

But your yield on the hour goes much much higher. So, it is okay to just take off and relax and come back even stronger. Monotony will make you unproductive.

In economics we call it the law of diminishing returns.

So, off your mobile, turn off your internet connections, stop looking at your emails...and see you in a few!

Capital Allowances - to use or not?

What are capital allowances? If you know what is depreciation, you know what are capital allowances. However, the distinct difference is the timing of claim, amount of claim, right to claim.

Depreciation rates expressed in years or a percentage are determined by the management of the company.

For example,
A Computer is deemed to have useful life of 3 years, therefore...

Cost - $1,200 Useful life - 3 years

Depreciation per year is $400.

What about IRAS?

Under Section 19A, computers has to be written off in ONE year.

So, a Company will claim $1,200 deductions rather than a deduction of $400.

Or in the case of a machine,

Cost - $3,600
Depreciation - $720 per year (over 5 yrs)
Capital allowance - S19A - $1,200 (over 3 years)

So, what's the loophole?

You are allowed to DEFER the use of capital allowances. IF you decide to START using it, you CANNOT defer capital allowances that you have started claiming.

For example,

Net profit as per accounts $800

Add back:
Depreciation $400

Adjusted profit $1,200

Less: Capital allowance
S19A - current (1,200)

Chargeable income S$Nil

*********************************************************

What if there was a loss of $400 for the year?

Net loss as per accounts ($400)

Add back:
Depreciation $400

Adjusted profit $Nil

Less: Capital allowance (Optional)
S19A - current ($1,200)

Unutilised capital allowance carried forward $1,200

You can opt NOT to claim your capital allowance and defer the claim to another year.

Why?
Although you can claim unutilised capital allowances in the following year, you are subjected to what IRAS calls a shareholders test. Whereby the present shareholder must maintain a 51% shareholding for BOTH the relevant period of claim.

If this test fails, all unutilised capital allowances brought forward are WIPED OFF!

Most new companies need new injection of funds, that means more shareholders in different tax periods and having these tax allowances disallowed can be a major tax disadvantage.

What if you have accumulated $50,000 worth of capital allowances brought forward? That is worth $10,000 (20% of $50k) worth of tax write off THROWN AWAY!!

End of part one...

Tax and Business Loop holes

Are there really tax loopholes? Are there really ways to structure your business to gain maximum financial, tax, operational advantages?

Isn't it all ILLEGAL? Well, not really. Tax planning services are openly promoted and most importantly done by top accounting firms everywhere in the world.

You have to however note the differences between tax avoidance (legal) and tax evasion (illegal). Will tax planners get it right all the time? The simple answer is NO.

Like all good government bodies, they (IRAS or your local tax authorities) reserve the right to interprete your transactions in WHATEVER way they deem fit.

Rule of the thumb is NEVER under declare your income and NEVER over claim your expenses.

In the following blogs to come, I will explore some tax planning that you can use WITHOUT falling foul of the law.

Why another blog??

Well, I have not been updating my blogs and to top it off, I actually made a spelling mistake naming my blog!!

smallbizThots -> became smallbizhots

How silly was that??

Now, why vchooz.blogspot.com? Well, there will be a new offering using the same domain name to all who are interested in this new service I will be providing.

It is NOT ready yet, so don't waste your time checking it out yet.

I will rant and rave and shamelessly copy and paste what was posted previously in my other blog!

Cheers!