Author Archive

Are you getting the most out of your accountant?

Often, clients put their accountants in a box like this and won’t let them out.  I have experienced this.  Once a client gets it in their head that “Polito is our tax guy”, it’s really hard to shake that image.   Our profession has so much more to offer!

When I was in the publishing business, before I knew what accountants did, I was the same way.  I called my accountant for tax stuff and little else.  I failed to take advantage of his years of knowledge and experience.  That business never flourished!

Many CPA’s start their careers as auditors for national firms auditing financial statements.  That is an extremely valuable experience.  Frequently, after between 2 to 5 years, these auditors  join public companies as controllers and chief financial officers….. and,  a significant number go on to become CEO’s of large public companies.  Indeed, there is a lot more to accounting than financial statement preparation and tax compliance!

About 10 years ago, we developed a service for a number of clients who had what I  term “technician syndrome”.  These clients  knew their particular trade or business and were fairly successful at it, but knew nothing about  the financial condition of their company.  They had no idea how they were really doing.  If there was cash in the bank, things were ok.  Actually, they were in a contest with their competitors but they weren’t keeping score!  In many cases, they didn’t understand the scoring system!

With the help of  my associates, I developed a series of graphs and reports tailored to each particular business.  We find elements of the financial records that if measured, could provide tools to gauge the success of various strategies.  We call these” Key Performance Indicators” (KPI’s).  We  model the effects of slight changes in these measures.  What would happen , for example if the company could increase margins by one percent?   What it would mean to the company, its owners, its employees, and other stakeholders.  We benchmark the clients by industry and size so they can see how they are doing compared to their peers.

We meet with these clients quarterly to go through the financial statements and the special reports that we designed specifically for that client.  At first, these meetings were the only time the clients seriously looked at their financial data. The meeting  is a really important part of this service.  It takes fairly deep study and analysis to really utilize the data.  This analysis coupled with the prodding of a seasoned professional outside the business, provides a stimulating atmosphere for new ideas on how to improve the business.  The brainstorming that goes on in these meetings is extremely valuable.

How do we use the data?

Using break-even analysis, we illustrate profitability scenarios.  We work with clients to develop budgets that support their strategies and we develop financial tools to measure the effectiveness of new strategies.  We develop forecasting models which our clients can use to project income and cash flow, and finally, we do tax projections with cash analysis so that the demand on cash for any suggested tax strategy can be quantified in cash required and cash saved.

To a non-accountant, this stuff is daunting.  I am convinced that one  reason some businesses can never “break through” to that proverbial “next level” is because they fail to make full use of their financial data.  By meeting regularly, even on a quarterly basis, for the sole purpose of assessing the performance of the business, clients tend to be more engaged, execute strategies more consistently, and frankly, make a heck of a lot more money!  In the final analysis, we are helping them keep themselves accountable by orchestrating  the reading of the scorecard.

At this time of year when we “resolve”  to improve, it’s a great time to develop tools to measure business performance and get very intentional about the way we run our companies!  How’s this for a New Year’s resolution…call your accountant and ask him or her how they can help you better measure your performance.  You might be amazed at the untapped resource on your team!

All $250,000 taxpayers may be the Wrong Target…Too important for such a broad brush.

All $250,000 taxpayers will often be the wrong target if the goal is to rebuild the economy with private sector jobs.

I have served small and medium sized private companies for over 35 years. The proposed tax increase on those so called “wealthiest Americans” is one of those broad brush solutions that will turn out to be counter-productive.

We know that employment is driven primarily by small to medium size privately held companies.  This makes sense.  These are usually owned by someone who lives in the U.S., works in the U.S. and does business primarily in the U.S.  Simply put, most small businesses exist to create a job for their owners and employees.  Contrast this “business purpose” with the purpose of a public company.  Public companies strive to build shareholder value.  Ever increasing pressure to create earnings tends to push labor intensive processes overseas and eliminate jobs through automation.

A study of most business classes will indicate that profit margin (net profit) generally runs between 5% and 10% if the business is profitable.  This category called “small to medium” size will have revenues somewhere between $2 million and $200 million.

Most of these businesses report their income and pay their taxes on the owner’s tax return.  Most of these business owners will tend to take salaries in the low 6 figures….say between $100,000 and $300,000.  Now let’s say that a typical “expanding” business grosses $5 million and nets 5%.  That net is $250,000.  When you add that to the say, $200,000 in salary, you are right in the cross hairs of the president’s proposed tax increase.  What may not be understood is that the $250,000 in profit is not in the owner’s hands.  It is in the business.  These earnings pay for things like new equipment, additional employees, debt principal and owner draws for taxes which are not deductible. 

In the accounting business, we call the $250,000 in my example “pass through” income.  The taxable income is passed to the shareholder’s or partner’s tax return, but the cash generally, is not.  When you tax it, the money has to come out of the company’s working capital leaving fewer dollars for expansion, hiring new employees, etc.

Also, when this “pass through” income is added to the owner’s salary, it is taxed at the owner’s highest rate which will be higher than the corporate rate if the President’s proposal is accepted by Congress.  It should not be taxed at a higher rate than the large corporations pay.  To do so will further cripple our economy.

An Individual who makes $200,000 per year in salary or a couple that makes $250,000 without adding any jobs to the economy probably ought to pay more tax.  But a business that employs people should not be subject to the same level of tax.  Fairness is not at issue here.  Our struggling economy is the issue!  There should probably be some sort of exemption or maximum rate of tax (like the current treatment of capital gains) for business pass through income that will help stimulate job growth in the economy.

It’s Your Money Not Theirs

Clients, Friends and Fans,
Sunday night Don and Paul were guests on the radio show “It’s your money not theirs” hosted by our good friend and former partner, Richard Muscio.  The show airs every Sunday at 7 p.m. on 760 KFMB.

We talked about entity selection and borrowing from traditional lenders like banks.

We have added some of the material to our website under articles of interest you can download the pdf here “Choice of Entity


Listen to


Time may be running out for large tax-free gifts!

Early this year, Congress passed a two-year revision of the Estate tax law.  One of the elements of this “two year wonder” is that the amount exempt from gift tax was increased to $5 million.  This meant that a married couple with proper estate planning in place could gift up to $10 million to heirs without any gift tax.  We have never seen an exemption of this magnitude.  The law as passed earlier this year expires 12-31-2012 when, if congress doesn’t act, it returns to $1 million. 

The congressional “super committee” charged with balancing our budget is seriously considering  changing this $5 million exemption back to $1 million THIS MONTH!

Rumor has it that for a variety of reasons, this is a compromise Republicans appear willing to accept.

The fear is that the change will take place in a bill which will get an immediate yea or nay vote in the senate.  If passed as expected, it will be enacted as part of a deficit reduction measure which will become law as of the vote….likely on November November 23rd (Thanksgiving is early this year).

Those who have been planning to make large gifts to take advantage of this $5 million exemption need to complete these gifts by November 23rd to be safe.  If you had planned on revising your estate plan to put a large gift into play before the end of 2012, I think you should move on those revisions quickly. 

Gifts of this magnitude should never be made without careful thought and planning.  If you have that sort of wealth and you wish to pass it to your heirs at some point, it would be extremely wise to get started on the planning.  If this pending reduction doesn’t become law this month and it is being considered as a deficit reduction measure, there is little chance that the $5 million exemption will survive into 2013 and beyond as many estate planners initially thought.

We always suggest that you seek professional assistance when considering strategies like this.  It is MOST IMPORTANT in the area of estate and gift planning!

The Dry Cleaner

One morning I stopped by my dry cleaners to drop off some clothes. There was a sign on the door thanking the loyal customers of so many years, and due to an equipment breakdown, same day service was no longer available.  Also, the prices were increased by about 40%. The reason I have been using this cleaner for the past 20 years is that he offered same day service.  The convenience of only having to remember “CLEANERS” one day a week made this dry cleaner very appealing to me.  He was also the cheapest cleaner in town.

One day I asked the owner what happened.  He told me that his equipment was very old and he had never been able to save enough money to replace it.  Now, with credit markets as tight as they are, he cannot get financing to purchase new equipment. 

There are valuable lessons here for business owners: 

It is critical that you know your competitive advantages and disadvantages, in the customers’ eyes.  This business owner thought that he had to have the lowest price to compete.  So he priced his service about 16% to 30% below the competition. He was the only cleaner that offered same day service without an extra “same day” charge.  Now, he no longer has either the price advantage or the service advantage; he is just like his competitors. 

I wonder how much business he would have lost if he raised his prices to a point midway between the competition’s regular price and their “same day” price?  Certainly, he would have lost the “bottom feeders”, but by observation, most of his business was “going out” or office work clothes and uniforms…..clothes people need every day for work.  I’ll bet he wouldn’t have lost much business at all.  You are talking about 50 to 75 cents per garment. 

Here are some lessons in this unfortunate story:

  1. Know your costs…..including the wasting cost of the assets used in your business.  Nothing lasts forever.  Manufacturers have data they are more than willing to share.  Also consider the obsolescence risk.  Due to the high cost of labor, most manufacturers are automating equipment to greater degrees to limit labor inputs.  Many business owners think of depreciation as something you do for taxes.  In reality, it is “a rational method of allocating the cost of an asset to the periods it is used in the business.”
  2. Know your customers.  Ask them why they like to do business with you.  They will tell you.  If my cleaner friend had asked me I would have told him that it was worth a premium to be able to pick up my cleaning the same day I dropped it off.  If most customers were like me, he could have earned more over the life of his business and been in a position to replace the equipment.  When he is ready to retire, he would have had a saleable business.  I’m not sure he has that anymore.  He’s just another dry cleaner now.
  3. Find differentiators other than price.  Someone else can always do what you do cheaper.  Find a unique value proposition you can offer your customers and set your price based on that value proposition.  Regularly review your cost of providing the goods or services you sell and make sure you protect your margins. Frequently we help our clients in this regard by illustrating “cost, volume profit analysis” at various price points with various volume assumptions.  It is much easier for a small business to achieve and retain profitability at low volume and high margins than attempting to ramp up volume and hold down prices.
  4. Always keep an eye on technology as applied to your business.  Don’t be afraid to adopt new technology if your due diligence indicates that it will improve your value proposition. 

Michael Gerber, author of the “E Myth” and several other best selling business books, has built an empire based on a simple concept:  An owner must work “on” his business, not “in” his business.  

We must all work smarter, not harder.  Working hard at the wrong thing frequently leads to exhaustion, burnout and failure.

QuickBooks ventures into the world of Customer Relations Management

Jodi Coppens of AdvantEdge Accounting Solutions is a consultant we have worked with for years.  Jodi is an expert with the MAS 90/200 software family of products and the QuickBooks software line of business software.

Our clients really appreciate Jodi’s expertise in helping them maximize their investment in software.  Jodi was telling me about some significant features being added to QuickBooks for the 2012 releases.

I asked Jodi to write this blog for our readers:

By the way, if you are interested in contributing to our blog, email Mary for more information.

QuickBooks takes baby steps into the world of CRM with the release of its 2012 product line!

Introducing the Lead Center:  moving towards a mini-CRM functionality, a new “Center” has been added to manage Leads.  You have basic support for tracking your interactions with potential customer.  You can add lead information one entry at a time, or cut and paste multiple entries from an Excel spreadsheet (after moving columns to conform to the mapping that QuickBooks requires). Once a lead becomes a customer, you can easily move the lead data to your customer database with a single click, and the best thing is, they don’t clutter up the customer list until that time.

Users who desire more-robust CRM functionality now have the option of integrating this software with through the new Salesforce for QuickBooks add-on.

Also introducing the Calendar View:  You can now access an organized and automatically populated calendar view of appointments, your To Do’s list, and invoices and bills coming due or past due.

You can also use this view to see what transactions you entered on any given date. I think I’m going to find this very useful!!

For more preliminary information on new and improved features in the 2012 product line check our Blog!

Jodi M. Coppens 760-722-6839 

Made in America

The continuing unemployment news makes it obvious to me that we must find a way to compete again in the manufacturing sector.  There are long lists of reasons why we don’t make things in America anymore, but the fact is, we must if we want a vibrant economy. 

Not all of us are capable of being “knowledge workers” or similar highly educated people employed in high tech or service industries.  There will always be a portion of any population that thrives by making things – performing physical labor.  We cannot continue to “legislate” or “collective bargain” the value of that labor; the world economy has set the value.  The market always sets the value of goods and services. 

During the great depression, the organized labor movement got a huge boost as the government came to the aid of the then under-represented American laborer.  Over the years the protections and bargaining rights have developed to the point where in many industries our labor has simply priced itself out of the market.  Labor unions have in many cases, caused manufacturers to move manufacturing off-shore or to “right to work” states” in the U.S.  It appears to me that unions are now costing their members more jobs than they are saving. 

I have made it my business to look for US manufacturing companies that are flourishing.  It seems that those few (and the numbers are growing) have developed a niche, are fanatical about quality, and happy enough to make a profit.  Their goal is not necessarily to go public or make gazillions of dollars.  They are typically small, efficient businesses who have identified a need in the marketplace and filled it….with high quality, appropriately priced products.  They do not compete on price; they compete on quality and service. 

Typically the stakeholders of these small companies are the owners’ families, their customers and their employees; not investment banks and shareholders.  This is the way most businesses get started; identify a need and meet it, making a good living and return on investment in the process. 

I now find myself looking carefully at where the things I buy are made.  If I can find a product made in USA that meets my needs, I buy it over the foreign made competition.  Thus in my own small way I am supporting my fellow Americans.  There is a growing movement to increase support for U.S. manufacturers.  Check out Diane Sawyer’s  Made in America Challenge.   Also there is an interesting blog called   “China Ate My Jeans”  written by my cousin, Tina Parsons, who has made 2011 the year she will try to purchase nothing unless it is made in the USA.  She has identified many US companies who are slowly beginning to rebuild our manufacturing sector. 

It may never be possible for U.S. manufacturers to compete on price in the world marketplace.  However, on a local or “close to home” level, niche manufacturers are beginning to flourish.  In my experience, the quality of the U.S. made products reward my extra shopping effort required to find them.  You won’t find these products at the local big box retailer.  You will have to look online buying direct from the manufacturer or at specialized “niche” retailers.

SBA Opportunities for Commercial Real Estate

Steve Harrington is a local banker our firm has worked with for years.  His articale below provides very valuable information about potential SBA loans for commercial real estate.  Finally, some positive banking news during this slow economic recovery.

By the way, if you are interested in contributing to our blog, email Mary for more information.  

Steve Harrington
Senior Vice President
California Community Bank
(760) 542-4230
(760) 542-4289 fax
(760) 390-4771 cell

I came across an interesting accommodation the SBA is allowing due to the challenging times in which we have found ourselves.  Many business owners utilize the SBA 504 loan program to purchase commercial real estate.  This program’s key benefit is 90% financing of the real estate and the improvements.  The financed portion is split between a bank loan in 1st trust deed position for 50% of the property value or proposed project cost and an SBA loan in 2nd position for 40%.  

The impact of the economic challenges we have faced over the last couple of years is that the value of the real estate, in most cases, has fallen more than the 10% equity.  I have a customer that would like to refinance his 1st trust deed loan, but assumed that the SBA would be reluctant to subordinate to a new first trust deed.  This assumption was based upon his opinion that SBA would see that the current value of the real estate has exposed their 2nd and would not approve a subordination request for a new 1st trust deed.

 What I found through conversations with the local SBA representatives is that the SBA will require a copy of the new appraisal, but will not base their decision to approve a subordination request on the current loan to value ratio.  What is of concern is whether their loan is current and handled as agreed, and whether the new first improves the cash flow of the business.

Investment Strategy

Jeff Vistica, one of our business associates from Gradney & Vistica Financial Management offers this post with a comparison of my golf game to some other people’s investment behavior.   Enjoy!

By the way, if you are interested in contributing to our blog, email Mary for more information.

What’s your take on golf?

Jeff Vistica,

You may be for or against the sport or maybe you’re not going to adopt a stance either way. Regardless, I hope you’ll chuckle at a comment by Santa Clara University Professor of Finance Meir Statman, in which he opined, “Golf seems stupid to me — a cognitive error that misleads avid players into spoiling a good walk.”

Is the man crazy; clearly doesn’t get it? Or are you nodding your head in sympathy? Don’t worry, I’m not suggesting there’s a right or wrong answer. In fact, his challenge to golf enthusiasts along with his editorial title — “What Investors Really Want” — got me thinking about the value of differing perspectives.

When you take your leisure time, what is it that you enjoy the most? The competitive nature of sport…achievement…or perhaps a restorative pastime? What you choose doesn’t matter much to me. What does matter is whether you know deep down which is the right answer — for you. Wherever you find your reward should be the driving force for how you choose to play.

Translate that into the world of investing: like most years, 2010 offered up the usual frenzy of financial distractions that threatened to ‘hook and slice’ us into unforeseen sand traps. For example, consider this sampling of 2010 headlines:

  • May 29: “May 6 brought the ‘Flash Crash,’ a bewildering nearly 1,000-point slide that still defies explanation.” — The Wall Street Journal
  • July 23: “The equity markets are not working on a scale that is truly shocking.” — Financial Times
  • September 27: “Some 279 banks have collapsed since September 25, 2008.” — The Wall Street Journal
  • December 3: “The unemployment rate unexpectedly rose to 9.8 percent last month.” — The Wall Street Journal
  • December 29: “Housing market is still facing a blizzard.” — The Wall Street Journal

How did we respond to these and other reports? All too many investors reacted by swinging wildly at the risks and rewards from the previous hole, so to speak. Investors pulling their money in and out of the stock market documented this behavior. According to Morningstar, average stock mutual fund flows over the 36 months through November 2010 saw outflows of $414 billion, with $132 billion of these outflows occurring between November 2009 to November 2010.

Is this a wise strategy? Stocks in the S&P 500 Index ended the year up just over 15 percent. The Russell 2000 (U.S. small-cap) Index returned nearly 27 percent. International stock returns varied widely by country, with Peru and Thailand in the lead, and Greece and Spain in the basement. As a whole however, international stocks as measured by the MSCI EAFE Index, provided positive returns of just under 8 percent.

Investors who knew their game were best positioned to capture these sorts of returns in accordance with their personal risk/reward goals.  Those with a clearly established diversification plan realize a sound portfolio is built to ignore these distractions. They recognized that predicting market movements based on current events is nearly impossible and that a properly diversified portfolio is the winning strategy.

Book Review: Guitar Lessons by Bob Taylor

Paul Polito

Many of you who know me personally know that I am an amateur guitar builder.  I picked up this hobby when I was in high school back in the 60’s.  Every Christmas I usually receive gifts that “feed” this habit…….I mean hobby!  Most years its tools, gift certificates to woodworking equipment stores and the like.  This year, my lovely wife Helen gave me a new book written by Bob Taylor, founder and president of Taylor Guitars.  Bob grew up in about the same timeframe as me, loved the same music  I did and built his first guitar for the same reason I did…..he didn’t have the money to buy one!

In this very inspiring book called “Guitar Lessons” Bob shares with the readers the incredible story of how this tiny company started out and survived many years of no profits to become the most successful guitar manufacturer in the world.  I especially enjoyed hearing about how they hung on and improved the company during the 1980’s when acoustic guitars fell out of favor and the market dried up.  The market for acoustic guitars in the 1980’s was probably similar to the market for buggy whips in the roaring 20’s!

Each chapter recounts a lesson learned about things like lean manufacturing, automation and technology, employee relations, marketing, brand building, and more.  Any aspiring or struggling business person should read this book.  For years Bob and his partner Kurt couldn’t rub two nickels together so this book will definitely be a source of inspiration for anyone struggling to get a business off the ground.  There are many great lessons in this book about how perseverance eventually pays off and how listening to others can be the key to a breakthrough.  There are also great lessons in this book about risk and reward and doing the right thing no matter what.  The fact that it involves a very “hip” company makes it a valuable book for young people.

One of the nice features of the book is the short chapters which make “Guitar Lessons” a very easy book to read.  For someone like me who takes over a year to build one guitar, hearing about how Taylor Guitars got from one guitar a month to 500 per day was truly inspiring!  This is honestly one of the most enjoyable books about business I have ever read!

“Guitar Lessons, A Life’s Journey Turning Passion Into Business” is available at  Barnes and Noble both in hard cover or as a Nook Book.  I will send a free copy of Guitar Lessons to the tenth new subscriber to our Blog after this book review is posted.  New subscribers email your subscription request to Mary McDannold at .


It's Your Money, Not Theirs

Latest Show

April 21, 2013–Richard and Joe discuss the more than 800 celebrity interviews and his techniques with Entertainment Reporter, Fred Saxon.

Featuring Polito Eppich

December 16, 2012–Richard and Joe welcomed Don Eppich of Polito Eppich. (Commercial free. 42 minutes.)

August 19th, 2012–Richard and Joe discuss tax policy and accounting services with Paul Polito, CPA and Don Eppich, CPA.

March 25th, 2012-Richard and Joe discuss the best accounting practices and strategic advice for businesses with Paul Polito, CPA and Don Eppich, CPA of