Inc.com

President Obama and the Treasury Department proposed a major overhaul to the corporate tax rate. Here's what it means for small business.President Obama and the Treasury Department today introduced a 23-page outline that seeks to overhaul the corporate tax code, which, in its present iteration, is an unwieldy legal document that hasn't been modified since the Regan administration. The plan seeks to reduce the corporate tax rate from 35 percent to 28 percent, eliminate accounting loopholes, improve transparency, and simplify the document for small businesses."Our business tax system is not just outdated," noted Treasury Secretary Timothy Geithner in a statement. "It is unfair and inefficient."Tax boon for manufacturers The framework for the proposal puts American manufacturers in the spotlight. The plan calls to cut the top corporate tax rate on manufacturing income to 25 percent in an effort to succor American manufacturing. The framework also seeks expand the current domestic production activities deduction to 10.7 percent (from 3 percent).Businesses that deal in the production of renewable energy should also take note: The framework would make the tax credit for the production of renewable electricity permanent, "in order to provide a strong, consistent incentive to encourage investments in renewable energy technologies like wind and solar."Special perks for small business and entrepreneursSecretary Geithner and President Obama hope the proposed framework will ease the burden of taxes on American small businesses."We want to cut taxes on investment in and by small businesses, and we want to simplify the tax system for small businesses so that they can devote more of their earnings to investment and job creation and less to tax compliance," Geithner said.So far, experts seem optimistic about what the plan could mean to small businesses in America."The president's tax reform plan announced today is exactly what small business owners have been asking for," says John Arensmeyer, founder and CEO of Small Business Majority, a small-business advocacy nonprofit. "It will create a more level financial playing field for small and large firms, promoting healthy competition that stimulates the economy."Specifically, here's what the plan proposes:"Allow small businesses to expense up to $1 million in investments." Right now, small businesses can expense company-related investments of up to $500,000. But under the proposed framework, small businesses would be allowed to expense up to $1,000,000."Allow cash accounting on businesses with up to $10 million in gross receipts." Under current tax code, small businesses that make less than $5 million in gross receipts are allowed to use a cash accounting system, as opposed to an accrual accounting system, which is notoriously complex. The president suggests raising the threshold for cash accounting to $10 million."Double the deduction for start-up costs." Currently, entrepreneurs can deduct $5,000 from their start-up expenses. The president proposes doubling that deduction to $10,000."Reform and expand the health insurance tax credit for small businesses." Initially, businesses could qualify for the Affordable Care Act credit if it had less than 25 employees. Many saw that as a job-killing rule. The new proposal raises the number to 50 employees. Making the tax code simplerFor many small businesses, the cost of tax compliance is extremely expensive. In 2004, for example, nearly one out of ten small businesses spent over $5,000 in tax compliance and more than 11 percent devoted upwards of 500 hours to compliance. A recent National Federation of Independent Business (NFIB) study that found that four of the top 10 small-business problems were tax-related.The framework seeks to simplify the tax process. "Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns," the proposal said.Rep. Sam Graves, chairman of the House Committee on Small Business, has been a vocal critic of the impact tax complexity has on small business. In a recent speech, Graves noted that the more time and resources that spent on tax compliance issues, the less an entrepreneur has to hire employees and grow."During a time when job creation is a top priority, it is discouraging that our burgeoning tax code constrains small-business growth," he said. "Complexity weighs heavily on small employers, because they often lack the resources to hire expensive accountants or legal assistance."Does it matter for your business?Still, plenty of entrepreneurs are skeptical, and with good cause.First, the obvious question is whether Congress could even pass such a proposal in an election year. Republican candidates have already suggested their own plans (Mitt Romney wants to reduce the corporate tax rate to 25 percent; Rick Santorum wants to cut the rate to 17.5 percent and cut taxes for manufacturers; Newt Gingrich wants to cut the rate to 12.5 percent).For particularly fast-growing companies, a tax overhaul like this does little to address what really matters: access to capital.Zalmi Duchman, owner and CEO of The Fresh Diet, a Miami-based company the delivers healthy foods to customers, says: "Cutting tax rates or changing that tax code is only important if you're making money and if your company is profitable, but if your company is a growing company, you don't really care. You care about saving things like payroll tax. This doesn't help fast-growing companies; it doesn't help us on the Inc. 5000. We just need capital. For me, that's the most important thing."In the coming weeks, Geithner will meet with Senator Orin Hatch and Senator Carl Levin in the hopes of building a bipartisan consensus."In order to make us more competitive and create jobs here at home, we must reform our corporate tax code," Geithner. said. "The president's framework would boost growth and provide American companies with incentives to invest in the U.S. while simplifying and cutting taxes for our small businesses."

How to leveraged a low-cost structure into a strategic growth plan focused on low-risk, low-cost acquisitions.If you could get the jump on your competition, would you? Of course you would. By simply understanding your cost structure and comparing it to your competitors, you may be able to excel when others begin to fail. We recently worked with a client in global mining that was able to use this strategy to gain market share. Our work in helping the client evaluate profitable growth options involved an analysis of the company’s cost structure, which included four main steps:Understand the client’s own cost structure in detail. We carried out a very detailed cost analysis for each of the company’s individual mining operations.Gather industry data on competitors’ cost structures. In the mining industry there is a lot of publicly available information on cost structures, so we had a ready supply of information to use for our analysis.Talk to internal experts. We drew on the decades of experience of mining experts within the company. They helped us interpret the industry data and refine our estimates of relative cost structures.Use proxies where appropriate. In this case, we could look at regional differences in labor costs, energy prices, exchange rates, and a host of other cost structure drivers to refine our estimates.We have used this same approach with several clients and have consistently been able to reveal surprising insights about key competitors’ cost structures and profitability. For our mining client, we were able to show that the company was in the lowest-cost quartile of mining companies. This resulted in two key benefits:Their operations were likely to generate a profit at any realistic price level. In fact, prices would need to be so low that more than 50 percent of competitive capacity would need to be shut off before our client would see cash losses from their best mines (a highly unlikely scenario). In other words, our client was all but certain to generate positive cash flow, regardless of prices or demand levels. An enviable position, indeed, but such is the power of a low position on the cost curve.For the same reason, it was virtually impossible for prices to decline to the point that the client would be forced to shut down any mines. In fact, they could safely expand operations at their current mines with little risk.Not surprisingly, the CEO was gratified to see his company in such a favorable position on the cost curve. In fact, the company aligned around an explicit strategy to pursue only lowest-cost-quartile mining acquisitions. Although they paid rich prices for such “in the money” acquisitions, they concluded that the resulting lower risk profile of their operations more than offset the lower rewards from paying higher acquisition prices.By contrast, some of their competitors pursued a very different but equally legitimate strategy of pursuing high-cost, “out of the money” mining acquisitions. Essentially they were placing a bet on growing prices, and stood to achieve much higher rewards from high-price market scenarios, while incurring much greater risk of shutdown and cash flow losses from low-price outcomes. As it turns out, mineral prices have held up very well in recent years, so both strategies have paid off handsomely. Our client has earned very high ROIs from their mining operations, and some plucky independent entrepreneurs made investments in very “out of the money” mines, and have become very wealthy as a result.As you think about this case, here are three key questions to ask:How important is your position on the industry cost curve? Do you see low-cost rivals earning attractive profits and/or gaining share at your expense? Or do you see competition on other factors than price and cost, suggesting cost position is not so important?How does your cost structure compare to your competitors? Are you a low-cost producer? Or are your costs above the industry average?What impact does your cost curve position have on your growth strategy? Should you “fix” your current operations and lower your position on the cost curve before accelerating growth?

So, you're smart. But stop it already with the inflated vocabulary. To make the biggest impact, take a cue from the simplicity of Apple's branding and ditch the big words."I'm Bill Gates. Takes a genius to understand me." —Rapper Flo Rida in Good Feeling I hear that song on the radio and cringe. Flo Rida's lyrics suggest it's a good thing that it takes a genius to understand him—that complexity makes him, in fact, a genius. In reality, the opposite is true: It takes a genius to be able to communicate in a way that is understood by absolutely everyone and anyone. This inversion is one of the most important things for a creator to understand. This was the core finding of a 2006 study by Princeton professor Daniel M. Oppenheimer, wittily entitled "Consequences of Erudite Vernacular Utilized Irrespective of Necessity: Problems with Using Long Words Needlessly." Of the study's Stanford undergraduate participants, 86 percent admitted to puffing up their language at some point in an academic or professional context. It's an easy mistake to make. Those with higher IQs typically have large vocabularies. Thus we assume the converse must be true: if one uses a lot of big words, clearly one must have a higher IQ. There is a catch in this logic, however: readers, and users of software, are self-centered and also very lazy. In practice, we users care a lot more about our own experience of trying to understand something than recognizing the subtle genius of others. In a recent earnings call, Apple CEO Tim Cook explained one of the company's most core values: "We believe in the simple, not the complex." You can see this philosophy borne out in every aspect of Apple's customer experience: hardware, software, the retail experience, packaging, even down to words it chooses to describe products. In Adam Lashinsky's recent book Inside Apple, Apple exec Bob Borchers recounts that Apple boiled down the iPhone to three simple things: 1. It was a revolutionary phone; 2. It was the Internet in your pocket; 3. It was the best iPod ever created. Apple's consistent success is defined by its ability to describe a complex and powerful product in the simplest terms possible. Microsoft has served as a foil to Apple's simplicity for decades. Flo Rida's allusion to Bill Gates might be somewhat appropriate given the unusual amount of complex corporate speak found in Microsoft's product naming and marketing. For instance, products featured on the website of Microsoft Expression (a brand ironically aimed towards designers) include Expression Encoder Service Pack 2, Expression Blend Preview for Silverlight 5, and Expression Web *SuperPreview* Trial. It makes you wonder what exactly all of those products do, since it's not immediately obvious from their names alone. I'm a little afraid of finding out what "SuperPreview" means, as it will occupy neurons in my brain better suited towards more productive goals. Luckily, it's easy to avoid finding out because the product description is expertly hidden in a giant block of text. Flo Rida might be able to get by on a catchy beat and a memorable hook. Microsoft's engineering capabilities may make its naming gaffes forgivable. The rest of us will have to try create things that can be understood by geniuses and non-geniuses alike, and that very feat requires a bit of genius of our own.

So much for so-called f-commerce. Four reasons why Facebook users aren't buying.You'd think that Facebook would be a natural place for companies to sell their products and services. After all, the company claims far more than 800 million active users. But such big companies as Gamestop, J.C. Penney, Gap, and Nordstrom have all shut down their Facebook stores, according to Bloomberg.Gamestop says that customers had no reason to shop via Facebook rather than go to the company's own website. Gap's explanation was similar, while Nordstrom decided on a broader social media strategy. Wade Gerten, CEO of social media development firm 8thBridge, which opened a number of Facebook stores for its clients, said that companies are bailing out and that so-called F-commerce deserves a grade of F.Charles Nicholls, founder of e-commerce consultancy SeeWhy, recently wrote that, except for a few exceptions such as music and games, which can be inherently social, direct selling on Facebook is a bad idea for most companies for four reasons:People don't go to Facebook to shopCompanies sell their goods through retailer chains, e-tailers, and their own e-commerce websites because, to paraphrase bank robber Willie Horton, that's where the consumers are. Getting sales rests significantly on catching people when they're in a buying mood. That's why shopping malls can be so successful. Someone goes into a mall ready to buy and then sees other opportunities.But social networks are different. People go to them to socialize and have fun. Although there is a large group of people on Facebook, providing opportunities to shop may not work because that's not why they logged in.The results aren't incrementalThere are various reasons why you might want multiple retail outlets, but they generally boil down to more opportunities for additional sales. However, according to Nicholls, there is no evidence yet that Facebook creates those additional opportunities. Instead, they seem to cannibalize sales that a company could have made by using promotions to drive people to its own site.There might be ways to make the purchasing process inherently more social, but that would mean a different approach than setting up a storefront on Facebook and directing customers there instead of your own site. And if there aren't incremental sales, then a company ends up spending more resources on its entire retailing strategy, lowering margins as a result.T-R-U-S-TMany people distrust Facebook. That might seem unfair, given that other companies collect the same types of data to better target advertisements and marketing. But this is a case where perception trumps reason. According to Nicholls, some studies (he didn't name them) suggest that people are reluctant to shop on social network sites because of concerns about security and privacy.Small horizonsA company has latitude to do what it wants on its own website and to use information from viewing and purchasing habits to improve consumer experience and financial results. But you're more limited on Facebook. There is less space to display products and the Facebook stores typically have far less merchandise than on e-commerce sites. Throw in the further limitations of mobile interfaces to Facebook, which are very popular, and you now have a big merchandising challenge.There might be ways to make a Facebook store work, but most companies would be better off redirecting the efforts into improving the effectiveness of their own e-commerce sites and in creating promotions to drive traffic.

Bruce Eckfeldt of Cyrus Innovation and David Harouche of Multimedia Plus share their internal strategyTwo Inc. 5000 CEOs, David Harouche of Multimedia Plus and Bruce Eckfeldt of Cyrus Innovation, shared their strategies for transforming their business models with an audience of Greater New York area business owners and executives. Held at Inc. Magazine's headquarters in downtown Manhattan, David and Bruce both have a common goal: to improve their respective businesses through radical business model evolution.That's where their similarities end, however.David's company provides training programs for the retail industry (for example, teaching a Gap sales associate how to sell this season's new sweaters). Based on a purely transaction model, David creates training packages whenever his A-List clients require them. Seeking a more integrated relationship with his clients, he's evolved that "product" model into a "service" model where he provides cloud-based training programs which allow the client to track the training progress of each employee and correlate that to their sales output. By transitioning to a "per user" model and away from a "per training program" model, David has been able to create a recurring revenue stream that will increase the valuation of his company by nearly 8 times!Bruce's company provides programmers to large companies undertaking mega-scale software development projects. His company is paid by the hour for the services his programmers provide. He and his partners have been experimenting with a "product development" model so he can get beyond the "tyranny of the hourly wage." By redirecting internal resources to collaborate with other businesses who have specific market vertical expertise (for example a travel industry company), Bruce envisions moving into product development using his developers as a form of "sweat equity" in a series of start-up ventures. A home run would be a product that scales up and monetizes quickly, creating revenue in the short run and a big payoff down the road.Both David and Bruce are facing the kinds of developmental stages of growth that's common for Inc. 5000 companies: they've developed successful client relationships, built a team, created cash flow and produced a lifestyle business, but scalability is a choke point to further growth. By evolving their business model, they seek to use their expertise and existing resources in a new fashion to produce a more scalable result. Thanks David Harouche of Multimedia Plus and Bruce Eckfeldt of Cyrus Innovation for sharing your own evolutionary progress with our regional business community!