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Even Entertainment CPAs in Los Angeles Make Odd Business Decisions

In the last few weeks I have received not one, not two, but three phone calls from actors who are looking for a Los Angeles Entertainment CPA. Two of the calls actually were the parents of child actors. The services they requested varied a little, but the one thing that they did not like was the fact that they could not find a Los Angeles Entertainment CPA who prepared tax returns. What they usually found were Entertainment Business Managers who wanted to charge 5% of their income to handle their financial affairs(including tax returns). As one mother told the business manager, “What could you possibly do to justify taking 5% of my daughter’s income? She doesn’t own a house, or require any more than a few bills to be paid a month.”

I told each of the prospects, as entertainment CPA business managers, that we have never gauged services by billing a percentage of a client’s income. Over twenty years ago, I had worked for firms that billed that way. But, I believed it to be an inaccurate way of gauging a business manager’s value of service. Sure agents, personal managers, and some attorneys who help “create” the wealth. They have a legitimate reason to charge in such a way, but not entertainment CPA business managers and accountants. It’s true at times, that I am involved with contract negotiations, but my function is not to promote the client and create the opportunities.

A year ago I heard that entertainment CPA business managers and accountants are shying away from this practice, possibly because of the economy. But these last phone calls seemed to say otherwise.

So, what’s the point? If you are reading this, you are probably not an entertainment CPA business management firm like us. The point is whatever business you are in, you must always, always , always focus on the value you are providing the client and customer. Just because you think you are worth your fees or price doesn’t mean you have convinced the client that you are.

Whenever you are fortunate to get a phone call from a prospect who tells you that your billing structure is obsolete, you should re-evaluate your business strategy and billing practices.

Now some entertainment CPA business managers and accountants may say, ” Fine, you take the little guys and we’ll concentrate on the A+ level actors and musicians.” This attitude is what drove US Steel and Bethlehem Steel out of business. Micro mills slowly chipped away from the bottom up with a better strategy starting with the lowest grade of steel. Eventually, the smaller mills moved up to take the high grade steel, too, driving the big companies out of business.

As entertainment CPA business managers, our company promotes good business strategies, not just for our CPA firm, but for our clients. The small flame client you have today could be the big shining star tomorrow. And the shining star of today may be just a little brighter than what you think.

Business Opportunities: Gas Stations Making Their Own Music

Back in the 1960s, it wasn’t unusual to find four gas stations at an intersection in Los Angeles. These were full service stations who would fill your tank, wash your windshield, and check your oil. You would also just hand them your money (not credit card) from your open window to pay. These stations would try so many ways to attract customers and build a niche market in their neighborhoods.

Union 76 (currently Unocal) distinguished itself by creating a relationship with the former Brooklyn Dodgers. Union 76 would give away many different types of Los Angeles Dodger’s baseball memorabilia when you purchased a certain amount of gas. One such item was a flexible 45 rpm record of a Dodger player interview. Vin Skully would interview a Dodger player like Sandy Kofax. Union 76 had found a niche market with Dodger fans–forget about the gasoline.

Jon Ostrow’s article, How To Conquer Your Musical Niche reminded me of Union 76’s niche serving with automobile/Dodger fans. He laid out a number of items that a band should consider:

Demographic (age, gender location)
Similar / influential artists (remember to start locally, then branch out to the regional, national and global scale)
What are the influential promotional outlets?
Where do the fans exist online?
What blogs do they read?
How do they find out about new music?
Are they into fashion? If so, what brands?
What are their favorite hobbies?

At first glance, you may think this pertains to only musicians. But, look again. Here is the list converted to a 1965 Union 76 strategy:

Demographic (age, gender location)–Are they near a freeway that can lead to Dodger Stadium? Are they male?

Similar / influential artists (remember to start locally, then branch out to the regional, national and global scale)–Unocal may have start in certain neighborhoods and branch out.
What are the influential promotional outlets? Use Dodger radio to advertise Union 76 items.
Where do the fans exist online? What radio stations do Dodger fans listen to?
What blogs do they read? Advertise in the Sports Page of the Los Angeles Herald Examiner.
How do they find out about new music? Who do auto owners learn to about gas? Mechanics? Make sure each station has one.
Are they into fashion? If so, what brands? Sell Dodger hats at the stations.
What are their favorite hobbies? Unocal hit the head of the nail with Dodger fans.

Each business or band can use similar questions in nailing their niche market. The Blue Ocean Strategy is a strategy concept that can help you in searching for it.

Where Do We Go From Here? Strategic Planning In the Fog

The yellow bus lights glowed in the dark as my only beacon. I couldn’t see 20 feet in front of me on Highway 99 in the central California valley, but we had to get to Lake Huntington. The four cars packed with my companions followed my lead. At last, I saw the exit. Moving off the highway onto a dark farm road, my concern peaked. Where were the street signs behind the foggy shrouds? At last I stopped at an intersection and was able to see a sign, but only after I stood in the middle of a dark intersection looking almost straight up.

If you have been planning for the last three years, this story should sound like your attempt to plan strategically. Hugh Courtney’s Strategy under uncertainty lends us a flare in such dismal times. He offers a four-level framework for determining the level of uncertainty surrounding strategic decisions and for tailoring strategy to the uncertainty:

Level one: A clear enough future: Courtney states that managers can use the usual strategy tools in a clearer future as this. However, I see that medium and small businesses do not know what those tools are. The biggest private producers of jobs in this country, small business, usually work in a strategy void. Thus their decisions and plans are usually uninformed and a product of crises management even in the best of times.

Level two: Alternative futures: Outcomes are clear by hard to predict. Take the Ford Edsel, for example. The car seemed like a good strategy with a ready market, but it went the way of the do-do bird. This is where probability analysis can come in according to Courtney. For small businesses, look at the downside to each alternative. Is one downside greater? You may want to go the other way.

Level three: A range of futures:Taking Courtney’s cue, small businesses must limit their strategic options. Don’t take the shotgun approach and consider ten different strategies, for example, because you can. Your brain will explode, not a pretty site. Again, focus on the downside of your options.

Level four: True ambiguity: This option happens in an economic free-fall, or at least a controlled fall. More than ever, I recommend small business to take a Blue Ocean Strategy viewpoint and focus on the needs of your clients. Eliminate those attributes that your industry is providing clients that they can live with, e.g., meals on a commuter flight. You can take this approach for any other above levels, but at this level, it is usually a matter of survival. The wrong decision could land you in bankruptcy very quickly.

Small Business Promotion Using Social Media–How We Did It

I couldn’t believe it. Well, actually I could, but I didn’t want to. Gregg Towsley of WSI Quality Solutions sat down with me me 18 months ago and showed me that my business’s social profile was dead. In other words, if you typed in industry key words, we didn’t even show up on ANY page.

I came across What Drives Small Business Social Media Engagement? by Dan Schawbel. He cited a study by Roost which offered advice to small business owners who want to create brand awareness, customer, acquisition, and customer services.

Using only Facebook and Twitter, the study suggested the following:

Publishing photos: The study suggested photos of employees, products, and functions. I remember when I first put up our web page, our most valuable search term was my assistant Maddy Curley. She was an actress that had (and has) some success on television and film. People googled her after seeing her on a TV episode and came up with her picture on our personnel page.
Ask Questions:Start a discussion by asking questions. You see this a lot on LinkedIn. I feel that providing information along with questions is a better strategy. What do you think?
Share Quotes:There are way too many twitter sites and blogs quoting wise people. I don’t like to. I find it is far more interesting to coin my own phrases that display my expertise. You don’t convince others of you knowledge and wisdom by using someone else’s brain. (You can quote that).

The main activity that got our firm on the front Google page ahead of CPA firms much larger than us is our content and consistency. To be successful, you must give to the business community. We provide advice and steps to individual businesses that can help them in managing their finances.

2010 Small Business Tax Breaks Revisited

It’s always good to practice the basics, like a major league baseball player who may work on his swing by hitting a ball off a tee. So here I am going back to the IRS tax site to remind small business owners of the Tax Relief Act of 2010. There may be benefits that you may be missing.

Sect. 2011: Temporary exclusion of 100% of gain on certain small business stock

Expanding on the provisions of Internal Revenue Code Section 1202 and the American Recovery and Reinvestment Act, the Small Business Jobs Act provides an additional incentive for investment in qualified small businesses. Under this Act, investors in qualified small business stock can exclude up to 100% of the capital gain upon sale of the stock.

Under the SBJA, in order to claim the capital gain exclusion, the qualified small business stock must be:

Acquired after September 27, 2010, and before Jan 1, 2011, and
Held for at least five years before the stock is sold.

However, Section 760, Temporary Exclusion of 100% of Gain on Certain Small Business Stock, of the Tax Relief Act of 2010, extended the exclusion for qualified small business stock acquired before January 1, 2012.

Under current law, the earliest tax year for which this 100% capital gain exclusion can be claimed is 2015. Additional limitations, qualifications and requirements may apply. Capital Gains and Losses has information on reporting capital gains.

Sect. 2012: General business credits of eligible small businesses for 2010 carried back 5 years

The new law allows an eligible small business to carry back general business credits five years. Previously, the credits could only be carried back one year. The carryback is for credits determined in the first taxable year beginning after December 31, 2009.

An “eligible small business” in general is defined as follows:

A corporation whose stock is not publicly traded, a partnership, or a sole proprietorship, and
The taxpayer must have $50,000,000 or less in average annual gross receipts over the three preceding tax years.

This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009). The five-year carryback period is available only for credits carried forward to the tax year 2010 and/or earned in the tax year 2010.

Sect. 2013: General business credits of eligible small businesses in 2010 not subject to alternative minimum tax

The new law allows general business credits to offset both regular income tax and alternative minimum tax of eligible small businesses as described in Section 2012 of the Small Business Jobs Act (see above). The provision is effective for any general business credits determined in the first taxable year beginning after December 31, 2009, and to any carryback of such credits.

This is a one year initiative applicable only to the tax year 2010 (For fiscal year filers, the effective tax year is the first tax year beginning after December 31, 2009).

Sect. 2014: Temporary reduction in S-Corporation built-in gain recognition period

Under the Small Business Jobs Act, if the fifth year of an S Corporation’s recognition period ends before their 2011 taxable year begins, then no entity-level tax is imposed on the net recognized built-in gain for the 2011 tax year. Sect. 2021: Increased expensing limitations for 2010 and 2011; certain real property treated as Code section 179 property.

An expense deduction is allowed for businesses which choose to treat the cost of certain qualified property, called section 179 property, as an expense rather than a capital expenditure. For qualifying property placed in service during the taxable years 2010 and 2011, the new law increases both the maximum amount of the deductible expense under IRC Section 179, as well as the statutory phase-out amount. The provision also expands the definition of IRC Section 179 property to include the following types of real property: qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.

Sect. 2022: Additional first-year depreciation for 50% of the basis of certain qualified property

Generally, businesses are allowed to recover the cost of capital expenditures over time through depreciation expense. IRC Section 168(k) allows for additional first-year depreciation, for 50% of the basis, of certain qualified property placed in service after December 31, 2009. The new law extends the additional first-year depreciation deduction to qualified property acquired and placed in service during 2010.

Section 401, Extension of Bonus Depreciation, of the Tax Relief Act of 2010, expands the additional first-year depreciation deduction (bonus depreciation) to equal 100 percent of the cost of qualified property placed in service after September 8, 2010, and before January 1, 2012. It also provides for a 50 percent first-year bonus depreciation deduction for qualified property placed in service after December 31, 2011 and before January 1, 2013.

Sect. 2031: Increase in amount allowed as deduction for start-up expenditures in 2010

For taxpayers starting an active trade or business, the new law increases the amount the taxpayer is allowed to elect as a deduction for start-up expenditures under section 195(b) for taxable years beginning after December 31, 2009. Section 2031 allows up to $10,000 as a deduction for start-up expenditures, but requires a dollar-for-dollar reduction of the $10,000 deduction if startup expenditures exceed $60,000. This expense should be claimed as an “Other Deduction” on business returns, such as the Form 1120, 1120S or 1065, or as an “Other Expense” on the Schedules C or F of the Form 1040. The remainder of any start-up expenditures, not deducted under section 195(b), can be amortized ratably over 180 months on Form 4562, Depreciation and Amortization.

Sect. 2042: Deduction for health insurance costs in computing self-employment taxes in 2010

Generally, small business owners may not deduct the cost of health insurance when calculating self-employment tax. Under the Small Business Jobs Act, and subject to specific statutory restrictions (i.e. deduction is not available if self-employed individual is eligible to participate in an employer-subsidized health plan maintained by the employer of the taxpayer or the employer of the taxpayer’s spouse), business owners can deduct the cost of health insurance for themselves and their family in the calculation of their 2010 self-employment tax.

Always consult your tax professional before making any of these decisions.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Business Vision and Goals: Understand the Target You are Aiming For

In the early 1970s, I watched a Stanford professor choose Jim Plunkett, (Stanford’s star quarterback) to demonstrate perception and the brain. The professor placed a pair of glasses on Jim that caused his vision to be distorted, shifting everything he sees to the right about 20 degrees. Jim missed his attended receiver throwing consistantly to the right by 20 degrees.

Drawing his share of laughter, Jim compensated and started aiming 20 degrees to the left, thus hitting his receiver about five times. The professor explained his point about perception and congratulated Jim on his adjustment. As Jim took off the glasses and proceeded to sit down, the professor asked him to throw one more pass with no impairment to show the crowd that the professor did not ruin the star quarterback’s talents. Jim laughed and passed the ball one last time. The ball soared past the receiver by 20 degrees to the left. His brain had not re-adjusted.

The Association for Strategic Planning-Los Angeles (ASP) had the honor of hearing Deepa Prahalad speak on September 13 at the beautiful Dole Corporation auditoium. Deepa spoke of her book, Predictable Magic, and its message to identify company goals. She stressed that if you have only broad goals, both your customers and employees will not understand what the company stands for. She suggested that you must become the interpretor of your message.

As in the case of Jim Plunkett, if you cannot see what you are aiming for, you will miss your target. The start of a good strategy is to have a clear vision of what you want to accomplish. Just to have a vision to be your industry leader is not good enough. Once a business establishes a viable vision, they can create a path with quantitative metrics to move towards that vision. Jim Plunkett’s vision changed, so he has to alter his tactics to get there.

Business today is always changing, so a vision you had five years ago will most likely be obsolete, or commonplace in your industry. The ASP preaches the steps of Think-Plan-Act, but if you are thinking about the wrong vision, your plans and actions will lead you towards a failing destination.

How Does a Small Business Grow? You Can Try to Think Like A Rock Band

We were called the Mini Playboys. Three ten year old musicians who temporarily put down their rock roots to play old standards, big band, and Italian songs. The band consisted of a drum, guitar, and accordion. We almost never played like this for our friends for the obvious reasons, but played at old folks parties and restaurants. Heck, we each earned $5.00 an hour in 1967 when minimum wage was $1.40. Great money! Our band focused on a strategy to hit a particular niche market, and it worked for 2 years until we went our separate ways.

I came across an article by Apryl Peredo, So, You Want a Label Contract? The article listed 5 reasons why bands are not signed by record labels. The article laid out some good, though basic advice to young band members. However, as I read the article I substituted the word “small business” for “band.” It also seemed to translate into good advice to those small businesses that are looking to grow their business. Here is what I mean:

We don’t sign “newly formed” bands. Customers who are looking for value and trust like to see an established business. This also pertains to expertise. I remember working for an accounting firm who declared themselves as experts in any area where they performed a single engagement. That hardly builds up the trust you want with your customers.
We don’t sign undeveloped bands.As a business owner, you must walk before you run. Starting small is not bad, it allows you to make mistakes without risking too much. Design your strategy to build slowly and in control or you may find yourself in the “white water” (Les McKeown’s definition in Predictable Success).
We don’t sign unknown bands. Customers and clients like to see a reputation, a good reputation. In looking at E-Bay, I noticed that some of the most successful businesses are those who have hundreds of good ratings. This weighs a lot with a new customer, so build your fan base.
We don’t sign people/band we meet at parties. Very few people would hire an attorney who advertised door to door. There is just a culture that discourages that kind of selling for that profession. It may work for a realtor, but not a surgeon. Learn your industry’s norms and culture.
We don’t sign based on “oral” favors. Business character counts. Always be beyond reproach in your client solicitation practices.

The article summed up a band’s quest to secure a label contract with “persistence, practice, professionalism, creative development, and hard work”

That is good advice for any small business looking to grow. Very few businesses make it “big” over night, and the ones that seem like they do, worked at it for years.

Good and Bad Aspects of Small-Medium Sized Business Strategies

When I speak of “strategy” to business owners or entertainers, I usually get a blank look. Small and medium-sized businesses usually don’t have a specific business strategies. However, what they don’t realize is that they do have a strategy, formal or otherwise, and it was probably a bad one.

The Perils of Bad Strategy by Richard Rumelt discussed this concept of bad strategy. Rumelt defines a strategy as “a way through a difficulty, an approach to overcoming an obstacle, a reponse to a challenge.” The problem is identifying the challenge.

I have met business owners who refuse to face the problem. Why?

Their ego gets in the way. They want to see the business in their own light, and not reality.
They are afraid to look at the business problem. The owners literally bury their heads in the sand like an ostarich and ignore the problems.
The business owner is excellent at their trade, but not at management of a business.

Rumelt also states that business owners mistake goals for strategies. “We want to raise our sales revenue to $20 M in five years. So? That is not a strategy, that is a goal. I hear that type of talk all of the time from clients. They point to the “where,” but not “what,” and then the “how.” They don’t look at their core competancy (or Hedgehog concept as explained by Jim Collins in Good to Great.) And recently, I have not even been able to get that far because the company’s internal reporting system is inadequate.

The third hallmark of bad strategy discussed by Rumelt is “fluff.” I see this in the entertainment industry business propects. I remember one prospect that wanted to start a new record company. It was a typical scenario, a group of musicians and friends who are financed by a rich parent or two. This particular group set their entire strategy of one guy who was going to write for them and any band they sign. I alerted them the risk of establishing a company on the back of one unproven talent, especially in an industry who is still searching for a new business model. I didn’t get them as a client.

As a small business owner, you don’t have to hire someone to create a 100 page strategy complete with the history of your company. In fact, you can find someone to do it in about an hour. Then, as a small business owner, you should impliment it faithfully.

Charismatic Business Leaders: What to do afterwards? A Problem to Be Avoided

I can remember back in the late 1970s when only engineers and escentrics operated an apple computer. My neighbor brought me over and tried to explain how the large odd-shaped device worked. MS-DOS was not invented, and my attention span waned.

Business has embraced many aspects of Apple, along with the consumer, driving it beyond Microsoft’s highest endeavours.

But what happens without Steve Jobs at the helm, and how does this series of events relate to small and medium-sized businesses?

Kathleen Pender speaks of this issue in Maintaining success after exit of a charistmatic CEO. However, she really is not addressing the right questions. Does a company need a charasmatic leader? Or, what kind of personl should lead a company?

Jim Collins writes about these in his two books, Good to Great and Built to Last. In Built to Last he states that visionary companies do not require great charismatic visionary leaders. “In fact, [they] can be detrimental to a company’s long-term prospects. Some of the most significant CEOs in the history of visionary companies did not fit the model of the high-profile, charismatic leader.”

In Good to Great, Jim states what kind of leaders should lead a company. Level 5 leadership during pivotal transitional years “refers to a five-level hierarchy of executive capabilities, with Level 5 at the top. Level 5 leaders embody a paradoxical mix of personal humility and professional will. They are ambitious, to be sure, but ambitous first and foremost for the company, not themselves.”

Steve Jobs seemed to fit this definition. He seemed to push the company, not himself which will help foster the Apple tradition long after he departs from it.

Small and medium-sized business owners should take note of this distinction. I find that so many owners sell their personas, not the company. This is almost fatal in two respects:

When the owner wants to sell the business.
When the owner dies.

In both cases, the inherent value of the company is tied to the owner, not the balance sheet. If he goes, it goes.

So, how do you get out of this vicious circle. I recommend:

Read the E-Myth by Michael Gerber. The author descrives the owner’s chokehold on a business, and why a business of that type struggles to grow.
Train, train, train others to do specific tasks that you perform. If you are worried about losing your customers to you employees, create a system of divided labor where each person performs specific tasks, but you still hold the key to putting it all together.
Set out a timeline for an exit plan. When do you plan to sell the busiess? How big does your business have to be before you sell it? What annual metrics can you measure to make sure you are on your path?

Quantify you feelings. Don’t dream of a company that you cannot measure its success or milestones. You can be a visionary, but the it is not about you, it is about your business.

Are Business Strategies Obsolete? Does it Matter?

My wife and I have started a new hobby of collecting and reselling small antiques. We really enjoy “the hunt,” but one of the most rewarding aspects is our increased knowledge of 100 year old household tools. One such item was a nickle/steel handle with a cone cup on the end. The cone cup had a butterfly handle on the end of the cone that turned blades inside the cone, scraping the sides.

Almost nobody guessed its function, which was a Delmonico ice cream scoop.

Today, the basic operation of the Delmonico ice cream scoop is the same, scoop it up, and scrape it out.

The McKinsey Quarterly published an article by Bradley, Hirt, and Smit entitled Have you tested your strategy lately? The article listed ten tests of which most companies strategies failed. The first test was the most comprehensive, “Will your strategy beat the market?”

Looking at my Delmonico ice cream scoop, I question whether any of today’s companies can execute a strategy that can produce a product or service that can be an industry standard 100 years from now.

A major complaint about American corporations is that in the last 25 years, they have been striving for the short-term profits, and not planning for the distant future. We have seen that in the auto industry.

But what about small/medium-sized business strategies? Will they follow in the footsteps of the some of the large corporations?

That all depends. If you are like most small/medium-sized businesses, you are only concerned about Sales and whether you have enough cash to meet payroll.

Bradley’s ten tests may be a good place whether you are in the business plan or seasoned stage. In my experience, most businesses of these sizes could not pass three of these tests.

Managers and owners must review their strategies continuously during its implementation. Too many fall into The E Myth (Michael Gerber) and have the business run them, and not them running the business. Or as Gerber puts it, ” working on your business” as to “working in your business.”

When it comes to strategy, Bradley et al proclaim that it is not the newest strategy that a business owner should find, but flaws in their current strategy.