Advice for Small Business Owners » government

Understand Bureaucracy

Elie Kochman — Wed, 23 Mar 2011 11:45:52 +0000

In recent dealings with several large financial institutions, I learned about bureaucracy – and how to work with one.

Forced to enter discussions with them, I was overwhelmed by the volume of paperwork and the miles of red tape that seemed to be targeted at making my inquiries impossible to be answered. With one employee at an institution assuring me that I would get an answer, and others presenting all the complications that stood in my way, I wasn’t sure if a simple solution existed.

A phone call to a colleague suggested an answer. He directed me to a particular branch of one of these institutions, where they were under significant internal pressure to work with clients such as myself. As such, they had streamlined their own processes to make dealing with the inquiries swift and painless for the customers.

While they had no assurance that even with a positive answer I would give them my business, they were aware that negative experiences could drive me away. As such, they solved my real problem for me – they explored the inane rules that they had to follow, and found ways to circumvent them.

This is similar to the experience of Mr. Incredible, who, working for a large insurance company, explains to one of the clients how to circumvent the bureaucracy to get a claim processed. This branch took it one step further, though, and instead of telling me how to get past their systems, they did the work for me.

If you have to work through a bureaucracy, it may be worthwhile to find people inside the system who have ulterior motives for helping you. This can be in order to meet other internal quotas, a relationship with you (e.g. a friend), or merely disdain for the complexity of the faceless entity they work for. These people, working within the system, know how to get things done, and how to do so expediently.

There’s no getting around the paperwork or the red tape, but there are certainly ways to make the experience less frustrating. Knowing which particular forms need to be filled out, and which ones do not, can save you large amounts of time, and can lead to faster answers to the questions you’ve been tasked with answering.

The Best Location For Your Business

Elie Kochman — Fri, 26 Nov 2010 11:45:36 +0000

A common question when starting a business is in regard to choosing a jurisdiction under which to operate. For example, here in Canada you can incorporate provincially or federally. In the US, you can incorporate in any of the states, provided you meet their requirements. Other countries will allow you to form a corporation under their auspices, which may have various benefits to you and your business.

To decide the answer as to which jurisdiction is best for your business, you need to think about the basic reasons why you incorporate to begin with. First, it offers you as a private person protection from the liabilities of the corporation (with a few exceptions). Second, it offers you options for taxation purposes. Third, it gives you a vehicle under which to operate your business, raise capital, etc.

The first benefit is pretty much standard fare for a corporation, and so is basically irrelevant to this discussion.

The second would require some serious consultation with your accountant and lawyer, who could work out the most beneficial way to organize your business.

The third would imply that you look at what you intend to do with your business, and what requirements might ensue from that activity.

For example, if your entire business is operating in Toronto, with no business activity outside Ontario, you would be unlikely to have any reason to incorporate anywhere other than Ontario (except for possibly incorporating federally instead). If you will need to borrow money, you should look at what requirements banks and similar institutions have in regard to whom they will lend money to, and at what terms.

The simplest rule of thumb, though, is to incorporate in the same place that your business operates. If you don’t operate in the Cayman Islands, than why are you putting your corporation there? An audit of your finances might reveal this holding, and could result in penalties if you’re caught doing something like this, under the premise of tax avoidance. If you think that isn’t likely, both Canada and the US have recently been catching people with exactly this type of arrangement, and the fines have been incredibly steep, far beyond any potential savings the arrangment might have provided.

Where Does Your Loyalty Lie?

Elie Kochman — Tue, 19 Oct 2010 11:45:16 +0000

I was reading the expose in the Wall Street Journal on how Facebook applications have been discovered to be sharing more information about the users of those applications than people may have realized. This is not the first time, and I suspect not the last time, that the giant social networking site will be criticized for its poor handling of user data.

Perhaps the reason for this is that the loyalty of Facebook is not placed where users of the site would like it to be. While one may dispute whether or not the slogan is accurate, the Google slogan:

Do no evil.

it is nonetheless indicative that the company claims, at least, to have the best interests of its users in mind. That is, decisions are presumably being made on the basis of how that decision could be perceived in a negative light, and whether or not that is an acceptable means of handling the situation.

Other companies, though, place their loyalty in the almighty dollar. As such, the implications they look at are relatively short-term, as they pursue increases in profits. Another way of looking at this loyalty is as a loyalty to the shareholders, who are generally concerned with the value of their holdings in the company.

The result of this loyalty perspective is that people in the company become aware of what might or might not be acceptable practice. This has downstream implications that even the people in the company may not be aware of until it’s too late. As an example, I don’t believe that Mark Zuckerberg is trying to abuse the data which users have entrusted to his site’s care. However, the fact that he (or more precisely, his company) has allowed such abuse to occur repeatedly in a variety of manners indicates the lack of importance that such trust occupies.

In other words, Facebook has indicated repeatedly that it only cares about its users data, and the protection of people’s privacy, only to the extent that they have been mandated to do so. The Canadian Privacy Commission required certain changes, and they were made. However, other violations of people’s privacy continued to occur, and until they were caught, they remained unfixed.

When your loyalty does not lie with your customers, then the trust they should place in you should generally be limited to the value that the item entrusted is valuable to the person or entity with whom the company’s loyalty does lie.

Are you placing your loyalty in your customers, or in someone else? Are the people around you aware of where your loyalties lie?

Small Business and Small Business

Elie Kochman — Fri, 01 Oct 2010 11:45:55 +0000

A conversation recently with my insurance broker had me highlighting a problem in the economies of Canada and the US, to which policy is seemingly being addressed, but in reality is not. We are aware, of course, that small businesses play a significant role in our economies, employing large numbers of people and contributing in various ways to research and innovation.

However, what the policies fail to address is the fact that there are two types of small businesses, and their needs are not the same.

On the one hand, there’s the small store which has been operating for many years, employing a dozen people, and churning over annual gross revenues of $2,000,000. Certainly small when compared to large corporations who measure annual revenue in the billions of dollars, these stores are actually not the real small businesses in the economy.

The real small businesses are those built of a couple people just starting out. These are the people who are funding their business out of their savings, perhaps starting with as little as $100 to their name. They grow organically, slowly building up revenues while trying to keep costs down out of necessity. The per capita revenues in their case is often higher after an initial growth stage, since they are forced to keep costs down to hiring people, not buying things.

These companies look at an expense of $1,000 as being a lot of money, and are conceived under the umbrella of austerity. Government funds for growth and development? Sorry, these guys aren’t big enough. Bank loans? Sorry, we only need $50,000 and the bank’s minimum loan is $100,000, which we can’t afford.

If the governments really want to help the economy by helping the small businesses, they should be looking at how to help businesses calling themselves startups, not businesses labeled as small businesses.

True Source of Funding in Canada

Elie Kochman — Fri, 25 Jun 2010 11:45:12 +0000

In a discussion this week with the owner of another company, I was surprised to hear the following fact:

It’s easier to borrow $5 million than it is to borrow $50 thousand. In fact, if all you want is $50,000 then most lending institutions are not really interested in your business.

Surprised, I went to verify this with someone knowledgeable in the area, and he confirmed it. As a small, business, client, the banks have little interest in your business. The implied reason is because a smaller business is a higher risk than a larger business.

That’s not to say the banks won’t lend you money. However, they require that the business put up an amount equal in size to the amount borrowed. So if a business is looking to borrow $100,000, then they must put up that amount as a security against the loan.

The logic, of course, is flawed. If the business were capable of putting up that amount of money, they wouldn’t need to borrow it.

Additionally, here in Canada the loans are insured up to $100,000 per loan. That means that the true risk for the bank is very little, since the principle is essentially guaranteed.

For all the talk about how stimulus dollars are helping businesses grow, it seems that the reality is that big businesses can get bigger, but small businesses are finding it exceedingly difficult to acquire the capital they need in order to grow and expand.

I would be curious to know your thoughts on this, and whether in your locale you are witnessing a similar story when it comes to hunting for small business loans.

The Rules of the Game

Elie Kochman — Tue, 02 Mar 2010 12:45:08 +0000

There are few, if any, situations in life which do not have rules. Sometimes the rules are vague, others are very specific. But there are always rules, although a new inductee into the field may not be able to discern them.

Business has its own set of rules. Some govern how we advertise our business – what we can and cannot say (for example, you aren’t allowed to make false claims about yourself). Others govern how we earn money – records that must be kept, files that must be submitted. Still others deal with the environment in which we can act – as a sole proprietor, a partnership, or a corporation.

What is common to all of these rules is that as new inductees to the field, we are not familiar with all the rules. We are, however, liable for failing to follow them. If you don’t file your taxes correctly, you can face significant fines, for example, despite the fact that you were not aware of the error in your filing at the time of reporting.

As a small business owner, we face significant risk on a daily basis. We have expenses to pay, clients to talk to, prospects to woo. Often, especially at the early stages, we’re worried about the success or failure of our business as a whole, and just how long and hard the crash and burn might be.

For this reason, we need to mitigate risk as much as possible, especially for the things we know we don’t know about. So, if you’re starting a business, make sure you have the following resources available to you:

Lawyer: Every business has paperwork that needs to be drafted, filings that need to be made, and, if you’re successful, complex negotiations with investors. You need someone who knows and understands the law as it relates to your business, and who works with other businesses of your size and type. (Divorce lawyers are out unless your business deals with breaking up relationships.)
Accountant: You will have to file income returns every year. You will have to pay taxes – certainly income taxes, but if you have employees, you may be required to withhold tax, or you may have to submit sales tax at regular intervals. You will want to structure your revenue and expenses in such a way to keep your taxes down.

Ideally, your accountant and lawyer should be in touch with one another, to set up your company in the most strategic way possible. Naturally, they both have fees which may make such coordination prohibitively expensive, but you should certainly dedicate part of your budget to planning with both. At a minimum, you should have their phone numbers available when you need them – and they should know who you are when you call.

Invest in the Little Guy

Elie Kochman — Thu, 25 Feb 2010 12:45:10 +0000

In a previous article, I wrote that most people work for small businesses, and that such businesses are the source of most new jobs in pretty much any economy. As such, it is amazing how short-sighted some governments can be when it comes to spending stimulus dollars.

I’ll illustrate this with an example that I can relate to based on the industry that I’m in, but I’m sure you can find other examples (and please feel free to share in the comments below).

I work in technology, specifically in the area of software development. Currently operating as a corporation with a single regular employee (myself), most of the contracts I work on can be done by myself. For example, if I’m hired to build a program to parse and analyze some data, I’ll build that application myself.

If I were to land a larger contract, however, which was beyond the scope of my abilities, whether from a time commitment or because I lacked certain skills, I could still get the job done. I would simply go out and hire someone, which would give that person a job. If I got a really big contract, then I might hire several people, most of whom would have been unemployed until I gave them the job.

If that same contract were given to a large company, however, it is unlikely that a new job would be created. More likely is that an existing employee would be assigned to that project, perhaps allowing him to keep his job. So giving contracts to big companies doesn’t create jobs, it maintains jobs.

As such, because the giving of contracts to small businesses is more likely to create additional jobs, you would think that the various governments, when trying to stimulate the economy, would go out of their way to make it easier for small businesses to be considered for such projects.

It hasn’t happened.

As a small business, I find it much more difficult to bid on government projects than on private sector projects.

The government requires specific forms to be filled out, which is a time-consuming process. They have complicated rating rules for evaluating proposals. Last, but certainly not least, there’s the political element which could bias the entire bidding process from the start.

As a small business, I don’t have the resources to spend hours on each proposal unless I can be sure that my bid will be evaluated fairly, and that I have a reasonable chance of being selected. For me to be able to bid on government projects, the initial bidding process needs to be simple.

The one subject that I haven’t touched on here, but will in a future article, is that of cost. Using smaller companies can bring down the cost of larger projects – and help put limits on the cost of the projects. Yes, the risk may be higher with an untested company that few people have heard of. But the payoff can be higher as well, sometimes by significant amounts of taxpayers’ dollars.

Immigrate to the USA and Start a Company

Elie Kochman — Tue, 23 Feb 2010 12:45:38 +0000

I was introduced yesterday to a group of people who are looking to assist in reforms to the US Immigration Legislation – to make it easier for people to immigrate to the US and start companies. For my Canadian readers, I’m not sure what the situation is here, but it’s definitely something worth considering as to how it may impact us.

Startup Visa and its various founders know how hard it can be to move to the US in order to start a company. Immigrating to a new country, regardless of the situation, can be difficult. Add in complex legislation that requires you to provide information about future sources of income, and using the explanation of entrepreneur just won’t cut it.

At the same time, the largest growth factors in the economy are from such businesses. Most businesses in Canada and the US are what we would think of as small companies – mostly less than 5 employees, but including up to about 25 employees. It’s these companies that the average person can relate to – the dry cleaners, the corner vegetable stand, the small design company down the street.

In order to facilitate changes to legislation, the founders of Startup Visa are collecting stories and experiences of immigrating to the US, and the difficulties encountered. These will be presented to various members of Congress when they travel to Washington to meet them. If you want to support this endeavor, please click the link to Tweet a short message about your story, or visit their site and leave your story there.

Rules of Work

Elie Kochman — Thu, 18 Feb 2010 12:45:45 +0000

When you’re in an employment situation where striking is not an option, what can you do to force negotiations with your employers? If you’re working with a contract, then you can play by the rules, and drive your employer crazy. Just follow the rules.

Many rules are defined as part of any work agreement, but many of them are typically ignored by employees and employers alike. Other rules are not defined, and are likewise ignored by everyone. But when you choose to stick to the rules, it can help push negotiations your way, but be prepared for an amendment to the rules at the end of the bargain.

As an example, if your contract does not stipulate that you may have to fill in for an absent co-worker, you can refuse to do their work. Or, you can show up exactly on time, and leave exactly on time, putting in not one minute extra,

Of course, you can get even more clever than that. If a process that you are supposed to follow includes verification, you can insist on doing a complete verification instead of the superficial one that was intended. Train engineers in France did that whenever a train crossed a bridge, since that was technically part of their job. Australian postal workers weighed each piece of mail to ensure that the proper postage was affixed, even when a visual scan could confirm that many times faster.

The idea is to slow down the system to the point where following the rules (for which you cannot be penalized) becomes so time consuming that the employer needs to put an end to it. You want the employer to have you go back to work as usual, where the inconvenient rules are conveniently ignored or modified so that the job gets done in a reasonable manner.

Competition and Anti-Trust Law

Elie Kochman — Thu, 11 Feb 2010 12:45:37 +0000

In the markets of the past century, there have been various attempts to achieve the following – to increase the amount of competition in any given market. The reason for laws to govern this is simple – when a small group of individuals or companies controls a segment of the market, they can drive up prices without restraint.

Such laws which prohibit business practices preventing the creation of competition have existed since Roman times, where it was illegal to prevent ships from making deliveries of grain. Currently, the laws are used to ensure that it is not only large companies that are able to enter a given market, that mergers and acquisitions do not reduce the amount of competition, and that cartels, whereby different companies get together and form a group, are banned in many countries.

The laws differ between each country, but the fundamentals are the same. If you want to start a business in a particular field, that is your right, and existing companies cannot stop you. You are not allowed to infringe on their patents, trademarks, and copyrights, but you can create a similar product and compete. You are not allowed to get together with your competition and agree on a price for your goods. You are not allowed to buy out your competition if that would give you complete control over the market segment.

The reason the laws are referred to as anti-trust laws are because in the early 19th century, trusts were often utilized as a means of controlling competition. While trusts on their own are perfectly legal, the use to which they were applied was not. As a result, various Acts (the Sherman Act, the Clayton Act) where passed to prevent such practices.

Investing and Saving

Elie Kochman — Thu, 17 Dec 2009 06:11:00 +0000

For the average person with some money to invest, a recession can be a golden opportunity. As the economy slows, prices of stocks fall across the board, even for companies not directly affected by the cause of the economic collapse. As a result, for those who can afford to do so, investing at this time can translate to getting bargain deals on various stocks.

The catch, of course, is that such investments are still a gamble, and the wise investor does not put up money that they cannot afford to lose. Perhaps that is the explanation for the survey released by RBC which I was reading about on the 680 News website. In the last year, the survey found an 8% drop in the number of Canadians saving or investing for retirement.

The article, which first appeared in the Canadian Press, suggested that this might be on account of high unemployment, resulting in less disposable income. However, I don’t believe that this can fully explain the observations.

Canadian Unemployment Rates

First, in recent months, the unemployment rate has slowed its rise, and may be falling, albeit slowly. Looking at the history of unemployment rates, you will notice that 8.5% unemployment is not up from 0% or 1% – it’s up from 6% or so, which is a difference of 2.5% and can therefore not explain the 8% difference in the number of people saving. While I don’t mean to belittle the numbers, and acknowledge that a 2% change in the unemployment rate is significant, it is not the determining factor here.

In fact, with rising unemployment, you might expect to see an increase in savings, as people try to create a larger buffer for themselves in case they too join the ranks of the unemployed. While those who are not employed are unable to save, it would be assumed that those with a job would try to be more frugal in order to protect themselves.

I think the real issue in this case is not any concrete reason for lack of investment, but a general lack of knowledge, and fear of the unknown. Yes, the markets seem to be falling, and are therefore perceived as a high risk. However, if you’re saving for retirement, short term fluctuations in the market are almost irrelevant, as over the course of 10 or more years, the market has always gone up.

What seems to point this out to me, and to highlight this issue, is the fact that not only are fewer people investing, but they are also not saving. This indicates that there is consumer confidence, in that spending has not slowed, and in fact, may have gone up. However, with all this extra money that could be saved and isn’t, it indicates a lack of understanding of the long term effects of investments.