Increase Net Income by Reducing Costs

With this being the first week of a new year, it is a good time for business owners to think about how to increase net income in 2011. The knee-jerk answer is to increase gross income by increasing sales. This thinking is not flawed, as more sales should lead to higher net income. However, simply increasing sales is a one dimensional approach to increasing the bottom line. On a profit and loss statement, between the gross income and net income, there are a lot of costs. Decreasing these costs allows each sale to generate more net income, making it entirely possible to increase net income even on stagnant or shrinking sales. Cutting costs while increasing sales is even better for the bottom line.

The following are some of my suggestions for increasing net income by reducing costs.


START WITH GOOD FINANCIALS


Good financials not only show how much money is coming in and out of a business, but in great detail show WHERE the money is coming from and WHERE the money is going. Without good financials, it will be impossible to know which cost cutting efforts will significantly cut into sales and which will have little or no effect on sales.

Start looking at the financials. If good financials are not available, hire a bookkeeper or accountant to set up a proper accounting system and generate them. Financials will only cost a couple hundred dollars per month for most businesses, and this investment could be worth thousands of dollars per month if the information is used properly.


If you do not currently use an accountant or bookkeeper, call me or send me an email and I will gladly suggest a few professionals I trust.


ONLY KEEP THE RIGHT EMPLOYEES


Employees are the usually the largest single business expense. While most businesses cannot survive without employees, cutting costs while increasing sales is about having the right employees in the right positions, and not necessarily just fewer employees.


Every person drawing a check from a business needs to be doing one of two things: (1) Making the business money; or (2) Saving the business money. Identify how each employee is either making the business money or saving the business money. It is not always obvious.


For example, do not fire a receptionist doing tasks for $10 per hour when other staff will have to do this work at $25 per hour. The receptionist is saving the business money.


A contrary example is that of a salesperson who does not up-sell or cross-sell. This salesperson is not making the business money because anyone can answer simply answer a phone and take orders from customers. Replacing this salesperson with another, more motivated salesperson who actively seeks out new sales and works to increase the amount of goods or services sold in each sales transaction is an example of a salesperson who makes money for a business.


ADVERTISE WITH A NARROW FOCUS

Advertising is another typically large business expense. Advertising smarter by narrowing the focus of distribution will reduce costs while giving a greater return on investment for each advertising dollars.


Figure out where customers are located and direct advertising there. Is a client going to drive from their home or office to a frozen yogurt shop miles and miles away, or will they just go to the closest place to get what they want?


Also think about the media in which advertisements are placed. Do not advertise hearing aids on the internet or snow boards in a newspaper. Understand how to best reach customers, and quit wasting money advertising in the wrong media.


If it is unclear where clients are coming from or how they learned of the business, just ask them at the first contact or point of sale.


FASTER INVENTORY TURNOVER


Streamlining procurement is another way to save big money and free up capital. Many businesses get sucked into buying too much product from distributors offering price breaks on quantity. Yes, a 10% price break might be extended for restocking in bulk, but if the inventory does not turn at least every 30 to 90 days (this is industry dependent), too much capital is tied up in inventory and increases costs in several ways.


Costs associated with slow inventory turnover include spoilage, obsolescence, cost to insure inventory, and cost to warehouse inventory. Spoilage and obsolescence will cause inventory to be discarded or sold at deep discount, while high insurance premiums and high rental rates also create unnecessary drains on gross income. If too much of a perishable or trendy item is stocked, when the perishable spoils or when yesterday’s trend is no longer selling, that inventory must be sold at a deep discount (if you are lucky) or thrown in the dumpster; a costly waste of your money.


Consider using necessities or options contracts to secure the ability to purchase at a discount and never run out of inventory while at the same time not purchasing more inventory than necessary at any given time.


PAY LESS TAXES


Every business needs a solid strategy to deal with taxes. While paying taxes is unavoidable, there are options available to businesses to reduce tax liability.


Classification of a worker as an independent contractor rather than an employee passes the duty to pay employment taxes and workers compensation insurance to the independent contractor. While this savings is significant for the business, not every worker is eligible for classification as an independent contractor and improper classification of a worker as an independent contractor can result in expensive fines and other penalties from the Internal Revenue Service, so get some professional advice before reclassifying any employees.


The type of business entity used to conduct business can also have a significant impact on tax liability. For example, sole proprietorships are typically more heavily taxed than corporations organized under Subchapter “S” of the Internal Revenue Code. These “S-Corps” allow the business owners to split income between salary subjected to employment taxes and net income not subjected to employment taxes; a difference of 15.3% in tax liability.


A business attorney can help determine which business entity will be best suited for reducing tax liabilities in a given situation.


CONCLUSION


If you have any questions about the above ideas for improving your bottom line, I welcome you to give me a call or send me an email for a clarification or more details. I wish you all the best in 2011, and hope it will be your most profitable year yet.


Warm Regards,



Michael J. Leonard, Esq.
Attorney at Law
San Diego Corporate Law
www.sdcorporatelaw.com

Find me on Facebook: http://www.facebook.com/SanDiegoCorporateLaw

Beware of Asian Domain Name Registration Scams

A very valued and business savvy client called me this morning for my assistance with a domain name and trademark dispute that had been brought to his attention via email by a person claiming to represent a "domain name registration organization" in Hong Kong.

While not as prevalent or well known as Nigerian Bank Scams or other Advanced-Fee Frauds, there are a lot of Asian Domain Name Scams being emailed lately. ANY EMAIL RECEIVED BY THE OWNER OF AN INTERNET DOMAIN WHO RECEIVES AN EMAIL PURPORTING TO OFFER PROTECTION OF HIS/HER DOMAIN NAME AND/OR TRADEMARK RIGHTS SHOULD MEET THAT EMAIL WITH SUSPICION.

HOW THE SCAM WORKS

You will receive an email will read something like:

Dear President,

We are a domain name registration and dispute organization in Asia, which mainly deal with the global companies' domain name registration and internet Intellectual property right protection in Asia. On the Jan. 19, 2010, we received an application formally from "SOME BUSINESS YOU HAVE NEVER HEARD OF" who applied for the Internet Keyword"SOMETHING CLOSE TO YOUR DOMAIN NAME"and some domain names relevant to this trademark from our organization.

According to our procedures and in order to protect your intellectual property rights, we need to send this email to the original company for confirming the actual relationship with this company. If you do not know this company, we doubt that they have other motivation to register these domain names and probably want to do some cybersquatting. Currently, we have postponed this application of this company temporarily already. In order to deal with this issue better, please contact us by telephone or email as soon as possible.

PS:If you are not in charge of this matter,please transfer this email to appropriate dept. Have a nice day!

Best Regards,

A FAKE NAME

A FAKE TITLE
SCAMMER'S COMPANY NAME
Tel: +###-#### #### Fax: +###-#### ####
Email: SCAMMER@SCAM.NET
Web: www.SCAMCOMPANY.org

HOW THE SCAM WORKS

The business owner receiving the email responds to the person listed in the email by phone, fax or email and of course wishes to block someone from registering a domain using his or her corporate identity or trademark. Invariably, the representative of the "domain name registration organization" will tell you that the best way to block the registration is to buy the domain names in question for yourself. Naturally, if the domain names in question are purchased, the price per domain name will be artificially inflated by the "domain name registration organization" who is "protecting" your corporate identity and trademark.

HOW TO COMBAT THE SCAM

The best way to combat this scam is to do what my client did this morning: forward the email to corporate counsel or the law firm which represents your business and ask how to proceed with the information. San Diego Corporate Law advises its clients to forward any and all communications offering services or business deals which our clients do not fully understand. In this case, we investigated the correspondence and identified the scam it was intended to perpetrate, potentially saving our client from purchasing thousands of dollars worth of internet domains which might be truly worth less than one-hundred dollars if procured from a reputable source.

A strategy for protection of corporate identity might entail purchasing several domain names for your business (in addition to www.sdcorporatelaw.com, I also own www.sdcorporatelaw.biz, www.sdcorporatelaw.info, www.sdcorporatelaw.me, www.sdcorporatelaw.mobi, www.sdcorporatelaw.net, www.sdcorporatelaw.org, www.sdcorporatelaw.us, and www.sdcorporatelaw.ws). However, the time and place to purchase additional domains for your business is NOT when you are being held hostage by a supposed "domain name registration organization" asking for unrealistic prices.

WHO IS RUNNING THE SCAM?

While not intended to be an inclusive list, here are the domain names of some companies reportedly running the Asian Domain Name Scam:

http://www.alg-tech.com

http://www.anwins.com

http://www.asiaao.cn

http://www.asiadm.org

http://www.asiadnr.hk.cn

http://www.asiadnr.net

http://www.asiadnr.org

http://www.asiaip.org

http://www.asianetwork.ws

http://www.asianetworkonline.com

http://www.asiaregistrar.org

http://www.beijing-anwins.com.cn

http://www.bj-hk.asia

http://www.bj-hkzc.com.cn

http://www.bjhknet.cn

http://www.china-domainsolution.org.cn

http://www.china-net.hk.cn

http://www.china-net.hk

http://www.chinasps.net.cn

http://www.chinasps.org.cn

http://www.chooke.com.cn

http://www.chuk.com.cn

http://www.cnbcgov.org.cn

http://www.cnnet.hk

http://www.cntl.hk.cn

http://www.dnrnic.net

http://www.domainaudit.org.cn

http://www.domaininasia.com

http://www.domaininasia.org

http://www.erimut.com

http://www.europaregistry.net.cn

http://www.europaregistry.org

http://www.europatech.com.cn

http://www.europetech.com.cn

http://www.fexon.hk

http://www.firetrust.org.cn

http://www.govisp.cn

http://www.ha-zd.com.cn

http://www.ha-zd.comhttp://www.ha-zd.org

http://www.hkstareast.com

http://www.hkstareast.net

http://www.idci.org.cn

http://www.inveis.com.cn

http://www.inveis.com

http://www.inwis.cn

http://www.netinasia.com

http://www.netinchina.hk

http://www.netservice.hk

http://www.shanghainic.org.cn

http://www.shnetnic.cn

http://www.shundajishu.com.cn

http://www.skholdingscompanyltd.asia

http://www.sknet.hk.cn

http://www.star-east.hk

http://www.ujane.cn

http://www.ujanegroup.cn

http://westnet.hk.cn

http://www.westtechnology.asia

http://www.worldregistry.com.cn

http://www.ytym.org

Third Party Beneficiaries May Not Enforce Benefits Beyond Those Contractually Owed to Promisee

Doe v Wal-Mart Stores, Inc., 572 F3d 677 (9th Cir 2009)

Foreign suppliers contracting with Wal-Mart Stores are subject to a code of conduct Wal-Mart calls "Standards for Suppliers". Among the standards Wal-Mart requires is that suppliers must adhere to local laws and local industry standards in dealings with the supplier's employees. The suppliers are subject to on-site inspections by Wal-Mart to ensure compliance with the code of conduct.

Employees of Wal-Mart suppliers in China, Bangladesh, Indonesia, Swaziland, and Nicaragua brought a class action lawsuit against Wal-Mart suit in California superior court alleging inadequate compliance with the code of conduct, asserting that the employees of the suppliers were joint employees of both Wal-Mart and the suppliers, that the employees were third-party beneficiaries of the code of conduct, and that Wal-Mart breached its duty to conduct on-site inspections for the protection of the employees.

The district court hearing the case dismissed the case for failure to state a claim.

On appeal, the appellate court found that Wal-Mart's statement, "will undertake affirmative measures … to implement and monitor" did not create a duty for Wal-Mart. Wal-Mart was not promising to ensure its suppliers compliance with employment laws, and a third party beneficiary may not assert rights in excess of those contractually agreed upon. Marina Tenants Ass'n v. Deauville Marina Dev. Co., 181 CA3d 122, 132 (1986). Since Wal-Mart did not have a duty, the supplier employees could not rely upon their standing as third party beneficiaries to bring a cause of action. Further, without a duty, Wal-Mart cannot be negligent.

The appellate court affirmed the district court's dismissal.

Dealers of investment contracts forced to disgorge sales commissions.

Warfield v. Alaniz, US App Lexis 13531 (2009)

The Mid-America Foundation, controlled by Robert Dillie, sold annuities promising to provide income for the life of a person in being, with the remainder delivered to the charity of their choosing after death. After $55 million in sales, and no charity ever receiving a benefit, Mid-America was outed as a Ponzi scheme. Upon the Security and Exchange Commission's filing a complaint against Dillie, Lawrence Warfield became the court appointed receiver of Mid-America.

Warfield successfully sued those who sold the annuities and recovered the commissions earned on the sales of Mid-America annuities. The defendants appealed, and the appellate court reviewed the trial court determination that the annuities were investment contracts. The court relied upon SEC v. Rubera, 350 F3d 1084, 1090 which defines an investment contract as, "(1) an investment of money; (2) in a common enterprise; (3) with an expectation of profits produced by the efforts of others." The Mid-America annuities fit into this definition and were held to be investment contracts, and the appellate court affirmed the trial court's decisio, disgorging the sales commissions from the annuity salespersons.

Broker-dealers, beware. Know what you are selling and for whom you are selling.

Proving a breach of fiduciary duty by a securities broker-dealer becomes easier.

Oravecz v. New York Life Ins. Co., 174 CA4th 174 (2009)

Court of Appeal of the State of California

Second Appellate District

Division One

Oravecz bought investment securities in Tradex through broker-dealer Steve Roth, allegedly an employee of New York Life Insurance Company. What Oravecz believed to be an offshore trading fund was actually a Ponzi scheme. When the Ponzi scheme collapsed, and Oravecz had lost the money invested in Tradex, Oravecz sued New York Life alleging several causes of action, including breach of fiduciary duty.

New York Life successfully demurred on each of Oravecz's causes of action and was awarded summary judgment. The trial court based its decision to sustain the demurrer on the breach of fiduciary duty cause of action because, under federal law [e.g., Independent Order v. Donald, Lufkin & Jenrette, 157 F3d 933 (1998)], a fiduciary duty only arises when the investor gives discretion to chose investments and control trading authority.

Oravecz appealed, and the appellate court held that the trial court had correctly ruled on the existence of summary judgment under the federal law, but under California common law the investor need not provide a showing of discretion or control by the securities broker. As such, the trial court erred in finding that Oravecz's allegations did not sufficiently allege a claim for breach of fiduciary duty.

The federal requirement that a broker-dealer have discretion and control over an investor's assets for a breach of fiduciary duty to be owed is a reasonable standard. If not for such a duty, negligent and careless decisions by broker-dealers failing to conduct reasonable due diligence would carry few consequences. That California has no such requirement of discretion and control in effect makes each broker-dealer a babysitter for each investor, and begins a shift of responsibility to conduct due diligence away from the party making investment decisions and onto the broker. The slope is steep and icy, broker-dealers, be careful where you step.

Prejudgment interest may be awarded under the Song-Beverly Consumer Warranty Act.

Doppes v. Bentley Motors, Inc. 174 CA4th 1004 (2009)

Court of Appeal of the State of California

Fourth Appellate District

Division Three

In 2001, Doppes bought a new Bentley Arnage from Newport Auto Center. Shortly after taking delivery of the vehicle, Doppes noticed an "obnoxious odor" inside the vehicle. After 171 days without his new Bentley, which the dealership was unable to deodorize, Doppes requested a replacement vehicle from Bentley Motors. Bentley Motors denied this request.

Doppes successfully sued Bentley Motors and the dealership on numerous causes of action, including the Song-Beverly Consumer Warranty Act. In awarding damages to Doppes, the trial court allowed for prejudgment interest of 7% per year from April 2002 when the vehicle was purchased until the entry of judgment. Eight months after the judgment was entered, Bentley moved to set aside the judgment under California Code of Civil Procedure § 473(d). Bentley based its motion on the argument that the Song-Beverly Consumer Warranty Act does not allow prejudgment interest, and thus the award exceeded the jurisdiction of the trial court. The trial court overruled Bentley's § 473(d) motion, and Bentley appealed.

The appellate court affirmed the overruling of the § 473(d) motion on the grounds that California Civil Code § 3287 allows for any person awarded damages to recover interest on those damages "from any such debtor" and the Song-Beverly Consumer Warranty Act at California Civil Code § 1794 allows a customer damaged by violations of the Act to bring an action for damages, costs, expenses, reasonable attorney fees and civil penalties.

This decision is important for all business owners because the Song-Beverly Consumer Warranty Act potentially applies to every sale of consumer goods sold at retail in California. The Act is very strict about the type of formalities with which a manufacturer, distributor and retailor must comply to circumvent the implied warranty of fitness, less any party in the stream of commerce be liable not only for damages, but prejudgment interest on those damages.

CAVEAT VENDITOR; LET THE SELLER BEWARE.

Banks may charge fees on accounts containing public benefit money.

Miller v. Bank of America, 46 CA4th 630 (2009)
Court of Appeal of the State of California
First Appellate District
Division Three

In this class action lawsuit, class representative Miller was a recipient of Supplemental Security Income (SSI) and other public benefit money which was directly deposited in his Bank of America account. In January 1998, Bank of America erroneously deposited $1,799.83 into Miller's account. Upon realizing its error in April 1998, Bank of America debited Miller's account for the $1,799.83, leaving a negative balance in Miller's account. The bank took funds from Miller's May SSI direct deposit to settle the negative balance, leaving Miller unable to pay his rent and other living expenses.

When Miller objected to Bank of America's actions, the bank opened a second account for Miller's SSI direct deposit, and credited the new account for the May SSI payment it previously captured, but also informed him that Miller he was still responsible for the first account's negative balance. In June and July, Bank of America again seized and later restored SSI funds from Miller's second account to satisfy the negative balance in his first account. Bank of America also charged Miller's second account with Non-Sufficient Funds (NSF) fees related to overdrafts caused by fund seizures.

Miller sued Bank of America in 1998 bringing a host of allegations, including violation of the Consumers Legal Remedies Act (CLRA). Relying upon Kruger v. Wells Fargo Bank, 11 CA3d 352 (1974), the jury awarded $75 million in compenatory damages to Miller and the other class members on a finding that Bank of America violated CLRA by falsely representing the right to use public benefit money to pay overdraft fees.

On an appeal upheld by the Supreme Court of California, Kruger was found to not apply to debits of overdrafts and charging NSF fees because the instant case was distinguished from Kruger in that Miller's debt was not a past debt but arose from activity in a single account. Further, under California Financial Code 864, "debt" is defined to exclude "charge for bank services or...for an overdraft of an account."

This case is a victory for businesses in California. It is hard to believe Miller "did not notice" almost $1,800 extra in his account while he required SSI pay his rent and living expenses. That he did not call the extra money in his account to the attention of his banker is one thing, but that he spent the money and then complained when Bank of America corrected the error is another. When banks take losses on deadbeat accounts, the true victims are the account holders with positive balances who pay higher fees fees and earn less interest to offset the bank's loss.