People frequently ask, “Is it more advantageous to lease or to buy a vehicle?”. Revenue Canada has considered each option and has established rules to ensure that one has little if any benefit over the other. The decision is therefore based on your situation, needs and cash flow circumstances. Whatever decision you make, make sure you thoroughly comparison shop and sleep on it before you make any final decision, sign documents and take the car away. You want to make a decision based on sound logic–not based on emotion or the dealer’s sales pitch. Compare the cost of each approach over the term you expect to own the vehicle.

There are many different types of leasing arrangements, and dealers offer a wide variety of choices and options on both new and used vehicles. All leases involve making periodic payments for the term of the lease, and there may or may not be an option to purchase the vehicle at the end of the lease.

On some leasing contracts, the vehicle is returned to the dealer at the end of the lease period and you have no further obligation except possibly paying for extra mileage or damage. On other leasing contracts, you will be asked to “guarantee” the dealer a residual value for the vehicle at the end of the lease period. Residual value is the amount the vehicle is expected to be worth at the end of the lease period, and is specified in the contract. Sometimes you may be able to buy the car for the residual value. If it is returned to the dealer and sold for less than the residual value, you must pay the dealer the difference.

Lease contract
This contract sets out the contractual nature of the deal. You cannot count on any representations that the sales rep makes to you that are not contained in the lease contract. So make sure that any statements made to you to induce you to lease the vehicle are written into the contract.

Important questions to ask
Before you sign any contract, make sure you have answers to these important questions and calculate what they will mean to you.

* What would be the total cost to buy the same vehicle and finance its purchase through a lender?

* What is the best retail price of the vehicle, and what price is the company using as the basis for the lease? The difference between the market value of the vehicle at the beginning and end of the lease is one of the main factors in calculating monthly payments.

* What is the interest rate being applied to the lease and how does it compare with current loan rates for purchasing a vehicle?

* Is there an option to buy the vehicle at the end of the lease?

* Can you buy the vehicle during the term of the lease, and if so, and are there penalties or additional charges?

* Are you required to guarantee the residual value of the car to the dealer?

* Can you terminate the lease before the date specified in the contract, and if so, is there a penalty or additional charge?

* How is normal wear and tear on the vehicle defined, and what is excessive wear and tear that makes you liable for an extra expense at the end of the lease?

* How is extra mileage defined and how much might you have to pay at the end of the lease?

* What is the total cost of the lease, and could you have bought a similar car for that amount?

* What are the associated fees you might have to pay for items such as insurance and administration? What are the late payment penalties?

* What is the total financial obligation of the lease, including the cost of all lease payments, plus all taxes, levies, fees, trade-in allowance, security deposit, advance payments and any down payments?

* Is the leasing contract easy to understand and is the information large enough to read without difficulty?

* What are the restrictions on the use of the vehicle–can you use it outside your city or province, or in another country?

* What is your responsibility for maintaining and servicing the vehicle?

* What are the warranties and guarantees, and is there any insurance provided for or required by you?

* What is the retail price of the vehicle, the price on which the lease payments are based, and the interest rate applied to the lease contract?

* What are the details of periodic payments, including the total number of payments, amount of each payment, payment dates, taxes on payments, and the total amount of all payments?

* Do you have “gap” protection? If you do, and you are in an accident and the vehicle is damaged beyond repair, this program will cover the difference after you pay the deductible, between what you owe on the remainder of your lease and the amount of your insurance settlement.

ADVANTAGES AND DISADVANTAGES OF BUYING

Advantages:

* you own the vehicle and therefore do not have any restrictions on use.

* you are building up potential equity in the vehicle (the value of the vehicle less the debt you have paid off).

* you can use the vehicle as security to borrow money.

* you can sell the vehicle and keep the money, after any loans are paid off

If you are using the car as a business vehicle, there are additional benefits:

# depreciation is deductible. For cars, it is 30 per cent a year on a declining balance. However, only a maximum of $25,000 (plus taxes) is accepted as the capital cost of the vehicle, no matter how much more you pay.
# interest on money that you borrow for the car purchase is deductible. However, there is a maximum of $300 a month, no matter how much more than that you pay.

Disadvantages:

If you are using the car as a business vehicle:

* you cannot deduct the full cost immediately

* only the first $25,000 plus taxes may be capitalized and depreciated for tax purposes. The car you want or need may cost more than that.

* only a maximum of $300 per month for interest is accepted by Revenue Canada.

* you pay your own repairs and maintenance expenses.

* time and effort is required to sell the vehicle.

ADVANTAGES AND DISADVANTAGES OF LEASING

Advantages:

* you can change to a new vehicle relatively easily.

* you have more consistent and predictable cash flow requirements.

If you are using the car as a business vehicle:

* since monthly payments are generally less than loan payments when you purchase a car, you have better cash flow.

* lease payments are deductible, subject to limits set out by the Income Tax Act. At present, it is $650 per month.

Disadvantages:

you don’t own the vehicle.
you are not building up equity in the vehicle.
you are basically renting the vehicle for a stated time period.
there could be restrictions on where you can use the vehicle.
leasing costs are slightly higher than purchase costs.
leasing expenses can be subject to increases.
costs could include financing, administration and other fees.
you are responsible for maintaining the vehicle, according to the maintenance schedule set out by the leasing company. This could cost you more money than if you had the freedom to do what you wanted, where and when you wanted, as in a purchase situation.
there are many restrictions and limitations set out in the lease that potentially affect your use and enjoyment of the vehicle
you could be paying more money for greater mileage use, wear and tear and guarantee of residual value at the end of the lease, or penalties if you want to terminate the lease early.

If you are using the car for business purposes:

* depreciation is not deductible on operating leases.

In summary, if you want a more expensive car, you’re not emotionally attached to the idea of ownership and you change cars every two or three years, you might consider the lease option. However, what makes leasing appear less expensive than buying is that you are not paying any money to build up equity in the vehicle. When you buy a vehicle and pay for a loan, part of the loan payments are reducing the debt, and therefore building up equity.

For further information, you can pick up a free consumer booklet on vehicle leasing, Turning the Lights on Leasing, published by the Canadian Automobile Dealers Association. You can also purchase a Canadian “buy vs. lease” software program that customizes the pros and cons in specific situations. One such program is The Car Calculator, published by Orangesoft. You can obtain further information on it at 1-800-647-8693 or www.carcalculator.com. Also, check with your provincial consumer services department for brochures and any legislative lease protections for consumers that might be available.

Based on an original article by the Editors of CarPoint.

There is a distinction between an idea and an opportunity. Many people have good business ideas, but the idea may not be a viable business opportunity with potential for success. Careful research, evaluation, and preparation of a business plan will separate the real business opportunities from casual ideas. There are many innovative techniques for finding business ideas and opportunities. But before you start your search make sure that you have completed a detailed self-assessment. This will help you to find opportunities suited to your lifestyle needs. Here are some sources of information to consider:

Books. There are numerous books available which detail business opportunities that can be started with minimum financing (i.e., about $500 to $1,000). Check with your public library and local bookstores to see if these books are available.

Magazines and newspapers. Read your daily and community newspapers to become aware of trends locally, provincially and nationally. National magazines which cover small businesses are Profit, Entrepreneur, Venture, Inc. and Income Opportunities. Check at your local newsstand.

Trade and business associations. Almost every type of business has a professional or trade association which you may wish to check into. The association could be local, provincial, national, or international in scope. Check in the Yellow Pages under “Associations” for ones that interest you. In addition, check with your local library for directories that list associations in Canada and the United States.

Government Business Resource Centres. Check out the excellent business resource centres in your province. Look in the blue pages of your phone book, under your Provincial Government, and then under the Small Business Department. Look for the closest Canada/Provincial Business Services Centre.

Public libraries. Your public library is an invaluable source of business ideas, opportunities, and information. The business reference librarian will help you gain access to an extensive range of information relevant to your business interest. Many public libraries depending on the size of the community, have a full range of business-related books, catalogues, directories, trade publications, magazines, and newspapers.

Trade shows/conventions. Trade shows can be an excellent way to examine the products and services of many of your potential competitors. You will have an opportunity to meet distributors, franchise companies, and sales representatives. You will also learn of product and market trends, and identify potential products or services for your small business venture. You will find trade show information in the trade magazines servicing your particular field. Also look at the annual directories that publish a listing of trade shows in Canada and the United States. Trade shows also offer an excellent opportunity to stimulate creative thinking. You are exposed to speakers, panellists, and displays. You also have an opportunity to exchange ideas with other people attending.

Travel and hobbies. Whenever you travel, look for business ideas and opportunities. Many services and products may not have been introduced into Canada. You may be able to negotiate exclusive or non-exclusive Canadian distribution rights for a product. Alternatively, you may wish to duplicate, with modification and improvements, the product or service. Think of the areas relating to your hobbies or leisure activities where you believe a need exists. You might be able to devise creative ways of meeting those needs.

In summary, when you are looking for potentially profitable opportunities, it is helpful to review some of the main categories of business opportunities:

* Providing an information or consulting service

* Identifying new opportunities arising from your current business

* Becoming an agent, supplier, or distributor for someone else’s service or product

* Taking existing local products to new markets within Canada

* Transferring concepts from one industry to another

* Buying an existing business or franchise

* Imitating successful services or products

* Becoming an agent or distributor for a product imported into Canada

* Inventing a new product

* Capitalizing on a growth trend

* Solving someone else’s problem

* Rebuilding, repairing, or adding to an existing product or service

* Identifying specific target groups and customizing services or products for their needs

* Exporting Canadian products to other countries

* Finding productive uses for waste materials

* Catering to a market that is no longer being serviced

* Replacing imported products

* Targeting a small portion of a large market

Don’t forget to invite the candid input of friends and relatives on how good a fit the business concept is for you. Inquire from those in the industry on the viability and need for the business.

At some point in your small business career, the odds are great that either you will be suing someone or someone will be suing you. Litigation normally has a mystique to many people, and the process can be very frustrating, intimidating, stressful, uncertain and expensive.

However, by avoiding the classic mistakes that small businesses make, you will be better able to deal with the litigation process from a position of perspective and insight. You could be suing someone for a debt owing, or breach of contract or negligence. No matter what catalyst is causing you to think of suing, the following pitfalls to avoid should be kept foremost in your mind.

Lawsuit based on emotion
You might feel that you have been wronged for whatever reason and you are naturally very upset. Your decision to sue though, should be based on hardnosed business realities. Maybe there is not much money involved but a matter of principle. In that case, give yourself some time, maybe several months, to see if your emotional intensity has subsided. The litigation process itself has enough negative emotion and energy associated with it.

Unrealistic expectations of outcome
Many people assume that they are in the right and that they will “win” at the end of the day. However, the interpretation of the facts can vary and very few issues in law are black and white. The litigation process is inherently unpredictable. In addition, when you factor in your legal fees from any judgment in your favour, maybe you are not ahead of the game at all. If you win, the court costs you are awarded only amount to about l0%-25% of your legal fees, so you still lose. And then you have the pleasure and challenge of attempting to collect on the judgment.

Not assessing the defendants assets
You could “win” at trial, but still be a big time loser. The reason is that the personal or corporate defendant could have no assets in their name or have all their assets levered up with debt.

Not weighing potential gains vs. losses
In this situation, you need to realistically assess the relative pros and cons of litigation. In other words, the costs in money and lost productivity. Can you afford the fight to the end? Have you obtained various quotes as to the cost of complete pre-trial and trial process? Is the cost to pursue the matter going to be a lot more than the amount you are claiming? What if you lose? In the latter case, you will be out not only legal fees, but court costs as well. What if the defendant counterclaims against you and wins? You get the idea.

Not considering a settlement
The pragmatic and practical reality is that settlements occur all the time. Only about 5-l0% of lawsuits ever end up at trial, with the exception of small claims court. Even small claims court has a settlement hearing process before trial, in many provinces. The purpose is to see if both sides could agree on striking a deal and getting on with life. Settlements save a lot of court time. You have heard of people settling the case on the court house steps. The reason is the uncertainty of the trial process outcome. Settling for 20, 30, 50 or 70% of the original claim is better than the risk of getting nothing and being out legal fees as well.

Suing too early
In this situation, you commence your action before you have all the facts. Ideally, you want to have all the facts in your favour determined and included in your claim. It will show your opponent that you have done your homework.

Suing too late
If you wait too long, you could miss a statutory time limit to commence your action. In other words, you snooze, you lose. Different types of actions and different provinces have different time limits.

Lack of expert legal advice
You want to have a lawyer experienced in litigation matters review your case. Better still, have a minimum of three lawyers give you candid and objective feedback on your chances at trial, how long it will take and how much it will cost. If you contact the lawyer referral service in your province, most initial consultations are free or at a nominal fee. This will be time well spent.

Before you decide on any lawsuits, consider each of the above points and then sleep on it for a month. See if you have the same opinion at the end of that time. Remember the axiom, “act in haste, repent at leisure”.

Maybe you currently have a part-time or full-time home-based business or would like to start one some day. About one out of four Canadian households operates a business from home. If you are currently or will be in a home-based business, here are some tips to help save you money.

Many home business owners pay too much tax, because they don’t know all the types of tax deductions available or how to take full advantage of them. Others overpay because they are conservative by nature. And some either receive poor tax advice, or no advice at all. Whatever the reason, if you’re paying too much tax, it’s time to stop. Keep in mind two key points:

You have a right to maximize your tax deductions. It is important to adopt the mindset that a high percentage of your expenses legitimately relate directly or indirectly to earning business income.
You should find a professional accountant with an equally proactive attitude towards maximizing deductions. Accountants typically fall on the conservative side. You should locate one who adopts an aggressive approach to planning, enjoys the professional and intellectual challenges of knowing the “fine line”, and can bring you comfortably close to it. No chartered accountant (CA) or certified general accountant (CGA) would risk their reputation or livelihood by advising you to go over that line.

Anyone can call themselves an accountant, and many do, so select an accountant with a professional designation, such as CA or CGA. Even if you already have an accountant, obtain at least three other opinions from accountants who specialize in tax matters, to ensure that the advice you’re getting is appropriate–you need a benchmark for comparison. If you don’t have an accountant, have an interview with at least three of them before you decide which one, if any, you want to rely on for advice. You can locate these professionals from friends in business, or from the Yellow Pages under “accountants”. Most initial visits are free, but confirm this before the appointment. Before your meeting, put all your questions in writing in case you forget them, and prioritize them in case you run out of time.

Then, apply tax-planning strategies to every decision you make. These strategies should be customized to your situation and updated regularly. With your new bullishness, keep receipts of every expense you incur. Your accountant can advise you later what portion is usable.

Here are the deductions most frequently missed or ineffectively used by home-business owners:

Home:
Deduct the portion of your home that is used regularly for business purposes, including work, office and storage areas. If you have customers coming to your home, claim a separate reception area and washroom for business use, or a portion of it if it’s shared between personal and business uses.

To calculate the percentage of home-office use, you can divide the total area (excluding the basement) by the overall square footage used for business-related purposes. Don’t forget to include a portion of the “common area” used for business purposes, such as hallways and stairs. Use the committed office area percentage as a base.

Once you have figured out your business-use portion, apply it to your total house-related expenses to calculate your total business expenses. Allowable home expenses include: mortgage interest and property taxes (or rent), plus insurance, maintenance costs and utilities. Make sure you obtain extended homeowner insurance protection to cover home-office use–this extra premium is 100 per cent tax deductible.

Car:
If you have one car and use it for business 50 per cent of the time, claim half of your car-related expenses (gas, oil, maintenance, insurance, interest on car-financing costs) as business expenses. You should maintain a mileage log to support your usage claim. If you have two cars and use one exclusively for business, you can claim 100 per cent of that car’s expenses. Be sure to claim depreciation of 30 per cent on your car and deduct the appropriate portion each year from income. Also, make sure you obtain insurance coverage for your car to cover your business usage. The additional premium is 100 per cent deductible.

Furniture and equipment:
Your office furniture, computer hardware and software, printer, fax machine, copier and other equipment have to be depreciated over time using the capital cost allowance (CCA) formula, which lets you deduct a portion (20 per cent to 100 per cent) each year. The concept of depreciation is that the cost of the asset has to be spread over the projected useful life of the asset. If you have an incorporated business, you can sell your business furniture, computer and car to your business at fair market value. In doing so, you pay no personal income tax on the proceeds, as you originally bought the assets with after-tax income.

Salaries:
Salaries paid to children, spouse, relatives or others to perform work for your firm are all deductible expenses. Payments should be reasonable, and the arrangements structured properly to avoid problems in case of an audit.

Meals:
You can deduct 50 per cent of your total meal costs (including alcohol, taxes and gratuity) relating to promotion or other eligible purposes–for example, when you take a prospective or existing customer out to lunch or dinner, or someone who is knowledgeable in the industry whose expertise and opinion you want to benefit from. If you attend a trade show and pay for lunch for yourself, you can take 50 per cent of that cost.

Education:
If you attend any seminar, conference, convention or trade show relating to your current or future business interest or operation, keep all receipts; they are 100 per cent deductible. Don’t forget to include any parking costs. Also, all subscriptions to magazines and newspapers are tax-deductible if you are incurring those expenses to keep your knowledge current (keeping abreast of trends, ideas, the competition, pending legislation, the economy, etc.). And don’t forget Internet-related costs, such as ISP fees–you are incurring these expenses for research and other business-related purposes.

Travel:
This is one deduction many people don’t fully understand. With proper tax advice and planning, you should be able to claim up to 100 per cent of all costs, except meals, which would be at 50 per cent. The percentage and eligibility of deduction depends on whether your trip was deemed to be business-related exclusively (100 per cent) or partially (50 per cent). In the latter case, the other 50 per cent could have been a personal vacation.

Remember to obtain professional tax advice which is customized to your specific situation on an ongoing basis. Request a copy of the current year’s free publication Business and Professional Income Tax Guide from Revenue Canada. Ask your accountant about all the tax saving strategies available to you. And most importantly, remain proactive about maximizing your deductions. As they saying goes, “It’s not what you make, it’s how much you keep that’s important”.

The small business sector is a dynamic, innovative, and growing force that provides challenge, fulfillment, and financial security to millions of Canadians. Studies show that over 75% of these small businesses have under five employees, and various studies estimate that there are approximately 2.2 – 2.5 million Canadians working from home. This would include part-time or full-time self-employed people, as well as moonlighters.

Some of the trends which have encouraged the start-up of home businesses are:

Cocooning. Many people are preferring to centre their leisure time around the home. This lifestyle trend has been labelled “cocooning” and comes from the desire to eliminate a lot of outside stresses. This is reflected throughout the economy in an increase in the number and variety of goods and services available, such as home improvements, gardening equipment and supplies, delivery services, home electronics, home gymnasiums, and home entertainment.

Computerization. This trend has had a profound impact on home-based businesses. Equipment such as fax machines, photocopiers, personal computers, modems, and specialized software is not only smaller and more compact but affordably priced. Cellular phones, voice mail, memory pagers, and answering machines also make it possible to provide accessibility to the business world. A home office can have all the technical sophistication and professional image of a traditional business office outside the home.

Combining roles of career and raising a family. Many parents prefer to raise a family and operate a part-time or full-time business from home at the same time. There are many examples of both spouses operating businesses at home, either the same business or separate businesses.

Growth of the service industry. Many home businesses are ideally suited for this industry. They generally require less start-up capital, have lower ongoing operational expenses, and have minimal equipment cost.

But though there are many benefits, there are also risks and frustrations. Many people have an idealized picture of the rewards and pleasures of running their own business. It is important to objectively look at both sides of the issue of small business ownership in order to make a realistic decision.

Home-office benefits
Home-based business ownership offers some distinct advantages:

Start-up and operating costs are much lower, and therefore the business is easier to get established and less risky.
Commuting time and expense are reduced or eliminated
There are more opportunities for your business to grow because of fewer financial constraints. Therefore, you can expect to turn a profit sooner and increase your chances of success.
Such a business provides an atmosphere where commitment to a family and a career can be combined for the benefit of both.
Spouse and family members can be employed by the business.
There are tax write-offs that you can take for expenses you are already incurring relating to your home.

Home-office drawbacks
Operating your business from home has some disadvantages. However, many of these can be anticipated and thereby avoided.

There may be isolation from the companionship of and interaction with colleagues or fellow workers.
There is a risk of working too hard because of a lack of separation between the work and home environments.
Space may be cramped or inappropriate for an ideal working environment or for growth purposes. Your inventory storage and work area may spill over into your living space.
Personal or family lifestyle patterns or priorities may be disrupted or have to be set aside.
Distractions and disruptions due to the nearness of family or friends may interfere with concentration.
Tensions and frustrations may develop because of work blending into the family relationship.
It may be difficult to hire employees due to limited or inappropriate space.

Running a home-based business is not for everyone. What may be an advantage to one person may be a disadvantage to another. You will need to carefully assess your personal situation to decide whether the disadvantages are major or minor obstacles for you.

When searching for businesses there are a number of classic warning signs that should alert you to potential problems. Buying the wrong business could result in a financial disaster for you. The following is a partial list of common warning signs that you should be aware of.

Unfamiliar business
It would be a serious mistake for any buyer to invest in a business that the buyer knows nothing about. The dangers in running the enterprise are accentuated by inexperience and unfamiliarity. If you are the potential buyer, you could be buying a business totally unsuited to your personality, talents, or interest. You would be at a considerable disadvantage in trying to survive and compete with your competitors.

Partner-wanted business
Some business partnerships that are based on sound economic data can work out well and may be worthy of your consideration. On the other hand, many business partnerships do not survive in the long run. This could be because of conflicts of personality, philosophy, policy, priorities, or contribution of money, time, or skill into the business. Some unstable and undesirable business operations attempt to defraud the unwary investor by obtaining an injection of funds into the business and then using those funds in an inappropriate fashion without any controls. For example, investment funds could be used for paying past creditors’ debts rather than for working capital for future need and growth. Be cautious of any business partnerships that promise a disproportionate return based on the investment of money or time.

Business which use up all investment capital
If you are considering a business which would require all of your financial resources to pay the purchase price, you could be in a situation that you are starting off undercapitalized, without working capital or reserve for future needs. For example, if you take over a business and there is a decline in sales and profit during the transition phase, you would not have any resources to be able to buffer the financial crunch. Never buy a business without taking into account your working capital and contingency fund.

Personal service business
There are special concerns you should be aware of if you are considering buying a personal service business (for example, an architectural, engineering, law, dental, or legal practice). The main concern relates to the bonding and goodwill that has occurred on a one-to-one relationship between client and the professional. Once the business is purchased, a substantial portion or possibly most of the clientele could leave and go to other professionals because of a difference in style and operation. If you do buy a personal service business, you should build in protections because of the high risk that the goodwill may not necessarily stay when the other party leaves.

Failing or distressed business
Don’t proceed any further if you are considering a business which is going through serious financial problems. The exception would be if you are an expert in that type of business, have clearly identified the reasons for the financial difficulties, and know that you have the expertise and management resources to turn it around. There are people who buy businesses with a turnaround strategy in mind, and skillfully negotiate a purchase package which is very attractive. This can be done effectively, of course, only if the buyer knows what he/she is doing and is sophisticated in this type of distress purchase.

Many people starting out in a service business are more interested in performing their service than developing a clear credit, billing and collection policy. A lot of new business owners have had no previous business experience and do not realize the pitfalls that can occur.

Having a system that works is essential to your survival. It does not take many bad debts to completely eliminate the profit of the business for the whole year. In more serious cases, you could go out of business if a substantial debt owing by a client is not paid.

There are several effective techniques to minimize the risk of bad debts. The following general guidelines may not all be appropriate in a given client situation. Your judgement in each individual situation must dictate the appropriate approach.

Avoiding Client Misunderstandings on Fees

Communication is vital to minimize client misunderstandings about fees. Many people feel uncomfortable discussing money matters. It is important that the amount of money you expect is understood and agreed upon by the client before you commence work.

Three ways to eliminate misunderstanding on the issue of services performed for fees are through effective communication, written contract or letter of agreement, and clear detailed invoice.

Advance retainer
A client can be asked to pay a retainer or deposit of 10% to 25% or more of the total contract amount prior to the work being performed. This can be justified on the basis that you are very busy, and if you are going to schedule in a commitment to the client, it is your company policy to require an advance commitment retainer. This is also an effective technique for protecting yourself from a new client who might delay payment or who doesn’t pay.

Prepaid disbursements
Depending on the length of the job and type of client, you may wish to request prepaid disbursements if they are going to be sizable. Alternatively, arrange to have your client pay for any airfare, hotel or hotel meals directly. You do not want to carry the client for out-of-pocket expenses at the risk of your own cash flow. You also do not want to run the risk of a nonpayment or dispute of the overall account. It is one thing to lose your time; it is another thing to also be out-of-pocket your own funds.

Progress payments
It is common to invoice at specific points in the project. The stages at which progress payments are to be paid would be outlined in the contract.

Regular billing
Statements can be sent out on a weekly or monthly basis, depending on the circumstances. This also provides you with the advantage of knowing at an early stage in the project if the client is going to dispute your fees, and at this point you can either resolve the problem or discontinue your services. It can be very risky to allow substantial work to be performed before rendering an account or waiting until the end of the project.

Billing on time
Generally a client’s appreciation for the value of your services diminishes over time. This is a common problem. It is important, therefore, to send your bill while the client can see the benefit of the service you have provided.

Monitor payment trends of clients
Record and monitor the payment patterns of clients so you can watch for trends that may place your fees at risk.

Follow-up of late payments
If you see an invoice is more than a week or ten days overdue, begin the various steps of your collection system immediately.

Personal guarantee of principals of a corporation
Depending on the project and client, you may want to have the principals behind a corporation sign a formal contract as personal guarantors. Another variation is to have the contract in the name of the corporation and its principals as co-covenantors of the contract.

Involving client in assignment
Try to involve the client in some fashion during each step of the project. By making your client aware of your services, benefits, time, and skill, you should minimize problems that could occur because of an unbonded or remote relationship.

Every business decision involves some legal consequence. Whether your business is operating from a home or office tower or whether it is a computer-related business or not, you face the same potential legal risks as any other business. It makes a strong argument for considering the benefits of incorporating.

What are the main business risks that could result in you being sued? The most obvious is debt: your business owes money it cannot pay. Then comes breach of contract – when your business commits to doing something in a certain time frame, but for some reason cannot fulfil the bargain. The last is negligence: you could be sued if someone using your service or product; is injured physically or suffers financially. No matter how hard you try to avoid these risk areas, problems can occur.

In my opinion, incorporating your company is sometimes essential and always advisable to consider. It is the cheapest peace of mind you can buy. Incorporation means you create a limited-liability company to carry on your business under federal or provincial law. If your company is sued, the liability is almost always limited to the assets of the company. If your company has no assets, the creditor with a judgement against it is out of luck.

You can incorporate by yourself or go through a lawyer. Doing it yourself costs about $300 (mainly in fees to the government). Going through a lawyer adds about $350 to $500 in legal fees, but could help you wade through key issues of corporate structure and other legal strategic planning. You can contact the lawyer referral service in your province to get names of lawyers who do corporate (business) law. The initial consultation is free or at a nominal fee (e.g. $10).

If you are bringing in partners, complete a shareholders’ agreement when you incorporate. This can cost $500 or more, but it’s money well spent as it sets out formulas for resolving disputes.

The penalty for not limiting your liability can be huge. Consider two business people I’ve encountered who could have benefited from incorporating.

A computer consultant underestimated his costs when he signed a large fixed-price contract. He quit half-way through the project as he couldn’t afford to complete it. The client sued him personally for losses due to breach of contract. The entrepreneur lost his house and declared personal bankruptcy. The trauma caused a marital break-up – a common outcome.

A computer programmer designed a program that allegedly had flaws and did not perform the functions expected. As a consequence, the client had a lot of down-time and had to have a new program developed. The client sued. The programmer had to sell his home and declare bankruptcy.

Incorporating probably wouldn’t have saved the businesses. But it might have saved the owners’ homes – and maybe even their marriages. Here’s why I am sold on the benefits of incorporating.

Legal benefits: You can protect yourself as a shareholder from being personally sued, as long as you haven’t signed a personal guarantee to creditors, suppliers and landlords. But directors can be sued by statutory creditors, that is, government departments with claims against the company, such as Revenue Canada.

Financial benefits: A corporation has more financing options available. It can attract investors, and it provides more security to lenders because of its ongoing legal structure. When a shareholder dies the corporation can still be carried on, passed on or sold, as a corporation is a separate legal entity. A non-incorporated business ceases to exist as a legal entity when the owner dies. Lenders and investors don’t want that risk.

Marketing: An incorporated business implies prestige, stability and greater resources than an incorporated business. This may be illusion, but it happens.

Tax: There are many tax advantages to incorporation, such as dividing business income between family members by splitting shares, deferring tax on business income, and the capital gains exemption on the sale of the business.

Your accountant may suggest that you hold off from incorporating until you are making more money. There are solid financial grounds for doing so. But the bottom line is your potential liability, which starts the second you begin doing business. If you perceive any risk, the answer is simple – incorporate.

Many business owners who are unable to access money in terms of debt or equity capital may be forced to reassess their needs, resources, and business management. For example, quick handling of accounts receivable, effective inventory control, customer prepayments, and cutting down on unnecessary expenses can free up funds not otherwise available. It forces your business to operate in a more efficient fashion. This will lessen your need to look outside the business for financing. Some of the various methods of internal financing include the following:

Customer prepayments
A business can encourage customers to make a deposit, prepayment, or payment on delivery. This is a very common technique in the mail-order business and in service-type businesses.

Inventory control
Effective inventory control will ensure there is the right amount of stock to satisfy customer demand. Determine guidelines for proper inventory purchases. Adjust your purchases to meet the peaks and valleys of your annual business sales. Too much money tied up in slow-moving inventory, debt servicing payments on inventory loans, and lost customer loyalty due to insufficient stock is costly to your business.

Collecting receivables
Receivables can be reduced by tighter credit-granting policies, better monitoring of accounts, and more effective collection policies. You may wish to consider credit cards or cash only as a means of sales.

Delayed payables
Establishing a good working relationship with your suppliers can result in extended payment terms. Make certain they are aware of your loyalty to that firm and your repeat business. You may be able to negotiate a discount on volume or regular purchases.

Restructuring payment arrangements
There are times when a small business is not able to maintain monthly payments plus interest on loans or repayment to creditors. By using creative negotiating techniques, there are ways of getting around short-term problems. Some alternative repayment plans that you may consider include:

* A period of grace for principal loan payments during the start-up period of your business operation.

* Blended payments that feature a long amortization period resulting in low payments of principal in the early years.

* Graduated payments; that is, low payments on principal in the early years and higher ones later on.

* Payments of principal during the high season only, so that the business does not have a cash-tight period during the low sales volume season.

Selective product lines
Only handle product lines on which you get the most favourable terms from the supplier and which have the highest sales turnover and profit margin.

Fixed assets
You may wish to sell your assets to a leasing company and lease them back, thereby freeing up cash for working capital purposes. On reviewing your assets, you may feel that some of them are not necessary to the business and may be sold to free up additional cash. By purchasing secondhand equipment and machinery, you can reduce financial outlay.

Renting or subletting
You may decide to rent space for a store or factory rather than buying, to improve your leverage and your cash flow. By subleasing space you can offset your monthly payments, thereby increasing your working capital.

Stringent management
By reviewing the points discussed above to determine how to conserve on capital and save on expenses, financial resources can be freed up and the business risk minimized. The business owner should analyze the financial condition of the business on an ongoing basis.

Are salaries too high?

Is the owner taking out too much from the company for personal earnings rather than keeping it in the company for working capital?
How do the company’s costs of goods and other expenses compare to other companies in the industry?
Is the lease too expensive?
Are supplies being wasted?
How do actual expenses compare to budgeted expenses?

The business owner knows best where expenses can be trimmed from the operation. In addition to controlling expenses, the owner should always be looking for ways to increase profits, sell surplus inventory or assets, and maintain an effective receivables collection program.

Statistics show that one out of four Canadian households have a part-time or full-time home-based business, and that number is growing.

If you are operating a part or full-time business out of your home, you have already made a conscious decision to reduce the financial risk of having your own business, in terms of low start-up capital and low overhead. But a home-based business is vulnerable to liability risks. Keep in mind that almost all basic homeowner policies specifically exclude any claims for losses incurred in your home or around your property as a consequence of home business activity. Here are a few examples and the types of insurance that would protect you:

* You have an electrical power surge which damages your home office computer equipment and destroys all your clients’ records. (Business property/business replacement cost insurance added to your home insurance.)

* You operate a computer tutoring business and someone who comes to your house slips on the stairs, injures her back and is off work for six months. You are sued. (General liability home insurance with additional coverage for business.)

* You have a short-circuit in your computer equipment, resulting in the house burning down and loss of business revenue. (Home fire insurance coverage with additional business use coverage/business interruption insurance.)

* You have expensive desktop publishing hardware and software in your basement office. Your home is broken into and all your equipment is stolen. (Business property/business replacement cost insurance, added as a supplement to home insurance.)

Now that you are aware of the potential risks relating to having the home office, the next step is to select the right protection.

Your goal is to ensure you are fully covered at all times. This can be achieved by periodically reviewing your risk and keeping your insurance representative promptly informed of any changes in your business that could affect your coverage. Such changes include buying more equipment, building an extension on your home, or using your personal car for business. If you are using your car for business and personal purposes, have your insurance company cover the car for business use. Otherwise, your policy coverage could be void if you have a claim. It’s not worth the risk, and besides, the extra premium is nominal.

You may need to increase your liability limits. Or, a change in circumstances may mean that you no longer need a certain type of insurance or level of coverage. Periodic reviews will save you from being overinsured and help avoid overlaps and gaps in coverage, thereby keeping your risks and premiums lower. This is especially important if your business is growing.

To help plan your insurance program, assess your business and identify the likely risk-exposure areas. Decide which type of protection will work the best for you–absorbing the risk, minimizing the risk or insuring against the risk.

To reduce the cost of insurance, shop around for competitive rates and negotiate for lower premiums if your loss experience is low. If you need a high level of expensive protection, increasing the deductibles should lower the cost of the premium. Look in the Yellow Pages under “Insurance Brokers”, and contact at least three of them for quotes.

For example, most home insurance companies will provide additional protection, which is referred to in the industry as a “rider” or “endorsement” to your existing home insurance policy. This would cover business equipment losses, or increase the third-party liability coverage to include injury to people on your property for business-related reasons.

These riders generally exclude business-interruption losses, product liability, off-premises loss or disability income coverage. You may therefore want to check out group insurance coverage for other aspects of your home business. Certain organizations have excellent insurance programs for their members. Contact your local Chamber of Commerce, the Better Business Bureau, or the Retail Merchants Association for more information.

Studies show that only one-quarter of home business owners are covered for theft, damage or other loss of business equipment. More than two-thirds have no business interruption insurance. Nine out of 10 have no disability insurance, and most do not insure the business use of their cars. The majority do not have extra homeowner insurance coverage for their home business, and in addition, many homes are underinsured or lack adequate replacement value coverage.

To protect your assets, adequate insurance is a must for the home-based business owner. If you don’t have the proper additional insurance coverage, your claim will very likely be rejected. The premium cost for any additional coverage for business purposes is a 100 per cent tax-deductible expense against your business income.