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The 5 Cornerstones of Performance Management in the Financial Sector

Guest — Sat, 04 Feb 2012 10:00:00 +0000

The main aim of performance management is to ensure that an organization functions in a way that helps it achieve its goals and objectives. The financial sector is very competitive as institutions are constantly competing for new customers and seeking better business opportunities from existing customers. These institutions also face considerable demands from shareholders who require improved profitability and superior levels of performance. Managers in the financial sector apply performance management strategies to answer critical questions such as how the organization is doing; why it is doing this way; what should be done to improve performance.

In spite of its importance, it poses various challenges for the financial sector manager.

Branch Collaboration

Managers have the task of ensuring that branches are working in tandem with the overall strategic goals of the main institution. In managing the branches’ performance, managers often take a top-down approach. This approach may impose performance targets upon branch networks; the branch networks may then lack ownership of these targets. Managers can develop management systems that allow network branches to contribute to their own operations and to collaborate freely with the main branch. Collaboration is a management tool that offers the managers clearer information on which branches are profitable, what is making them profitable and actions to take to improve the performance of branches.

Employee Engagement

Engagement ensures that managers identify talented employees, keep them and get the most out of them. This involves mapping out a clear career path for these employees and communicating to them how important they are to the organization. Managers face the main challenge of identifying the most valuable employees and retaining them. Managers can overcome this by using management tools which are designed to identify an organization’s core objectives. These core objectives are then tied in to measurable results of how individual employees are meeting these organizational objectives.

Information Access

Managers face the challenge of ensuring that communication channels are clear, to improve employee and organizational performance. This requires that systems adopt advanced technology based systems. Technology based performance systems ensure that employees access information conveniently. Also when managers adopt technology based performance system, they will promote the exchange of feedback between managers and their employees. This approach not only saves money but ensures that financial sector managers keep up with changing objectives of the company.

Productivity

Managers face the task of ensuring employees stay productive for the profitability of the institutions. A large majority of the current workforce in the financial sector is young, dynamic and in need of new knowledge. This type of workforce is most productive in an organization which values technology and collaboration, to ease the exchange of knowledge. The challenge for managers is to find new ways of increasing opportunities for employees to network effectively and to explore emerging technologies, which make work in the financial industry much easier. Managers can encourage the use of tools such as instant messaging and portals not just for communication between employees; but also to track employee concerns and find ways to address these concerns.

Compensation

A considerable challenge facing financial sector managers is the issue of compensation. In the past, it was assumed that performance based pay improves employee performance. But changes in the financial sector indicate that there is little evidence that this assumption is applicable. Performance based compensation does not necessarily retain the best employees nor does it improve employee performance. Managers are, now, increasingly under pressure to adopt other methods of motivating and retaining employees other than differentiated pay for employees.

Although compensation is important, managers need to focus more on performance tools such as clear goal setting, peer feedback, and fair performance metrics. These tools give employees a clear map of how they are doing and what they should be doing to optimize their performance.

The 5 Cornerstones of Performance Management in the Financial Sector originally appeared on Canadian Finance Blog on February 4, 2012.

Tax Time: Deducting Home Business Costs

Tom Drake — Mon, 30 Jan 2012 10:00:07 +0000

Increasingly, more people are operating businesses out of their homes. These businesses might be full-time ventures, or they might be part-time side hustles. In any case, chances are that you are paying expenses related to your home business. In such situations, it is possible to not only deduct some expenses from your home business income, but you can also deduct these home business costs against your other, “regular” income.

What Home Business Expenses Can You Deduct?

There are a number of home business expenses that you can deduct. However, you need to make sure that the deductions you take are related to your efforts to earn money. Otherwise, you could find yourself on the wrong side of the CRA. Make sure that you keep proper documentation of your expenses so that you can prove the appropriateness of your business deductions.

Some of the items that you can deduct as home business expenses include:

Internet-related costs: Domain registration, web development, web hosting, and other fees.
Dues: If you join a professional organization related to your business, you can deduct the dues.
Office supplies: Make sure these are just used in your home office, and not used for personal purposes.
Advertising: Online and offline ad costs are deductible.
Travel: You can deduct business-related travel, including mileage for driving, hotel costs and airfare. You can also deduct the fees related to conventions and conferences in your business field.
Entertainment and meals: Business meals and entertainment is deductible, but only 50% of the cost can be deducted.
Bank charges and interest: Your related bank fees and interest charges can be deducted.
Payment to others: Payment for business-related services are tax deductible, as are salaries and contracts paid to employers and hired workers.
Courier and postage: When you mail items, or have them sent via courier, you can deduct the costs.
Use of your home: In some cases (make sure you qualify according to the CRA), you can deduct costs related to the business use of your home. This includes utilities, taxes, mortgage/rent payments, and insurance costs.

Add up all of the expenses you pay in order to keep your home business running, and consider deducting them. Remember, too, that some of your costs are only partially deductible, since you might use your Internet connection for business 70% of the time. Determine the percentages involved, and be careful not to deduct personal use as business use.

Deducting Your Home Business Expenses

Your taxable income will be reduced, even though a deduction isn’t a dollar for dollar reduction in what you owe in taxes.

In order to claim home business expenses, you will need to fill out a form T2125. The form contains sections that may or may not relate to your home business. If you aren’t selling actual goods, for example, you won’t need to fill out Part 4, which deals with tangible inventory. Your business expenses will be listed on Part 5 of the T2125.

Because you will need to list your total income for the year, make sure you have been keeping track throughout the tax year. Indeed, it is best to keep good records of your income and expenses throughout the year so that you can reference your information easily. Financial software and bookkeeping software can help you with this. As long as you keep good records, and your business deductions are truly for business expenses, you shouldn’t have a problem with the CRA.

Tax Time: Deducting Home Business Costs originally appeared on Canadian Finance Blog on January 30, 2012.

The Basics On Cash Flow Statements

Nelson Smith — Thu, 22 Sep 2011 09:00:36 +0000

Beginning two Thursdays ago, I began the most anticipated three part series in the history of the internet. First I started with the basics of balance sheets, and then I sexied up your screen with the basics on income statements. I know, I know, the last two Thursdays have pretty much been the best two weeks of your life. Well, be prepared to be unproductive for yet another week, as I end the post with the overlooked cousin of the financial statements, the cash flow statement.

What are we waiting for? Let’s get to it!

The Cash Flow Statement

As I said above, the cash flow statement isn’t nearly as popular for investors to analyze. There’s a couple reasons for that. Firstly, people aren’t exactly sure exactly what cash flow is. And, if they do figure out what it is, they don’t know the significance of the number.

Cash flow is defined as the change in a company’s cash position, over a period of time. Why is this important?

Well, firstly, cash levels are important to the viability of the business. If a company is low on cash, they run the risk of not making payroll, paying their bills, or paying the interest on their debt. Assuming the company can’t borrow any additional cash, bankruptcy is the only option. This, obviously, is bad.

The cash flow statement is divided into 3 parts: cash flow from operations, investing, and financing activities.

The Three Parts

Cash flow from operations is a fairly simple calculation. You take net earnings, and add depreciation and amortization, deferred taxes and changes in working capital. Like the name indicates, the number is simply the addition of all the stuff from operations that has a positive impact on cash.

Now, if earnings were negative, this wouldn’t be good for cash levels. Most of the time though, substantial negative earnings are because of write downs of assets, which has to be accounted for somewhere. So even though the company loses tons of money, cash levels aren’t affected so much.

The second part of the cash flow statement is the investing activities portion. This part of the statement will show the amount of money a company spend on things like real estate, equipment, marketable securities, etc. This is stuff the company spent money on that is used to run or grow the business. Over time, most of this stuff will be depreciated as it ages and loses value.

The final part of the cash flow statement is the financing activity portion of the document. This part of the statement looks at the total cash gained or spent on financing activities. These activities include issuing (or buying back) shares or debt. It also shows you whether the company paid out dividends, and how much the dividends were. Essentially, the investing activity looks at changes in a company’s cash position thanks to changes made in the capital structure. As an investor, you’ll want to pay close attention to this part of the cash flow statement, since it will tell you whether a company is borrowing more or repaying their debt.

What It’ll Tell You

Personally, I’ll spend far more time studying a company’s balance sheet and income statement than the cash flow statement. And yes, I know they’re even more boring than the first two types of financial statements, if that’s even possible. But, there are some reasons why you should at least glance at the thing.

First, you need to know if a company is going to have enough cash to make it until next week. If a company constantly bleeds cash each quarter, it’ll either eventually need to borrow or go bankrupt. This much is obvious. What else can the cash flow statement tell an investor?

When a large percentage of income is generated from large non-cash items, this income can be considered low quality. This means that using the cash flow statement can be a more accurate look at the true profitability of a company. An example of this is a company that owns a lot of real estate. Since real estate is allowed to be depreciated each year, profits can appear to be large just from the depreciation alone. When the cash level isn’t going up so fast, this tells an investor to be cautious of reported earnings.

One more thing, then I promise never to talk about financial statements again. If a company knows cash flow will be weak over a quarter, they may quickly attempt to raise cash through operations, by doing stuff like blowing out excess inventory or delaying paying some bills. Unfortunately, as investors, there’s really nothing we can do about that, besides looking at the income statement and cash flow statements and making sure the numbers make sense. Good luck doing that without a team of accountants behind you though.

Basically what I’m saying is that you should just stick to index investing. Leave this stuff up to the pros.

The Basics On Cash Flow Statements originally appeared on Canadian Finance Blog on September 22, 2011.

What Chip and PIN Smart Credit Cards Mean for Merchants

Guest — Thu, 05 May 2011 09:00:00 +0000

Credit card technology continues to become more advanced and secure as electronic theft gets more and more complex. The ability to accept credit cards for business is critical to improving customer service and profits, yet security must be a top priority whenever a merchant is swiping cards for transactions. Or, with recent changes ahead for Canadian merchants, the more accurate term is now “dipping” Chip and PIN cards for transactions.

Chip and PIN credit cards involve a new embedded microchip technology that replaces the traditional magnetic swipe credit card. Instead of swiping the card through the terminal, merchants “dip the chip” by inserting the card’s microchip into the terminal while the cardholder enters a secure PIN. Following the success of Europe’s recent migration to all Chip and PIN technology, Canadian merchants are now required to make the switch for enhanced security and more efficient credit card processing. By 2015, magnetic stripe cards will no longer be accepted at the point of purchase for Canadian businesses.

So what does this mean for Canadian merchants? As Chip and PIN credit cards make their way into Canadian businesses, merchants must fully understand how the new system works, the new technology’s benefits, and the proper steps to implementing Chip and PIN technology.

How Chip and PIN Smart Credit Cards Work

When it comes to processing Chip and PIN smart credit cards, not much changes: the cardholder presents the credit card to the merchant, the merchant captures the account information from the card, then sends it to the card-issuing bank for approval and through a secure payment gateway to safely transfer funds. The main difference between the Chip and PIN and traditional magnetic stripe credit cards is how the account information is stored within the card and captured by the merchant. While the stripe is swiped through the magnetic stripe reader, the Chip and PIN’s microchip is inserted (or “dipped”) into the terminal and remains there through the duration of the transaction. The customer then enters a secure PIN, which replaces the signature formerly used to verify the cardholder.

A few tips and considerations to keep in mind when dipping the chip:

In 2015, magnetic stripe credit cards will no longer be accepted at the point of purchase in Canada. Merchants must pay a surcharge for swiped cards, and thus have the power to not accept certain cards and to surcharge the customers for using non-Chip and PIN credit cards.
Liability for security breaches, compromised data and fraudulent activity has shifted from the financial institution to the retailer. Merchants are responsible for securing their business and customer data.
As the transition from magnetic stripes to chips occurs, terminals will have both swiping and dipping abilities. PIN pads must be EMV (Europay, MasterCard International, Visa International) compliant and certified.
The Chip and PIN credit card must stay in the terminal throughout the entire transaction. Removing the card before the transaction is complete will result in an unprocessed payment.

The Benefits of Chip and PIN Technology

The main driver behind the development of Chip and PIN technology is security. The United Kingdom first introduced Chip and PIN credit cards as a response to rising credit card fraud caused by stolen cards, forged signatures, credit card skimming and electronic theft. Chip and PIN technology reduces these risks, making credit card duplication extremely difficult and replacing signatures with secure PINs. With enhanced security behind merchants’ credit card processes, customers can feel safer when dipping the chip for purchases.

In 2006, the year the Chip and PIN went into full effect in Europe, Visa Europe reported that fraud was reduced by $36 million. Malaysia credit card companies also reported significant drops in fraud at the point of purchase after adopting the Chip and PIN in 2005, including an 84% drop for Visa during the first six months of implementation and 90% for MasterCard during the first five months.

In addition to improved security, Chip and PIN offers faster authentication processes and speedier checkouts, as entering a PIN is two to four seconds faster than signing a name.

Making the Switch to Chip and PIN

For Canadian merchants, implementing the right Chip and PIN system begins with speaking to a Canadian merchant account provider that offers Canadian and Chip and PIN processing capabilities. Different merchant types require different equipment; for example, restaurant merchants may want to upgrade to wireless Chip and PIN terminals, which allows wait staff to process credit cards at the cardholder’s table. Eliminating the need to swipe the credit card away from the cardholder prevents card skimming and minimizes fraud, while improving customer convenience and service.

Once the right Chip and PIN technology is in place, merchants must train their employees to correctly use the equipment. The switch should be simple for the most part, as most businesses already require PINs for accepting debit cards in Canada. However, the training process should still be thorough. During the transition period, employees may be presented with both magnetic stripe cards and Chip and PINs, and they will have to recognize which is which and be able to identify the proper processing procedure for each.

While the Chip and PIN helps to enhance credit card security, Canadian merchants must still follow advanced security precautions in order to protect customer data and business. After all, merchants are now liable for compromised data, and a security breach can lead to a loss of customers and a loss of business. In addition to Chip and PIN technology, Canadian merchants should be sure to use advanced encryption methods to keep credit card numbers safe, and to avoid storing unnecessary credit card information. Even simple fixes, like changing default passwords and settings, can mean the difference between a secure business and a business highly at risk.

Credit card processing has come a long way in recent years, with products like wireless, mobile and e-commerce technology dramatically improving business. Merchants must keep up with advancing processes if they wish to provide their customers with the highest levels of service and security. The Chip and PIN is a big step toward safer, more efficient transactions, allowing merchants to focus on the core of their business.

Author Bio: Jacqui MacKenzie is a writer for Straight North, a premier Chicago Internet marketing agency that works with BluePay, a leader in small business credit card processing solutions.

What Chip and PIN Smart Credit Cards Mean for Merchants originally appeared on Canadian Finance Blog on May 5, 2011.

Resources to help keep your personal and professional financing on track

Guest — Mon, 21 Feb 2011 10:00:00 +0000

Whether you’re a business owner, unemployed, or something in between, managing your finances isn’t something you have to do on your own. There are a number of programs and agencies out there to help you make important financial decisions—you just need to know what they are and how to find them. The following are some resources that can help make your budgeting decisions easier.

Canada Education Savings Grant (CESG)

The Canada Education Savings Grant helps parents save money for their child’s future post-secondary studies. Once the beneficiary turns 17 he or she can use the money in a number of ways, including full-time or part-time studies in an apprenticeship program, CEGEP, trade school, college, or university. As participants continue to put money into their child’s Registered Education Savings Plan, the government also adds to the fund incrementally. The amount the government adds varies based on the income of the child’s primary caregiver. Interested parties should contact the Canada Revenue Industry.

Canada Small Business Financing Program (CSBF)

The Canada Small Business Financing Act was enacted in April 1999 to help small businesses professionals get the necessary financing needed for maintaining a successful operation. Qualified business owners can get loans up to $500,000 for things like renovations, expansions, and other improvements. Likewise, the program assists new business owners in securing financing for new business start-ups. To qualify for the program, businesses must have an annual gross revenue that’s less than $5 million per year. Interested professionals apply for the program at local banks and other financial institutions who then use their discretion to issue the loan.

Job Bank

Canada offers this online service to help individuals find careers that suit their job skills in the public sector. The service allows individuals to search for jobs as well as market themselves to potential employers. Thousands of jobs from across the country are listed on the server. The service also offers separate searches for student jobs and paid internships. The service also offers a job alert option that notifies the user when a new job opening that matches their search criteria becomes available.

Small Business Internship Program (SBIP)

The Small Business Internship Program was established to assist businesses interested in giving recent college graduates real-world work experience in online development. The program’s goal is for the intern to work with the enterprise to implement an e-business strategy that will increase productivity and competitiveness. The program centers around online development, so while the company must have fewer than 500 employees, it must also have a pre-existing online presence. The program offers financial reimbursement to medium-sized businesses interested in partnering with a post-secondary student intern. The program offers to reimburse 75% of the intern’s wages up to $10,000 over a 12-week period. Interested business’s can apply for the program at participating organizations.

Universal Child Care Benefit (UCCB)

The Universal Child Care Benefit program offers additional financial assistance to parents to help pay for childcare costs. Parents registered for the program can receive up to $100 per month for each child under six that attends a child care facility. Currently, the parents of more than 2 million children receive assistance through the program. Interested applicants should contact the Canada Revenue Agency to apply for the program.

Author Bio: This article was written by Chris Foley of SuretyBonds.com. The agency aims to educate consumers on how to save money in both their personal and professional lives.

Resources to help keep your personal and professional financing on track originally appeared on Canadian Finance Blog on February 21, 2011.

Top Debt Relief Options for Small Businesses

Guest — Sat, 29 Jan 2011 10:00:21 +0000

Small businesses are hit hard by debt problems since cashflow can be tight and managing sales versus inventory or financing the build or assembly period for products may cause undue strain on an otherwise profitable business.

Like individuals, any small business can benefit from developing a debt management plan plan using experienced external advisors to help. Using outsiders has the advantage that they look at issues more clinically and with less emotion and, therefore, tend to make more direct and relevant suggestions on how to ease debt problems.

The Canadian government have also set aside funds to provide grants for small businesses to help with relieving debt. Whilst the criteria are strict it may be worthwhile getting specific advice to see if your business might qualify. Government grants can be the cheapest and most flexible form of financial support available so it is always worth asking.

Some form of fundamental review of the company’s borrowings may also yield areas where costs can be saved. For example, if your business has a number of loans then it may be a viable option to consider a debt consolidation loan. This is where you apply for a new loan and use the balance to pay off a number of existing facilities where the payments or interest rates are too high. A new debt consolidation loan may well have a lower interest rate and almost certainly a longer repayment period meaning that the monthly repayments can be reduced. Whilst this doesn’t eliminate debt problems it can provide a useful breathing space and a simplified debt structure for your business on more affordable terms.

Whilst sorting out the borrowing side of the business will yield benefits, the other part of an effective debt management plan is to make sure that you receive payments for your invoices on the due date. Do not become your customer’s bankers – develop an effective credit control function for your business or consider factoring your debts to generate cashflow for the business.

Debt problems rarely go away for small businesses since the margins can be tight. Borrowing to expand the business means that you can always be stretched and even a minor downturn in the market can lead to payment problems. Take advantage of any good times to rationalize any borrowings through a debt consolidation loan approach and seek out funding when rates are low and your trading performance is good or improving. That way any dialogue on debt management plans should be short and less frequent!

Top Debt Relief Options for Small Businesses originally appeared on Canadian Finance Blog on January 29, 2011.

The Other 8 Hours Determine Your Happiness and Net Worth

Book Excerpt — Sat, 18 Sep 2010 09:00:33 +0000

The following excerpt is from The Other 8 Hours: Maximize Your Free Time to Create New Wealth & Purpose, written by Robert Pagliarini.

Six years ago, Mark and Sarah were on a cruise ship touring the South Pacific when a violent tropical storm damaged the ship’s hull. Several passengers were knocked overboard and into the dark, churning waters nearly fifty feet below. Mark and Sarah were two of the passengers who plunged into the cold waters that night. They frantically grabbed pieces of debris and hung on tight— doing whatever they could to keep their head above water.

The next morning, Mark washed up onto a small and uninhabited island. Sarah washed up onto a neighboring island, also uninhabited, about two miles from Mark.

After the initial shock of the situation wore away, fear and anxiety overcame them. They knew that it would not be easy. They would have to work hard to build a shelter, pick fruits, locate fresh water, and fish for food. The first few days were scary and difficult, but they both managed to build makeshift shelters to protect them from the rain and sun. They found freshwater streams deeper into the islands and plenty of fruits and nuts. As the days turned into weeks, they even got good at trapping crabs and spearing fish.

In the late afternoons, Mark had some time to relax after a hard day’s work. He’d climb to his favorite bluff and watch the waves crash against rocks. As the sun set and the stars lit up the sky, he’d dream of galaxies far away and pray that he’d be rescued soon.

Sarah struggled to survive each day, too. Like Mark, her day began when the sun came up. Chopping wood, climbing trees for fruit, picking nuts and berries, fishing, and getting water kept her busy. At the end of her daily routine, she’d long to relax on the beach, but she knew she wanted more than just to survive. Sarah wanted to get off the island.

Each afternoon, Sarah spent a couple of additional hours gathering and storing wood. She tested nearly every type of vegetation on the island to see which produced the darkest and thickest smoke. She collected rocks of all sizes and used them to spell “help” in gigantic letters on the beach in four areas around the island. Sarah also dug fire pits on the beach in several areas where she kept a large supply of dry wood and special vegetation.

Because it rained often, Sarah found it necessary to continuously replace wet wood and vegetation with dry supplies. Her rock signs around the island also needed care and attention. Not wanting to place her fate in the hands of a rescue team that might never come, Sarah started building a raft out of bamboo and vines— a little bit each day.

Of course, she’d relax as well. Her favorite time of day was sunset. Sarah would take a handful of nuts and berries she’d picked earlier in the day down to the beach and sit under her favorite palm tree. She’d daydream about her family and how wonderful a big piece of her mother’s special chocolate cake would taste. During these daydreams, she’d also spend a few minutes going over her rescue plan.

Day after day, without any fanfare or recognition, Mark and Sarah did what they needed to do to survive. After several noneventful weeks, that day finally came. Sarah was picking fruit near the beach and Mark was trapping crabs when they both— almost at the same time— saw a small plane in the distance.

Sarah jumped into action. She ran to the small fire and used it to light the large pile of wood. She dumped the vegetation on it and used her homemade tiki torch to light the other stacks of wood on fire. She then ran back to add more wood and vegetation to the fire. Huge plumes of smoke rose into the air and filled the sky above her island.

Meanwhile, Mark was frantic. He ran around trying to figure out what to do. He fumbled, trying to light a fire, and once he had one lit, he was disappointed that it produced very little visible smoke. He sprinted into the jungle and grabbed any kind of vegetation he could find to throw on the fire. Unfortunately, the vegetation he used quickly suffocated the fire and Mark wasted several precious minutes trying to light another one. Each time he threw new vegetation on the fire to create more smoke, the fire would die and he would waste time trying to restart it.

The plane turned and started heading toward the islands. As it got closer, Mark realized it was not flying toward him but was headed several miles off course. The plane circled Sarah’s island and touched down a hundred yards offshore. Two rescuers jumped out of the plane and started paddling toward her in a raft. As they got closer, she looked around her island one last time and dove into the ocean and swam toward the raft. Minutes later, Sarah was airborne. The pilot asked her if there were any other survivors and Sarah told them that she had been alone.

Desperate to get their attention, Mark resorted to running up and down the beach waving his arms in the air and screaming in desperation. As the plane flew out of sight, Mark realized that he had missed his chance.

Mark survived. He survived the fifty-foot plunge into the water, lived through the violent storm, made it to dry land, built a shelter, and found food and water. Sarah also survived. She did what was necessary to make it each day, but she had a bigger plan—she wanted a better life. She wanted to see her family again, to taste chocolate, and to read a love story. She wanted to hug her friends and hear the sounds of her church choir. She wanted to pet her dog, attend a play, and grow old with her husband. She needed to survive on the island, but she made the decision that surviving was just not enough.

Mark and Sarah’s lessons aren’t reserved for castaways on remote islands. Their story is played out every day around the globe—in small towns and in big cities, in diners and in corner offices, and for those working for minimum wage and those pursuing advanced degrees.

If you feel like you are stranded on an island of monotony, unpaid bills, and forgotten dreams, or if you find yourself daydreaming of a different life but have no idea how to achieve it, there is only one solution.

Related reading: Find out how to calculate net worth.

The Other 8 Hours Determine Your Happiness and Net Worth originally appeared on Canadian Finance Blog on September 18, 2010.

Learning to Fail Fast

Alan Schram — Wed, 01 Sep 2010 09:00:55 +0000

Nobody likes to make mistakes. However, the simple reality of life is that at some point, all of us are going to be wrong, do something bad, or somehow screw something up. That’s just life, and it has been since we learned how to walk, write out the alphabet, and do calculus. We are going to make mistakes. The trick is to learn how to fail fast, so that you can get back to doing things right again. Let’s look at a couple examples and see how failing fast will help us earn more money and save more money.

Small Business

Imagine you are thinking about starting a small business. You want to open a dog sitting company. You’re not sure how much to charge, or how to advertise, but that’s pretty normal when you’re embarking upon a new adventure. Instead of dumping all your money into online advertisements or setting a firm price of $75/hour, recognize that you are going to make a lot of mistakes and set yourself up to learn from them. Spread your advertisement dollars around by trying online ads as well as newspapers, flyers, door to door, cold calling, church newsletters, whatever you can think of. The key here is not to simply spread your money around, but to see what actually works. Do you get a lot of sales from going door to door, but none from picking up the phone? Then recognize that you’ve made a mistake (cold calling), chalk it up as a failure (lost money), and move on.

Budgeting

What about learning to fail while using a budget? Let’s say you take some time on a Saturday, sift through your bills, and build a budget for the next couple of months. You want to keep groceries at $300/month, and you want to cut back on entertainment and restaurant bills. Except you hate keeping receipts and refuse to use cash, so you pretty much have no idea how much money you’re spending. At the end of the month, you realize that you actually spent more than $300 just at the restaurant, and your grocery bill is nearly double that! Instead of buckling down and saying, “Well, this month I will just have to have more self control” and keep on trying to work on a failing budget, chalk it up as a loss and move on. Instead of trying to keep your grocery bill at a certain level, just track back over the last few months, see how much you’re already spending on groceries, and just put that number into your budget. Or, set up a secondary account just for groceries and automatically funnel a set amount of money into that fund. That way, when you’re out of money in the account, you’re out of grocery money. No tracking or receipt counting required.

Investing

Maybe a coworker of yours just let you in on a hot stock tip. He says that this particular stock is just about to skyrocket. So you scrounge around, find some money, and purchase a whole bunch of this stock. Except it doesn’t skyrocket. Maybe it slowly starts to lose value, but your tipster keeps telling you that someday it will go up, you just need to be patient. So you sit on it, and you wait, and wait, and wait, and eventually, you realize that your money has been tied up in this stock for about a year and it’s lost about a third of its value. The company is no longer on the edge of a leap forward, but your tipster has a new stock for you. “Sell that other one”, he says, “and put all your money in here. It will skyrocket”. Instead of just keeping on doing something over and over again that isn’t working, that is failing, then just tell yourself that this is a learning experience, and from now on, I will only put my money into safer investments. Or you can just choose to learn that your tipster isn’t much of a tipster, and really, more a gambler.

The sooner you can realize your mistake, and the sooner you can own up to it, the sooner you can move on with a lesson learned. The only way you will learn is through failure, so if you want to learn how to be rich, you’re going to have to fail a lot. Just think of the lost money as investing in education, and remind yourself that the sooner you can learn the lesson, the sooner you can stop paying for your education.

What have you failed in? What lessons did you learn?

Learning to Fail Fast originally appeared on Canadian Finance Blog on September 1, 2010.

Business-Use-Of-Home Expenses

Tom Drake — Thu, 02 Apr 2009 10:00:55 +0000

If your home is your principal place of business, you can claim Business-Use-Of-Home expenses on page 3 of the T2125 form.

The expenses allowed to be claimed include:

Heat
Home Insurance
Electricity
Maintenance (i.e. cleaning materials)
Mortgage Interest (interest only, not mortgage payment)
Property Taxes
Water (if applicable to your business)

The amount you can claim is based on the square footage of the area used for business use. For example, if your house is 1,500 sq ft and the office you work out of is 150 sq ft, then you can claim 10% of the expenses above if you use this room solely for business activities.

If you also use the room for personal use, you also have to calculate the fraction of time that it is used for business use. For example, if you do 4 hours of work a day, 5 days a week, then you have to take 20 hours (4 x 5) divided by 168 hours (24 x 7). In this example, that’s 11.9%. That would be multiplied by the square footage calculation and you would only be able to claim 1.19% of the above expenses. Obviously, you would be better off if you use the room only for business activities.

Unlike the business expenses and Capital Cost Allowance we’ve discused this week, Business-Use-Of-Home expenses can only be applied against a net income and cannot create a net loss. For example, if you have $2,000 in business net income and $1,500 in Business-Use-Of-Home expenses then you can claim the full amount. If you have a net loss (income minus expenses), then you cannot claim the Business-Use-Of-Home expenses that year. However, the dollar amount you calculated should still be entered into the tax form as it can be carried forward to future years. So once you are finally achieving a positive net income, you can claim the carried forward amount up to the amount of your net income. If you still can’t claim it all, carry forward the remaining to the next year.

Business-Use-Of-Home Expenses originally appeared on Canadian Finance Blog on April 2, 2009.

Capital Cost Allowance (CCA)

Tom Drake — Wed, 01 Apr 2009 10:00:22 +0000

Yesterday we discussed claiming business expenses. With those expenses, you can claim the full amount in the year the expense happened. While also part of the expenses used to calculate net income (or loss), some items are subject to Capital Cost Allowance rules.

Capital Cost Allowance is a set of rates stating the amount you can claim each year on a depreciable property used for business activities. In the first year, you can only claim based on half the amount paid. This is in place since if you acquired the equipment during the year, there is not a full year of depreciation.

For example, say you bought a desk for $500. This falls under CCA’s Class 8, “Other Property”. Class 8 has a rate of 20%.

First Year $250 (half of $500) x 20% = $50 expense claim. This leaves a value of $450 next year.
Second Year $450 x 20% = $90 expense claim. This leaves a value of $360 next year.
Third Year $360 x 20% = $72 expense claim. This leaves a value of $288 next year.
You continue depreciating the desk this way until you are at $0

These calculations are done in Area A and Area B on page 4 of the T2125 form.

For a home business, the following four classes would likely be of the most interest to you:

Computer equipment and systems software Class 50 (55%) (100% from Jan 27, 2009 to Jan 31, 2011 – half year rule does not apply)
Data Network Equipment – Class 46 (30%)
Small tools ($500 limit) – Class 12 (100%)
Other Property (furniture, appliances, fixtures, machinery, and equipment) – Class 8 (20%)

You can find all classes of CCA on the CRA’s website.

As the claimable part is calculated with expenses, this is another case where you can claim expenses that exceed your business income.

Capital Cost Allowance (CCA) originally appeared on Canadian Finance Blog on April 1, 2009.