Getting Healthy versus Staying Healthy

My wife and I started a new workout regimen. We recently decided to begin working out daily for 30 minutes. A few weeks in, and we are sticking to our goal and noticing some changes. We have more energy, we feel better, and we know in our heads that we are doing the best thing for our bodies.

My chiropractor once told me that it is much easier to stay healthy than to get healthy. Once you figure out what’s wrong with you, and you fix that problem, then you have to maintain the wellness. It’s easier on your body if you take care of yourself and stay well because you don’t experience those hills and valleys of sick, then well, sick, then well. It’s just good business, you could say.

Physical health is similar to business health. We began working with a client a few years ago, purely for tax advisory/planning and QuickBooks file review each quarter. We did our job, notified them when profits were high and we had tax planning opportunities, and carried on. 
Then one day we noticed that they were getting really busy, and the bookkeeping was beginning to suffer. They used to close each month no later than the 6^th of the following month; then one month it was the 10^th; and the next month it was the 20^th. Before we knew it, they were an entire quarter behind in updating their accounting records and tax planning was nearly impossible. 
So, we set about helping them “get healthy.” We cleaned everything up, made sure that all the activity was entered and reconciled, and then we proposed a plan to help them “stay healthy.” 
To this day, nearly two years later, we handle most of their accounting work, their payroll, the business and personal taxes, and we do everything from assist in forecasting the acquisition of a new client to the purchase of new real estate. Staying healthy (accounting-wise) is a heck of a lot easier than getting healthy.

Today, I emailed that client to let them know that I had prepared a tax projection for 2015 and we needed to get ahead of a serious liability before we moved too much further into 2015. I got the greatest thank-you email and we scheduled a time to meet. No shots, no fasting, no prodding…just staying healthy and making entrepreneurs better.

"Because I Deserve it" Isn't on Your Income Statement

I had a very interesting conversation with a small business owner the other day. We were reviewing his cash flow, and I noticed that his cash was dwindling at a quicker rate than normal, but his general overhead and payroll expenses weren't changing month-over-month. His sales were down about 25% from the year before, so the cash trend was worrisome to me. I then examined his Shareholder Dividends account, and noticed some drastic increases there. I had found my cash flow leak, and it was the owner.

So, I asked some questions, mostly because I was concerned that something personal had happened and he needed cash quickly. That’s never a good thing and I wanted to help.  

“I took that money out because I deserve it.”

What he said to me made me sit back and scratch my head.

I have to say, I've never heard anyone say that before. I’m sure people think it…heck, as business owners, we all think it sometimes. It’s just never been spoken.

“Why do you think you deserve that cash?” I asked.

“Because I took all the risk, I paid the taxes on the profit, and I’m not paying myself enough. Therefore, I deserve to take this money out,” he replied.

Well, I can’t argue with the fact that he took the risk. As entrepreneurs, that’s what we do when we start a new business. And since he is the sole shareholder, he also paid the taxes on the profit. He’s got me there. I had been on his case to raise his payroll a bit, but he hadn't done it yet because he hates paying Social Security and Medicare tax. He’ll never see a penny of that money, or so he says. But, it’s the word “deserve” that I have a problem with.

In the setting above, with less sales, less profit, and presumably less cash in the long run, did it make sense for the owner to deplete the cash because he “deserved” it? In this case, I argued that it wasn't a wise move.

I think dividends are dangerous to some S-Corporation shareholders. It looks like free money, but it’s not. I see companies get into cash flow trouble when the owner takes cash out of the company as a dividend, mostly because owners only read the Income Statement and they don’t show up there. Out of sight, out of mind. When we work with family businesses, we stress the importance of allocating profits for the future, for things like expansions or periods of time when cash is tight. In my client’s case here, cash flow could be tight before year-end if the sales trend continued, and where would he get cash to keep things moving?

I asked this question. “If you are sitting here in six months and sales are trending downward, and cash flow works out as we have projected, will you be comfortable firing 5 or 6 people to help ease your problem?”

His face drooped a little. “No, I don’t want to fire anyone. I can’t fire anyone. I’ll take less pay if I have to.”

But isn't that what you are doing now? How well is that working?

I looked at him over the rim of my glasses. “My advice is to start acting like that concerned boss today, and ease up on the dividend checks. I don’t see a “Because I Deserve It” account on your Income Statement. What I do see is “Payroll” and “Payroll Tax” line items. We can raise your pay slightly if you need more cash, but maybe we should talk about how you spend your personal money to make sure we don’t create a problem at your business in six months.”

I really hope I see progress when we meet again. When I checked up on him last week, he seemed to be upbeat since sales were up and he felt good about his personal cash position. He seemed more humble and less deserving. He and his team will reap the rewards of that change of heart.

Who’s the Problem? It’s Probably You.

I normally write my blog posts from home on Wednesdays.  But, at 10:10 am on Thursday morning after a quick meeting with my team, I realized a harsh truth.

They had a few questions regarding one of our business clients’ accounting records for last month, and they had been spinning their wheels on it since yesterday. Lo and behold, I had taken notes during my last meeting with the client, but I hadn't communicated it to them.

Crap.

How much time had they wasted due to my poor communication? I feel like dirt right now. Their time is valuable, and while I don’t track time and use it to price anything, I don’t want them wasting their time. They look at it as “I’m spending so much time on this account right now, and it’s probably costing Jonathan money.” I look at it like “I want their work time to be productive and rewarding, but experiencing uncertainty due to my lack of communication isn't helping further that.” They may not blame me for it to my face, but some of this is my fault.

I read the other day that when something happens over and over again, and it’s causing you problems at work, it more than likely isn't a people problem. It’s a process problem. Man, was that ever made clear to me today.

DIY Payroll…Go Buy Some Stamps

Did you get into business to write letters and beg for forgiveness? No, not unless you’re working the customer service desk at Comcast. You got into business to provide a valuable service/product, become profitable, and provide for your employees and your family.

Payroll is one of the most important aspects of your business. Even if you’re the only person getting paid, it’s crucial that the work be done accurately and that you make those pesky tax deposits in exactly the right manner, for the right amount, at the right time. If those tax deposits aren’t handled properly, IRS puts you on their Christmas card list and off we go!

We work with many clients who began processing their own payroll, submitting their own payroll tax deposits, and things started out fine. Then one day, they forgot to make that federal tax deposit. The notices started rolling in, and one day the certified letter came with the threat to freeze the business bank accounts and seize the amount that was due. That day, the business decided they needed help. The thing is, at that point, it’s almost too late to get help. IRS is ready to come take your children and your pets. Stuff got real.

Entrepreneurs are "do-everything" people, and consequently they seek out a payroll solution so they can continue to, you know, do everything. Just like those terrible ads that attempt to sell DIY accounting services, there are equally terrible DIY payroll ads. Payroll is promised to be "easy" and "quick." It's a hollow promise, people. Payroll, in my opinion, isn't a DIY activity. I liken payroll to dentistry and electrical repair...don't try those things at home.

I have two quick examples of why you should never do your own payroll:

Several years ago, I asked one of our long-time clients if he wanted to turn over his payroll to us. He begged off, mostly to save some money. After about three months, he sent me an IRS notice. I responded at an additional charge to him, and sent him some suggestions to keep this from happening again. Three months later, we got another notice...and six months after that, we got two more. Guess what we were asked to do? You got it...he begged us to take over the payroll, and there hasn't been a notice since then.

I had to call IRS the other day for a client. I was on hold off and on for 2.5 hours and I spoke to 9 different agents. I know how irritated I was, but imagine as a business owner if you had gone through that. Would it have ruined your entire day and caused you to be completely unproductive and miss a deadline? Could you have been doing something to make your clients happy instead of talking to Doris in Philadelphia who was ready for her lunch break and really didn’t care about your tax problems? Probably.

We never say that clients aren’t smart enough to handle their payroll. If that was all they had to do, they’d do fine. But, it’s not. It’s one very important, time-intensive, deadline-driven, mess-this-up-once-and-you’re-doomed-to-a-life-of-writing-letters-to-Doris aspect of the business. Things spiral out of control when it takes you an entire day of holding on the line with IRS to argue about a tax notice and come away with no resolution. Consider allowing a major leaguer to take on this task for you, because the minor leagues won’t cut it when it comes to payroll.

Why Do I Need You?

My first response to this question is “You may not.”  We are really big on making sure you are a good fit for our firm, because a mistake in judgment here costs you and it costs me.

If that one doesn't work, then I have a series of questions/rebuttals/comments that will hopefully answer your question. The last thing I want is for you to pay me and not gain any value from it; conversely, I am not fond of wasting my time with work that isn't valuable to you, my prospective client. See how we have the same concerns in mind?

Here are examples of replies when I begin to talk about my services and prices:

But I don’t bring in very much money. 
I get that, but I assume it is your goal to change that situation as quickly as possible. If it is, then I encourage you to consider our fees an investment in your company and use our expertise to help you make more money. We are generally the first ones to say “This isn't a good fit for our firm.” Assuming we haven’t yet told you that, we know we can help you. It’s up to you now to make that decision of spending the money to have unlimited access to our knowledge and expertise, or move on to someone else. The most important thing to consider:  If we aren't delivering value to you, then we aren't the right firm for you.

But my business isn't very big.
Here’s the thing….the size of your business has nothing to do with profitability. Of course you’re not GM. Hardly anyone actually is that large. Some of my most profitable clients are family-owned businesses, operating out of a home office. But, even if it’s just you, there are complexities and strategies with which we can help you. One of the proudest moments I had with a prospect involved my offering him to serve as his Pricing Committee for the first year of his business. I would sit down with him, review all of his contracts for new customers, and make recommendations on how he could be more profitable. He couldn't afford the monthly cost of that service in the beginning, but his eyes lit up and he said “I never would have thought of even asking you to do that with me. That’s an amazing service.”  See how creative we can be!  The most important thing to consider:  No, you aren't that big yet, but you want to be, and we can help you get there.

I just don’t think it’s that complicated/I don’t think it’s that involved.
This is where I get confused. You called me and asked for this meeting, so I assumed you thought the work was more complicated than you could handle. I have yet to meet anyone who came in, admitting that their work was extremely complicated and they absolutely had no way of knowing what to do. Most often, it’s the opposite, and they think that the QuickBooks Pro file they just handed me is Hop On Pop. You may think it’s not that complicated, but trust me, it is. The most important thing to consider: You want things done right. You may not be able to pull that off. You aren't an accountant, because if you were, you wouldn't be in my office. You owe it to yourself and your family to invest in expertise to make sure the information you rely on to make business decisions is accurate, and that you are doing everything in your power to be successful.

I just don’t know why everything has to cost so much.
It’s at this point that I realize we are not a good fit, if nothing else has thrown off the red-flag alerts before now. If you’re a start-up, I know that every single person you've talked with before me (and let’s face it, I’m usually the last person you meet with, even though everyone from your father-in-law to your banker has told you to call someone like me before now) has asked you for a retainer or your credit card number. You’re tired of spending money. Maybe you have a home office, little to no overhead, and the thought of plopping down 2-5% of your revenue to a CPA firm makes you hive up. The most important thing to consider: Here’s the deal, my friend.  You’ll realize more benefit than you’ll ever pay me.  Period. 

And this is the real world. Everything costs something. And around here, we either do it ourselves or we pay someone else to do it.  Isn't that what you want your customers to do?

Is the 1099 Life Working for You?

Meghan recently sent me an article where Elizabeth Warren was quoted as saying that the “1099 economy” is a huge problem in the US workforce. I agree that when businesses hide behind paying someone as a subcontractor when that person is really an employee, they should be made to change the classification. It’s bad for the worker, as well as fraudulent for workman’s compensation insurance issues and payroll taxes.

But what about the new “on-demand” labor force, with people who are classified as independent contractors with Uber and Airbnb? These business owners are now creating income by sharing things they already own, and becoming self-employed in the process. Does that muddy up the definition of who is an independent contractor and who isn’t?

Think of the independent contractor relationship in the simplest way possible:  Think of the home-building process. You engage a builder to build your house, and that builder calls up his favorite carpenter. He tells the carpenter that he needs the house framed by a date in the future. He doesn’t care when the carpenter works; he doesn’t supply the hammers and nails to the carpenter; and if the carpenter needs a new ladder, he has to buy it. The builder doesn’t buy it for him. The builder pays a lump sum for the project as opposed to paying the carpenter by the hour. That’s the textbook independent contractor relationship. There is no control over the hours worked, no expectation of being in an office from 9-5, and the carpenter buys a new drill if his old one breaks. If your relationship with a questionable worker doesn’t fit this description, then you could have a problem.

Going back to our example above, using the IRS definition of an independent contractor, those new business owners in the “on-demand” labor force fit the bill. They’re not employees, paying taxes as they work. That’s where independent contractors get into trouble, from our perspective. They only know that they’ve embarked on a venture for profit, and they have no idea how their taxes are calculated or what comprises “taxable income.” This information isn’t intuitive, nor is there an instruction manual. That’s why most self-employed individuals learn lessons the hard way.

We advise our clients on these questions quite often. The taxes are very important, as are the matters of complying with both federal and state law about how you compensate someone who works for you and how that compensation is reported. Clients say, “I just wanted to start a business and make a little money. This compliance sucks.”

Amen, I say. Pull up a chair.

http://www.buzzfeed.com/mathonan/elizabeth-warren-on-rise-of-the-1099-economy-a-real-problem

Are You Being Clear?

I don't like the term "full-service." I have used it to describe my firm in the past, but I don't use it anymore.  Why?

I think describing your business as "full-service" is a cop-out these days. The age in which we live now allows for specialization like never before. Being all things to all people is exhausting and not nearly as profitable as being focused on the ideal client and serving them like the expert you are.  
Being full-service used to mean "I'll pump your gas, change your oil, check your tire pressure, and clean your windshield." What happened to those guys?  
Digital, self-serve pumps happened. That little knob you push in your car that cleans your windshield happened. Quick Lube happened. Those businesses specialized and made more money being "special" to their ideal customer.

The point is this....as an entrepreneur of a successful company that's been around the block a few times, you have the ability to make a product/provide a service that is specific to your ideal client/customer and CHANGE THEIR LIVES. Do you take advantage of that power? Most don't, because saying no to someone is scary.  
And let's face it....to specialize, you have to say no to others in order to say yes to the right type of work. 

When you're starting out, you can't afford to be niche-focused because you need to eat and pay the bills. But what happens when you've been around and you've experienced success? Do you even realize when you became "successful"?  (Sometimes the creep of success manifests itself in the problems you are having, not the money you are making... but this is another conversation.)  

Full-service implies you'll work for anyone with a pulse and a checkbook. Full-service doesn't make you stand out. You now should know who your ideal clients are, and you should be able to focus on providing profitable, life-changing work for them.  

Explore the freedom of specializing, and re-learn why you started your business in the first place.



Jason Fried talks about his decision to do less in order to do more.  We really enjoyed this video.  If you have 3 1/2 minutes, you probably will to!  Check it out:

http://www.inc.com/jason-fried/inc-live-why-you-should-power-pivot-your-mission.html