How to Survive The Great Recession of 2009, 2010, 2011, 20... Part 2

 

Solutions "CURE" Part 2

This is the rest of the story, Cut taxes by incorporating the government keeps making more regulations which makes it harder to run a business and make a profit.  So we need to help ourselves instead.   When I first started my business 31 years ago, I was a sole proprietor.  Things were simple then...  I hired my wife and she was exempt from payroll taxes.  Does anyone remember that rule?   Well later, the Internal Revenue Service took that exemption away.  So the next year, I became a corporation.  Now, if my wife is a part owner, much of her income and mine is exempt from payroll taxes.  How?  We as investors are allowed stock distributions, which technically is completely tax free because withdrawals from "Retained Earnings" is not taxable for "S" corporations.  Stock distributions are exempt from worker's compensation, provided that we are paid a reasonable salary from our corporations.  If this is something you are interested in doing, I can show you how to incorporate online.  It usually takes about 20 minutes and it is done.  For my clients, I do not charge to make these changes.  If you do it yourself, after you incorporate, the Internal Revenue Service gives you 75 days to request becoming an "S" corporation.  Just file a Form 2553.  I can help with this as well.  Since corporations are generally exempt from 1099's, you are basically on the honor system.  The governement does not know your income until you tell them on your tax returns.

The next thing I would like to touch on is understanding financials as the purpose of a profit and loss statement is to let you know how much income or loss you have made in the current month or year-to-date.  A balance sheet tells you the amount of net worth you have on a given day such as the last day of the year. 

Know that your liabilities or debts should not exceed 77.9% of your assets.  Your top two debts are usually Notes Payable and Loan from Shareholder.  We can compare your numbers with your peers by comparing your business code on your tax return.  Usually it is on top and is similar to your S.I.C. codes. 

Another thing to watch is your cost of goods sold; general administrative expenses; and net income percentages, should be similar to the percentages on the graph examples below.



Knowing your percentages of expenses vs income will go a long way to helping you make the right business decisions.  Understanding these graphs and how they pertain to your business is part of what we do here at Professor Tax.  We have went through the gambit of what makes a business succeed or fail and we always pass on our knowledge to our customers.  Part of that knowledge is in thinking ahead, seeing that something is not working, and be willing to take immediate action to try something new which leads us to my next subject in this article advertising and other methods of marketing.  I have always done some form of marketing the entire 29 years I have been in business.  I used telemarketing from 1992 until 2010 and it always worked.  However at the beginning of this latest recession, it was starting to get difficult to make appointments.  So I tried seminars, network groups and more recently dove into the social media world.  The fact that you are reading this on either my blog entry, from my monthly newsletter or from one of my social media platforms is very encouraging.  Thank you. 

Word of mouth marketing has always been good even during a recession.  You need to ask all your customers, clients, patients etc. for referrals.  If you care about them, they will know and be more than happy to recommend people to your business.  If you don't ask, you don't get.  You can't sit by the phone hoping it will ring.   Become aggressive! You must try to market every day. You may fail but not always.  It is a game of numbers.  Eventually, you will succeed. 

"Far better it is to dare mighty things, to win glorious triumphs, even though checkered by failure, than to take rank with those poor souls who neither enjoy much nor suffer much, because they live in the gray twilight that knows neither victory nor defeat."

--Theodore Roosevelt

Consider joining a networking club like BNI (Business Networking International) or an AMI Team (Adding Needed Solutions Working Every Relationship).  I joined a little over two years ago and already the referrals and new clients I have gained would pay for my membership for life.  You basically become a team and give direct referrals to each other on a regular basis. 

You need to review your current advertising/marketing.  Are you getting results?  If not, stop wasting your money.  Don't be afraid to experiment, but if the results don't come in STOP.

Last item I would like to cover in this blog is evaluating job performance. As I stated before, having employees is very expensive.  During this recession, I have had to eliminate most of the fringe benefits so as not to lay off any employees.  I also require them to produce enough income so that the cost of their wages does not exceed 35% of the revenue they bring in. 

You must analyze your staff the same way.  What percentage of sales can you afford to spend on salaries and still make a decent profit?  You cannot go over that magic number.  You cannot carry unproductive employees.  It may require getting more productivity from your performing employees and letting go those employees that don't make you a profit.  Otherwise your company could fail and no one would benefit from working at your company.   Another idea that I have tried is doing more of the work myself.  We, as business owners, have a vested interest in our company and are more productive on average than our employees.  But don't overdo it, because you still have to run your company. 

In conclusion, knowledge is power and having the right knowledge and a clear understanding of it you can build a profitable business.  Professor Tax is here to help.  We are looking forward to meeting you, answering your questions and helping you reach your goals through the clear understanding of your financials and how to make the numbers work for you, not against you!

I hoped you enjoyed reading this as much as I enjoyed writing it.  If I can be of any help, please connect with me!  Call 850-814-9994, Stop by or Email Me!

Henry Baurley - Professor Tax

How to survive the Great Recession of 2009, 2010, 2011, 20....? Part 1

Problems "Go Me" Part 1

We have heard the news read the papers and seen the effects that recession has had on our economy, friends, family and yes even on some of you reading this.

There are many things business owners can do to 'manage' during these trying times.  A main part of that is knowledge. First within government regulations, know that if you are a sole proprietor, limited liability company, or a partnership you have less privacy and pay more taxes than an 'S' corporation if you show a profit as little as $9.00 per week!

For work that you perform, as little as $600 a year, you may receive a Form 1099-Misc. The Internal Revenue Service also receives a copy of the same Form 1099. So far corporations 'S' and 'C' are exempt from receiving Form 1099s.

Sole proprietors, a limited liability company, or partnerships are liable for self-employment taxes on their profits (basically 15.3%). Since 1959 corporations have been exempt from paying these taxes. This can be avoided by switching to an 'S' corporation, you can avoid having to pay self-employment taxes. However, the government does expect that you pay reasonable wages for the work performed if you are an owner.

Again knowledge is power and most business owners don't observe their numbers close enough or if they do, don't grasp what they are looking at and how it can help them. They are too busy running their company to pay attention to the details needed with their bookkeeping. But by not paying attention, they are often shocked by the results of their tax returns prepared by others. You don't need to be an accountant but you should have an understanding of your normal monthly operating expenses.

The three biggest expenses for most companies are: 1) Cost of goods sold (actual product sold); 2) wages and payroll taxes; and 3) rent. But by not paying attention, you may not make the profit you were hoping for. There are many other expenses to pay attention to: advertising; auto expense; bank charges; insurance; outside services; taxes & licenses; telephone; and many others piled under the miscellaneous heading. People who fail in business more times than not, is because of a lack of understanding of bookkeeping and tax rules. Many times, they get in trouble with payroll taxes, and sales tax. Of the four problems and solutions that we will discuss during this two part newsletter, understanding financials is probably the most serious.

You've heard of marketing strategies before and probably have been thinking of getting some support in this area, as there are so many ways of marketing.  By not doing any marketing of any type, you will slowly go out of business. According to the Yellow Pages, we will lose 81% of our customers over a period of 10 years. Not because we made our customers unhappy but because people retire, they move to another area, and they eventually may not need our product or services anymore, etc. The point is, can we survive with only 19% of our current customers?

I have about 150 clients that I do books for every month. If I lost 81%, then I would only have 28 clients left. How could I stay in business? I would have to lay off almost all of my employees and do the work myself. Could I pay my bills? could I ever retire?

Not much fun is it. So we must do marketing everyday in order to stay in business. We as CEO's are the best sales people in our company. We are selling our own products or services. Who could do any better than us?

We will discuss this further in the Solutions "CURE" section of our blog but right now I'd like to dip into the subject of employee expenses. Remember that I said for most companies, the three biggest expenses were: cost of goods sold; wages / payroll taxes; and rent. Well, employee expenses is number two. If we are not careful, wages can get out of control and literally put us out of business. Besides wages, we also have payroll taxes to add to the cost of employees. That could be another 10% or more between social security, medicare, and unemployment taxes. Also, worker's compensation can add to the cost of hiring employees. And what about fringe benefits such as health insurance and retirement plans? With all this additional overhead, having employees can be very expensive if not closely watched.

Do you remember when you first started your business? If you were like me, you were able to do all the work yourself and you made a nice profit and had good cash flow. What happened when you expanded and hired employees? You were able to delegate which was nice, but soon you noticed that the cash flow was getting tight and you didn't seem to make as much profit as before. Well this is a problem we need to solve and will address in part two of this blog.

Solutions "CURE" Part 2

Look for part two under Professor Tax USA Blogs!