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!
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.
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