Technology

Want a Better Business? Focus on Recurring Revenues!

There are more ways to make money in business that can be listed. However, one mostly overlooked business model by a majority of small businesses is the recurring revenue model. Larger businesses already know this and are taking advantage of the benefits. Here are some pros and cons and how to implement the recurring business model:

Pros: Recurring revenues, specifically monthly recurring revenues, provide a steady stream of predictable cash flow. Since you can easily predict your income you can plan ahead for the amount of expenses needed to support your revenues, such as employees, technology, supplies, inventory, etc. This will in turn significantly lower your expenses and help to increase your profit margin. Additionally, a business with recurring revenues has a much higher value than one-shot deals. Think homebuilder (one-shot) vs. a subscription service like Netflix (monthly revenues).

Cons: Many small business owners love the large payments that they receive when they land a one-time or short-term project, which do not exist with the recurring revenue model for the most part. It can take time to build a recurring revenue business, but an existing business should realistically be able to see a massive change with a one year period.

How to Implement: Take a look at the services and/or products that you provide, and determine which ones can be modified to fit the recurring revenue model. For example, a marketing company that helps clients with social media can develop a package to perform certain tasks each month in exchange for a recurring monthly fee.  Virtually any business can turn at least a portion of their business into recurring revenues

The recurring business model is not costly or difficult to implement, but rather a low-risk, high-reward activity. It takes courage and openness to change your business, but it will be worth it.

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Small Business, Large Profits

All small business owners want to increase sales, open new locations, obtain more customers, add employees and grow, grow, and grow some more. It sounds good, but is it really necessary? Is there an alternative?

Necessity: It is necessary to grow your business as the alternative isn’t too appealing. You have financial obligations and people that depend upon you, such as family, employees, and customers. So, yes, it is necessary, however, here is a different view on growth.

Focus on profitability: If you double your profit margin then this has the same impact as doubling the sales of your business. Even if you increase the profit margin by several percentage points then it has the same impact as increasing sales. It sounds too easy, but here are some ways to do this:

  1. Decrease the number of services/products. Spreading yourself too thin usually decreases your profitability because it is hard to do everything well.
  2. Service the proper clients by targeting a more defined niche.
  3. Use marketing methods that only target the customers that you want to serve.
  4. Plan ahead for large purchases or investments, including space requirements, people, vendors, equipment, and technology.
  5. Price your products and services properly.

The interesting fact is that when you are more profitable, then each additional dollar of business is worth more to you, which makes it easier to actually grow further.

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How Long Should You Save Your Tax Returns and Financial Records?

The IRS says that you should normally keep your records for 3 years, and for some situations you should keep them for 6 to 7 years. However, I strongly disagree and here is what you should do and how to do it:

Tax returns: Do you want to know the prudent answer to how long you should save your tax returns? Until you are dead, and even then your heirs should probably keep them until years after the estate is settled. Why should you do this even though the IRS has 3 years to audit your returns and 6 years if you under report more than 25% of your income? Here are several real-world practical reasons:

  1. It is far too common that the State of New Jersey will send a letter to you stating that you never filed a tax return from more than 10 years ago. Additionally, if you are selling your business, trying to obtain a specific license, dissolving a business, or for any number of reasons, then the State will perform research to see if you filed all of your tax returns. Even though the State may be wrong, you will still generally need to file the returns.
  2. Information carries over from year to year. As your tax return becomes more complex, your income tax information tends to carry over for many years, such as investment losses and rental property purchases.
  3. A safe way of storing your tax returns is to keep both digital and hard copies.

Financial records/receipts: What if social security has incorrect information about your earnings from 25 years ago? If you have the actual records then you can prove your case more easily. This includes tax information, such as W-2’s and paystubs. Here are some timeframes based on the types of documents:

  1. Tax documents should be saved forever, just like you save your tax returns. This especially relates to business tax records. Brokerage statements should be included as part of your tax information as they contain purchase price information.
  2. Bank and credit cards statements can be discarded after a few years. However, if they contain tax information or are connected to a business or real estate, then you should save them forever.
  3. Utility bills can be discarded after about 6 months. Sometimes you need these to prove your residency, but the timeframe needed is generally a few months.
  4. ATM and purchase receipts can be discarded once you view the transaction on your bank statement or online. However, when purchasing from a restaurant, you should make sure that the amount after a tip is accounted for actually settles, which can take several days.
  5. Receipts for improvements to your home or for large business purchases should be saved forever.
  6. If you are short on physical space then save your records electronically, but make sure that you have a cloud backup.

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Be Careful When Making Online Payments to the IRS

We usually recommend that taxpayers make their tax payments online to the IRS and states. Here are the benefits, but a few caveats to watch out for:

Benefits: When making payments online, your payments are generally credited on the day that you make the payment. Additionally, you can clearly apply your payments to a prior tax year, current tax year, or for estimated tax payments. This helps to minimize errors when the IRS receives your payments, such as applying them to the wrong tax year and the date the payment was made.

Beware of these issues: Recently, we discovered that it is imperative to use the primary taxpayer’s social security number when making payments online to the IRS, otherwise your payment may sit in limbo and not be applied to your account. Other tips include:

  1. Make sure that you specify the correct year that a payment should be applied to.
  2. Double-check your banking or credit card information to ensure that your payment actually gets processed.
  3. Save the confirmation that you paid your taxes as a pdf document or print it out

Overall, we have seen a much lower number of issues when clients make their payments online. Just make sure to adhere to the tips above.

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3 Ways to Turn Around a Struggling Business

After the Great Recession there are still some businesses that may be struggling and don’t know what to do about it. Here are a few ways to turn around a struggling business:

Upgrade: The rate of change nowadays seems to be accelerating at a pace that has not existed in the past. This includes technology, competition, lifestyles, behaviors, and preferences. Although business principals never change, everything else around us does. Questions to ask are:

  1. Is my service or product still relevant and in demand? A perfect example is Blockbuster and department stores.
  2. Are delivery methods of your product or service in sync with customer preferences, lifestyles, and behaviors? Another closely related question is, “How easy is it to do business with you?”
  3. Have demographics changed?

Your business may need to upgrade/change any of the following: location, technology, including website capabilities, payment processing, scheduling, and communications with customers, turnaround times, product and service offerings, the type of customer you are servicing, and so on.

Marketing: Marketing methods have changed dramatically over the last 10 years. Are you marketing your business to keep up with these changes? If you relied heavily on newspaper or phone book advertising in the past, then I would make a bet that it is not very effective anymore. Even businesses that serve very local customers need to have a strong Internet presence. The best products and services still need to get the word out. Rationally, they shouldn’t have to, but this is just not true.

Analyze and take action: Take a fresh look at your business and seriously consider hiring a consultant to point out your blind spots. Most likely you are not recognizing what needs to change or possibly you do but do not know how to go about making changes. The next step is to actually implement changes.

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How and Why to Strengthen Your Personal Finances to Increase Profits

Most people view their business to be a completely separate entity from their personal finances, and rightly so. This is generally true from a legal, tax, and accounting standpoint, whereas your business operations and finances should be separated from you personally. However, most small business owners are completely dependent upon their business to support them, as they feed off each other. So how and why should you strengthen your personal finances to increase your profits?

Why:

The business won’t starve: By withdrawing every single penny of profit from your business, it will make it much harder to invest in technology, equipment and capital improvements, and people. One of the main reasons that businesses fail is due to a lack of capital.

Increased profitability: If you have a large personal expense that is coming due, such as your mortgage, then you are more likely to take on less profitable customers, jobs, or may even sell your products at a discount due to desperation.

Better business decisions: It’s no secret that people make better business decisions when they are not feeling stressed or anxious. A common example of a bad decision is to cut expenses that support the main operations of a business to save a few pennies, but it ends up costing you dollars of revenues.

How:

Decrease your personal spending: There are numerous ways to decrease your spending, including groceries, dining, entertainment, taxes, auto, clothing, and virtually every category of spending. Some of my other posts will give you ideas regarding cutting expenses, but a few tips including: using cash more, cash budgeting (aka the envelope system because almost no one actually prepares a real budget), reviewing all of your “necessary” expenses, and delaying expenditures/gratification.

Increase cash reserves: Most people are poor at this (no pun intended), including those who save well for retirement. Savings should be allocated for short-term needs, such as emergencies, mid-term needs, such as for a house, and long-term, such as retirement. The easiest way to start saving is to allocate a very small percentage of every deposit that you make in your personal account towards a separate savings account. You can even start with 1%, just to get used to doing this and you’ll quickly realize that it is not that difficult. Over time you can increase your savings rate as you increase your business profits.

Reduce debts: Similar to increasing your cash reserves, you can start with applying a small percentage of every personal deposit towards your debt balances. The big question is which debts should be paid down first. Since finances are very behaviorally driven, then one technique is to start with the smallest debts first while ignoring the interest rate. The reason for this method is because it creates a sense of accomplishment once a debt is paid off, and will motivate you to continue moving forward.

 

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Don’t Change for the Exception

Most people don’t like conflict and make a great effort to avoid uncomfortable situations with people, especially those who are difficult to satisfy. It’s important to learn from these situations and consider their feedback, but you probably should not change your business practices because of them. Actually, if you listen to them you may seriously harm your business. Here are a few examples:

Pricing: There is always going to be someone who thinks that your product or service is priced too high. Most likely this is not that case as most businesses actually underprice their services. This is true in all industries, from software developers to manufacturers. If you do not price your product or services properly, then there will not be enough money to invest back in your business to support operations or make improvements.

Speed: Everything takes time. This can take the form of turnaround time or communications. Today, communications are instant, but it doesn’t mean that a business owner can communicate instantly. If you rush or perform work out of its place, then it can negatively impact the quality or your product or service. An example of this was on the show The Profit regarding a furniture manufacturer that would rush furniture production when a customer was over eager to receive delivery, but then their quality would decline dramatically.

Technology: There is always someone who will resist the implementation of technology, but it doesn’t mean that you shouldn’t move forward if technology will help your business. You may be able to make exceptions, but you should still change.

The bottom line is this does not mean that you should over price your services or perform poorly for your customers, but to be careful not to listen to the wrong people. Sometimes you should put in ear plugs when you hear the squeaky wheel.

Struggling Business Fail to Spend Money on These 3 Things

There are characteristics of successful business and also for struggling businesses. It is almost as if they do the exact opposite of each other. Three areas that struggling business owners tend to ignore because they see them as costs instead of improvements to support and grow their business are technology, people, and infrastructure/equipment. Let’s take a look at each to see the importance of each one.

Technology: Technology can help an organize with scheduling activities, taking orders, processing information, performing work, communicating with customers, collecting customer payments, financial activities and reporting, and assisting with an unlimited number of tasks. Technology must be implemented and used properly for a business to see a return on its investment. Additionally, it can take some time to get it up and running before you start reaping the benefits.

People: People are the life of an organization. Making sure that you have the right people will help your business run smoothly. Don’t be afraid to hire and train people to support the growth of your business, but you must make sure that they have the right resources, training and direction so that they can succeed. Can you imagine how a business can be transformed if it just hires one sales person that brings in 10 times the cost of their salary?

Infrastructure/Equipment: Have you ever been to a restaurant that looked like it hasn’t been updated since the 1970’s? It starts to lose its appeal and then the disturbing thought of what the kitchen must look like comes to mind. Have you noticed that franchises tend to be updated more often (generally they are required to), and their success rates far outpace non-franchised restaurants? The same can be said for equipment that can help virtually any industry to serve their customers better.

When a business ignores these investments they tend to suffer and their profitability goes way down, eventually leading to the demise of their business. The wise business owner will count the costs before making these investments and predict how the business will benefit. The struggling business will just see costs and never invest anything.

If You Want More Success Then Know the Difference Between Important vs Urgent

Important vs. urgent. Many people confuse the two, but if you want to be more successful, then you need to be able to discern between them. Important items have great significance or value while urgent items require our attention immediately. Here are some examples:

Important:  These are items that you need to do, but do not have to be done today, such as projects and assignments, planning, exercising, learning/training, saving for the future, etc.

Urgent: These usually have to do with grabbing your attention immediately, such as text messages, social media, doing dishes (our spouses may disagree with this one), interruptions, emails, most telephone calls, etc.

The problem arises when the urgent items seem to be important because they are pulling at us, and then we ignore all of the important items that we should have done. This is probably why many people say that they didn’t get anything done because their attention was diverted to urgent items. Even worse is when we procrastinate and make the important items both important and urgent.

What are some solutions? If an item is important, then you should set aside time either daily, weekly, or monthly to take care of it and actually put it on your calendar. Once an important item is scheduled there is a high probability it will get done. As for the urgent items, you can schedule these as well to take care of them at specified times or on a specific day. If you want to be bold then try this experiment for one week or even one month: shut off all of your alerts, emails, etc. while you are working, and designate a time to check them, say twice a day. Then, see if your productivity improves, and let me know what happens.

How a 10% Productivity Increase Can Increase Profits by 35%

A simple way to increase the profits of a business is to increase employee productivity. Each business and industry is unique, and here are several simplified illustrations to show the impact. The assumption is that if productivity increases by 10%, then sales will also increase by 10% due to extra capacity as long as there is demand for services.

Example #1: A service business that also has product costs, such as a tradesman, landscaper or other service provider that also sells products to a customer.

Example 1
 Current 10% Increase Diff %
Sales          1,000,000          1,100,000          100,000 10.0%
COGS              350,000              385,000            35,000 10.0%
Gross Profit              650,000              715,000            65,000 10.0%
Expenses              500,000              512,500            12,500 2.5%
Net Profit              150,000              202,500            52,500 35.0%

 

Example #2: A professional services business such as a consultant or architect, that does not sell products.

Example 2
 Current 10% Increase Diff %
Sales              750,000              825,000            75,000 10.0%
Expenses              450,000              461,250            11,250 2.5%
Net Profit              300,000              363,750            63,750 21.3%

The big question to ask is how can this be accomplished? Here are 3 ways:

  1. Having the Right Employees: Making sure that an employee is a good fit for your business is crucial. There are traits beyond technical capabilities that you should look for, such as attitude, ethics, loyalty, and energy levels.
  2. Training: A highly trained employee will be much more productive because they will know what to do and how to do it correctly. Mistakes and lack of training cost time and money.
  3. Better Scheduling: Virtually every business needs to schedule their jobs, appointments, meetings, work, etc. Proper scheduling can easily be implemented and yield a very high return with usually little to no cost.