Are You Too Financially Cautious?

Is it possible to be too financially cautious?  Cautious does not mean that you are just conservative or frugal with your money, but that you are too afraid to spend your money wisely. You may not even be aware that you are too cautious and here are some examples:

Hesitate to make the right investments: Aside from traditional investments, you may be too cautious to invest in your own education and knowledge, spend the money for new equipment and technology, marketing, or spending money on employees.

Too cautious about wasting money: If you are so concerned that you will waste your resources then you will end up spending too much time trying to save a nickel, but it ends up costing you a dollar. For example, you don’t want to spend the money to keep track of your finances in QuickBooks or even Quicken for personal use, but yet you incur hundreds of dollars of insufficient funds charges each month. I have seen clients spend approximately $10,000 for insufficient funds fees.

Not taking a loan when you should: I am not an advocate of borrowing money excessively or foolishly, nor do I think that borrowing should be avoided at all times, which some pundits advocate each position strongly for. However, sometimes you need to have a line of credit to smooth out some bumps or to take advantage of low-risk opportunities that arise. Alternatively, if you pay off all of your debts too quickly then you may not have any cash available.

Time versus money: Using your time productively strongly dictates your financial success. However, if you spend your time on $10 per hour activities that drive you crazy instead of paying someone to perform them, while you can be making $200 per hour, then that is a poor use of your time and financial resources.

Money before relationships: If you are too financially cautious then you will probably never want to get married, and if you do, then you will worry about not having enough money for your children and will probably not have any.

Another way of saying financially cautious is to be penny wise and pound foolish. Don’t try to save your pennies, but make dollars!

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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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Focus on These 3 Areas to Multiply Your Business Success

Having a business is not easy, and even successful business owners know this. But what is the secret to running a successful business and multiplying your results? You must focus on these 3 areas:

Operations: Operations is a very broad category, but it can be viewed as any activity that supports or creates and delivers the services or products that you are selling from start to finish.  Many small business owners are very good with providing their service or selling their product. However, there are usually great improvements that can be made with efficiencies, employees, and using time and resources wisely.

Marketing & Sales: Surprisingly, some small business owners perform almost no marketing activities, but are actually marketing their business by their reputation, the way they deliver their services, the characteristics of their products, and the overall customer experience. Virtually all must sell to some degree as many interactions are sales opportunities. Think of restaurants that try to “upsell” a larger size or additional items, such as much needed desserts! Smart marketing and effective sales can help you to multiply your revenues, and it does not have to be expensive.

Financial: This is all of the boring stuff, such as accounting systems, cash flow, internal controls (to ensure more reliable financials and to reduce fraud), and managing receivables and payables. I have yet to see a business that does not either have cash flow issues or tax issues if they ignore this part of their business. Finances are a crucial part of every business and are mistakenly ignored or paid very little attention to. With proper attention to finances, a business can easily become more profitable, have greater cash flow, pay less taxes and interest, reduce stress levels, and have a greater sense of control.

An interesting observation is that all three areas are very interdependent upon each other. An improvement in one are will help the others, but on the flip side, if one are is lacking, then the others will suffer as well. If you need help with any of these, then please let me know.

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.

The LLC Trap

Operating a business as a limited liability company, or “LLC” is very popular among small business owners. LLC’s have been around for several decades and can be formed in every state. There can be several benefits, but several major drawbacks.

The Benefits of an LLC:

Less Administrative Burden: If you operate as a single-member LLC, you generally do not have to file a separate tax return. You also may not need to have worker’s compensation insurance, which can save on expenses.

Liability Protection: By having your business operate as an LLC, you will separate your business liabilities from your personal assets, which can offer protection of your personal assets.

Now, for the Drawbacks:

No Tax Withholdings: Since you usually do not draw a paycheck as an LLC member, you will not have taxes withheld from a steady paycheck. This requires you to remit estimated taxes quarterly, but in reality, many business owners miss some payments, make partial payments, or skip them altogether. This is how tax problems develop.

High Potential Audit Risk: Many LLC’s only have one owner and do not have to file a separate income tax return for the LLC. Rather, the activities from the LLC are reflected on Schedule C of their individual tax return. This is easier than having to file a corporate return, but at the same time, it increases your chances of being audited significantly.

Self-Employment Tax Shock: Since you usually have to pay self-employment tax as an active member of an LLC, this can double the amount of social security and medicare taxes because you have to pay both the employee and employer portion.

You need to carefully structure the way you operate your LLC in a manner so that you can reap the benefits, while at the same time reduce any downside. This should be performed with the assistance of a tax advisor that is well-versed in business structures.

Simplify Your Home Office Deduction

The home office deduction is used by both small businesses and employees, which allows a deduction for using part of your home exclusively and regularly for business purposes. This allows a percentage of certain expenses to become tax deductible or at least more tax favorable such as mortgage interest, property taxes, rent, utilities, homeowners insurance, repairs and maintenance, and depreciation. The downside is that it can be both complex and time-consuming when taking this deduction.

The good news is that the you can use a simplified method for deducting home office expenses. This method allows taxpayers to deduct $5 per square foot of business use up to a maximum of 300 square feet for a total deduction of $1,500, as opposed to having to figure out all of your expenses.

Although this new method is simplified, you need to determine if it makes sense to use the simplified form or the traditional method of calculating home office expenses. You also want to make sure that you meet the criteria for having a qualified home office. Additionally, the rules for employees using a home office are more complex and need to be followed strictly.

Getting More from QuickBooks

The most popular small business accounting software by far is QuickBooks. It can be easy to use, is very affordable, and can help you to run your business better. Unfortunately, QuickBooks is quite often not used to its potential. Here are some things you should be doing with QuickBooks:

Running Financial Reports: To know how your business is performing you can do so by running a profit and loss report to view income and expenses. You can easily compare results from year to year, month to month, or any time frame you wish. The same applies to running a balance sheet, which shows you amounts such as customer receivables, loan balances, cash balances, and equity balances.

Reconciling Your Accounts: QuickBooks makes it easy to reconcile your bank, credit card, and other accounts to your monthly statements. This way you know that your balances are correct and can quickly fix any discrepancies.

Customer & Sales Metrics: It is important to know who your largest customers are and you can figure this out by running a report called “sales by customer.” You can also run reports to see sales by product, service, or item. Additionally, by running accounts receivable reports you will know your customer balances.

Keeping Track of Vendors: While it’s important to know who owes you money, you also want to know who you need to pay and when. Bills can be entered with due dates and amounts so you can better plan your cash flow.

Budgeting: Instead of using Excel to create a budget and manually update it, you can create a budget within QuickBooks. Then you can plan for the future better and compare the budget vs. your actual results.

An alternative to QuickBooks is to go back to using ledger paper, which is shown in the photo above, but let’s not go back in time!

It is important to utilize QuickBooks as much as possible as a tool to help your business prosper.

Before You Buy a Business

Businesses are bought and sold each day and some make better investments than others. Before you buy a business, here are a few things to make sure you make the right move:

Why is the seller selling? There can be many reasons why a business is for sale, and some reasons are better than others. For example, if the business owner is retiring, that is a good reason, but if the owner is selling because they are not making much of a profit, then that is a negative sign.

Do you know the industry? If you worked for years as a general manager of a restaurant, then this would provide you with a good base of knowledge of how to run a restaurant. The same goes for any other industry.

Due diligence: You should not just take the seller’s word that the business is making a certain amount of money, as the seller should be able to substantiate it with information, such as bank statements and tax returns.

Seek the advice of a professional: Seeking legal, business, and tax advice can pay for itself over and over again. A good attorney will help to work out the legal agreements, while a CPA will help to advise on how to maximize the tax effectiveness of buying the business. I have seen business purchases after-the-fact whereas the new owner loses tens of thousands of dollars of deductions because it was not structured correctly. The agreements can be made so that both parties receive the benefits they are looking for.

The Hidden Retirement Asset

Financial advisors frequently mention the three main pillars of retirement, which are social security, pension plans, and personal savings. Yet, you rarely hear them speak about an asset that may prove to be an individual’s largest asset – their business.

Many business owners invest their money back into their business over the years, especially during the early year, which makes them appear to have minor savings at first. In reality, the returns of investing in a small business can potentially be far greater than any stock market returns. Of course, there are risks as well.

How valuable can a business be?  A business can be valued in several ways, such as a multiple of sales, profits, or the value of its assets, and each industry has its own ratios that it relies upon when coming up with a price. For example, if the net profit of a business is $200,000 and sells for 5 times profits, then the valuation would be $1,000,000. A part-time, home-based business may not be worth much at all, but a profitable restaurant, service business, medical practice or other well-managed business can be worth hundreds of thousands to millions of dollars.

Don’t Wait Until It’s Too Late: Selling your business at the right time will have a huge impact upon the selling price. For example, if you are nearing retirement and have health problems, then you may be forced to sell your business at a huge discount if you suddenly are not healthy enough to run the business. Worse yet, if you pass away suddenly, then the value of the business will usually drop even further.

Getting Top Dollar: Ideally, you should prepare for the sale of your business 3 to 5 years ahead of time. This will allow you to be in more control of cleaning up the finances and improving profitability. You will obtain a much higher selling price if your business is doing well and you don’t need to sell it in a hurry.

Do You Have Too Many Customers?

What do you think is better, 100 customers or 200 customers? It might actually be the lower number, and I’ll explain why.

Let’s say that a small business provides landscaping and maintenance services for both businesses and for residential customers. Most of the customers are within a reasonable driving distance from the main office, and the total amount of customers they have is 200 (50 businesses and 150 residential customers). In order to serve their customers the business has 10 employees and several business vehicles.

After reviewing the amount of services provided to each customer, the owner realizes that it is either unprofitable or only slightly profitable to service a small residential customer, especially if they are more than 15 miles away.

Furthermore, the owner realizes that if an employee performs work for a business customer it tends to be much more profitable because only several are being serviced in one day for a total of eight hours of service performed. For residential customers, only four hours of service is performed after factoring in travel time, plus there are additional costs of travel. Also, the work for business customers tends to be steadier and provides overall higher revenue.

What is one possible solution? The owner may decide that it makes sense to only service business customers. By decreasing the number of customers from 200 to 100, it means that 50 more business customers were acquired, while discontinuing service to 150 residential customers. If each business customer usually receives $5,000 of services per year while each residential customer receives only $1,000, then revenues will actually increase by 25%, while actually decreasing costs.

All you have to do is substitute the type of business with your own, such as computer consulting, printing, medical practices, all types of contractors, and you will get the same results. I believe that serving too many customers even leads business owners to feel that they are busy all of the time without having anything to show for it.