Money Pit Pitfalls

We have many clients who own real estate, and not one of them is named Trump (thank goodness).   The complicated tax rules that surround rental properties, both commercial and residential, are many and understanding is limited.  Even tax professionals have a hard time with them, so can you imagine how confusing it is for someone who just wants to purchase a fixer-upper for $300 of monthly income?

We had a very difficult case arise with Ron and Anne, who purchased a commercial shell in a distressed area to turn it into a commercial rental property.  Anne owned a business that was going to utilize half of the building, and they planned to get a renter for the other half.  This tap dance went on for three years, and no one was renting anything.  Anne devoted most of her time to working with contractors and real estate agents, doing anything and everything to rent that place, and she felt as though she should be able to deduct all of the expenses related to the property.  We felt that it was a toss-up, and informed them of the possibility of losing the case under audit.  And that’s exactly what happened.

We never like losing something under audit, but we certainly learned a lesson that we’ve been passing along to every single client after them.  You can bet that we’ll share this story with our Start-Up School attendees because this lesson is a golden one.

Outsourcing Isn't Defeat...It's Growth

Entrepreneurs are “do everything” people.  I’d say that it is difficult to run a successful start-up if you don’t possess that trait.  The entrepreneur crosses a milestone when she realizes that she can’t do everything forever.  Just like we tend to allow auto shops to change our oil and rotate our tires, there comes a time when outsourcing some of the important aspects of your growing business becomes necessary.

Outsourcing is a difficult call to make, because it costs money.  Maybe it will cost you slightly more up front than you benefit.  But, done properly, the outsourcing should eventually free you up to make a quantum leap in profitability.  We aim to discuss how to do this properly when Start-Up School convenes in the Spring.

Outsourcing should provide mutual benefit.  In other words, if you experience more problems with the outsourced task after you delegate it than when you were doing it yourself, then something is wrong. 

Understanding the end result of your outsourcing decision is key, and Start-Up School was designed to help entrepreneurs assess these types of situations with a critical eye toward success.

Margins Don't Just Exist on the Edges of Your Paper

It’s difficult to find a business that lives and dies by its gross margins any more than a restaurant.  Margins can make a restaurant very profitable, but failing margins will close the doors for good.

We began working with a local restaurant, providing very basic services like tax preparation and financial statement generation.  But everything we did focused on the past…what happened last month or last year.  We were asked by the owner to prepare real-time financial reports and weekly profit & loss reports so he could track his margins.  With our assistance, he was able to improve his margins by nearly 9% after he was able to see the areas that needed improvement each week when reviewing our reports.  His year-end profit increased by nearly $60k by engaging us in this enhanced role.

Restaurants are among the most difficult businesses to run, manage, and sustain.  Let's face it....tastes are fickle.  But bad food is only one reason that most restaurants fail, and I bet it's not even in the top three.  I would bet that the top three reasons relate to finances. We hoped when Start-Up School was formed, we would have the chance to work with more restaurateurs (yes, I did spell this word correctly....check it if you don't believe me) from the beginning to make them aware of what they didn't yet know about restaurant finances. For us, that's rewarding work and the ultimate "pay-it-forward."  Who knows...I may get some free entrees out of this!

3 Common Newbie Accounting Errors

1.      Death.

2.      Taxes.

3.      QuickBooks Pro accounting errors made by newbie entrepreneurs.

The three things we can count on, as CPAs.  As sure as the sun will rise, and as sure as Congress will never understand what it means to own a small business, we will see the same errors made by every start-up that attempts to do its own accounting.  I will refer to QuickBooks Pro here, because that’s what my clients use.  But you can insert any accounting software name here.  We see these errors all the time, and advise start-up entrepreneurs on how to remedy them…or sometimes do it ourselves.

Setting up a chart of accounts that would make GM flinch:  For most small businesses, I would estimate that all accounting could be done through maybe 30 general ledger accounts.  More than that, you start to have duplication and confusion, not unlike the Duggar family. I have seen the following accounts set up in QuickBooks…taxes, payroll taxes, property taxes, federal taxes, state taxes, estimated taxes, business taxes….in the same QB Pro file, for one client.  You’re not Bubba from “Forrest Gump.” Consolidate, please.

Never reconciling the checking account:  OK, this is dangerous.  Checking the bank balance online each morning is NOT the way to run your business. Actually comparing that intimidating, three-page bank statement to your accounting records is a good thing, grasshopper.  I met with a prospective client that ran a $3m company, and he wasn't aware that his in-house bookkeeper hadn't reconciled his company accounts in more than two years. I was seriously fearful of the mess awaiting me (for good reason, I later found). Make it a habit, like your morning coffee or reading the Twilight series.

Recording deposits from customers incorrectly:  I once saw an accounts receivable balance in QuickBooks Pro for -$1,845,526.  This company was nearly 10 years old and had never once recorded a customer revenue deposit correctly.  And they had never balanced their checking account (see the previous paragraph). When it came time for the business to entertain buyers, they wondered why no one was knocking down their door.  This was one of those problems that I just didn't think we could fix.  It would take less time to press “delete” and start over again.  Even my love for Single Malt couldn't get me through that housecleaning.  Sheesh.

There really are people who have no business doing their own accounting.  I’m not ashamed to say that.  But if you insist on doing your own accounting, watch these three things so that I don’t make fun of you when I review your work.  Because I will make fun of you.

Pricing for Your New Business - A Longer Process Than Ordering Take-Out

Pricing is difficult.  How do you determine how much to charge?  Do you compare your prices to others in your industry, then add 10%?  5%?  What if you could set your own pricing strategy, determined solely by the value you bring to your customers?  Charles thought I was nuts when I brought this up. 

“I know what my customers will pay me, and if I raise my prices, I’ll lose them.”

My answer to him went something like this:
"Of course you’ll lose them if you raise prices but give no additional value in return. But can you agree that prices should rise when you receive more?  I’m talking a little about raising prices, but more about making your services so important and valuable to the customer that they’d never think about leaving you." 

I’m talking about creating a scenario where your customer LOVES paying you after every interaction. One where you bring so much value to the table that they rave about you to everyone they know. I'm talking about reevaluating what you are doing, not gouging your client. 

It doesn't surprise me that most entrepreneurs don't know how to price for their service or their product. Most of the time, they are still thinking like a customer. Which is important, but one-sided. When you price a service there is more to it than just, "What can I get someone to pay for this?"

I thought I knew how to price for the longest time. But when I came to dread the question, "So how much?" I came to the realization that I had no clue. What caused my stomach to churn and my speech to stammer was that I had no real foundation for where these "prices" were coming from. Which meant that if I was pushed at any point, everything became negotiable. Then I found myself doing work I didn't really want to do for less than it was worth. And that was frustrating.

If you have a franchise, you have limited opportunities to change your prices.  But for those of us that don't work within a franchise environment, pricing strategies feel a little like the "What came first, the chicken or the egg" exercise.  You don't know what people will pay until you put something out there, but you don't want to price something too high for the fear that no one will buy. Check, please!

I wrote the Start-Up School curriculum piece on pricing first, because to me, it's one of the most important elements of any new business venture. The mindset you have toward the pricing in your business will make or break it.  If you think that's shocking, wait until you hear me say "Cost has nothing to do with price."  
(I just blew you mind, didn't I?)