Lip Balm Will Not Save You

I once worked with a new business owner who started her own hair salon.  She had been in the industry for more than 20 years and felt ready to leap out on her own.  This sounds like a great story so far…frustrated technician is ready to begin running her own business and do what she loves.  Right?

Here were the problems:

•  She had signed a non-compete with her former employer, and she had to move more than 5 miles outside the radius of her previous location.
•  She couldn't, of course, gain access to her client list.  So, she couldn't call them to tell them where she was.
•  Before my client had even vacated her rental chair, her soon-to-be former employer was calling her clients and telling them their stylist had quit and had left no forwarding address.  All they had to do was come in, and someone else could start working with them.

It took weeks for even her most loyal former clients to find her in the new location.  Her expected revenue took a big hit, and she had little to no advertising budget.  She was a frustrated technician.  She had no experience in running a business.

When I met her, things were at the point of no return.  She was done, and out of business, only she didn't know it yet. In one conversation, we were discussing these troubles, and she said, “Maybe we should get one of those Burt’s Bees displays and start selling lip balm. Surely that will drive up sales.”  These were not the words of an expert business-builder or marketer.  These were the words of a demoralized, exhausted, scared technician who finally realized that she didn't know what she was doing.  How had she gotten here?  All she wanted to do was cut hair and make her clients feel beautiful.

When a business owner is in this position, it’s very easy to make mistakes.  Throwing a Hail-Mary works in movies, but seldom do you connect with your intended receiver in real-life.  My client’s problem was that she didn't know how to move retail.  She didn't have enough traffic, nor did she know how to increase it.  But, she also didn't have enough money to hire someone full-time to assist her, and she didn't have enough time to do it all herself. Her chair might have not been full, but she still had to be there every day to answer the phone. She had to make sure there was color and product for the clients she did have. She had to pay the utilities. She had to learn a new scheduling software. The laundry did not do itself. The landscaping and the sign needed to be maintained. And even though she wasn't making much money she now had to worry about sales tax, business returns, property tax returns and who needed a 1099.

This is the dreaded catch-22 some business owners find themselves in.  The sad thing is that she had no one to turn to before the trouble started, to mentor her and offer some advice on how to start things on the right foot.  She felt helpless now and like a failure.  She lost her building, she filed for bankruptcy, and then had to start over again.

How do you know if you’re in trouble?

•  Have you taken out a mortgage to help fund your business, over and above the mortgage you owe on your house?
•  Do you think that “one big insert event here” will help you turn things around?
•   Are all of your credit cards maxed out?  Have you considered debt consolidation so you can get another one?
•  Have you offered up junky self-prepared financials to someone interested in buying your business, only to hear them say no?

This is a true story for far too many people. Owning a business is high stakes game for the business owner. They have everything to gain, but they also have everything to lose. I still wonder how things might have gone differently for her if she had someone that could have helped her locate the landmines before something catastrophic happened. A person who would have helped bridge that gap between the theory of owning a business and the reality of running one. 

I really wish that in this case it had been as easy as selling lip balm.  

"My Spouse Will Just Do My Accounting."

Wow, if only I had a nickel for every time I've heard that one.  You know who’s never in the room when a business owner makes that comment? The spouse.

I am about to give you a cheat-sheet that will guide you through this terrible idea, in the hopes that your decision will change when you’re done.

•      Question 1 – "Spouse, is this something that you want to do?" Please record the answer to this question on your handy, dandy iPhone thingy.  I want to hear the response.
•       Question 2 – "Spouse, how long will you be willing to help me to do this?"  If the first answer is anything other than “as long as it takes you to find a CPA,” I will buy you a steak dinner.
•       Question 3 – "Spouse, when did you last study accounting?"  This can go two ways.  Either the spouse replies “Never.”  Or “I cannot remember what happened last week…you want me to recall what happened 10 years ago in college?”  Either way, you have detected a problem with your spouse’s level of accounting expertise.  Houston, we have a problem.
•      Question 4 – "Spouse, when will you have time to do this for me?"  Whoa, you need to take a step back….right now.

I get it.  When you have 3 nickels in your business checking account, it makes perfect sense to think long and hard about hiring someone to help with your accounting needs.  It’s ironic that this is also the time that you need someone the most, isn't it?

How your hard-earned money is accounted for affects more than your bank account.  Accounting records are used for preparing tax returns, applying for business loans, and enticing investors to help you out.  If that information isn't classified properly, then you could cause yourself some serious heartache. 

•  For instance, when recording money that you have deposited into your company bank account, do you classify it as capital or a loan?  Do you know the difference?
• Do you know the proper way to record the purchase of a new piece of equipment, like a company car or leased office furniture?  How about that land you purchased, on which your new building is about to sit?
• Do you have the proper tax identification numbers?  Did you know that you can’t start processing payroll until you have them, nor can you open a bank account until you can prove to your bank that the business is legitimate?

Fast-forward two years. Assume you’re still married and that your spouse is still doing the accounting for your business

• Do you know how to respond to that latest tax notice from IRS?  They’re expecting a response in 30 days, and it’s day 28.
• Are you ready for the worker’s compensation insurance audit next week?  Do you have all those payroll reports printed, along with copies if your last four quarterly payroll tax reports?
• Do you know who is supposed to receive a 1099 at the end of the year?

Shoving something you don’t have time to do onto someone who doesn't have the expertise can cause some tense moments at your office, and at your house.  Trust me.  But, if your spouse is willing to continue to help you, it could only help matters to have a professional who can serve as a resource to him/her.  You started this business to enhance your life, not fast-track your ride to divorce court.  But if you take for granted that accounting is “no biggie” and your spouse “can just handle it”, you may be in for a bumpy road.

"Do-Everything" Could Mean "Forgets Some Things"

Sometimes, when you are a “do-everything” entrepreneur, you forget things.  You leave your cell phone at Starbucks; you leave your iPad in the car and it slides underneath the seat, and you find it three days later after tearing apart your home; you forget one of the 3,267 passwords you have for websites you access, and it happens to be the most important one.

On the scale of seriousness, forgetting to file a tax return is at about a 7 (with 10 being what we call a "tax-evader"). 

For business owners, it’s like flossing.  You hate doing it, so therefore you push it to the back of your mind.  It wasn’t intentional, but IRS and SC sometimes don’t care whether you meant to do it or not.  You didn’t file the return, it’s late, and you owe penalties and interest and the fatted calf.  Like Stanley, who owned a construction company and didn’t file a corporate or personal tax return for 4 years.  His corporation was dissolved by the state of SC; he paid nearly $6,000 in penalties for late filing and late payment of taxes; and his poor wife was about to pull all of her hair out.  We helped reinstate his business and get caught up, but the cost for all of this in time, worry and cash was completely avoidable.

We chose to establish Start-Up School to help entrepreneurs understand as many facets of running a new business as our time will allow.  One of those topics covers how the IRS and state agencies can be persnickety when it comes to filing tax returns accurately and on-time.  We seek to arm you with as much information as possible....think of us over the 10-week period as your concierge in the hotel of entrepreneurship.

How is a Business Partnership Like a Marriage?

Partnerships are complicated….sort of like marriages.  You've heard of pre-marital counseling?  I think that every entrepreneur needs to discuss adding partners with someone else who’s also done it….like me.

I have discussed the issues that surround partnerships with many of my entrepreneur clients, as my experience draws both from having a partner of my own for a while and from years of advising clients.  The potential questions that arise often pertain to tax and accounting, since those are the obvious ones.  But what about the touchy-feely questions, like whether or not you actually LIKE the person with whom you are about to share profits and business; what about whether your strengths compliment each other?  Are you risk-averse and prone to hives when things don't exactly go your way, while your partner takes risk believing that "no risk equals no reward"? Not every business question needs to have a dollar sign in front or behind it.

My partner experience ended badly.  Bad experiences fuel great cautionary tales, which is one of many reasons why we established Start-Up School.
Plus, a business partnership cautionary tale is a lot less painful when it has happened to someone else.

You + Payroll = Heartburn

Any entrepreneur that tells me he wants to prepare his own payroll confounds me. I mean….why? As one of my clients told me last year, after trying to do her own payroll for one month, “Payroll is just….HARD.” 
She is an architect. She is a smart capable lady who draws things I could never understand or do myself. So, for her to tell me that, says something about payroll. She had no time to figure out payroll and try to run her new business. 

I don't think payroll is necessarily difficult from a process standpoint. There are software applications that can make it pretty easy. It’s every single thing that comes after you process your paycheck….making payroll tax deposits, filing quarterly payroll tax reports, preparing annual payroll tax forms like W-2’s and 1099’s, new hire reporting, verifying that your new hire isn't an illegal alien…and the list goes on and on. Not to mention any time your employee moves or gets a new bank account or owes back child support their payroll issues become your issues. I don’t even do my own payroll anymore, and I only have a grand total of 4 team members.

Every single client who once allowed us to assist with payroll, then left to do it themselves, always returns with two things in hand….the info for us to begin assisting with payroll again and a stack of IRS and SC payroll tax notices. And did I mention Unemployment? Don't even get me started. When I say that it takes nearly four months to rectify a payroll tax error, I’m being conservative. I had one client who made a mistake in filing an incorrect form, and it took me SIX YEARS of writing letters to fix it. No lie.

Start-Up School was designed to alert entrepreneurs to all of the things necessary to run a business well, and payroll is something that every business will likely encounter at some point. I think that having someone to assist with the proper setup and with answering questions BEFORE the first check is processed is key.   

3 Elusive Accounting Concepts

In my 21 year career as a CPA, I have met scores of entrepreneurs….start-ups, established business owners, and those about to jump into the arena of comfortable retirement. To be successful, you have to understand accounting concepts. But there are some areas that are just elusive….too nebulous for anyone to understand. Enter the reinforcements…the trusted advisor….the CPA.

Retained Earnings:  “Um, what is that number down at the bottom…retained earnings?”  I get this one all the time. I remember having a tough time wrapping my college-aged head around this. I have taken to using the penny jar analogy, and it goes like this:

Imagine that all of your profits from Day 1 have been deposited into this penny jar.  Imagine also that every year that you lose money, pennies are withdrawn from the jar.  And lastly, if you take distributions of profit from the company, pennies are also withdrawn.  What’s left over is your Retained Earnings figure.”  50% of the time, I get an enlightened nod.  50% of the time, I get a hesitant nod, meaning “I don’t quite get it, but let’s move on.”

Dividends/Owner Draws:  Entrepreneurs are a lot like my 10-year old daughter when it comes to profits.  When my daughter receives money for doing things around the house, she wants to spend it right away. Same goes for entrepreneurs who start to see blank ink where their net profit figure resides. So, they remove the profit from the company in the form of dividends.  Trouble is, you can’t do this forever because you will come to a point where those profits have been exhausted. And telling the trusting entrepreneur who has looked to me for advice and guidance that she can’t keep taking dividends quickly turns her into my 10-year old. The look of incredulity is scary. So, I won’t attempt to explain dividends and draws here, but suffice it to say that I will spend hours explaining this concept in Start-Up School…it’s not an easy one to understand.

Accrual Basis Accounting vs. Cash Basis Accounting: My therapist probably makes money off me due to the stress that this conversation causes with my entrepreneurial clients. There’s a reason “accrual” has the word “cruel” in it.I should just place a bull’s eye on my face and give them a hammer.  So, I've tried to use this example:

Accrual basis accounting records income and expense when incurred…you send an invoice to your customer, it counts are revenue. You receive your utility bill that is due in 28 days, it counts as an expense. Cash basis accounting records ONLY record things when cash is received or spent. But, there is one exception….credit card expenses….

And then I lose them. Insert bull’s eye and get your hammer.

I get it, this stuff comes easy to those of us that do it every day. But, as I have said, I don’t change my tires because the guy at the tire shop does it all the time and it takes him 30 minutes. Entrepreneurs like to be “do-everything” people, but sometimes you gotta call in reinforcements to explain retained earnings and why it’s important.  That way, you can get back to filling that penny jar.

#salestaxhurts

How many people do you think work for Target in the area of sales tax implementation?  I don’t know either, but I’d imagine it’s quite a few.  I recently read of an error that Target made in Richland County (South Carolina) in the addition of a 1% tax that didn’t apply to sales at all, but to transportation.  Some shoppers noticed that their taxes were too high on the receipts, by only 1%, but too high nonetheless.  The SC Department of Revenue worked with Target to fix the problem, and all was well.

How many people do you have helping you with sales tax?  Is it less people than Target has?  I bet it is.  If Target can mess it up, do you think you can?  I bet you can.  Do you think it would be helpful to have someone walk you through the pitfalls?  Yeah, I bet you do.