At Willis & Jurasek, we are more than tax geeks and accounting nerds. We are trusted business advisors who take what we learn from working with hundreds of businesses and try to “spread the wealth” by advising all our clients about some of the best practices we see in the business world. Unfortunately, we also see some “worst practices,” and in this article we are trying to spread some cautionary tales to keep others from making the same mistakes.
- Relying too much on family– You may have heard of the tax benefits of hiring family members to work in your business. It is true that these can be significant, but this does not mean that many or all of the key roles in your business should be filled by family members. For instance, if your entire corporate board of directors is made up of family members, you are not getting the valuable outsiders’ perspective that other business people can bring to your organization.
If your spouse or children have talents that will enhance the business, then by all means hire them and utilize those talents. But if you are just putting Johnny on the payroll because you just want to help him out, have you considered that this might be counter-productive? Let’s suppose you are getting to the point of devising an exit strategy from your business because you want to retire. You know that your child(ren) can’t or don’t want to own and operate the business, so you are considering selling to a third-party buyer. Often the price that buyer will pay is based on a multiple of the net income of your business; in this case let’s say a buyer will pay 5 times net income. If Johnny is on payroll at $50,000, he is probably really costing the company $60,000 when considering payroll taxes, benefits, increased insurance costs, etc.
Using a multiple of 5 times net income, this means that having Johnny on payroll might cause your business to sell for $300,000 less than it otherwise would, presuming the service he provides to the business could be absorbed by other employees and/or by someone not as costly.
- Falling in love with your hard assets – We see too many clients sitting on too much inventory and/or pieces of equipment. Some are so bad that they could definitely be called “pack rats,” with a few possibly even border-line hoarders. One of the common traits of these individuals is that they tend to work in businesses where they create things “out of thin air,” such as construction or custom manufacturing.
What is wrong with not being able to let go of your hard assets? These items represent cash tied up in your business that you could use for more productive purposes: pay down debt, reward key employees, contribute to your retirement. If there is inventory covered in dust on your shelves, or you have a piece of equipment that hasn’t been used in years, you can and should strongly consider breaking the emotional attachment to those tangible items and converting them to cash.
You may say that those items aren’t really tying up cash because you might only be able to sell them for pennies on the dollar, if at all. You may have a point. It may be difficult to find a buyer, or you may just have to sell the items for scrap. But even doing this you will still be freeing up cash because you will no longer be insuring those items or paying personal property tax on the equipment.
- Not shopping around– I know this point could be considered a bad one to make because it argues against loyalty and because someone might take the idea to shop around for a CPA firm. (We know we’re not the cheapest firm in town, but we feel pretty confident we’re the best.) But the point about shopping around isn’t always necessarily to find the best price, but to find the best value.
What cost in your business has been increasing the most recently? For many of you, the answer is health insurance. Yet, I met recently with a business owner who wasn’t sure when the last time he shopped around for health insurance was. I told him about how we do it. We don’t get the cheapest policy available, but each year we ask our insurance agent to provide us different options with different levels of coverage so that we can see if one is available that is a better compromise between price and benefits received vs. just accepting the same policy as the year before and being stuck with a 15% – 20% annual premium increase. That compromise, or balance, between price and benefits received is the heart of finding the best value.
Health insurance is just one example. Maybe advances in technology make it so that your materials provider is no longer your best value. Even though they are just down the street and pretty cheap, the equipment they use is old, so there is a high defect rate in their product and they can’t quickly respond to your requests. But maybe in the next town over there is a vendor with new equipment, and/or employees with better skill sets, who can provide you parts at a slightly higher cost but with 50% less defects and a turn-around time that is one week faster. The problem is, you won’t know unless you shop around.
The above three things are pretty big deals, but they are just the tip of the iceberg in terms of all the ways business owners shoot themselves in the foot on a daily basis. If you need assistance with any of these, or want to hear more about areas for improvement in your business, please contact us today.