Tag: small business

Owning Versus Renting

~ C.O.R.E. Beliefs ~ Leave a comment

Good morning and happy Thursday.

Today’s blog is brought to you by Kubae’s insistence.  It was brought on by our being guests of Jeff Taylor with Key Bank at the Portland Thorns match last night.  It was our first visit to the Key Box at Providence Park and she fell in love with it.  By it, I mean the food and the opportunity to watch the match while also enjoy some interesting conversations with the other guests.  It was a great evening and my thanks again to Jeff and the team at Key Bank.

The decision to rent or buy is often a very challenging decision.  You would think that it would be pretty logical – I will generate X dollars of revenues (or cost savings) by spending Y dollars on equipment.  Sadly, it hardly ever is given that level of scrutiny.  Most rent versus buy decisions come down to an emotional “Ownership” decision where I look at the fact I can call it my own instead of admitting to the world I rent.

For you lovers of logic and numbers, I do have a spreadsheet which will help you through this part of the analysis.  I also have a spreadsheet (actually it is just a blank workbook) for you to list out and quantify all the emotional reasons to own.  If you are interested in my Rent versus Buy spreadsheet, shoot me an email and I will send you a copy.

When asked if a small business owner should rent or buy, My first question is about utilization.  How much will it be used over the useful life of the item?  There are a few rules of thumbs out there but the one I work with is:

  • Rent if used less than 20% of its useful life
  • Lease if it is used between 20 and 80% of its useful life
  • Buy if used over 80%

An example:  A contractor needs a new work truck.  It can be driven about 350,000 over 10 years before it starts to run into trouble and should probably be disposed.  The contractor estimates she will put on 210,000 miles over a 7 year period.  First pass answer is  Buy.

The truck is designed to handle about 35,000 miles per year.  The contractor will use the truck 30,000 miles per year.  This comes out to 85% of the useful life of the truck.

I would not stop there though because the important question is, does it make financial sense?  My spreadsheet helps with that as it calculates the Net Present Value (NPV) of the investment in equipment and forces us to think about all the costs of owning the new item.  For instance, with a truck (like above) there are oil changes, maintenance, tire changes, axle replacement, etc. that one needs to consider.  I also consider potential revenue benefits for the investment as well since in most cases that is the main reason for buying an asset!  If all of these items generate a positive value then the decision is supported.

So back to why Kubae suggested that Owning versus Renting would be a good topic for today.  First, we lease our condo.  When we really do the math on the Rule of Thumb, we only  use the space about 62% of the time – since we both work in other offices and we typically spend our alternate weekends exploring; but to be sure we ran it through the Net Present Value calculation.  It actually calculated out with a better return on investment for us to lease a Condo rather than purchase it.

By the way, the same for the Subaru that Kubae drives.  We put on less than 1,000 miles a month so we definitely fell into that Lease category.  We didn’t even bother with the calculation as the answer felt right.  Plus we are excited about the changes to automotive technology which will reduce our dependence on driving even more, but that will come in a future article.

Key Bank did the exact same thing when it came to that Box at Providence Park.  They knew it would generate more than sufficient revenues to offset the cost and ran it through their own NPV calculation system.  Emotionally it might have made sense to invest in that Box but it only happened because it added value to their business.  Have you ever wondered why there are no Apple Fields or Intel arenas?

In business, especially in a small business where every dollar counts, I would strongly encourage you to try to take as much emotion out of the Buy versus Rent decision as you can.  If you insist on owning it even though all the logic says rent, then purchase it personally (or though a separate LLC) and then rent/lease it back to the Company.  If it can generate positive NPV for you that way, then your emotional hunch paid off.

I strongly encourage you to talk with your accounting professional about how to go about buying equipment and other assets for your business.  If you do not have an accounting professional or would like a second opinion, feel free to contact me.  I offer a free no obligation consultation to help us get acquainted and for you to see if we are good fit.

Have a great day.

 

Taxes

~ C.O.R.E. Beliefs ~ Leave a comment

Happy Wednesday.  It is an amazingly beautiful day in Vancouver and tonight Kubae and I are guests of Key Bank and Jeff Taylor at the Portland Thorns game.  We haven’t decided if we are eating in before we go or heading over to the Max station early and grabbing something to eat in Portland before the game?  Kubae and I are from different parts of the spectrum as I enjoy cooking and eating at home while she loves trying new restaurants every chance we get!  Does anyone have a suggest for a pre-game meal?

I was asked the other day why I never talk taxes.  This is not entirely true as I have older posts where I talked about it; and in this blog I haven’t gotten around to it yet!  But to dispel the concern about taxes, I will gladly write a few words.

There are two separate issues to address when writing about taxes: Filing and Planning.  Filing tax returns is an obligation.  Now, it can be easy or painful and it is your choice!  To make tax filing easy (and less costly) I strongly suggest you follow my guidelines in the various blog articles about how to structure and organize your accounting.  If you keep it simple and put transactions in the right place, your tax preparer will be able to easily complete your return for you to file.  No muss no fuss.

On the other hand, the small business owner who does not pay attention to his accounting generally makes tax filing a massive undertaking.  You are now paying someone with an advanced degree several hundreds of dollars an hour to fix your books.  I have seen year-end accounting services run to several thousands of dollars, all because the business owner had no idea what he was doing and the accounting firm (us as much as I hate to admit it) never took the time to properly teach the client how to keep a good set of records.

Planning for taxes is not an obligation, but is essential to the health of your business.  However, there are a few rules to tax planning you should be mindful of:

  1. Planning requires your business to be profitable before taxes
  2. Planning demands time
  3. Planning needs alternatives

Keeping these simple rules in mind, here is how to work with your accounting firm on tax planning:

  • Keep your books up-to-date and properly adjusted
  • Set an appointment no later than August 31 to review your books with the accountant
  • Be clear on your objectives for planning (new purchases, retirement, etc.)
  • Think about what you and your business might need over the next 12-18 months

There is nothing more frustrating, for you or your accountant, than waiting until February to discuss the fact you made $250,000 in profit for the prior year and then went out and bought vital business equipment which cost $250,000 in January.  The problem becomes, obviously, that you owe $75,000 in taxes on the prior year profits and you spent all your liquid cash on the equipment!

Yes, this happened more than once.

By coming in early and discussing your plans and objectives, you give your accountant the alternatives for you to review and approve.  In the situation above, for instance (and in hindsight), a planning meeting in August might have showed that profit was $175,000 and the owner might have addressed the fact that a new piece of equipment was needed early the next year.

Two things would have come out of that conversation – accelerate the purchase of the equipment and use some reasonable amount of debt to finance the purchase.  Due to the way the tax law works, taxes would have been reduced and the Company could have retained working capital – two objectives met for the price of one!

Since we are now approaching optimal tax planning time, consider making an appointment with your accounting firm to discuss and plan your tax situation.  And if you are currently not working with an accounting professional or would like a second opinion, feel free to contact me and have a free no obligation consultation on your business and plans.

Have a great day.

Thoughts on Starting a Business

~ C.O.R.E. Beliefs ~ Leave a comment

Happy Tuesday.  I had an awesome weekend.  Brendan and David had 3 friends over Friday night for video games and movies.  We watched Monty Python’s “The Holy Grail” and it was so much fun watching 5 tweener’s laughing at comedy written when I was a child.  Naturally, the boys were awake until about 4am when they started passing out from sheer exhaustion.  But mornings around here start early on Saturday and we had them up and “zombie-like” by 9am where we went to Esther Short Park to play some Football.  It is great fun to play some touch football with half-asleep 11 year olds!

One of the most enjoyable moments I have is when I get to meet with someone who wants to start a business.  They have an idea, or are tired of making someone else a profit or just want “freedom”.  I look at it as my solemn duty to help the budding entrepreneur understand the risks and benefits of starting a small business and am proud of my track record.

Part of the process is understanding the truth about starting a business.  First,  “The Idea”.  This might sound cynical but there is some truth to what I am about to say… There really is no such thing as an original idea in business.  Think about this, chances are your business idea already exists in some fashion somewhere.  What you have is a belief that you can do it better, faster, cheaper, with different colors, in a different part of town, etc. than anyone else who has tried this before.  And, if by chance, you can’t find a direct competitor, ask yourself why an established business hasn’t tried it before?  The odds are someone has tried it and it didn’t work out; and there is a lesson there as well.

Next, “Keeping the Profits”.  If you have read my other blogs about revenues and expenses and the balance sheet, you have a good idea that there is a lot to consider to get to a profit.  Remember, first you must have the equity to invest upfront to create your business and then you must reinvest your “profits” back into growing your business.  A healthy business is a growing business.  You will likely never know when you have excess “profit” to distribute out of the business – until it is time to sell.  And selling the business, that is, your exit strategy, is when you really are going to keep your profits.  if you have set your business up right.

Finally, “Freedom”.  No one in the world works harder than an entrepreneur.  80-100 hour weeks are common, divorce is high, heart attacks, strokes, and general burnout are the norm.  Most small business owners have no freedom, they have a job they cannot quit and cannot pay anyone to do.

Now, keeping these things in mind, can you set up your new business to address these issues and actually reach these goals?  Absolutely!  It requires you to think hard about the more important parts of the business that are typically not considered until you are overwhelmed.  I created a Pro and Con worksheet I am happy to share with you if you would like to have a yardstick to measure starting a new business against.  Send me an email and I will forward it to you.

To succeed, realize your idea has likely been thought about before and is likely even in operation somewhere.  It may not be exactly the same, but something is close to it.  Try hard to find it, think about what works and what doesn’t.  What strengths do you bring to the table to deal with those things which may not work right?  Where is your plan for automation and scalability?

To succeed, realize that you need to design your business to ultimately be bought by someone else so you can receive the real compensation you have worked so hard for.  Pay yourself well for the work you do, but don’t try to do everything.  Hire the right people, train the right people and help them succeed.  You can command a good price for a business with a solid and dependable system – you will get next to nothing for a business that relies solely on you and your skills and knowledge.  If you don’t think so, ask a lawyer how much her practice is worth when she goes to retire.  then ask Mark Zuckerberg.

Finally, to really succeed, you must focus on your processes so your business can take “you” out of the system.  Yes, you will have to work hard and be chef, cook and bottle washer for a while, but you need to develop a system and an organization that you start hiring for.  Think about what positions your business needs to succeed, design those positions and start to fill them.  Your small business then does what it needs and you can focus your energies on more important things – like living.

None of this is easy but it can be rewarding if you look at it through the lenses of these three areas.  If you have questions, I strongly encourage you to speak with your current accountant and ask her to help you with thinking about how to succeed in starting a business.  If you do not have an outside accountant or would like a fresh set of eyes, contact us at Currie & McLain to schedule your free no obligation consultation.

Have a great day.

 

New Customers

~ C.O.R.E. Beliefs ~ Leave a comment

Happy Friday.  In a few hours I go get Brendan and David and they are evening have a few friends over this weekend.  4 young boys playing X-box, drinking soda’s and eating gummy worms.  Pizza night is being replaced by spaghetti.  We generally do our own individual pizza’s over the barbeque but I even making a big pot of spaghetti too!

One area I think we often overlook, especially in small business, is prospecting and new customer development.  It isn’t that small business owners don’t care, it is that they are focused on bringing in business – any business, to help pay the bills.  And then, one day, you wake up and your whole world is consumed by “bad customers”.

A few years back, I went to a seminar and the speaker presented the fact that there is no such thing as a “bad customer”.  What there is, he said, was poor training.  My biggest takeaway from that presentation was this:

You train your customer or your customer trains you

With this new thought bouncing around in my head, I revisited how I went out and did prospecting.  How do I let prospects know that the firm will be training them on how to do business with us?  How do I ensure that the new client respects the rules of our relationship without it seeming overbearing?  I created what John Jantsch in his book “Duct Tape Marketing” called the New Client Orientation Kit.

We actually followed his prescription to the letter.  The kit laid out how the process was going to work from beginning to end, including asking for their participation in quarterly and annual client workshops.  We explained how we were going to bill them, when to expect the bill and how important it was to pay the bill on time.

In short, we trained new clients on how to work with us.  And we started that training in the prospecting stage.

By clearly stating what we wanted from the relationship and how clients could benefit from this approach, we left them with the “Yes” decision.  In this stage, I was no longer saying “Yes, we want to work with you”, it turned into the client saying, “After hearing all this, yes, we want to work with you.”

Instead of bringing in 20 new $250 tax returns, we were now bringing in 1 new $5,000 small business client.   The marketing approach pivoted and we got far more “No’s” than ever before, but we ended up with new clients that met our expectations and who wanted to work the way we envisioned it.

Can you do the same in your small business?  Absolutely.  You don’t even need to read “Duct Tape Marketing” (although I strongly recommend it) and you don’t even need to create a New Client Orientation Kit.  Although I found it much more effective to have it in writing.

First Make sure  your marketing literature is targeted to your ideal customer.   Yes, that means be very clear with yourself on who your new ideal customer is!  Throw out the pulse and checkbook approach!  If your target market is a single mom in the medical field, then identify that mom and find out what makes her want to do business with you.

Second, once the prospect gets to “Warm acceptance” explain your expectations.  Your expectations are “This is how you will get the most from working with us”.  If you are picking up that mom’s dry cleaning, then the expectation is “You will have your dry cleaning in the bag we will provide and it will be at the front desk at 3:30.  Our courteous driver will be there to pick-up and drop-off between 3:30 and 4:00.”  Oh, and don’t forget, “We will charge the credit card on file for the items dropped off on Friday morning.”

Third, make sure they know who to call with questions, comments and referrals.  Something else I learned the hard way, you do not have to take every phone call!  You have an amazing staff (or you soon will), let them do the job you hired them to do.  Which means you explain that if you are going on vacation, call the 800 number and press 3 to speak with dispatch.  Call the 800 number and press 9 if there is a question on the bill, etc.

Fourth, ask if they have questions about the process.  And finally, ask them if they can see themselves being successful in this process.  The answer is “Yes” or “No”.

I know I make it sound easy.  Trust, me, this part is very easy once you believe that the process you offer is what adds value to your customer.  The hard part, is wanting to take a hard look at how you are currently doing business and asking “Can we do it better?”

Have an awesome weekend.  John (my oldest) and Andrew are both in town this weekend and are coming over for our Father’s Day “Grill and Chill”.  I am looking forward to a great time with the boys.

BTW 840 works and 44 minutes.  (I was editing too much today)