1. Keeping an Eye on Economics
We already know that economic conditions—from home sale prices to the cost of money (the worth of the U.S. dollar)—affect us as individuals. But they also affect our businesses and in many cases, more so. In particular, taxes have a great impact, particularly on small businesses. Small businesses provide an incredible amount of jobs in America; while we would think preserving their viability would be paramount, it isn’t to all politicians. We often see politicians try to raise taxes on businesses, which directly impacts your bottom line. The smaller the business, the more impact raising taxes will have.
You need to watch conditions of the market; what is the consumer sentiment?
Are people spending? How is the gross domestic product (GDP) doing? Is it growing? If people are spending and have discretionary income and feel wealthy, they are more likely to spend money eating out, on clothing, and on more expensive or designer goods. You may have to adjust your business—from your prices to your marketing strategy—based on consumer sentiment.
1.1. The Impact of Market Conditions
Many people don’t realize how much impact the Federal Reserve has on the wealth of the nation. When the Federal Open Market Committee (FOMC, or Fed) adjusts the reserve requirements or the interest rates, they either contract or expand the economy. When they raise interest rates, banks are more likely to want to lend because they will earn more, but fewer people will want loans because they cost too much. Also, the higher interest rates are, the more people will invest money instead of spending it because the incentive to do so is higher. This is a contractionary climate, where we pull back spending and make the cost of money more expensive.
What impact does this have on your business? Plenty! First, if people want to put their money into a certificate of deposit (CD) this month because they can earn 8 percent, they’re less likely to buy your designer handbags or eat at your restaurant. Also, if there is a higher opportunity cost to spending money (e.g., there will be less money to invest in a high-return environment), they’re less likely to spend money on goods and services. We know that even gratuities (tips to your waiter or waitress, valet, etc.) go down when we have a contractionary climate.
On the contrary, when the economy is in expansion mode (as it was in the early 2000s), money is cheap and people borrow like crazy and build like crazy. They expand their businesses with inexpensive loans, and people feel more wealthy. The downside to this, as we saw in the mid-2000s, is that the build-up can be a house of cards that crumbles, as the mortgage implosion showcases so well.
When the economy is expanding, people feel the wealth effect and they spend money more freely. In these years, GDP tends to climb and spending climbs. People build houses, build shopping centers, and invest a lot in their businesses, the cost of money being inexpensive. Banks protect themselves by offering variable rates—the rate plus a margin—but when the Fed changes its policy to be more contractionary, business owners often aren’t prepared and get hit with higher finance charges. This startles businesses back into contracting and not expanding as much.
Be careful and watchful of the economic environment in general. Watch what the Fed does with rates, the state of banks, and the health of the stock market.
All are indicators of not only consumer sentiment, but also the health of our economy in general. Watch unemployment rates; anything above 5 percent is considered above the natural rate and may be cause for concern. People without jobs are people not buying. This is also a time many people start businesses, as they are feeling overlooked by Corporate America.
1.2. The Impact of Taxes and the Political Climate
All politicians like to take our money and spend it. Individuals in surveys are less sympathetic to taxing a business than they are to taxing an individual, although most don’t realize how closely tied the two are. Even if you don’t enjoy watching politics for instance, I suggest you find a half-hour or one-hour business show and watch it diligently each day; read a business newspaper or a business magazine and keep current on what is happening in the political and tax climate. Politics, economics, and government regulation affect businesses and you should be aware of what is happening.
You also may need to make forward-thinking adjustments to the type of corporate structure you have if you see taxes increasing in the relatively near future (say one year out). If you are working with a CPA, ask to be on his or her business e-mail list. Most will send out quarterly e-mails with tax changes and credits. Sometimes you will see random credits people aren’t aware of, like a credit to buy a vehicle or the ability to write off a capital asset in one year, for only that year. This is all information you want to know.
As of 2008, the corporate tax rate ranges from 15 percent to 39.6 percent, depending on structure and amount of revenue. (Small Business Taxes and Management, 2008) You will want to work with your tax accountant or advisor to see how to best structure your business to keep taxes low.
2. Dollars and Sense
Every dollar you spend is a dollar you cannot reinvest in your business, its infrastructure, its employees, or its growth. It’s also a dollar you don’t have to give yourself a raise! It’s easy to go to the local office supply store or shop online and order 100 pens and pads of paper although there are plenty in the supply closet. Watch even small expenses very closely because that end-of-the-month credit card bill can sneak up on you, particularly if you give your employees
their own cards and allow them to make purchases up to a certain limit without your approval. Authorized users in some cases account for 50 percent or more of spending in a business.
2.1. Watching Your Pennies and Tracking Your Expenditures
The amount of accounting required to truly watch every penny and categorical expense can feel daunting, and for good reason. There are tools, though, to help you. Two that I personally have used since their inception are QuickBooks, by Intuit, and NeatReceipts.
QuickBooks (quickbooks.intuit.com) helps you track your income by category, client, and type; expenses by category, client, and even employee; outstanding invoices, accounts payable, accounts receivable—you name it. Many mediumsized businesses don’t even feel the need to “scale up” when they grow because the software is very powerful and can handle quite a bit of growth. It has particular add-ins if you run a certain type of business that requires additional tools, like property management. Reports are run quickly and easily, and can be used to present to your team—to document or explain, for instance, why costs must be cut for the next period. You can also look at profit margins and profitability by client, by service, or by product, and so on. You can also run reports to show you which clients are delinquent and need to pay up.
NeatReceipts (www.neatreceipts.com) is a fairly new technology and business, but a great way to make tax time less of a nightmare. By scanning each receipt that comes in, you make audits less scary and daunting, and you can easily classify your expenditures and know what you’re spending on a daily, monthly, or yearly basis. After scanning the receipt, it keeps and stores a PDF copy of the receipt so that you can simply transfer the information to your accountant or onto your tax return at the end of the year.
2.2. Making Investments
If you want your business to grow, you will have to invest in it. From websites to new computers, everything you spend on your business should be a “value add”— that is, it should add to the overall well-being of the business. This includes money spent on consultants, legal or professional help, software, hardware, equipment, and even major expenditures like manufacturing equipment, if that is your business type.
Like everything else you do in business, you must know what type of expense your purchase falls under. There are general expenses, and then there are capital expenditures and then assets that must be depreciated over time. The IRS’s rules are best to follow. You have buckets like office supplies, cost of goods sold, insurance, office expenses, utilities, and so on. You can also write off business use of automobiles using one of two methods: a flat rate amount or a per-mile rate. Be sure to keep track of your mileage at the beginning and end of the year, and keep a driving log indicating where and how you used your car for business. If you keep a log or hang onto receipts and label them, you can have an accountant sort through it or you can get a copy of a Schedule C from the IRS and see how they categorize items into specifics. This often helps with planning.
2.3. Calculating Returns on Everything from Staples to Furniture
It seems silly to figure out what the net benefit is to buying staples, right? One rule of thumb is to agree to spend X dollars on office supplies—no more. The truth is that everything has to have a return. Some are harder to quantify—like pens and paper—but are necessities. These fall under office supplies on your tax return. You might not stress so much about the little things, but do watch your expenses.
Bigger items are another deal altogether. A personal example—when I moved into my new casita-based office, I had to buy all new furniture. I wanted to feel like I stepped into a professional office; I also wanted to spend a little bit of money. I had to find a nice balance between the two. If your business is more image-driven, consider that when making purchases. If image is irrelevant and you do all your work on the back end, consider how you feel about your business space and if you want to be there. Sometimes that affects the bottom line, too.
Will your office help retain top talent? As frustrating as it might be to always pay for the office snacks, it is okay to set a monthly limit and spend that much money if it helps morale. On the other hand, you could offer a place for people to store their own goodies and reinvest in your business.
To calculate a return on investment, use a simple formula like this:
A = cost of the item B = value of the item to your business
If you divide A by B and you get a low number, consider whether it’s worth the purchase.
Some purchases are not quantifiable, like those that improve morale or make people want to be at the office and—hopefully—be working while they are there. Be careful of employees who “hang out,” eating and drinking your office-supplied snacks and Red Bull while not doing productive work. This is purely a cost to you. I had a boss once who would let us hang in the office late if we could show that productivity resulted. Often he’d treat us to lunch if we were far ahead of deadlines. Those small gestures went a long way for the team members who realized that he had to pay for those things out of his own pocket; therefore, they meant a lot to the team.
Source: Babb Danielle (2009), The Accidental Startup: How to Realize Your True Potential by Becoming Your Own Boss. Alpha.