Manage episode 223188034 series 1409586
Elizabeth Hale, the author of Protect Your Profit—Five Accounting Mistakes and How to Avoid Them, is here to help you, because you could be failing to pay attention to the factors in your business that can spell the difference between profit and loss. In order to really understand where your money is going, you need to get a grip on your accounting.
In this episode, Elizabeth really breaks down what will help you avoid worst-case scenarios, not just getting your finances in order, but avoiding things like embezzlement, or getting into debt that can put you out of business. We also talk about how you can avoid paying more than what you owe on taxes and what some simple accounting practices can do to help you grow a healthy business that really drives.
A quick bio on Elizabeth, she is the founder of eeCPA, an accounting firm that serves over 300 clients. They’ve been in business since 2004. She’s worked with small to medium-sized businesses for more than 25 years and in this episode, she’s going to share all her wisdom that will help you protect your profit.
Get Elizabeth’s new book Protect Your Profit on Amazon.
Find out more at eeCPA.
Elizabeth Hale: My dad went bankrupt, and my parents quickly divorced after that. He lost the securities license. He was a professional trader and took some fairly large risks, not only with his own portfolio but with some of his client portfolios.
I grew up, basically my mom had to go on food stamps. There are three kids, I was the eldest. I was actually relieved when my parents got divorced when I was six. Typically, kids are distraught, but they so did not get along that it felt like a relief when they weren’t in combat. Not physically in combat, but emotional or verbal combat.
That was the beginning of the trouble with money.
My dad really struggled with ever being able to keep money. He’s been an amazing father, and I totally love him. I’ve been close with him my whole life, but he was borrowing money from me at age 13 to buy a new TV because we didn’t have one. I’ve been working since I was eight years old, and I clearly thought early on what it’s like. It’s terrifying when you don’t have money.
I mean, I grew up very poor, but I was totally happy. Actually, working with some of the clients that I do today that have tons and tons of money. I almost think sometimes it’s better not to have any at all. I was always worried and I always was independent and wanted to make sure that I can survive anything.
I was very interested in accounting because it was very logical, and I was able to help other people that has struggles with keeping track of their money.
I’ve met these clients 10 years ago and they were two years behind on tax filing. Their business was just breaking even. In June of this year, we’ve been working with them for the last 10 years. We’ve helped them with all of their businesses. They have a variety of them.
They’re amazing entrepreneurs and they just were able to sell their business for 425 million.
Charlie Hoehn: I can only imagine how, even though it was really challenging, back then it shaped your greatest strength today.
Elizabeth Hale: Yes. Yes. That’s why I love it. My mother actually who was the financially responsible one in the relationship, actually she and I had constant conflict when I was a child. She was like, “Oh, you love money.”
It’s not that I loved money. I mean, on her deathbed, she acknowledged that she was sorry that she said that. It’s not that I loved money. It’s just, I saw that money represented to me, freedom, which is very important to me and always has been since I was young. It meant responsibility and being able to take care of myself and take care of my family, which is very important to me.
Not Just the Government
Charlie Hoehn: You have as the first chapter, Blaming Uncle Sam. Is this a really common one that we’re saying the government is screwing us?
Elizabeth Hale: I’ve spent many years in the field. Just there are options out there for business owners to save money. There are plenty of provisions in the tax code to take advantage of RND credits…We just had a huge—with the law change under Trump last year, the tax cuts and Jobs Act, there was a huge amount of tax law changes.
The calculations are complex, and most people don’t understand it and aren’t too excited about it. They get more interested if they have to pay a lot of money. Since business owners generally may be employees of the businesses they own. Typically they’re in it, involved with some pass-through entity, like a partnership, or an S Corp. They’re receiving a lot of this income and not always having taxes withheld.
They’re shocked usually at tax time when they find out they have to write a huge check.
What I work with them on is taking advantage and planning ahead and taking advantage of some of the options before the year closes, on what they can do to mitigate that tax bill and keep the cash, so that they can continue to grow their business. Overpaying the tax is blaming Uncle Sam. Getting fined and not planning ahead can also be on the part of the business owner.
Most often, we look at probably 10 tax returns from prospects a week at my firm. Most often, I see that just their previous tax preparer has not taken advantage of some of the deductions or benefits that they can have, or if they changed their structure they could mitigate their tax, but literally thousands of dollars.
Typically, I can usually look at a tax return and save at least $10,000.
Charlie Hoehn: Goodness. You say on average, what clientele are you typically dealing with? I mean, are these primarily business owners, or what?
Elizabeth Hale: Business owners. Yeah. Primarily only focus on working with business owners.
Charlie Hoehn: Do you have a rough ballpark range of revenue per year for your clientele?
Elizabeth Hale: I mean, some of our clients make as little as $200,000 a year, but I would say the majority make a million or more a year. Then we even have clients that are a $100 million or more a year.
Charlie Hoehn: That’s amazing that you’re able to get your clients out of those kinds of results, and that’s the exact type of person a business owner wants to work with.
Elizabeth Hale: Yeah. I mean, $10,000 is all relative, but I would say we’ve saved considerably more. We have a ticker on our firm website that keeps track. We just started keeping track and about two years ago, and we’re over $20 million today.
Charlie Hoehn: What are people screwing up when it comes to making a profit?
Elizabeth Hale: Well, when it comes to making a profit, a lot of times they get really jazzed up about driving sales. Most entrepreneurs are pretty focused on the top-line revenue. The problem is, oftentimes they don’t have a system in place to track what is that dollar of revenue costing me.
What is the cost associated with bringing it in that dollar of revenue, and what are my overhead costs? What are my fixed costs of doing business?
I have to have an office, or I have to have a manufacturing plan, or I need to have five trucks on the road to have five routes. Just analyzing the whole picture and looking at how to identify okay, that if I bring in that dollar of revenue, it’s costing me 95 cents.
If we take an evaluation like that of a client, it happens during high-growth periods typically that they start out and they might be keeping really careful track, but then as their business grows, their attention gets diverted, because they have to train more people, or they’re doing more deals, or they have more things going on and they lose pulse on, its expanding and growing and everything’s great, a week in sales, but their cost structure has gone up. Identifying those costs and maybe reining some of them in.
Do they have a ton of advertising marketing that’s driving sales sellers, but maybe one of those isn’t working. Are billboards effective, ineffective strategy, is it costing them too much, or can they spend that money on digital advertising and get a better bang for their buck? Just taking the time to analyze what the return is on each investment that they’re making. Sales and marketing, costs, or direct investment in driving that top-line sales revenue, but making sure that you’re making a profit.
Or if it’s a new startup and a technology area, you might be running at a loss for a year or two while your product is fully developed and you work out all the bugs and you scale up the advertising.
You need to have a good story to be able to project profitability, so that you can get money that you need, whether from investments—even if you get your employees to volunteer to take lower salaries, because they’re so excited about the effort that you’re actually going to be driving to profitability.
There’s a lot of strategies around that and it really depends on the business, the business owner, the line of business and what strategy might work best to get that level of profitability where eventually, you’re either going to get some, or you’re going to be able to maintain this and maintain the lifestyle, or have the lifestyle that you dream of having, since you’re working your butt out there every day, making sure everybody else gets paid.
The Concept of Good Debt
Charlie Hoehn: You recommend staying out of debt. Do you do you make any exceptions?
Elizabeth Hale: Well, strategic debt is great. If you’re going to finance something, for example, I bought a new building last year. I am not a debt person. I don’t like to have debt, but I was out of office space and leasing space to go into tenant improvements to make my office, again, at a place that I didn’t own really didn’t make a lot of sense. I bought a building, and I did an SB loan on the building, so 90% loan to value is what I was able to get. They did a huge renovation project with the loan funds.
I maxed out my line of credit, so I had the most that I’ve ever had in my entire life. I had a strategy for that. I knew it was a one-time thing, and it was an investment. It’s a great location, the building, I’m able to monetize it by running out some of the space to other tenants. I made a co-working space in here, and now a year into it and I still have the huge mortgage loan, but I have a lot of equity.
I believe the property value has gone up, and I paid off the line of credit with current earnings.
I was able to do that strategically with a plan in place.
Strategic debt is awesome. It’s just sometimes, business owners get carried away and get super excited. They’re like, “Well, if I can just borrow this.”
I see people get in over their heads because something else is going wrong in their business. They’re not quite sure what it is. I had a plastic surgeon—you would think plastic surgeon is very popular on the cover of all kinds of magazines here.
That way, he was way over spending on all kinds of things, both within and without his business, and he got totally upside down. He was actually doing credit card financing. When you do merchant processing financing, you’re paying up to 20%, 30% and you have to make daily loan payments. The merchant actually withholds some of the sales that you’re processing through on your credit cards.
Charlie Hoehn: Could you break that down into even simpler language?
Elizabeth Hale: Okay, sure. If you are a business owner and you just got MasterCard and Visa, you can make a deal with your credit card processor, whether it be PayPal or whoever it is. They will loan you funds against your future deposits. They know based on your history that you’re going to run an average of let’s say a $1,000 of credit card sales a day. They’ll lend you $50,000, but you have to pay it back at $250 a day. They’ll withhold that 250.
The problem is that the cost of those loan funds is extremely high. If you take $50,000 at 30%, you’re paying an extra $15,000 to get those funds today. It can really accelerate rapidly, because to that level of needing money, you can get over leveraged. Over leveraged is you have way more debt than you have assets, cash or equity in your business.
When you get to that point, you’re left with very few options to borrow.
A traditional bank will not give you a loan, or a line of credit. You’re usually in tax debt and haven’t paid the government either. You can get to a point where you can really lose your business. I’ve seen quite a few. A lot of it is because of just mismanagement and also overspending. Go big or go home.
It’s overspending. A lot of construction contractors here in Phoenix, Arizona during the downturn, as well as the other areas of the country. Phoenix is one of the hardest hit for the real estate downturn.
A lot of the contractors and real estate developers were really spending money. They had a ton of money, so they would to save on tax, they were buying all kinds of razors and toys. Razors are like, you can drive them out in the desert. All these sport utility-type of vehicles. They were buying all the stuff and writing it off, because they were saying that they used it for the business, which they probably did, but they were buying it all with financed debt.
The problem is if the market falls and you’re over leveraged, you can’t control the market cycle. Then you can’t make the payments, because you don’t have the revenue coming in anymore. You lose all that stuff. Yeah.
You just have to be careful. It’s good to use debt in certain circumstances, but definitely I’m not against using debt, but getting over leverage to the point where you totally strapped and you just have no options and you have no freedom.
Charlie Hoehn: What are the mistakes that they need to avoid when it comes to buying or selling?
Elizabeth Hale: The structuring of the deal can be really important from a cash flow standpoint. I had a client that actually bought a business, acquired a business, that they had worked in. It was buying and selling human tissue, believe it or not. Taking cadavers, they would take the human tissue, keep it frozen, label it, serialize it, and resell it to hospitals and things like that, that could do knee replacements and that kind of thing.
It was a very lucrative business. When they acquired it, they acquired goodwill.
The seller sold them the whole thing as a goodwill business and structured it that way. The problem is they had to pay to the seller $250,000 upfront, and they could only write off $30,000 that year. Even though they came out of pocket with $250,000 in cash, because it was all considered goodwill, which you can advertise for—or you couldn’t depreciate for tax purposes. You had to use a 15-year timeline.
That’s cash out today at the $250,000, but only being able to deduct $30,000 in that and having to deduct the remainder of it over the next 15 years. They were then having to pay tax on profits that really didn’t have the cash for, because they spent all that cash on acquiring the business.
Just structuring, that’s a negotiation point between buyer and seller. How you’re in an asset sale going to acquire a business and how those assets, there are plenty of ways to do it, where the seller would have gotten some great preferential treatment on the sale and been able to recognize long-term capital gain, which is the goal of the seller.
The buyer could recognize the sales price by assigning it to assets, or some other items that they could have expensed immediately. That would have given them ample ability to reduce their tax bill to preserve the amount of cash that they had available.
Even when you’re acquiring businesses, and I’m just talking about the financial aspects or the tax aspects of it, you need to be careful not just on all the deal points and negotiating the deal, but also seeing how it’s going to pan out at the end of the day for you and what that means for you when you’re putting that money out upfront.
Working with Elizabeth Hale
Charlie Hoehn: What is the transformation that they can ultimately achieve? What have you seen in your clients?
Elizabeth Hale: Probably my biggest success story is a client that I started working with in 2008. I was originally engaged by them, because their CPA disappeared and they had two years of tax filings that hadn’t been made as a result.
Charlie Hoehn: What happens when that happens by the way? I mean, I assume everybody panics.
Elizabeth Hale: Yeah. Pure panic.
Charlie Hoehn: What are the potential repercussions?
Elizabeth Hale: Well luckily, they had refunds coming. They had actually overpaid in their taxes. When they filed, there was no penalty. If you discover that you haven’t paid taxes, or discover you haven’t filed returns for two years and there are significant taxes owed, then the penalties can be up to 25%, almost 50% of the tax due over time.
You have to be very, very careful, because they add the late file penalty, the late payment penalty, those add up, and then if you have business entities, there’s even flat fees depending on how many partners, or shareholders there are.
It can be up to $200 a month per partner, or shareholder for any late filings.
Charlie Hoehn: Yeah. That number can get really high over time.
Elizabeth Hale: Yeah. You got five partners, you can file your partnership return for a year. All of a sudden you owe 12 grand just for the one year file.
Creating Better Practices
Charlie Hoehn: Let’s get into some of the accounting practices. Maybe you could tell a story about a client you helped using some of these practices.
Elizabeth Hale: One key practice is making sure you know, just as a business owner, there’s so much you have to know, right? Even just logging into your business bank accounts every day. Looking at the credit card bills, spending 10 to 15 minutes a week, doesn’t matter who does your accounting. Having regular meetings with a person doing your accounting if you’re outsourcing that.
Keeping track of your money—just best practices, as far as making sure that you’re looking at canceled checks, or bank statement copies, with is cancelled checks. We have a client that actually has a very successful business here in Phoenix. I really connected with her right in the beginning.
It was such a heartbreaking story.
She started her business in her mother’s house and was selling nurses badges for 88 cents apiece and with delivery included back in the 80s. Just started out very little with nothing. Began and has built it up today to over a 10-million dollar a year business, employing 40 people and just doing a great job doing a lot for the community here.
What happened to her was she hired a bookkeeper who she thought was a great friend. She took her away on her honeymoon when she got married, all kinds of things. Well, this bookkeeper had started working for her and noticed right in the beginning that she was not a numbers person and didn’t pay any attention to bank statements, or look at any of the cancelled checks.
This woman that was working for her started, it was later determined through forensic accounting that she had started stealing 90 days into the job. She’s in jail now, but she stole over a million dollars over the years. I mean, luckily she’s still in business and her business is making a profit, but that stuff happens every day. There’s a recent study, and it’s 67% of small businesses report some form of fraud or embezzlement. Embezzlement is super common.
Automatically High Risk
Charlie Hoehn: I had no idea it was two out of three businesses deal with something like that. How do you mitigate against that risk?
Elizabeth Hale: I think you still have to check. You have to take that 10 minutes a week out of your schedule just to keep a pulse on that. You have to log in, give it just at least look. Having a good accounting system again, would bring out that. Just the other day, we used a tool called Receipt Bank.
We collect receipts for every transaction, and it’s a real quick app. You take a picture of a receipt, or drag and drop it, or you forward an email to it, and it basically keeps track of all your receipts.
Then you just code it and push it right into the accounting system. To be quite honest, the other day even at our firm, we’ve been using that from last year. Before that, the shoemaker doesn’t make his own shoes, or his kids are walking around with no shoes. I don’t spend a whole lot of time looking at our firm books, because I’m busy running our firm and dealing with clients and focus on everyone else’s problems and ideas.
But happened to notice, because we have this receipt bank system that an extra charge came through and it was from a common vendor, and honestly, if we weren’t using this receipt bank system, I’m sure I would have picked it up eventually, but I was able to pick it up in one day, because I noticed, oh, we cater lunch in the firm every week for our team, they provide weekly catering bills, and we didn’t have an invoice for this.
It caught my eye, and I looked back. We called them and determined that normally, our lunch is about a $150, and they had charged us $220 dollars. Come to find out it was for another customer.
They fully refunded that money to us, and I believe it was an innocent mistake on their part. I mean, it’s only $220. It’s not the end of the world, but those $220 things add up.
That’s the problem—once you find a problem, usually it’s not the only time that problem has occurred.
There might be something similar that comes up. Having a good system in place to prevent as much as you can, and also just background-checking people.
I had another client that really relied on their controller, their in-firm controller. They were a landscaping company that did tree work, a couple/few million dollars a year in revenue. So they found out that this controller, the controller would talk to them.
I just gave it talk the other day on this, but when someone talks to you at a level that you can’t understand because they are arrogant, or throw out a bunch of in terms of code sections, or generally accounting talk—pronouncements or some old crazy stuff like that that no one understands—a lot of times that is an indicator.
If you feel intimidated by the person taking care of your money, then that is cause for alarm, because a lot of times those people speak to you so you deliberately do not understand and make it seem very complex. Then as a result, I have been asking a lot of questions of this controller, and he had so many excuses. He was very aggressive. In fact, I couldn’t even have anyone on my team talk to him after a while, because he was nasty on the telephone and just inappropriate and in a professional environment.
I called and talked to him, then I talked to the business owner, and the business owner still really liked him. I said, “I think something’s off though. He’s not really collaborative and it seems like there’s something off.”
Well, something else came up after that.
They weren’t really convinced by observation alone, but something else came up a month or two later that seemed odd, and I think combined with all these other inputs that the business owner had received, he put a little more of his attention on some area and discovered thousands of dollars that was just missing that was written to vendors that they didn’t use.
They didn’t use those vendors, but this person had check-writing authority on their account, and it was later discovered that he had done this to several businesses.
He had come from Texas, where he had a long rap sheet. They never ran a background check. Running background checks and taking of some of these preventative measures, even if you don’t understand the money piece of a business, just taking these measures to ensure or to give you a little bit better edge, I’m not having ambivalence, for example.
Then just watching your expenses and the trends. A lot of times business owners will push off the accounting piece like, “Oh, my God. We don’t have to care about that or whatever, but I would. “Oh my God. We got to focus on these customers that are screaming right now and oh, my God. Our sales are down from last week.”
It really is easy to push it to the side, as long as you have enough money for daily operations and you can’t make payroll.
I guess it comes to the forefront usually when you can’t make payroll and you find out your line of credit is maxed out, but you haven’t received any financial reports. The line of credit, a lot of these banks you don’t see the line of credit when you log into your bank account. Sometimes that’s a real high risk area, where if you’re not paying attention to the statement for that, you might be surprised that you’ve been borrowing from that the whole time as you have other people in charge of your account management.
Now all the sudden, you’re strapped, now it’s a crisis, it’s an emergency.
You’ve got to come up with money, and you had no idea. You’re blindsided by this information. I would say that’s another case to avoid that thing by having regular reports, at least issued to you, even if you only look at them for five minutes. Getting a regular consistent set of financial statements that show you your FD, or cash, your debt, knowing where you stand and just facing that where you are at this moment in time.
Charlie Hoehn: At the very least, a lot of these accounting softwares can automatically deliver you the reports so you don’t have to generate them, you don’t have to seek them out. You can get on an automated schedule, right?
Elizabeth Hale: Right. You can get them delivered right to your email inbox. Just take a look at those. Every business owner looks at his sales every day. Everyone knows how to log in from their iPhone or Samsung or Android.
They check that daily, what are their sales. Because the problem is to stay in business, you actually need to make sure you’re making a profit, not just sales.
Connect with Elizabeth Hale
Charlie Hoehn: Elizabeth, if somebody’s listening to this and they want to get in touch with you, or they want to follow you or whatever, what’s the best way for them to do that?
Elizabeth Hale: My e-mail is firstname.lastname@example.org.
Charlie Hoehn: Can you give our listeners a challenge, the business owners listening to this, what is the one thing they can do this week that will have a positive impact, that’s from your book? You have about 15 seconds or so, go.
Elizabeth Hale: Check your financial statements, read them, look at them, make sure you have a balance sheet and a profit and loss statement to look at.
Get Elizabeth’s new book Protect Your Profit on Amazon.
Find out more at eeCPA.
Listen to more authors on protecting your business and wealth:
- 5 Steps for Selecting the Best Financial Advisor: Jonathan Dash and Jack Waymire
- Beyond a Million: Jim Dew
243 episodes available. A new episode about every 2 days averaging 37 mins duration .