5 Tax Tips For Small Business Owners

When it comes to taxes, very few people are excited about paying them. From the rates, to the paperwork to the time and hassle, it is simply not something most of us like to deal with. For the small business owner the issues are multiplied. In addition to personal income tax, a business owner is faced with filing and paying income taxes, sales taxes, and payroll taxes for the business.

Unfortunately, failure to properly manage taxes has been a downfall for too many small business owners. From failing to file all necessary returns, failure to file returns properly, and failure to make prompt payments, many business owners find themselves in positions which put not only their business’s financial health, but also their personal financial health at risk. And while we all know taxes are unavoidable, too many business owners procrastinate and delay addressing problems while still manageable. They wait too long and the situation becomes dire.

But there are many things business owners can do to make it easier to manage their taxes.

1)      Utilize a payroll service

Most small business owners didn’t go in to business hoping for an opportunity to do accounting, let alone payroll accounting. Additionally, withholding taxes is one area in which the law will allow the Internal Revenue Service to pierce the corporate veil and pursue the business owner for any unpaid liabilities. A qualified payroll service will not only free up the business owner to spend time on their core business, they will ensure that returns are filed promptly and payments made when due. Because the payroll service will take the necessary taxes when taking the funds to pay employees, the business owner knows the funds have been set aside without having to do so themselves. In the event of an error, a qualified payroll service is responsible for correcting the issues with the agency involved.

2)      Escrow your tax payments

One of the simplest things a business can do to ensure tax compliance is to escrow funds for payment. By simply setting up bank accounts outside the main operating accounts to hold the funds, a disciplined business owner can avoid coming up short when it is time to make a deposit. One strategy is to escrow payroll taxes as employees are paid and to escrow sales and liquor taxes on a weekly basis. By segregating the funds a business owner can better manage their day to day cash flow while also preparing for future obligations.

3)      File returns promptly

Many times when a business owner is concerned they will not be able to pay taxes due they simply fail to file the return. This only makes a bad situation worse. By failing to file not only will the unpaid taxes accrue interest, but also penalties will be added to the balance. The amount that is eventually paid will be much larger, and this larger balance can increase the priority level at the agency.

4)      Don’t ignore tax notices

When your business receives a notice from any taxing agency it is important to deal with the situation promptly. A business owner who is working with the agency to resolve an issue is more likely to reach an amicable solution than one who fails to open a dialog. By nipping the problem in the bud it may be possible to avoid liens and levies, as well as to implement a payment plan that is achievable.  On the contrary, ignoring the notices may increase the likelihood of more aggressive actions and necessitate a plan with large, hard to make payments.

5)      Get help

Regardless of the situation, when the problems escalate it is best to have someone with experience to help you work through them. Ideally, it is best to use an individual or firm that specializes in resolving tax issues. While it may be tempting to go it alone or stick with your accountant, there is value in working with someone who deals with the agencies, the legal issues, and the necessary documentation on a daily basis. Tax resolution is a very specialized area, and just as one wouldn’t want a General Practitioner to perform open heart surgery, it may be best to utilize an expert to help you evaluate the issues and come to a resolution.

Taxes can be one of the least enjoyable aspects of being a small business owner, but managing taxes properly is a key to running a successful and healthy business. Whether you are paying sales and use tax, liquor tax, withholding taxes, or income taxes, failure to manage the process and payments can ruin any small business, and often results in serious consequences for the business owner. Utilizing these 5 tactics can assist you in keeping your business healthy, and reducing your tax related stress.

But My Agent is a Good Customer

We hear this statement from restaurateurs every day. While patronizing our clients is very important, we do that not because they are clients, but because they provide an extraordinary dining experience.

For the most part, the restaurant industry has narrow margins (10% to 15% is average). Below are the primary costs and optimal percentage of total sales that most profitable restaurants strive to maintain:

• Prime Costs          (Food and Payroll) 60% to 65% of total sales
• Management Salaries         10% or less of total sales
• Occupancy         10% or less (rent, CAM, Insurance, and taxes)

Let’s look at Occupancy costs since that includes the cost of insurance for the business. Those are the costs most business owners find the least “interesting,” however, a shift in just a few percentage points can quickly rock your profitability up or down.

Here is a real example of a recent situation we had in our agency. The owner of a fine dining restaurant in our city was contacted to discuss the insurance on his business. He said he would allow us to “bid” his insurance even though his current agent is a friend and a “good customer.” While meeting with him we did a risk assessment and gathered all of his insurance policies so that our team could review his current coverage. The following was the result:

• Double coverage that was costing him $3,500 per year
• Grossly under insured limits on Employment Liability protection
• Inaccurate sales figures
• Inadequate property protection
• No risk management training of his management team for Employment Liability
• No training of his management team for emergency situations
• No procedures in place for reporting and capturing incident reports for potential lawsuits
• Insurance cost savings of 17% or about $13,000 annually

Now my question to him is, “Did you hire the best insurance agent your money can buy?” If your typical profit margin is 10% is your current agent spending more than $130,000 per year in your restaurant? Can you afford to keep your “friend” as your agent?

If you would like us to review your current insurance program to see if your “agent friend” is doing the best for you, please contact us at 214-216-0225 or email Mona Carpenter at mcarpenter@innovativenationalrisk.com

Daily Deals, Too Good To Be True?

Daily Deal sites offer merchants quick access to cash with the potential to attract new customers. On the surface the offer seems too good to turn down, as combining marketing with convenient working capital is an ideal situation for the typical small business. Unfortunately, many find that the end result is less than ideal.

A typical Daily Deal offer is fairly straight forward. A merchant agrees the site selling number of coupons which provide a deep discount, 50% or more, for goods and services. Usually the deal site will keep one half of the proceeds from the sales with the merchant receiving the other half.

Negative Profit Margin
As many businesses find it very difficult to absorb the costs of doing this type of promotion. If your product or service does not have a large profit margin, you can find that each of these transactions comes at a significant loss. If there are no additional sales made to the customer, it is hard to justify the deep discount, as the business is unable to recoup the loss from the deeply discounted coupon. The simplest solution to overcome these cash shortfalls is often engaging in another Daily Deal offering, continuing the cycle.

Low Customer Retention
The goal of doing a daily deal coupon is to influence first time customers to try the business’ product or service. Many businesses also do not see the repeat business they anticipated, as a large portion of the Daily Deal customer base simply moves from discount to discount, rarely returning without another coupon. Many small businesses note there is an uptick in business when the coupon is first issued and another when the coupon nears expiration. Otherwise, volume remains consistent.

Loss of Value
Existing customers are put off to find that other customers are paying significantly less, and are less likely to continue to feel paying the established price is a good value. While Daily Deal site users tend to drive activity and increase discussion of a business, a recent study found that they are more likely to leave a public review, and on average, will rate a business 10% lower than a traditional customer. As a result, many businesses see their rating scores on sites like Yelp! drop noticeably.

Decrease Product or Service Quality
Businesses have found that more coupons are sold than they can realistically manage. Unless the deal is properly structured, businesses have often found that the number of sales exceeds their capacity. In one instance a flight school had to end sales on a deal early because 2,600 lessons had been sold and their capacity for all lessons over the prescribed time frame was only 2,000. Another merchant found themselves forced to bake 102,000 cupcakes, at a loss of $3 per dozen, as a result of a “successful” offering.

Employee Dissatisfaction
In service industries, there can also be increase in job dissatisfaction among employees, particularly those whose income relies on tips. Customers will frequently base tips not on what the cost of the food would have been without the discount, but on what they actually paid. In many cases, customers used only the value of the coupon with, ordering no extra additions, and left no tips. If they did, they were well below what is appropriate for the service provided. In essence, employees find themselves also forced to offer their labor at a discount.

The important thing for merchants to consider before accepting an offer from a Daily Deal site is to view the whole picture and determine if it fits with the image, business model, and financial reality of the business. If the sales are going to come at a loss, the question becomes, can the business absorb that loss? Do the benefits outweigh the cost? While the information and analysis provided by the site may be impressive, a merchant is strongly advised to do their own research, in regards particularly to how similar businesses have fared. While there is a place for these kinds of offerings, they are not something to be taken lightly.

Food Borne Illness

Market fruits and vegetablesYou buy only the top quality produce, proteins, and dairy from the best suppliers. Your restaurant has had rave reviews from your local press and even Zagat’s is saying very good things about you, your chef, and level of service. Everything is going beautifully and then the worst case scenario happens. You get a call from three customers who dined at your restaurant 14 to 25 days ago. All were hospitalized after eating at your establishment and the doctors tell them they have ingested a dairy product that contained a strain of listeria monocytogenes. They believe it came from the lasagna they ate at your restaurant during their last visit. Their doctors said the CDC (Center for Disease Control) has reported that there has been a recall of ricotta salata cheese from a specific manufacture that is known to supply your restaurant. What do you do now?

Does your business have procedures set in place to manage this PR nightmare? Do your employees understand what they should and shouldn’t say to the press and customers if there should be more calls with additional reports? And furthermore, financially what should you do? How should you communicate with your local and state health departments?

Typically Commercial Property and Casualty insurance policies do not offer business interruption coverage for food borne illness outbreaks. These policies are designed to respond to events involving physical damage and claims for medical injury and lawsuits associated with physical and emotional injuries. They may offer some coverage in the event a customer is hospitalized, however they are not designed to cover expenses that are going to continue regardless of whether the restaurant is open or closed.

The impact can be devastating to your revenue while you work through the press and government inquiries and requirements. Do you have the capital in reserves to enable your business to keep key employees and cover ongoing expensed. Below is an example of a typical financial impact of the effects of an outbreak:

Chart of Financial Impact of a Food Borne Illness Outbreak

Chart of Expenses When Revenues Drop

If you want to know whether or not you are prepared for a worst case scenario situation, please contact our office. We will be happy to audit your Business Interruption and General Liability policies to give you piece of mind should a food borne illness Outbreak should hit your business.

Please contact us at 214-216-0225 or email Mona Carpenter at mcarpenter@innovativenationalrisk.com if you have any questions.

DON’T GIVE UP EQUITY!

In these crazy, unpredictable times—when playing the stock market is like riding a roller coaster blindfolded – the lending market is tough, especially for restaurants and hospitality.  This in mind, how can businesses find short-term money without giving up equity?  CapRock Services’ Growth Capital program allows growth without giving up equity or putting up collateral.  By factoring future credit card sales, CapRock operates much faster than banks can, and doesn’t have a lengthy or bureaucratic approval process.   With funding as quickly as three to five days, we are the fastest in the industry.   Whether the economy is up or down, we are in the business of creating jobs, helping companies thrive and maintaining the entrepreneurial spirit.

Planning a New Restaurant?

They say success is 90% planning and 10% execution – opening a new restaurant is no exception. As you begin planning for your next restaurant try this approach:

Demand:
Discovering whether or not there is a demand for your concept in your market is the first step in deciding if the concept will survive. Do your market research to determine if your idea has merit. Ask yourself if there is already a successful brand delivering your idea? If not, what neighborhood in your market has the demand for your offering?

Outlook:
Once you’ve determined there is a demand in the market for your concept, develop a 5-year financial proforma to determine if your concept can financially succeed through the first 5 years. It’s known that the mark of a successful restaurant is one that survives beyond 5-years, so plan intelligently. Use total covers, turns per meal period and per person averages to calculate projected daily, weekly and monthly sales. Use these figures to reach your projected annual sales.

Location:
It’s now time to scout potential restaurant locations. Find neighborhood or mixed use developments in your market that will foster the traffic you need to hit the financial projections outlined for your business. The ability to draw your desired covers per meal period is a key financial indicator (KPI) to your success. Don’t pick a location that can’t produce the needed traffic.

Lease:
Once you’ve selected your location you will have to negotiate your lease. Don’t settle. Never settle! That’s a non-negotiable. Your monthly rent is a “make it or break it” financial fact. When negotiating, regardless of the tenant assistance or rent abatement offered, don’t fall into the trap of a base rent that exceeds 8% of your total sales. 6% is the target, but 8% is survivable. The triple-net rates will push it closer to 10% of total sales. 10% is the maximum. Don’t exceed that amount.

Accountability:
Next you must define your company’s ownership structure. Seek the aid of a professional tax attorney to help you structure your restaurant’s entity in the way that best fits the desires and needs of the investors and members of the company. It’s important in the operational agreement to outline roles and responsibilities, so that no one is confused as to who will be performing which role in the business, and what they will be held accountable for.

Reaction:
You’ve now thought through just about all the preparations for your next restaurant opening. Now it’s time to take a step back. Share the concept, the financials & the location with your inner circle(s) or confidants. See what their thoughts and opinions are, and where you may have consumed too much of your own Kool-Aid. Let the advice of those you trust help you determine if this is truly a concept and location worth pursuing.

Start-up:
If you’ve passed the sniff test with your closest advisors, then it’s time to talk start-up costs. How much will it truly cost you to get the restaurant off the ground? That’s the $100,000 (or more) question. For construction costs on a 1st generation location, try not to exceed $100/sqft. For a 2nd generation location, try not to exceed $60/sqft. For Furniture, Fixtures & Equipment (FF&E), it’s important to identify what new items you will actually need and what you can get used. These dollars will be your “make it or break it” dollars.

Once you’ve completed this exercise, and if all of the D.O.L.L.A.R.S. makes sense, then go ahead and generate a business plan. Break a leg!

If you would like more information on Restaurant Consulting Services provided by Caprock, please feel free to email Zach Hopkins at zhopkins@caprockservices.com.