Can Your Business Weather a 12.5% Cut in Profits?

By: Sherri Daymon, Washington Small Business Development Center

Does your business employ minimum wage employees? If so, are you aware that effective January 1st, 2020, the minimum wage in Washington State is increasing 12.5% (from $12.00 to $13.50 an hour)? Holy schmoly, that’s a HUGE increase in costs (i.e. a GIANT dip in your company’s profits). Your business advisor at the SBDC is here to help you plan for your particular situation, but below are some general strategies to make this cost increase a little less painful.

Increase Prices

When deciding whether or not to increase prices, you need to ask yourself, “Will our customers pay a higher price? Is our product worth this much more? Will our sales volume drop with a price increase?”

Sell More!

Are you sitting on a lot of inventory? Are there frequently a lot of empty seats at your restaurant? Are your landscaping tools or machinery often idle? If so, these are sure signs that you could use some marketing and sales assistance to increase the attractiveness of your current product or service. The SBDC can help you identify your target audience and tailor your marketing message to better reach potential customers.

Reduce Fixed Costs

Fixed costs are your monthly expenses, regardless of sales volume (examples include things such as rent, insurance, and debt repayment). Whereas increasing your prices can be done rather quickly, reducing your fixed costs can take some time. You may need to find another location, negotiate with your landlord for reduced rent, or find a symbiotic business to share your space. You may need to shop around for a more cost effective insurance policy. You may need to refinance or restructure your debt. Essentially, now is the time to go through every lineon your Profit & Loss financial statement and ask yourself the hard question, “How can I reduce (or even eliminate) this ‘fixed’ expense?”

Reduce Variable Costs

Your variable costs are the expenses directly related to your sales and/or production volume and ideally appear on your Profit & Loss financial statement as COGS or Cost of Goods Sold. Variable costs include items purchased with the intent to resell (in the case of retail) or ingredients that go into your dishes (for a restaurant example). Finding suppliers with lower costs and reducing waste are just two ways to reduce variable costs.

Examine Hours of Operation

Hourly labor can be tricky. On one hand, if business is slow, you can send an employee (or several) home to reduce costs (suggesting that labor is a variable cost). On the other hand, if you have set hours of operation, a component of your labor is fixed. Thus, it’s worth a serious examination of your daily and hourly sales to identify if you can and should reduce hours (or even full days) of operation to save on hourly labor expenses.

I worked through this analysis with one of my clients, who realized that he was consistently spending more in labor than he was generating in revenue the first and last hour his shop was open. By shaving 14 hours off his weekly hours of operation, he increased his annual profitably by over $17,000 (since a minimum of two employees are required in his shop at all times).

Reduce Labor Hours

If you don’t have daily and hourly sales data available to make the strategic decision about reducing hours of operation, but you want/need your total minimum wage labor costs to remain at the current dollar level (despite the $1.50 increase in the hourly minimum wage), here’s the formula to help determine how many hours to reduce, come January 1, 2020: Current minimum wage labor hours x $1.50 / $13.50. For example, if you currently have one minimum wage employee working 40 hours per week, you’ll need to reduce the hours worked per week to 35.5 hours.

Consider Cutting your Losses

If your business is struggling now and you rely on minimum wage employees and the suggestions above seem unfathomable to help weather a 12.5% cost increase, you might consider closing your doors. Regrettably, it’s not uncommon for business owners to pour their heart and soul into an enterprise and exhaust their personal savings trying to keep a business going. If you are currently paying employees minimum wage and forfeiting paying yourself and exhausted trying to turn your business around, I encourage you to be honest and brave in knowing it’s only going to get more challenging in 2020. Treat yourself with kindness and consider cutting your losses.

Remember, your SBDC business advisor is here to help you grow (or at least maintain!) your level of profitability. Contact us today so we strategize a combination of tactics to weather the imminent spike in the minimum wage.

You can meet your local Washington SBDC advisor at the Resource Center at Biz Fair on Saturday, Sept. 21.

This article reposted with the permission of WWU and Washington SBDC, see the original post here.

5 Tips to Ensure Your Business Gets Paid

 

By: The Export-Import Bank of the United States

According to a U.S. Bank study, “roughly 82 percent of small businesses actually fail due to inefficient management of cash flow.”  One of the catalysts for inefficient cash flow is outstanding invoices, which continues to be a major pain point for small businesses that try to remain financially healthy. Costs associated with late payments—such as interest costs or legal fees—must be avoided, and when domestic business turns into foreign business, collecting payment can be much harder, so we’ve identified some tips below to ensure your business gets paid going forward.

1. Develop a Systematic Payment process

It’s critical to set up an easy-to-use payment process system to allow your customers to receive automatic notifications, emails and alerts. For example, if a due date is coming soon, an email can be sent out automatically to the buyer or an alert can be sent to the exporter notifying them to call the buyer. Calling has served as a great customer service technique because it allows the exporter to establish a more personal relationship with the buyer.

2. Incentivize customers

As you start to build a relationship with your foreign buyer, it may be wise to incentivize a customer to pay earlier than the due date by providing a small discount on the total invoice price.

 3. Communicate with your company

An exporter’s credit management process needs to be understood by everyone in the organization because there may be times when other internal departments play a part in collecting the payment. For example, an exporter’s sales group may communicate with the client more than the finance department, so being able to communicate, educate and enforce the payment process from all departments may help the exporter collect final payment.

 4. Document, document, document!

Make sure there is an efficient document management system when collecting invoices (especially the signed invoices) and other payment conditions/notices. Each invoice must clearly state terms and conditions, but before sending out an invoice, have a lawyer review the initial invoice template with stated terms and conditions (and if modifications need to be made, have it reviewed every time for consistency).

5. Research, research, research!

Finding out information about a foreign buyer may be difficult, therefore, leveraging your relationship with the U.S. Department of Commerce local offices or your local trade association may help when doing your research on whether or not the potential foreing buyer is in financial good standing. Local credit bureaus or local Chambers of Commerce groups may also be avialable to provide information on foreign buyers and they also may have industry background data on payment tendencies (such as average days sales outstanding). Finally, visiting the foreign buyer in their home country may give an exporter a better idea of whom they are doing business with and helps to establish better relations.

EXIM Bank offers export credit insurance, which helps the exporter mitigate the risk of foreign buyers not able to pay. With export credit insurance, EXIM Bank will cover up to 95 percent of the invoice and, in addition, will vet potential buyers to ensure they are in good financial standing. For more information on export credit insurance, click on this link to set up a free consultation with an EXIM Bank specialist in your local area!

Join John Brislin from the Seattle Regional EXIM Bank at the “How to find customers outside the U.S.” seminar to learn more about how to get paid at Biz Fair on September 30.

Small Business Bookkeeping

By: Jim McClaflin, Director at Washington State Society of Enrolled Agents (WSSEA)

What we see in the tax business are small businesses that are running a profitable business but their bookkeeping processes don’t hold up under an IRS audit. When you have difficulties proving your income and expenses to the IRS you then have to in essence recreate the business’ books properly. This is expensive for the owner(s) as this type of bookkeeping comes at a premium cost. Audits are normally done years after the tax return is filed and it is difficult to remember all the details of your business transactions, which could result in unallowed deductions or additions to business income.

Here are a couple of common stumbling areas for small business bookkeeping that we frequently see:

  • Combining personal and business accounts. There is nothing illegal about doing this, but it greatly complicates an audit and brings your personal accounts into the audit process. If you sell a personal car on Craigslist and that income goes into your personal account which is included in the audit, then you have to prove that the sale of your personal car was not business income. In an audit the IRS will go through every single deposit and you have to show that it was not business income. Personal expenses paid out of your business account can be identified as an owner’s draw, however an excessive amount of personal expenses will cause the auditor to question if some of the business expenses are in fact personal in nature and not deductible. For LLCs and Corporations this starts to breakdown the legal distinction between the person and the company.
  • Not keeping invoices or receipts. Several businesses use their credit card statements that show where the purchase was made as their method of proof of a business expense. This is not a fool proof plan. In a Washington State audit if you have made a purchase over the internet the credit card statement will not show if you paid sales tax. In an audit if you can’t prove via an invoice that you paid the sales tax, then you will be required to pay use tax (the same rate as sales tax). Since I run a tax business a purchase from Staples would logically be a business expense and accepted in an audit, however a purchase from Lowes would be questioned and I’d likely need to show an receipt proving that what I purchased was needed for the business. The best plan it to scan in all your receipts and write any notes about the purchase on the receipt or invoice.
  • Not using a professional bookkeeper.  Bookkeeping seems pretty easy to do, until it isn’t. A professional bookkeeper is a cost effective method of keeping your business records straight. At the very least have a professional set up your books and show you how to make the entries correctly. Going back to fix the books is incredibly frustrating and time consuming for a business owner. A professional will also bring other accounting/tax knowledge to your team besides just the books themselves.

Learn more at: http://wssea.org