Stupid Tax Mitchell Baldridge

In the previous episode of Mitchell's Mailbag, Mitchell and Scott set aside one email to dedicate an entire episode to -- this is that email! Listener Tim W. (T-dub for short) shares his new SEO marketing business he has rolled out, and some reservations he has about growing it beyond a certain point. While T-dub only wants to grow the business enough to cover his monthly nut and a little profit on top, Mitchell and Scott warn of the dangers of a business that just generates enough profit to get by, especially when times get tough and business slows down. They also take aim at his service offerings, and offer some suggestions to enhance the value proposition of his services to attract more valuable customers.
 
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Mitchell Baldridge
Twitter: @baldridgecpa
https://baldridgecpa.ck.page
https://baldridgefinancial.com
 
Scott Hambrick
Twitter: @hambrickscott
IG: @ogscotthambrick
https://onlinegreatbooks.com
https://scotthambrick.com

Mitchell Baldridge, CPA and Scott Hambrick reach into the Stupid Tax inbox and look at three questions submitted by listeners. One young business owner started a handyman business in the fall of 2023 and started off with a bang, making $14k in his first full month of operation. The following three months were lean, however, with revenue falling off signficantly and net operating losses. Mitchell and Scott offer some advice on ways to figure out what worked in the first month, and target his customer base with higher margin, more attractive service offerings.
 
Another listener has been sitting on a business idea for quite some time, and put together a pitch deck to lay out his plan: a community to help Christian fathers improve their relationship with their children. Mitchell and Scott point out the problems with a business like this, and more to the point, the problem with taking so long to try out a business idea and figure out if it works or not. 
 
Mitchell and Scott offer a third listener advice on building a solid marketing pipeline to reach customers by reducing the friction between customers receiving communication and buying services.
 
Want your question answered on a future podcast? Email Mitchell and Scott:
show@stupidtaxpod.com
 
Stupid Tax is now on Twitter/X! @stupidtaxpod
 
Mitchell Baldridge
Twitter: @baldridgecpa
https://baldridgecpa.ck.page
https://baldridgefinancial.com
 
Scott Hambrick
Twitter: @hambrickscott
IG: @ogscotthambrick
https://onlinegreatbooks.com
https://scotthambrick.com

Many business owners struggle with the idea of raising prices. Even in the current environment of high inflation and rapidly increasing costs for just about everything, many people struggle to raise prices. Sometimes it's in fear of losing good business, sometimes it's because raising prices feels like conflict and owners are conflict-avoidan. Other times it is because people have deep seated insecurities and low self-confidence, and feel like they simply aren't worth the extra fee. Regardless of the reason, raising prices regularly, to keep pace with the costs of running the business as well as remain competitive, is crucial to a business' long-term survival.
 
As Mitchell explains, the Pareto principle applies to customers and profits too: 80% of your profit comes from 20% of your customers. When you neglect to raise prices, the "bad" customers, that is, the low margin customers who cost a lot to service (in time, stress, and maybe even physical materials) and demand the lowest rates, become worse customers. Then the good customers -- your most profitable customers -- become bad customers, because you are continuing to charge them the same rates while your costs increase!
 
Raising prices regularly accomplishes several things for the business:
It allows the business to pass on increased operating costs (due to inflation), so your profit margins remain stable Some customers will stop buying your products and services due to the price increase. These were your least profitable ("bad") customers anyway, so they need to go to make room for you to service better customers. You end up doing less work and making the same amount of money when you let these people go. Good customers stay good (profitable) customers. They are the most likely to agree to the price increases anyway, because they are likely not buying based on price. You train customers to expect regular price increases by regularly increasing your prices!  
In a high inflationary environment, raising your prices in step with your costs may be the difference between making it or going bust. If you haven't raised your rates in a while, now is the time!
 
Ask Mitchell and Scott a question:
show@stupidtaxpod.com
 
Stupid Tax is now on Twitter/X! @stupidtaxpod
 
Mitchell Baldridge
Twitter: @baldridgecpa
https://baldridgecpa.ck.page
https://baldridgefinancial.com
 
Scott Hambrick
Twitter: @hambrickscott
IG: @ogscotthambrick
https://onlinegreatbooks.com
https://scotthambrick.com

Mitchell and Scott discuss a common problem that successful business owners encounter in their first coupe years of operation -- an income tax trap caused by rapid growth. Here's the scenario: our young business owner Connor leaves his low paying W-2 job to start a business, and it's a hit! He generates $150k in profit in his first year of operation. He leaves $50k in the business, and distributes $100k to himself. The newfound income is a windfall for his family. But... the looming tax bill is greater than you think, and requires careful planning to make sure you have enough cash to cover it.
 
As Mitchell explains, in order to satisfy IRS safe harbor requirements, Connor must pay 110% of his prior year's taxes during his first year of operation. This 110% amount, of course, will be based on the salary at his low paying W-2 job, let's say $40k. When April 15th arrives on the following year, however, his taxes due for the year will now be based on the $100k he distributed to himself from his new business. Connor has paid estimated taxes based on his $40k salary from the previous year, but will owe a far greater amount because his actual income was $100k. If he didn't save extra money to cover this tax bill, the shock on April 15th can make your stomach turn!
 
This scenario is the result of success, but it far too frequently becomes the business owner's undoing. Not only do you owe the larger amount on April 15th for the previous year's taxes, you also owe estimated tax for the first quarter of operation in the current year. Business owners who take home a large chunk of cash from the business and then spend it on lifestyle improvements can find themselves in a big hole, sometimes unable to get out. This scenario will play out again in the second year of operation, if the business experiences more growth.
 
Mitchell and Scott walk through the math of Connor's tax dilemma, and identify the cash flow pitfalls busines owners need to navigate in their first couple years of business. With good planning, a good CPA, and discipline withholding cash for future tax bills, you can make it through the minefield and come out the other side with a successful, highly valuable business.
 
Ask Mitchell and Scott a question:
show@stupidtaxpod.com
 
Stupid Tax is now on Twitter/X! @stupidtaxpod
 
Mitchell Baldridge
Twitter: @baldridgecpa
https://baldridgecpa.ck.page
https://baldridgefinancial.com
 
Scott Hambrick
Twitter: @hambrickscott
IG: @ogscotthambrick
https://onlinegreatbooks.com
https://scotthambrick.com

Bad businesses are a Ponzi scheme, says Mitchell, in which owners hang on for dear life until the next check clears, only to immediately be in the hole again when the next project -- and the costs associated with it -- comes in. In fact, most businesses start this way! The job of the owner is to turn that bad starting business into a good one, a business where there is plenty of cash flow to handle the costs associated with taking on new business, hiring new employees, and other working capital needs without needing the cash from the next project to cover them.
 
Lack of capital, or undercapitilization, is a problem for many starting businesses. It's important for the owner to understand his margins, and understand his costs, so that each time revenue comes in, he can set aside some of that to handle the next project. Over time this extra cash on hand builds up to a nice stash of working capital, funds available to handle the day to day costs of doing business and growing the organization to handle more business in the future. This takes discipline, and often personal sacrifice, to leave the money in the business.
 
But it's the only way to ensure the health of the business, and ultimately the health of the owner. Money stress, constant worry over whether you can meet payroll before the next hit of revenue comes in, etc. can rob you of your health and happiness over time. Don't be the guy running a Ponzi scheme on yourself!
 
Ask Mitchell and Scott a question:
show@stupidtaxpod.com
 
Stupid Tax is now on Twitter/X! @stupidtaxpod
 
Mitchell Baldridge
Twitter: @baldridgecpa
https://baldridgecpa.ck.page
https://baldridgefinancial.com
 
Scott Hambrick
Twitter: @hambrickscott
IG: @ogscotthambrick
https://onlinegreatbooks.com
https://scotthambrick.com

Hang around a group of small business owners -- folks who have been in the business for a long time -- and you'll find that nearly every one of them has had someone steal from them or commit fraud at one time or another. Small businesses are prime targets for fraud and theft, mainly because they tend to have weak or ineffective fraud controls, if they have any at all! It's imperative for any small business owner to understand common fraud risks and develop some basic processes to ensure they don't happen.
 
The most common reason people get away with unchecked fraud and theft is because the business owner is simply not paying attention to his accounting. The books aren't reconciled often enough, invoices are not reviewed regularly to ensure they match revenue, and too many people have deposit and check writing permissions for the business. As Scott says, the only other people that should have the ability to write checks for the business, besides you, the owner, are your wife (husband) or your mom.
 
Having a bookkeeper is great for getting insightful reporting on your business, ensuring your books are done on a regular basis, and your taxes are filed stress-free and on time. But you, the owner, still need to personally review the books on a weekly basis, check the invoices, and maintain a list or database of your contracts, so that you can catch any funny business before it snowballs into a very expensive problem for your business. There's no substitute for being in touch with your business' numbers, even if you have someone else doing the dirty work of categorizing transactions and reconciling bank accounts.
 
Ask Mitchell and Scott a question:
show@stupidtaxpod.com
 
Stupid Tax is now on Twitter/X! @stupidtaxpod
 
Mitchell Baldridge
Twitter: @baldridgecpa
https://baldridgecpa.ck.page
https://baldridgefinancial.com
 
Scott Hambrick
Twitter: @hambrickscott
IG: @ogscotthambrick
https://onlinegreatbooks.com
https://scotthambrick.com