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2012

QAneilgordon_Body.jpgby Sharon Kahn.

 

Figuring out how much to take in salary is never an easy equation for small business owners. How much is too much—or too little—and how that sum squares with the need to invest in the company are all issues to be considered. Neil R. Gordon, founder of N.R. Gordon & Co., has been providing small businesses with compensation and benefits expertise since 1995, and currently serves on the board of directors of two young technology companies. Recently, Gordon spoke with business writer Sharon Kahn about determining how much salary small business owners should take and why other forms of compensation can be just as valuable.

 

SK: Since the answer to the question ‘How much salary should small business owners take?’ undoubtedly depends on the profitability of the company, let's start with startups.

NG: When you don't have any sales, salaries don't matter. Even after you start raising investor money, you pay yourself as little as you need to survive, meaning to pay your rent and eat. Investors would say you're not going to need any money for entertainment because you're not going to have any time for entertainment. As you progress, salary might bump up a little higher, but cash is dear so salaries tend to be at the low end of the range. Of course equity rewards tend to be higher.

 

QAneilgordon_PQ.jpgSK: Do you create a contract to say you'll be paid more as the company grows?

NG: No founder can be expected to work for free indefinitely. It might be important to establish some salary guidelines, depending on who your investors are, and possibly an agreement among the founders. Don't pretend that extended family is always friendly.

 

SK: What about more established small businesses?

NG: If you don't have outside investors, you get to decide what to pay yourself. Whether you own a professional practice or a barber shop, most small businesses owners say, ‘I wish I could pay myself more, but this is what I earn after I pay the expenses.’ Sometimes you have a good week and can pay yourself more, sometimes you don't.

 

If the company is larger and more successful but you still control it, you weigh the need for capital for expansion versus how much to take out. If the company is more mature and generating way more than it needs to invest, you get into tax planning issues.

 

If you have investors, the strategy revolves around how to spread the wealth. Now it becomes a matter of matching market salaries. To arrive at a more objective vision of what's fair, you can work with consulting firms or industry trade groups, which often track the average range of salaries in your industry by job description and size of company.

 

SK: What are some ways, other than salary, to pay yourself?

NG: Minimizing taxes is often an important strategy for business owners, and deductible expenses are an important aspect of that strategy. If you don't have outside investors, these can include club memberships, and a company car, for example.

           

Paying family members for legitimate work performed is another approach. I know a company in Rhode Island that made picture frames for commercial sales at places like Wal-Mart. The frames come with pictures of the owners' two-year-old granddaughter. For use of the picture, they paid her a modeling fee. The company gets a tax deduction, and the granddaughter, who is in a low tax bracket, can use that money for her college fund.

           

You can also delay some compensation. It's fairly common to base bonuses on three- to five-year results, when the amounts may be higher and the company can better afford to pay. If you're involved in tax minimization, you can also structure 401(k)s or other retirement plans so you're not getting fully taxed at your current level of compensation. And of course there's equity. Taking your company public or selling it will provide returns in the long term.

 

SK: Are there tax consequences to consider?

NG: I always recommend talking to a tax attorney and CPA to make sure you don't run afoul of the IRS and your other investors, too. Red flags can go up if you don't pay yourself enough. The IRS might view low wages as a ploy to avoid payroll taxes. And if you're not paying yourself enough because you're propping up the business, you may need to make some adjustments to become more profitable—or look hard at getting out.

 

Compensation is also an issue that comes up when it is time to sell the company. It's fairly common for sellers to point out that the books—and the tax records—show a profit or loss that includes all of your compensation planning. You might provide an analysis that shows what profits would be without payments for your plane, your country club dues, or your granddaughter's modeling fee. Then you can say, "If you make these adjustments, such as a fair salary for the CEO who's going to run it after me, you get a picture of a more profitable company." If you believe you may sell your business, it may be simpler to just pay yourself a fair salary and not have to provide explanations.

 

SK: How much should you pay employees? Don't the good ones expect a market wage and benefits?

NG: They do, but options or stock grants are common in startups. Stock is a legitimate form of salary—it is the primary reward above subsistence pay.

 

Of course, a family owned business won't want to give stock because [the owners] don't want to lose control, and the payday of going public or selling the business may never materialize for the employee. But you can set up profit sharing and perks such as a 401(k) match that can make up salary. You can, in effect, contract with your employees: I own all the shares, but if there's $100,000 profit at the end of the year, I get $90,000 and you get $10,000. This provides a similar incentive to employees as if they were shareholders.

 

This interview has been condensed and edited.

 

Since every small business is unique, before handling any salary issue, it’s wise to consult a tax attorney who can advise you on the best course of action for your company’s individual circumstances.

Body_PriceNoObject.jpgby Robert Lerose.

 

As a mentor for SCORE in Atlanta, Jack Bernard has godfathered hundreds of small businesses over the past four years, and there's one question that owners invariably ask him: What's the best way to market their business?

 

"There are essentially three variables: price, quality, and service," Bernard says. "Frankly, the worst way to market your business is almost always by price."

 

It seems counter-intuitive. After all, the aim of a business is to attract and retain paying customers. If your business offers a dramatically lower price than your competitor, it stands to reason that you'll snag more buyers, doesn't it?

 

Not necessarily.

 

Even in these tough economic times, low prices don't automatically translate into a healthy bottom line. In fact, rock-bottom pricing often works against some businesses and can even tarnish their image. What's more, counting on customers to recognize low prices often sets the expectations bar too high. As this "Mind Your Pricing Cues" story from the Harvard Business Review explains, many customers don't know the price of the things they buy and, even when they do, they often lack enough information about competitors' prices to make an informed decision.

 

Willing to pay for value

It's sensible for big businesses to compete on price, Bernard explains. Because they buy larger quantities of materials and merchandise and have greater economies of scale, they can offer better pricing to the customer. Stores like Wal-Mart and Men's Warehouse are obvious examples in the consumer retail sector. But this same advantage applies equally well in the business-to-business sector.

 

"I was in group purchasing in the healthcare field for 20 years," Bernard says. "The New York Hospital Association, which is [made up of] all the hospitals in the city, purchased through us because we were larger and could leverage the prices better. But competing on price as a small business is a horrible strategy."

 

PQ_PriceNoObject.jpgOne downside comes from the long-held belief that we get what we pay for. Sure, customers want bargains, but more importantly, they want value. Cutting your price without a sound rationale sends the wrong signal that perhaps your quality is declining or your business is in some kind of trouble. While lower prices can generate quick, much-needed revenue, they can also bruise the reputation of your business over time.

 

"You've got to be consistent with your brand, and part of your brand is your pricing structure," says Steve Spencer, a SCORE counselor in Ohio. "You've got to determine if you're going to build your business on quality and service for the long-term or if you're just going to be the low-cost provider."

 

Despite these pitfalls, there are times when it does pay to compete on price.

 

Distinguish your business with service and quality

For example, when a competitor is in a weakened state, taking advantage of their vulnerable situation by matching or undercutting their prices could enlarge your share of the pie. "If you know your competitor is on the ropes, you can deliver a knockout punch [that drives them] out of the market," Spencer says.

 

Another time to compete on price is when you want to introduce a new product or service. Such a "get acquainted" offer, where you get customers to sample something at little or no risk, is an established tactic in business—provided you remember it's for a temporary, limited time.

 

But instead of going head-to-head in a fruitless price war, small businesses that compete on service and quality can distinguish themselves in the eyes of their customers, generate steady revenue, and "own" their space.

 

Case in point: Bernard had a colleague who sold yeast to major companies. Even though his yeast cost more than the competition, he bested them repeatedly because he gave better service. He delivered yeast around the clock whenever it was needed, whereas the competition took much, much longer to fulfill orders.

 

"My friend was selling yeast extremely well, even though his price was higher than the competition," Bernard adds. "You can always go back and compete on price if you establish service and quality. You're going to have a much better reputation and a better profit margin."

 

Standing firm on price and doubling sales volume

Service and quality are two things that Jessica Johnson knows all about. As the vice president of the Bronx, New York-based Johnson Security Bureau, which provides professional guard services throughout the New York metropolitan area, she and her brother are third-generation operators of their 50-year-old family-owned business.

 

"We've seen a lot of competitors come and go," she says. "If you lower your prices, it may win some short-term successes. But in the long-run, you're selling yourself short. It's hard to recover from that type of strategy."

 

Taking a cue from Spencer and Bernard, Johnson eschews slashing prices and opts instead for competing on more intangible qualities. For example, she peppers new clients with questions to uncover their exact needs and concerns. 

 

"I've had clients tell me that price is an issue," she says. "But if you ask enough questions, you'll understand that price is generally not the only issue."

 

Sometimes she'll do an assessment of a client's situation to see if there are security threats that they're not paying attention to. Then she'll provide information on how to handle them.

 

"That's not something we built into the price of the guard services, but it's a way that we can differentiate the service we provide," she explains. "It also opens the door for us to have an ongoing dialogue. Then, [we can] ask those questions at another point that can help us get more business."

 

The strategy is paying off. According to Johnson, they've doubled the number of their employees and sales every year from 2009 through 2011.

 

"The marketplace needs small business to be competitive," she emphasizes. "It's where the majority of new jobs are created. So we have a responsibility as small business owners to not sell ourselves short and to appropriately price our products and services." 

Body_Budgeting.jpgby Cindy Waxer.

 

Long gone are the days when an entrepreneur could scribble a half-baked business plan on a napkin, hang out a shingle, and hope for success. Given today’s volatile economy and tight credit market, small business owners need to establish an ironclad business budget that maps out the company’s anticipated revenue, costs and growth.

 

“Without a budgeting plan, it’s difficult to project how fast you’re growing,” warns D. Alexander Washington, CEO of The Washington Consulting Group in Bala Cynwyd, Pennsylvania. His company provides financial planning and budgeting services to small businesses. “A plan is necessary to measure how and when you reach the benchmarks you’ve set, both mid-term and long-term,” he says.

 

Anna Phillips knows all about the importance of budgeting. As CEO of The Lash Lounge, a Texas-based beauty salon franchise, Phillips says, “I actually had to take a step back and look at what we were doing. We were chugging along day to day, trying to keep up with everything, but we didn’t have a vision for the future.” Just weeks away from opening a seventh location, Phillips now boasts a detailed budget that will take the franchise through the next five years and the launch of an additional 43 salons.

 

Here’s how to create a five-year budget for your small business that will help you manage the money your business is making, the money it’s spending, and the money it’s likely to earn in the future.

PQ_Budgeting.jpgSales, revenue and cash flow

Calculating how much money your company is making—and spending—is critical to creating a realistic budget. But for many small businesses, seasonal changes and marketing fluctuations can have a significant impact on cash flow, making it difficult to cover capital expenses.

 

To better anticipate these dips, The Lash Lounge keeps a graph chart that “shows our franchisees, historically, when our busy times are and when we have slow times,” explains Phillips. “For example, when school lets out or starts up again, sales tend to dip down a bit. With the graph, we can prepare for slow months like June by ramping up our marketing efforts in May. That way our monthly cash flow stays relatively the same throughout the year.”

 

Pricing for profit

A small business owner can set his or her own price, but entrepreneurs have little control over how their suppliers price their products and services. Just ask Phillips. “The biggest surprise jump in price we’ve experienced is when a certain type of lash glue that we needed to provide our services went through the roof from $50 a bottle to $200 a bottle,” she recalls.

 

To better manage these variable costs, Phillips says she’s made a point of “negotiating accounts with vendors where, while prices may go up every so often, they are capped at a certain percentage.” What’s more, Phillips says making strong supplier relations a key component of a budget has helped her find new vendors with better prices on short notice and without any impact on the company’s bottom line.

 

Forecasting the future

It’s one thing to keep careful tabs on how much money your company is generating. It’s another to know how much you’re spending to keep your business afloat. But what about five years down the line? Failing to anticipate changes in inventory, pricing and consumer demand can stunt a business’s growth. For this reason, many small businesses deploy accounting software such as Intuit’s QuickBooks or Sage 50 Complete Accounting. Reasonably priced and easy to use, these programs allow small business owners to keep track of their daily growth numbers and to make sure they’re meeting their monthly targets.

 

Nevertheless, while software programs such as QuickBooks are ideal for budgeting, Washington warns that small business owners should feel comfortable using a particular solution before staging a full-fledged deployment. “There’s so much budgeting software out there,” he says. “You really have to pick what comes easy for you to understand.”

 

Managing manpower

Many small businesses are so busy wheeling and dealing with suppliers that they forget about what is typically a business’s largest expense— its people. In fact, manpower—and its accompanying costs— should be a key component of a small business’s budget. That’s because young companies need to look at how many employees are needed to get the job done, how many new hires will be required as the company grows, and how these numbers are likely to fluctuate during seasonal changes.

 

Financing finesse

Factors such as inflation can easily turn fixed costs into a variable nightmare. However, Phillips says it takes more than accounting software to avoid a cash crunch. “We’ve applied to be put on the SBA Franchise Registry so that when we go to the bank for a loan, we’re already on the list and they don’t have to do as much of an investigation,” says Phillips. “We’ve also started looking at alternate lenders to finance the business.”

 

It’s an approach Washington believes is wise. “The first thing a small business has to do is establish a banking relationship,” he says. “As a business owner, without proper financing and working capital, it’s difficult to operate. You never know when you may need more manpower or have to increase inventory on short notice. So know who your bankers are and establish a relationship with them—that’s the key to financial stability.”

Not sure how to create your own budget? The US Small Business Administration offers some great examples to help you get started.

Body_TradigitalCash.jpgby Cindy Waxer.

Smart cash management is critical to a small business’s survival. Keeping tabs on profit margins, tracking working capital, managing expenses—they’re all critical steps a growing company must take to keep employees paid, customers satisfied, and the business afloat.

Fortunately, there’s a crop of online budgeting tools that help small businesses streamline their budgeting, forecasting, and reporting processes with the click of a mouse. Intuit, Centage, and Sage are but a handful of the vendors now offering out-of-the-box, digital cash-management tools. 

However, the proliferation of Web-based budgeting solutions isn’t cause to toss aside more traditional tools like Microsoft Excel spreadsheets. In fact, many companies find that a combination of time-tested budgeting products and cutting-edge cash management tools is the best answer to effectively managing a company’s finances.

Just ask Mark Benson. He’s the controller at Dial One Wolfedale Electric (DOWE), an electrical contractor in Ontario, Canada. Rather than abandon age-old tools, DOWE relies on a mix of both traditional budgeting products like whiteboards, as well as software solutions for comprehensive management of its cash flow.

Read on to discover the money management tools every small business should own, and the platforms that support them, from old-school spreadsheets to sophisticated software programs.

PQ_TradigitalCash.jpgAn automated revenue-planning model

A revenue-planning model not only helps a company track the amount of money it’s generating but how that figure will change as circumstances fluctuate. Sure, Excel spreadsheets feature plenty of rows and columns for forecasting. But Benson prefers software to gain a long-term perspective on finances. “We use the long planning horizon provided by Budget Maestro to look out over five years,” he says. “That way we can see the implications of receivables, cash, and the assets we need on our budget. In the end, we get a better, fuller picture.”

Cash flow forecasting with software

According to Charles H. Green, it’s not enough for small businesses to simply manage revenue projections. A small business financing expert and author of The SBA Loan Book, 3rd Edition, Green says growing companies can greatly benefit from a cash flow management solution. “Revenue is just one component of growth,” he says. “If you increase your sales 25 percent, you might think you’re going to have all this extra cash coming through. But if you dig deeper, and assess the cost and timing of your finances, you’ll be better able to determine if you can afford and absorb growth.”

Benson agrees. He depends on Centage’s Budget Maestro platform to anticipate DOWE’s cash flow influxes and bottlenecks. “[Our software] tells us what the long-term outlook on cash is,” he says “That’s important because you don’t want to find out at the last minute that you need more money. You need to know that well in advance to take the appropriate actions. For example, you might need to adjust your credit line or change your sales terms.”

Manual manpower planning

Not every budgeting activity requires a Web-based solution, though. Exhibit A: Benson still relies on Excel spreadsheets to determine “whether we need more people or fewer people” on our staff. Not only can Excel spreadsheets efficiently keep track of payroll expenses, but they can also be used to better allocate human resources during peak seasons.

Green, too, says age-old tools like spreadsheets are the perfect fix for budgeting manpower. After all, he says, “You can see more on your own screen and respond faster than you can with an online tool. A lot of these online tools make you go from page to page so you can’t see how one entry may affect other numbers right away.”

Online expense budgeting

When it comes to maintaining a fleet of 40 vehicles, however, Benson opted to replace the company’s traditional computer spreadsheet with an online tool for expense budgeting. “We’re now able to load the cost of each vehicle and related maintenance fees into the system as individual data records for greater detail. Plus, it’s all in one place rather than spread out among various spreadsheets.”

Green says that by keeping careful track of spending habits, a small business like DOWE significantly minimizes the need to “stretch out” its finances just to survive. “More companies fail because of excess growth than inadequate growth,” warns Green. “You can figure out a way to lower your costs to get by but it’s when you have growth—and money to spend—that people start getting in over their heads.”

Whiteboarding sales projections

From creating a marketing plan to forecasting next year’s sales, Benson says a traditional whiteboard is an ideal “non-digital tool we use to post sales numbers. It’s big, easy to change, and it keeps people who are not computer literate involved. Plus a whiteboard helps facilitate things in a group meeting.”

But that’s not all. Benson says many of today’s digital budgeting tools entail “a steep learning curve. They’re so different from anything we’ve seen that it often takes a while to get your mind around the concept of how it functions.”

Without a doubt, planning for the future is becoming a digital disclipline for many small businesses. But that’s not a reason to discount time-tested tools. A combination of both is often the answer to keep a small business’s money matters under control.

 

Of course, since the details of each business situation are unique, it’s wise to seek the advice of a qualified financial planner or certified public accountant before making any significant changes to your small business’s cash flow management system.

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