Business Tips for New or Relatively New Businesses – PART 1 of 3

By Tom Grandy, Founder

This three-part series is going to focus on several “tips” for new company owners.  These are things to think about as your company begins, as well as considerations when setting those first, all important hourly rates.  Let’s get started.
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<li><strong>Positioning Yourself within the Labor Pricing Model</strong> – All new company owners are going to begin by working in the field. Likewise, nearly all company owners will eventually make the transition from the field into the office.  You may recall that when that transition takes place the company typically needs to increase its hourly rate by $8.00 to $12.00/hour just to make the same profit.  Think about this.  When setting your initial hourly rates consider building yourself in as field labor <u>and</u>, at the same time, putting yourself in overhead as the owner.  The net result will be that your salary will be built into the pricing model twice.  You will be in the field and in the office.  Why would you want to do that?</li>
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<li><strong>Cash flow</strong> – The “extra” salary will build up the company’s cash reserves. Do you remember previous discussions on cash flow?  We talked about the need to fund inventory, receivables, paying suppliers on time (when customers don’t pay on time), funding growth and a whole lot more.  The “extra” cash will help fund these things during the initial critical years.</li>
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<li><strong>Transition from the field to the office</strong> – When the owner is already built into the model as an overhead cost (while also being in the field) there will be no need to dramatically increase the companies hourly rate when the transition is made. The additional dollars will already be accounted for.</li>
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<li><strong>Chart of Accounts</strong> – Setting up a formal chart of accounts, right from the beginning, will prove invaluable as time goes on. Very few companies track their gross sales, by department or by the type of service they offer.  However, Cost of Goods is the big one.  Companies that do track sales by department, seldom break out material purchases by department.  Having worked with companies one-on-one since 1987 I can honestly say less than a handful have tracked materials purchases by department.  Most companies start out doing only one thing.  However, as we discussed before, most end up providing service, new construction, commercial work, retail or any number of other services.  At some point in the company’s life they will want to begin departmentalizing the company.  It’s tough going back to break things out.  My suggestion: track sales and costs of sales by department to begin with.  Years from now, you will call to tell me how glad you are to have done that from the beginning!</li>
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<strong>QuickBooks</strong> – Roughly 80-85% of all trade’s companies use QuickBooks. It’s a great program and I use it myself. Having said that, spend a few extra dollars and hire a QuickBooks representative to help you initially set up your chart of accounts.  Good record keeping from the beginning pays off down the road.
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<li><strong>Don’t Let Your CPA/Accountant Enter the Companies Monthly Revenue and Expenses</strong> – It seems simple and easy to have an outside person enter data into QuickBooks. However, they literally don’t know where costs belong.  Have someone inside the office enter the data.  If there is a question where an expense goes, the answer is a few steps away.  The real benefit is when the owner/staff wants to review the P/L Statement at the end of the month.  The “internal” person will be able to instantly click a couple buttons in order to view any detail desired.</li>
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<li><strong>Review Financials with CPA monthly!</strong> – Finding a really good CPA is both difficult and vitally important. The trades industry “assumes” since CPA’s work with numbers they understand their business.  That is a false assumption!  If you are able to find a CPA that understands your business as well as the accounting side, hire them.  No matter what they charge, they will save you money.</li>
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With that said, be sure to review your financials with your CPA by the 10<sup>th</sup> of  each following month.  If the CPA isn’t asking you questions about your business at each meeting…find another CPA!
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<li><strong>Recalculate Hourly Rates At Least Twice A Year and/or Whenever A Significant Cost of Doing Business Occurs</strong> – Let’s face it, the cost of doing business goes up month after month. Any increase in the cost of doing business is going to <em>necessitate</em> a change in pricing to the customer.  Review the company’s cost of doing business at least twice a year and adjust pricing.  However, if any significant increases in the cost of doing business occurs during the year, the company best adjust their hourly rates.  Remember, any increase in the cost of doing business will result in one of two things happening:  <em><strong>Option 1</strong></em> is to pass the additional cost on to the customer in the form of an increased hourly rate.  <em><strong>Option 2</strong></em> is to do nothing.  In that case, the extra costs will be absorbed by the company, therefore lowering the company’s net profit.</li>
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Ok, this should provide a few things to think about over the next month or so.  My suggestion would be to pick at least one of the above areas to work on diligently.  Next month, in Part 2 of this article, we will provide a bit more food for thought.

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