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Use Tax Time to Take Stock

Howard Scott |

Tax season is here, and what are you going to do about it? “Don’t bug me,” you say, “I’ve got a business to run, orders to get out, employees to motivate, customers to satisfy. My accountant handles everything.”
Okay, but remember, you’ll spend extra money on accounting when you should be watching every expense carefully. More importantly, you’ll miss a great opportunity to build a keen understanding of your business.
If you have a bookkeeper or administrative assistant, you can work with them, delegating as much work as possible. A point-of-sale (POS) system will facilitate the process, but it won’t eliminate all of the steps required.
If you don’t have office help, the whole task will fall on your shoulders. Perhaps you’ll want to schedule an hour after the business closes each night, or try to arrive an hour early. One week of overtime should be all that’s necessary. Here’s what you’ll need to do.ASSEMBLE YOUR EXPENSES
Make piles with itemized tapes and totals. You’ll have totals for electricity, water, chemicals, poly, perc, counter help, production labor, management, rent, environmental expenses, rent, etc. Staple the piles together neatly. You now have individual expense totals for the year.
Why do this when an accountant can? Because it’s bookkeeping, not accounting, and he or she charges $100 an hour. An accountant should be paid for analytical skills, not for the mechanical tasks anyone can do. And you can probably do it faster because you’re familiar with everything; he/she would have to ask a lot of questions.MAKE A BREAKDOWN
Sort your expenses into categories. If your business has a single component (say, retail drycleaning), then the categories represent a basic cost breakdown — labor, utilities, occupancy, supplies, administrative, marketing and management.
There is an eighth category of expense — capital costs — but in this exercise, we will assume that those are fixed and unalterable. An example of capital costs is monthly financing payments.
Labor includes wages (minus your pay), including payroll taxes and workers’ compensation. Utilities include heat, electricity, water and gas to run, heat and light your plant. Occupancy includes rent and associated costs such as waste disposal and window cleaning. If you can separate out heat and light for the facility, it is an occupancy cost.
Supplies are any items that go into the process, including perc, poly, hangers, press pads, tickets, maintenance and repairs, etc. Administrative expenses are expenditures needed to run a business, such as insurance, licenses, uniform rental, legal and professional fees, bad debts, etc.
Marketing includes any sum dedicated to promoting and selling the company’s offerings, including advertising, brochures, Val-Pak mailings, vehicle painting, billboards and store signage. Finally, management includes your salary and any bonuses. Again, you’re in the best position to do sort these line items, since you know what goes where.
When you have separated your expenses into these seven categories, divide total expenses by each category, and you will come up with a percentile breakdown that adds up to 100%. It might be something like 28% labor, 18% utilities, 15% occupancy, 8% supplies, 15% administrative, 12% management, and 4% marketing.
If your business has many components — say, a plant, three drop stores, one coin-op, commercial work and four routes — try to allocate the costs by business category. After you divide the costs into business segments, add a sales figure in each category. This will tell you which segments are more profitable; every business owner should know that. Later, you can use these figures to allocate recourses and capital.COMPARE THE NUMBERS
Once you have solid numbers, compare them to the past three years. Next to the dollar figures should be percentages to assist in the comparison and help spot trends. For example, you might see that supplies have changed over the years, going from 7% in Year 1, to 8% in Year 2, to 9% in Year 3, to 10% today.
Is there a trend there, and why? For supplies to go from 7% of the total to 10% is a 30% jump in expenses, which is significant — there must be an explanation. Does your new route use more supplies? Perhaps you’ve added on a supply-intensive product, such as gown preservation. Or is it a lack of discipline in shopping for the lowest price?
Now let’s say that occupancy costs went from 11% to 18% in Years 3 and 4. Does it reflect a recent move? Did the move pay off in increased sales? Can you do something to lower occupancy costs?MAKE A LIST
Create a list of questions for your accountant. Why are supply costs creeping up? What can I do to compensate for excessive occupancy totals? Why did the marketing budget double without doubling volume? How much does it cost me to bring in a new employee? What can I do to lower my labor turnover?
Why haven’t routes taken off? Would it make sense for me to close a drop store? Should I buy property rather than continuing to rent? Would it be cheaper in the long run to switch from oil to gas power? What percent of volume is upcharges? Should I do more “green” marketing?
Write these questions down and give the list to your accountant. Remember, he or she is more than a number-cruncher. He or she probably deals with a host of small businesses just like yours, and might be able to offer insights into the issues you grapple with.
Do these things, and you’ll make tax time into much more than a report to the government. You’ll make it an insightful learning experience.
 

About the author

Howard Scott

Industry Writer and Drycleaning Consultant

Howard Scott is a longtime industry writer and drycleaning consultant. He welcomes questions and comments and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359; by calling 781-293-9027; or via e-mail at dancinghill@gmail.com.

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