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Year End Dilemmas
319 Plays3 years ago
Year-end is when all the big questions get together and beg for your attention. Business questions like how much did we make? What do we have in cash? What about taxes? How do we want to grow next year, should we pay down debt? But then you need to layer in considerations for you and your employees around bonuses, salary expectations, and retirement contributions. Plus community impacts, charitable giving, tithes and a host of other things. Add it all together and what do you get? A year-end dilemma.
In this episode we’ll help you sort out how to think about and prioritize all of these things, starting with the end in mind. A lot of this will come down to what’s important to you, what you value, but even then there are systems and considerations that can help you make sense of the madness and give you a tangible place to start. Most of these “problems” are the right kinds of ones to have, so let’s use them to their greatest impact.
A few references from the show that we mentioned that may be of additional use to you:
Recommended
Transcript
Introduction to the Uncommon Life Project
00:00:02
Speaker
Everyone dreams about living an uncommon life, but how we define that dream is very different for each of us. And for most, it's a lifelong pursuit. Welcome to the Uncommon Life Project podcast. We're going to introduce you to people who are living that life or enjoying the journey to get there. We're going to also give you some tools, tricks, and tips for starting or accelerating your own efforts to live an uncommon life.
00:00:27
Speaker
A life worth celebrating and savoring. Please welcome your hosts, Brian Dewhurst and Philip Ramsey.
00:00:36
Speaker
Hello, and welcome everybody to another episode of the Uncommon Life Project, where I am your host, Philip Ramsey. And I'm Brian Dewhurst. Thanks for tuning in for another episode. We are going to rock it out today with a duo cast, Brian and I. It's actually recording it. I don't know if you'll ever see the recording, but we're going to get closer to the 21st century and recording it. The future. The future, that's right.
Year-End Business Challenges and Financial Strategies
00:00:55
Speaker
We got a fun one today, and it's the end of the year dilemma for the business owner. What does that mean?
00:01:02
Speaker
Well, we live this ourselves and we help quite a few people with this also. And I'm not saying we've got it down to an exact science, but it's just that year end dilemma of how much money did we make? How much money do we have in cash profit to show for the work that we did this year? What do we owe in taxes? Because if you own a
00:01:30
Speaker
LLC or an S corp or you know, they're just pass-through entities and so you're taxed on the You know net income or whatever of the business not just what you take home so you've got to figure in that and then you've got a factor in your growth and your Business plan for the following year and how much you want to keep in the bank Yeah, you've got you got to make sure that you have enough for the operating expenses coming up in January, you know and then
00:01:56
Speaker
debt repayments. If you want to try to pay down debt, we are, you know, I think diligence and probably some of your decisions because I probably would have spent more money than, than you have led us. And I say that in a good way because I think I would have not resulted.
00:02:11
Speaker
but we don't have any debt against the business, we don't have that, but some business owners do. For sure. And then you wanna save for retirement, so it's like, oh, do I put away more money in the retirement plan? Which takes cash away from the equation. Bonuses for
Implementing Financial Models and Profit Management
00:02:28
Speaker
employees, bonuses for yourself, Christmas time, it's just, man, there's a lot, that money can go out so fast. And that's why we call it the dilemma. So it's a dilemma, where do you put?
00:02:40
Speaker
How do you fund all those things or do you fund all those things? Yeah, and what's an equation for us to be thinking through or talking about? So that's what episode's about. Great job. We set up well. Where do you want to go from here? How do you solve it? Well, I think it's solved from the end in mind. And so we were very intentional last year.
00:03:00
Speaker
Uh, personally with our business and we, you know, we do utilize the entrepreneurial operating system, EOS as a framework to guide and communicate about our business. So we, we leverage that framework. And in that we set a revenue target, an expense target, and thus kind of like a net income or profit target.
00:03:20
Speaker
and we've hit that target. And we also set out to start basically stealing from ourselves to bank that profit. There's a really good book out there called Profit First. And there's actually now like a lot of like bookkeepers and stuff that are basically implementing that strategy. And it's not rocket science, it's basically just pay yourself first and set up an alternate account
00:03:46
Speaker
that you're not going to touch and bank the actual profit and pay yourself first. So we kind of set out on a course to do that. We actually stole from ourselves weekly. And I think we took about 25%
00:04:03
Speaker
So let's just say to use round numbers, let's say your profit target at the end of the year. And this is on top of what you're paying yourself. So this is like what's left over at the end of the year. And I will say that that's the profit first model. It's not that you pay yourself first with salary, you pay yourself first out of profits and you put them into an account where you would have access to them.
00:04:22
Speaker
Yeah. So let's just say your profit and your goal is just, I don't know, just a hundred grand. Yep. And you know, so then we took about 25% of that number and we divided that by 52 and we took weekly that amount that that kind of shook out to be. And we banked that every week. So we just wanted a number to steal from ourselves that like we wouldn't notice.
00:04:47
Speaker
And it was small enough that like, yeah, we're, no matter what happens in the business, we should be able to take this out without blinking. Kind of like a silent employee a little bit. And then quarterly, as we kind of went over our revenue expenses and our profit, and luckily we had those, you know, pretty much every quarter, then we would kind of take the bulk of the remainder of that 75% that was left and then bank that into the same account.
Business Growth and Team Management
00:05:13
Speaker
And so,
00:05:15
Speaker
we're shooting this here at the beginning of the fourth quarter and we've already banked our entire profit for the year. So it was pretty successful in that regard. We went over our revenue goal, so that was huge. And then our expenses were higher too. Yeah, they sure were. Yeah, they sure were. I don't know if you know the buzzword for 2022 is inflation, but also just, you know,
00:05:42
Speaker
raises, hiring people, all good things, you know, but it's just going through that. We went from, you know, basically 14 members to almost 18 members in one year and just, you know, thinking through the cashflow of all that and the added software and laptops and just different stuff. It's all good stuff. But yeah, now that we've been through that, it's like, oh yeah, like we want to go to 12 people next year. And I'm not saying that we do, but
00:06:09
Speaker
If we did, we kind of think have a better handle on what that looks like. Also too, I think just being candid with just our listeners, we didn't do a good job baking in our own.
00:06:20
Speaker
raises. Yeah. And so one thing that I do really value about Brian, and it seems to be kind of a mantra of our companies, we want to be generous. We want to be generous with the people that help us get to where we're at. And so we've been really generous with our, uh, the people that help us. And so, uh, that being said, we've been giving all of our, uh, I guess,
Goal Setting and Risk Management in Business
00:06:41
Speaker
I don't know, increase in pay to other people, which I think has instilled a very strong culture yet next year. I don't think we're going to do that again. So we want, we want to, we want to benefit too from the company. And I think, so yeah, this is just why we called this show the dilemma. Cause it's just, there's so many balancing, moving parts, contributing factors to your budget, the profit and where it all goes and
00:07:08
Speaker
So I think that's kind of where we started. And now as we were approaching the end of the year, it's kind of like, okay, the money's there, thankfully, praise the Lord. Now, how do we like divvy it up? Right. And so I think one of the things that we've kind of talked about, I think the easiest next place to start or the next step in that path is
00:07:32
Speaker
Well, we definitely need money for 2023, right? Like we got to have money in the bank to start the year. And what does that look like? And one of, uh, one of our kind of mentors and, uh, coaches, he's actually been on the podcast was one of the first few episodes. I think he's like the very first one. Yeah. Two or three, maybe, uh, Drew McClellan. Um, yeah. I like his approach. He kind of talks about two to four months operating expenses or like whatever your monthly net is, including your salary, including profit.
00:08:02
Speaker
you know, let's just say your monthly nut is, you know, a hundred grand a year. So your expenses are going to run 1.2 million. Um, then you probably want two months of that minimum in the bank. If you have really good recurring revenue. Um, so 200,000 is like, okay, you're going to need 200 K in cash just to start the year from an operating standpoint, monthly expenses of a hundred thousand dollars. Yeah. And then if, if you have,
00:08:30
Speaker
like half your revenue comes from one client, that type of stuff, or you're more commission oriented, like you gotta go and sell everything all new again this year, then that number is probably closer to maybe like four to three to four or five months, depending on
00:08:48
Speaker
which I think you do a great job talking about is like real risk tolerance of like, what's your risk tolerance?
Tax Planning and Financial Adjustments
00:08:52
Speaker
You know, are you, are you kind of more loose and fast and you're comfortable with two to three months in cash or you know, are you Uber conservative and you want like six to nine months in cash, you know? So every business owner is different, but I think you just have to have a framework to work from and start somewhere.
00:09:10
Speaker
Uh, but I would say the minimum, you know, is, is two months in cash from an operating standpoint. So, you know, let's say you have that, uh, you know, you have like a million dollars in the bank. Well, yeah, now 200 grand of it is set aside for next year and the operating expenses of your business.
00:09:27
Speaker
Because you wouldn't want to start your year off any different than what you have done in the past. So you can't go past that number or else it doesn't feel great to start the next year in a deficit. And because you're leaving that money in the business, you're paying taxes on that unless you're a C corp and the C corp is paying some of those taxes.
00:09:47
Speaker
You're paying taxes basically if you want to leave the money behind. Yeah. Right. Which is really interesting. Yeah. Cause in theory you could be paying, you, you might only be taking, let's say a salary of $60,000. Right. But your business is, you know, at that $1.2 million more and you're leaving, let's say $200,000 in the business, you're getting taxed on a whole bunch more than just the 60 that you take out. Correct.
00:10:13
Speaker
So yeah, so okay. That's a great place to start I think that's one of the first places to start of like, okay We got to leave that money in the business Then you know kind of like what we went through, you know, are you gonna hire? Are you looking to double your business or you know, do you have like these aggressive type goals? We kind of used to be that way probably more so because of me and the way I'm fired and that wasn't so successful in not like in the sense we didn't grow but like
00:10:38
Speaker
It's just tough when you set a mark of like, oh, we're going to grow by 50%. And then it's like 12. And you feel like, oh, did we fail? But it didn't fail. We paid our bills and we grew our business. But relative to the marker of 50, it kind of felt like a failure. And so we really pulled back a lot of those estimates. And now it's kind of the opposite. It's like we're crushing our goals. And so I think that's also one of the hardest things about a business owner and just leading a business is like setting goals. And how do you do that to incentivize a team?
00:11:07
Speaker
And like stretch yourself, but not get discouraged is a really healthy balance in there. Yeah. And I think also to in that model where we were over projecting what our revenue would be, it was hard for me to process through what the expenses should be. Yes. Because if you have this lofty goal, okay, then you put your expenses from that lofty goal. Well, what if you don't hit that lofty goal? What happens to your expenses? And so, and it, it then kind of forces you into like, well, we gotta keep spending money to hit this goal. And it's like your,
00:11:37
Speaker
your business is being dictated by chasing profit as opposed to operating from the profit. Right. I feel like when we made that switch, I think it was like two or three years ago, it was so life-giving because we just took the last couple of years of year-over-year growth and then we changed that or we just kind of kept that going.
00:11:58
Speaker
And then we thought about, OK, what expenses do we think we need? Let's talk about team members. Last year, we forgot about our own raises. But this year, I feel like we're just getting more and more savvy as a business owner. Seasoned. Yeah. Yeah.
00:12:13
Speaker
It's funny cause like we counsel a lot of people and a lot of businesses, but when you do it for yourself, it's a little bit different. And so we're constantly like, Oh, that didn't work. That worked better. That didn't work. And so implementing that, uh, not only for our clients, but also hearing what our clients are doing, what's been a success, what's been a failure. And I feel like we have leaps and bounds, more experience yearly, just because we get to go meet with people who are working through these things.
00:12:39
Speaker
These dilemmas. Yeah, dilemmas. So then they think it goes into, you know, from their debt repayments, you know, debt's a huge thing. And, you know, before when like interest rates were super low.
00:12:49
Speaker
It was probably easy to be like, I'm not paying that down at two or 3% interest, but now the interest rates are like six, seven, you know, like car loans and mortgage loans are now like six, seven, 8%. And it's like, you know, if you have credit card debt, that type of stuff, stuff that's like double digits, it's like, yeah, we should probably start paying that down at a more aggressive rate. Now the interest rates are super high.
00:13:10
Speaker
relative to where they were. So then you kind of go to, you know, should we use some of this cash to, you know, more aggressively pay down debt or restructure debt to free up cashflow?
Debt Repayment and Employee Incentives
00:13:21
Speaker
You know, I would say that is kind of a higher priority. And then three,
00:13:25
Speaker
is your own, you know, bonus, your personal financial plan and, you know, what you want to do for your employees, you know, whether you're, or your spouse and your family. So like, are you taking a distribution, you know, if you have an S corp and not taking it through payroll, so it avoids the payroll tax. You know, are you taking cash out to do your own personal financial goals and put money away? Or you can do that through your retirement plan. Like if you have a 401k,
00:13:54
Speaker
and you have a safe harbor option and a profit sharing option or a cash balance option, you can really put away a larger chunk of money through these retirement plans if you don't really need the after-tax cash, you don't need the income personally, your house is paid off, cars are paid off, you have the things, you're doing the things that you wanna do, maybe that money makes more sense into a retirement plan and deducting it.
00:14:21
Speaker
so that it doesn't pay income tax on it. So that's kind of, I would say, probably the third thing to think through as a business owner. And then from there you kind of have, how are you bonusing or incentivizing your employees?
00:14:37
Speaker
So are you doing like Christmas cash? We got a lot of business owners that do like Christmas cash. Hey, take the last two weeks of the year off. Here's an envelope of cash. That type of stuff. Or are you doing more like quarterly bonuses, which is kind of like what we've adopted and actually kind of what Drew McClellan leverages with his coaching group. And so we kind of have adopted quarterly bonus structure, incentives, more so goal oriented stuff.
00:15:03
Speaker
And then we could also do like a year end bonus, you know, just kind of a nice, you know, end of the year. Thank you. Um, and then, you know, doing that through payroll and, or then you can include that, you know, if you're doing profit sharing, that impacts your employees as well. So a lot of money can go out the door there depending on how you want to handle, you know, your personal situation and then retirement plan, profit sharing and, and bonus structure.
00:15:28
Speaker
Right. And then you have, I liked at the beginning, you just gotta, you gotta keep the end in mind. Okay. So if you're looking at what you want to operate your business as that's like your floor, then the rest of the stuff is like, okay, how do we divide all this stuff that we want to do? And each company is different values are different.
00:15:45
Speaker
and then try to figure out what percentages for each. Also too, I think it's important, you said taxes, is to consult with your tax professional with this. And so they can give you and educate you. Again, I like when they educate you, they don't tell you what to do.
00:16:00
Speaker
But educate you on what your options are to lower your tax burden as well as being generous, but keeping some because we don't run a business to be non-profit. I'll tell you that right now. So that's really important when you're trying to think about all these different things that you have to balance and push through. But the end of the year I think is there is something about it to look back on the year that you've had and seeing that the plane is up in the air is super encouraging.
00:16:29
Speaker
Not a lot of planes get up off the air, off the runway. And so the fact that you're having these dilemmas or opportunities, I think is one, should be encouraging. And then two, you want to try to be a good steward of it. So then you can have the continued growth next year.
Guidance from Uncommon Wealth and Future Planning
00:16:44
Speaker
And you know, 2022 inflation, man, things are crazy. The market has been up and down and up and down and down and all around, all around. And so what is it that we can hunker down into and control?
00:16:59
Speaker
And then also keep moving the ball forward. And that's what I love about uncommon wealth is we get to work with people who know what they have in front of them. They know the opportunities. They also know some challenges and things they have to overcome. But at the end of the day, they're the people who want the ball on fourth quarter and they're not going to fall victim to circumstances or things about the market. It's like, hey, no, we know what we need to do. Our business is thriving. We've planned for some of this volatility and now we need to advance the ball forward.
00:17:29
Speaker
First, I want to just encourage all the business owners out there that have another business and are dealing with these dilemmas, it's encouraging to both Brian and I that we are sitting in this position, but it also should be encouraging to you. Then, thinking through all these different things, and hopefully we added some of them to your list that it gives you a good framework how to work through for the next year.
00:17:52
Speaker
Yeah. Yeah. And I'd say if you want help navigating these things, we navigate this quite a bit with people. We meet with people's accountants and in a collaborative way, you know, um, you know, wanting to be part of a team. And if you do run a business and you're making, you know, six, seven figures, you've got to have a team around you to help you navigate these decisions. Cause there's just so many,
00:18:13
Speaker
things going on and I think that's getting people around a table. What really is the best for your personal situation? Have you thought about this? It's really valuable. I think two other things to consider this whole dilemma is one,
00:18:27
Speaker
you know, charity or tithing, giving money away as a percentage and, you know, giving your first fruits away. And then two would be, you know, more strategic purposes, like purchases for the following year, which is like, hey, we want to buy a building or, you know, we're going to need a down payment of 20% to buy a commercial building or a duplex or
00:18:49
Speaker
whatever it is you're trying to invest in to further your entrepreneurial spirit and passive income, do you need capital to launch something new? And what is the math around all of that? And how does that frame into your new operating expenses? So I think we've demonstrated the year end business owner's dilemma and you're not alone. And if you want help, we're here to help. And hopefully this has been encouraging.
00:19:17
Speaker
I'm not trying to throw shame at other advisors, but how does other people, like no other financial advisor seems to be talking about these things. And it seems like this is what's on business owner's mind. It's not like, Hey, let me contribute, contribute to that 401k. Like you have to think about all these things before you can really give a sound advice on needs.
00:19:38
Speaker
different things that you're thinking through and man, I'm grateful at uncommon wealth. We get to do this every day. Hey, there's a lot of different ways that we can carve this. What's your risk tolerance? What are you trying to achieve? And then let's try to put a plan together that accomplishes all this stuff, but you don't feel like something's falling through the cracks. And if you don't have somebody to bounce ideas off of, like the tax guy is only going to help you get rid of tax, which means you're going to get rid of your cash.
00:20:03
Speaker
Yeah, and ideally he'd be like, and just don't make any money. You have no taxes. That's probably not true. The second one is like a lawyer. Who are you going to talk to about that? Well, they're going to just tell you all the obstacles and pitfalls that you're going to fall into if you go down these roads. But here at Uncommon Wealth Partners, we really do want to start diving in on what is the opportunity
00:20:24
Speaker
What are the things that are keeping you up? And let's talk about how to make a plan and get you to execute some of these things so you feel like everything's taken care of, but you also are ready to go rock for the next year. So end of your dilemma. Hope you enjoyed it. You've been listening to the Uncommon Life Project. I've been your host, Philip Ramsey. And I'm Brian Dewhurst. Until next time, go be uncommon.
00:20:44
Speaker
That's all for this episode of The Uncommon Life Project, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.