11 quick tips for small business owners from Honkamp leaders
May 5, 2023
There always is a lot to consider when you’re running a small business, from financials to staffing to technology.
As we celebrate small business owners this week during National Small Business Week, here are 11 tips from nine Honkamp leaders* to help you get the most out of your operations.
- Get off to a good start: Setting up a new business? Reach out to your attorney and accountant prior to getting too far down the road. You want to make sure you are set up as the correct entity not only for liability reasons but also for tax purposes. Getting things established correctly on the front end can save you money and headaches later.
- Embrace getting help: Delegate whenever possible -- especially all of the tasks you are uncomfortable with. You can make more money for your business by spending your time doing what you do best. Allow experts to focus on the other areas that they specialize in.
- Maximize profits, minimize taxes, increase value: Many business owners are motivated by a short-sighted view of not paying taxes. However, this can have negative long-term implications for their business. Although the value of a business is based on many factors, profitability/cash flow is often the bedrock. Being profitable increases value and helps fund growth. Taxes are part of the equation, and proper tax planning can help minimize any amounts due.
- Consider a historical perspective: Every business is perfectly designed to get the results it has been getting. Performing a historical financial analysis with comparisons to industry metrics and benchmarks often provides insight into changes that could be considered to produce stronger results.
- Measure your efficiency: Your return on invested capital (ROIC) is a great metric to measure how efficiently a company is using its capital to generate profits. ROIC is calculated by dividing your net operating profit after tax (NOPAT) by your invested capital. Even highly profitable businesses may generate a low ROIC if management does not make efficient use of its capital.
- Keep an eye on your CCC: The cash conversion cycle (CCC) measures how long it takes to convert inventory/services into net cash received. A lower CCC can reduce risk and potentially reduce the reliance on debt financing. Business owners can track historical CCC and compare to industry benchmarks to check for areas of improvement.
- Pay your kids and start them saving early: Did you know that some parents can deduct a wage paid to their children who are younger than 18 and that wage is not subject to Social Security and Medicare taxes? If you own a sole proprietorship or single member LLC, or if you own 100% of a partnership with your spouse, you can pay your child for services and pay no employment taxes on the wage. If that wage totals less than $13,850, you will reduce your own taxable income by the wage paid and your child won’t owe any federal tax on the income. Additionally, the wage qualifies as earned income, which would allow the child to fund a Roth IRA -- effectively creating a tax-free savings plan.
- Ensure you have an agreement in place: If you own a business with other individuals, it is important to have an up-to-date buy-sell agreement signed by the owners. Structuring a proper buy-sell agreement and reviewing it annually will help in any event that triggers the movement of ownership, and it establishes the methodology of value for the ownership transfer.
- Maximize depreciation deductions: If you are purchasing or constructing a new building, take advantage of all the accelerated deprecation options available to you. Accelerated deprecation results in quicker tax deductions. As a result, it improves a company’s cash flow and allows you to reinvest those tax savings back into your business.
- Ensure you have a solid backup strategy: A good data backup strategy for small businesses should include both on-site and off-site backups, with regular testing and verification of backups. Cloud-based backup solutions can provide automatic backups, off-site storage and easy access to data in case of an emergency. Investing in backup and disaster recovery can save your business from the costs and disruptions associated with data loss and downtime, especially with the prevalence of ransomware.
- Work on your business: It’s important to make time regularly to work on your business, not just in your business. You can’t reach your big-picture goals if you only ever focus on the day-to-day operations.
* The Honkamp leaders who contributed to this article were: