Why so many small businesses fail within their first five years?

The sad truth is that half of the businesses in our community will not exist five years from now, and in 10 years only a third of them will actually be still in business. One of the greatest fears of a small business owner is, staying alive and staying in business.

I got a chance to discuss various topics related to the financial health of small businesses with my guest, Safie Russell, a CPA with a Masters in Taxation. Safie has an extensive background in finances with over 18 years, starting out with the Big Four working in public accounting, worked with business accounts of all different sizes, and is now serving the small business community through her own company. SDR Consulting Inc, helps small businesses from formation all the way through to tax preparation and all the stuff in between. In this discussion she provides insights to some questions that I posed on behalf of small businesses owners.

Why do you think so many small businesses fail within their first five years?

What I find is a lot of small businesses don't properly prepare. The main reason that I see and have experienced over the last 18 years is that they just jump into business, they start doing the work, they never prepare for the record keeping aspect of their business. Never questioning if they have enough cashflow or enough capital to start their business and maintain it. How do they pay taxes? They ended up getting in trouble with that after the fact, and not properly planning for estimated tax payments, not understanding how their business works, in terms of the financial piece of it. Also, the proper separating of your business from personal expenses. All those little things I find are some of the main reasons people do fail within the first five years. It's really just a failure to properly plan. Researching your industry is another one. You may start in a business where it sounds great, but if everybody and their mother is doing it, then where's your edge? Have you done the research to tell people what makes you stand out and what makes you different? So, I would say definitely just lack of proper planning, not having enough cashflow, not preparing a budget and not having a business plan. These are all things that are time-consuming but they are there for a reason, but people just kind of make a mess and then it's hard to clean up after.

Following Safie’s answer I want to actually add one, along the lines of planning. As you know, my focus is on customer satisfaction, but I often think that it's an afterthought. People are not, putting in systems, and not looking at their business from the customer's perspective. Not thinking about how they're going to ensure that they have repeat business, and have customers singing their praises or making referrals so that customer can keep coming back, referring and multiplying the business and that is tied to the cashflow.

STAY IN TOUCH! Receive future emails and exciting info.

The financial aspects of running a small business is something I'm very interested in. It’s a big chunk of the business that people often under estimate. People have a passion, and they're an expert in a certain field, so they dive into building a business. They think that their expertise alone is going to let them grow a business, and one of the big hurdles that they run into is the financial side, especially when it comes to managing the cash flow in the business. As small businesses fight for survival in the middle of this COVID-19 pandemic, it is important to identify some of the key things small business owners/entrepreneurs need to make sure that cashflow doesn't end up being what sinks their business. I asked Safie to answer the question what is cashflow and how do you manage it to ensure the financial health of your small business.

Safie’s response states that in starting a business it's important to know what is expected, in terms of your operating costs and equipment purchases and that all depends on the industry you're going in. If you are working while starting a business, you may have a little more cushion than those who just dive in. You want to get those things sorted out in advance. So, you know how much cash you're going to need. Determine if you’re going to need financing? If so, how much do you need? How long can you survive on a savings that you've come up with? That's really the starting point, of figuring out what you need in advance. Once you get into starting your business and you have that squared away, you need to actually track your income, expenses, operating costs and how much you have left to put away in savings for taxes. How much liquid money do you have in the event of an emergency? What if you lose a client? Having a budget and tracking your money at least weekly is the only way to maintain positive cashflow once you established it. So, it's really about starting with the right amount of money. If you need financing, get it in place, because you do need a cushion. If you have savings, that is great. After that, it's about tracking all of that and keeping that cashflow positive, and having that emergency money, readily available.

What are your thoughts about the economic recovery programs for Small Businesses and what should people be doing now and moving forward?

The programs were beneficial, if you could qualify, because those programs required your business to be in a place where you knew your numbers, where you had financials, and you could provide certain documents. A lot of people were scrambling with that. For those who were able to, I think it was beneficial overall, because if it helped you get through these gaps. Maybe it helped you to just pay the bills while you figured out what to do next. I do think they were helpful, but I do think that the way that the information came in pieces and the constant changes made it very difficult to under fully understand the implications of the different programs. In relation to the EIDL(Economic Injury Disaster Loan), that one was pretty straightforward. A portion of it was the grant advance, and then the other portion of it was the loan. The loan itself is pretty straight forward, it’s a 30-year term at a 5% rate. It was based on credit and your business finances. The grant, which came out first was originally stated that everyone was getting $10,000. It turns out it was really a $1,000 per employee. Some people did get more than they were supposed to. Now with the EIDL advance, if you also got the PPP, what people didn't realize is that you cannot be forgiven for both. So, if you have EIDL advance for $10,000, let's say you got the full $10,000, let's say you got a PPP for $20,000. The most you can get forgiven for is $10,000 because they're going to deduct the advance for the PPP loan. So that's something also to keep in mind in terms of forgiveness and what to expect. The PPP has a really low interest rate, 1%. It's not the worst, if it turns into a loan, with the other rates out there. That's just something I want to throw out there because a lot of people don't know the advance affects the PPP. Now what's currently on the table is, that the way that the laws are written currently (the tax code), any expenses you incur from income that is not taxable, are deductible expenses. That's a code section has been out for forever. So, when the PPP came out and that new law was written, it didn't exempt the expenses covered by the PPP from that existing law. So, the IRS came out with a revenue ruling 2020-27, that pretty much solidified that any expenses that you paid for with the proceeds, from the PPP, if you apply for forgiveness and are forgiven, you cannot deduct those expenses. So, let's say that example, you had a $20,000 PPP, if you are forgiven for the $20,000, then it can't be deducted. So, in essence, you're paying taxes on $20,000. So, it defeated the purpose of Congress's intent of the law because you're going to end up paying whatever your tax rate is on the $20,000 and that wasn't the intent, but until they fix it, that's what we have on the table right now.

So, for year-end purposes, right now, some people are at the position where they're starting to apply for forgiveness if they got the loans earlier in the year, and they may have to make a call, whether if this doesn't get turned around, should I apply for forgiveness? Should I take the 1% loan? That may be a business decision you have to make, but if it doesn't turn around and this is the end result, what is my tax liability look like not being able to deduct these expenses. You may be looking at your P&L right now, and maybe you had a huge PPP loan. If you take those expenses out, what does it look like now? What year end strategies can you put in to save taxes, assuming that is not reversed. So those are the types of things that, with a couple of weeks left for the year you may need to look into.

Well, as you can see, she knows her stuff. I would encourage you to reach out for her assistance.  If you’re an expert in your field, and your business, don't spend the time trying to figure that all of that stuff. I would say, leave it to the experts.

SDR consulting, is a tax and accounting and consulting company. We mostly work with small business owners, but we also work with individuals as well. People who may have complicated, tax situations or investments. We assist from business formation all the way through to tax preparation and all the stuff in between. That includes bookkeeping, accounting, taxes and business consulting. If you just have questions about how your business is taxed, payroll, sales tax, as well as tax resolution for those who get into trouble with the IRS or state. Our goal is to provide as many services that we can help small business owners, so they're not running all over the place. If it's something that we can’t provide, then we definitely have, colleagues and other advisors that we work with that we can definitely refer. Our goal is be that one-stop shop, for small business owners and for taxpayers.

Our contact information, the direct office line is (516) 255-6603. We're on social media at SDR consulting and our website is https://www.sdrconsultinginc.com/