Analyze costs, sales to lift profit
Dear Karen: My revenue goes up by 50% annually, but my profit rises by only 10% annually. I don’t want to lose customers by increasing prices. What can I do?
Answer: In some cost-intensive companies, 10% annual profit gains are perfectly respectable. And too much of a focus on revenue can mean your company will grow its way right into U.S. Bankruptcy Court.
To figure out how your company stacks up, you’ll need to analyze costs and revenue closely, recognizing that your costs are guaranteed and controllable whereas your revenue is neither, said Aaron Chaitovsky, a partner at New York accounting firm Citrin Cooperman & Co.
Improving profit probably will mean adjusting your budget, spending only where necessary and cutting costs shrewdly.
On the revenue side, make sales projections and draw up a plan to achieve them.
“People tend to look for that big winner, that windfall account, but that’s not going to save you. Go after the right sales, do some cross-selling to existing customers and add value so they are more dependent on your company,” Chaitovsky said.
Finally, figure out how much you’re spending to achieve your sales and analyze your product and client mix.
It could be that you are going after the wrong kind of business. If that’s the case, no amount of growth will improve your bottom line.
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Legal structure depends on firm
Dear Karen: I’m confused about which legal structure I should choose for my new business.
Answer: There isn’t a one-size-fits-all answer. The best entity depends on your business and a bunch of other factors.
Most small businesses are well served by the S-corporation or limited liability company designations, said Salim Omar, a New Jersey-based tax and financial educator.
“With both legal structures, you protect your personal assets from business activities that go awry and have the most flexibility available as you make your business work,” he said.
By electing to be treated as an S-corporation, you avoid double taxation (once to the shareholders and again to the corporation). You simply report your share of the corporation’s income and losses on your personal income tax return.
Before you make a decision on this crucial issue, seek professional advice. The entity you choose will have far-reaching implications.
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Put things in order before retiring
Dear Karen: I’m thinking about retiring from my business within 10 years. What should I be doing?
Answer: Call your accountant and start working on a personal retirement plan. Ask yourself this important question: Will you sell the company outright, have a family member buy it or retain ownership but bow out of daily operations?
Brent Lipschultz, a succession planning expert at tax advisory firm Eisner, said you should decide whether you will need business income to fund your retirement or whether you’ll use other funds.
“If you are keeping the business in the family, you should have enough life insurance to pay your estate taxes when you die, so that your family members won’t have to sell the company to cover those costs,” Lipschultz said.
You’ll also want to think about how your company will retain key managers and maintain adequate cash flow once you’re no longer in charge. You don’t want the business to retire just because you do.
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Got a question about running or starting a small enterprise? E-mail it to karen.e.klein@latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012
