For those who’ve beaten the odds to create a successful business, congratulations. But your challenges are only beginning. This is the phase where millions of viable organizations will now trip on their long term planning or will miss the factors that could be bringing greater profitability from current operations their way.
To this point, I would like to introduce Garrett Gunderson, a fellow Salt Lake City entrepreneur I met about six weeks ago as an introduction from a mutual friend (thank you, Hugh Ballou!) Gunderson has built multiple successful companies at the ripe (young) age of 35 and has authored a best selling book, Killing Sacred Cows. The title of Gunderson’s book is a clue to the approach he has taken in advising thousands of business owners and entrepreneurs—many of them in professional service sectors such as the dental and chiropractic industries, in particular—on how to prepare better for eventual outcomes. He also specializes in helping owners optimize their practices to create more income and to discover and eliminate the ways they are inadvertently throwing portions of their money away.
Garrett Gunderson, business strategist, best-selling author, and self-admitted “Money Nerd”
So I invited Gunderson to share the biggest mistakes he sees these businesses making with Forbes Entrepreneurs and to tell us what he advises them to be doing instead. Many of his strategies are counter-intuitive and the results are dramatic, but he assures me that none involve out-of-the-norm investing or exotic tax strategies that could run afoul of the IRS, which I would consider a chance not worth taking. With that caveat, here’s what Gunderson sees most and his suggestions that all of us could be using to manage our entrepreneurial finances better than we are typically (or even notoriously) doing today:
- Focusing on the topline, not the bottom line. Entrepreneurs are notorious braggers. If you hear that your competitor has hit $10 million or hired 10,000 employees, your first instinct is to figure out how to top that total, correct? Yet under the covers a much smaller business could be operating at a higher level of profitability and may well be the stronger organization overall. Every dollar that you create and protect as bottom line profit is much more valuable to your business and to you as an owner than the revenue dollar you create at the top. Can you streamline processes? Save on inventory? Save on taxes? These are the more valuable questions you should be asking yourself. But most business owners and operators don’t, or at least they don’t do so with sufficient accuracy and skill.
- Diversifying prematurely. Where should you invest your profits? Here’s a novel idea, Gunderson suggests: Why not invest it in your own business and also invest in yourself? “Focus, don’t diversify,” Gunderson says. “Build opportunity for your business by retaining the cash in your business as an opportunity war chest.” Cash is your best first investment, Gunderson maintains, as it allows you to make good choices. When you’re low on cash you accept bad clients. “Time terrorists,” he calls them. But when you have sufficient cash and apply it to the things that you know, you can grow. “Dentists don’t know real estate. I don’t know social media; therefore it’s a bad idea for me to invest in Facebook stock,” Gunderson says. “I understand business and money. It is most valuable to invest in your own business, and after that, invest in the things that you know.” At the end, there are no bad investments, Gunderson says, just bad investors.
- Investing in a 401K. Okay, this is clearly one of the sacred cows. The money a business owner invests in a 401K is meant to defer income for retirement as a means of saving taxes (more on that point in item 13). But the investment takes vital dollars that the owner could instead be using to invest in growing the business itself. Gunderson also points to the impact on an owner’s self esteem when the balance in a 401K account decreases: “It isn’t even the losses in the account that harm the business as much as the way business owners feel about themselves and their value and wealth when the account balance is down. It’s like a punch to the face, and they feel (perhaps even rightly) that they have no control.”
- Failing to focus on the right value equation. Dollars follow value, Gunderson maintains. The two greatest forms of capital in a business are the mental capital (your product and service expertise) and relationship capital (your audience, platform, organization, clients, family and friends). Mental Capital + Relationship Capital = Financial Capital. When these factors are in balance, the organization can shine. When they’re not aligned, however, the effort to work harder on a bad philosophy will not produce good results. Bad outcomes occur when you see an owner living outside of their means attempting to run the business like a treadmill as a means to keep up. Or perhaps the owner is attempting to run a value proposition that worked for someone else or for another set of customers, but isn’t well suited for them, such as the dentist who attempts to sell real estate investments on the side, or the marketing consultant who suddenly decides to use revenue from marketing services to own and lease private jets. When the business fails to match its value proposition to its natural platform and audience, things will seldom go well.
- Failing to realize that rookies stay invested, but professionals sit more fully in cash. Have you ever noticed that the greatest investors are typically sitting in cash, not investments, for a surprisingly high share of their time? Likewise, business owners feel too strong an urge to invest in “this and that” and are not invested strongly enough in protecting their liquidity by maintaining sufficient buffers of cash. What is the greatest cause of business stress and eventual failure? Generally, it’s not a problem on the balance sheet. It’s the lack of sufficient operational cash.
- Failing to invest in people. Too many business owners hire too cheaply, Gunderson says. This is flawed thinking. Instead, they should be hiring the best. They should also invest in the technology and expertise that allows them to streamline procedures and to eliminate the necessity to duplicate processes wherever possible as the company grows.
- Failing to realize there is no such thing as a passive income. There is never something for nothing, Gunderson acknowledges. Recurring revenue creates less work as time goes on, and is a worthy goal to strive for, but if you don’t manage the revenue at every stage, ultimately, the efficiency of outcome and even the revenue itself will go away.
- Doing too many things themselves. As a business owner there are things you do better than anyone you know, and so you continue to do them yourselves and procrastinate the hiring of others to handle those tasks, or you avoid paying for quality, saying “If you want it done right, do it yourself.” This is flawed thinking that doesn’t allow your business (or even your own capabilities) to grow, Gunderson says.
- Listening to financial managers who have a “cut back” mentality. The worst advice financial managers give business owners is to tighten your belt and cut back on spending, but they can’t tell you where. Or, in a similar vein, they tell you to augment your business cash flow by getting a second job. Really? “If you’re a dentist and you take a second job, you’re no longer my dentist,” Gunderson says. “This is a reduction mentality instead of a production mentality, and it is fundamentally flawed. If you used that time instead to properly focus your attention on our business just a little bit more, you’d succeed.”
- Failure to recognize that loans and debt can be good. In the business, do what it takes to create spendable cash for the owner, Gunderson says. (Presumably this is spendable cash to be used to increase business outcomes, and not to create extra bonuses for the purchase of vacation homes and luxury cars.) The traditional thinking, Gunderson notes, is that when you have extra money, you use it to pay whatever is due next or to chase the highest interest cost on your balance sheet and pay it off first. But the better idea, he says, is to take the loans you have, divide by the monthly payments, and apply our cash to the item that provides you with the lowest cash flow index first. Credit cards have the lowest cash flow index, meaning that if you pay them first, it frees up and improves your cash flow the most. “The number one factor for credit is your debt to income ratio,” Gunderson says. “If I can improve my credit with by improving that ratio, I can get a better rate on every loan that I have.” (As an aside he points out that 80% of Americans can’t get the best loans available right now due to their inability to manage this ratio. He also notes that 1 in 4 have a mistake that currently sits on their credit reports unresolved because they aren’t closely managing their credit and cash.) For businesses, an even bigger idea Gunderson suggests is to go for 3-6 months paying only the minimum amount on each debt and apply the additional money to the area of the business that is currently most vulnerable instead. He calls it a “90 Day Debt Delay.” “It will ease their stress and improve their business far more than the benefit of paying down the equivalent amount of money in debt,” he suggests.
- Thinking that simply working harder will move your business ahead. The least understood and most valuable commodity towards growing a business is strong vision, Gunderson maintains, and the ability to articulate it well. As a great example of this, he cites the case in point of JFK going on television in 1961 and saying we’ll get a man on a moon within this decade and we’ll get him home safely. “NASA showed up for work differently after that happened,” he says. How can owners increase their own vision? “People get better vision when they learn to take better care of themselves as an asset,” Gunderson says. “Consider spending fewer days at work than you currently spend. People can’t operate properly when the owner is always available. Owners are the cheapest labor available when they’re always there to solve problems. The team never gets tested or upheld, and the business owner burns out. Days out refresh the mind and allow the team to learn to make better decisions. When you think about it, most people are doing nonproductive things all day long. Create the opportunity for them to step up, and in most cases, particularly if you’ve hired and trained correctly, they won’t disappoint.”
- Thinking you have to work more to get more. “If you’re making $100K a year and you find out others in your role are making $125K a year you’re suddenly unhappy,” Gunderson says. “But when you really address the strategy of your company, you’ll recognize the ways to increase your efficiency, your team’s productivity, and the reach of your business without working more—simply working more strategically and better with the resources you already have, or are within your available reach.”
- Overpaying your taxes. This is not a bid for exotic strategies such as offshore accounts, Gunderson says. But these problems are most typically the result of simple issues such as not incorporating. A sole proprietorship, for example, has unlimited liability, Gunderson maintains, since it doesn’t allow you to differentiate the income that is offset by expenses related to work and they end up overpaying on self employment task. But even as a one person entity, by creating an S-Corp you can take salary and dividends on training, working on business training and not be subject to the 15.3% self employment tax, he maintains. Also, consider the strategy of cost segregation, which is an accelerated form of depreciation for business owners who own the building they are using for running their business. “Most CPAs (and individuals) take the standard depreciation rate not realizing that you can depreciate some portions of your asset more aggressively than others,” Gunderson says. “To not cost segregate your depreciation is throwing available money away.” “The other biggest mistake people make in this regard is to meet with their tax accountant just once a year,” Gunderson says. “You should meet with your accountant well ahead of time, several times a year, in order to plan in advance.” Here’s another tax related surprise: Gunderson loves paying taxes. I admit to being guilty myself of the traditional rash of business spending at the end of the year on allowable expenses to avoid taxable profits. “It just doesn’t make sense to spend $1 to save $.40,” Gunderson says. “I’d rather pay $10M in taxes than $1M, because I need to make so much more to pay the $10M. Yet accountants are notorious reductionist thinkers. Cut, reduce, save, defer. The best tax savings is to earn another dollar. Too many people purposely stop earning more money because of their fear of paying more tax.” So don’t overpay your taxes, Gunderson says. Of 117 people his business examined and tracked data for, he points out that 107 had overpaid their taxes by an average of $11,210 apiece.
For those interested, Gunderson has re-opened a service he has run in the past: Ask The Money Nerds, www.askthemoneynerds.com, is a free resource that allows readers to ask any personal or business-related financial question they like and to be assured the team of “nerd experts” will make best practice to return a response within 48 hours. No selling is allowed in this program, which points respondents to the best articles, resources and information to answer their questions. The program allows the Money Nerd experts to keep a pulse on the nature of the questions emerging, which is helpful in keeping them as relevant as possible within their specialized fields.
Gunderson himself is the “Nerdiest Money Nerd” within the squadron of experts. For other questions or to reach Gunderson directly, readers can get more information from www.freedomfasttrack.com.
13 Common Money Mistakes — And Their Solutions
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