Celebrating the Success of Spurrell.ca | What It Really Takes to Run a Successful Company

Show Notes

This man (Josh Spurrell CPA) drove all night to attend the Thrivetime Show Business Conference and he joins us today to discuss what it really takes to run a successful company.

• Is owning a business right for me?

1. 1. Some people have enough awareness to ask the question and some don’t but this is the number one question that everyone should have an honest conversation about before they start.
   2. You have to face the fact that 9 out of 10 businesses fail.
   3. Even though it’s true you will have a lower ceiling in terms of time freedom and financial freedom, you are more likely to be a millionaire if you work for someone else and develop disciplined savings habits. Although developing disciplined savings habits isn’t easy, it’s far easier than the level of discipline required to be an entrepreneur.
   4. Most people start a business with the false expectation of immediate time freedom. They are sick of working 40 hours a week and they think it they start a business, they can immediately get down to 30 hours a week, with 10 of those hours spent working in front of the TV. It’s my experience that you are going to be very disappointed with the financial results if you start out with that sort of schedule. If you want more immediate time freedom, find a more flexible job don’t start a business.
   5. If you are going to build a seven figure business where you make $100,000 more a year than an employee in your industry, you should be prepared to work at least 60 hours per week for a decade.
   6. Some people would say I don’t need that much money to be happy, so I’m not planning to work that much, I just want the freedom. I tell them no matter the size of your business you’re going to have to deal with added stress, more rejection, employees who steal from you, and unreasonable customers who don’t want to pay. Unless you build that battleship up to a certain size you’re always one bad break, one bad decision, one employee leaving to compete with you, one customer cancelling from everything falling apart. You have to ask yourself, unless you’re willing to put in the time to build a business that’s worth at least the same million dollars that most people can save as an employee, are you really ever going to that freedom that you want for you and your family?

• How do I get a bank loan or raise investment capital?

1. 1. People will not like this answer. The number one way to get approved for bank loans and increase your ability to raise investment capital is to develop a successful track record. You want CPA prepared financial statements, showing increasing profitability over multiple years.
   2. I’m not saying it’s impossible to get financing as a start-up, there are ways. Both the US and Canada have federally backed small business loans. Most entrepreneurs should look at setting up personal lines of credit and credit cards before they leave their job. Also, it’s generally easier to borrow at the time of purchase for hard assets like vehicles, equipment, leasehold improvements, than it is for soft costs like advertising, inventory, payroll, and other overhead expenses. Thus, rather than spending all your cash on purchasing hard assets and then trying to finance overhead costs after you get going, you should look at financing the hard assets at the time of purchase. Depending on the real estate market in your area, you should also look at getting financing from the landlord for the buildout of any space.
   3. However, people should not go into business unless they are prepared to execute a bootstrap strategy if they strike out on getting a bank loan or raising investment capital.
   4. People will ask me what that means. I give them an example of where someone needs $500,000 to start a nice restaurant. A bootstrap strategy for that client would go like this. Step 1: start catering events and cook from the kitchen in your home Step 2: Use those profits and add a food truck to the catering revenue, Step 3: Use those profits and do a cheap buildout on a restaurant in a space where a previous restaurant went out of business. You won’t get the exact build you want but you can make something decent. Step 4: Build the restaurant you wanted from cash.
   5. Of course, the awkward question that comes next is how long will that take? I tell them it could be a 3 to 5-year path. If they’ve watched too many Tai Lopez get rich quick videos, that’s probably the last time I’m going to talk to that wantrepreneur.
   6. We can keep approaching the bank and investors every year as we build out the track record, to try to speed up the process. However, you should have a plan B where you are in complete control of your destiny even if you can’t raise capital.
   7. Some people won’t like that approach because it’s not fast, but we know 9 out of 10 businesses fail. Let’s turn the tables on those odds and focus on strategies that work 9 out of 10 times rather than strategies that work quickly, but only work 10% of the time. I try to turn my clients into the entrepreneur versions of card counters at the blackjack table.

• Should I incorporate?

1. 1. The only reason not to incorporate is because of cost. However, at certain income levels, you will likely pay more taxes than the cost of maintaining the corporation. That profit number is going to vary from country to country, state to state.
   2. However, there are few other considerations:
      1. Limited liability
      2. Easier to qualify for bank loans and raise investment capital
      3. Greater ability to protect a company name legally
      4. Sometimes necessary for certain types of licenses and insurance
      5. Can be a customer perception that your not serious if not incorporated
      6. Often customers won’t hire you if you’re not incorporated because in some jurisdictions the customer will have greater risk of the contractor being deemed an employee for tax purposes or deemed an employee for employment law purposes
   3. I’ve been a public practice CPA for more than a decade. I have clients that have been with me since I was an articling student, before I wrote the CPA exam. I’ve helped people build and sell seven figure businesses. Out of thousands of clients that I have dealt with I only have 1 client on my roster right now who started out as a sole proprietor and grew up to be a corporation. When I was younger I use to think that people’s baby proprietorship would grow up into big boy corporations someday. However, I’ve realized that the odds of this happening are not good. Firstly, I’m not giving the same level of business planning because they are trying to do everything cheaply, that’s the primary reason that they are not incorporating. Also, I think there is a mindset thing at play here. Some people jump in with both feet. As the saying goes, they want to take the island so they burn the ships. The people who just dip their toes in the water as a proprietor, never seem to get there. 

• Can I use my personal bank and credit card accounts?

1. 1. You can but you shouldn’t
   2. It’s going to be more costly for the accountant to do the work if you have a business and personal transactions co-mingled in the same accounts
   3. Even if the accountant spends the extra time, there is a risk that the accountant will make an error if the transactions are co-mingled.
   4. Also, you will lose credibility in the event of an audit. People forget that audits in every country are administered by human beings and are subjected to professional judgement. If you’re trying to claim a questionable deduction, one that’s on the fence, and you have not demonstrated the ability to separate your business and personal expenses into different accounts, it’s more likely the auditor will rule go against you. 

• What can I deduct?

 

1. 1. Trying to learn tax law on deductions is not a good use of business owners time:
      1. They can vary from country to country, state to state.
      2. They can vary from industry to industry
      3. They can vary depending on the size of the business
      4. Budgets get passed, elections happen, tax departments make new rulings and the allowable deductions are always changing
      5. Ultimately tax law is subject to interpretation and audits are administered by human beings so they are never black and white. I’ve presented separate clients with identical situations to different auditors and they come back with different results.
   2. The honest question you should ask yourself is, “does these expenses help me earn income now or in the future”? If yes pay for it initially in the corporate account. Then get a month or 2 of activity together and go through the specific items with your CPA. They will give you specific guidance on which items to keep using the corporate account for and which items to use the personal accounts for moving forward.
   3. Then a good CPA will often tell you that they are going to look at all the items again at the end of the year to determine the level of risk on these deductions. Let’s say your CPA tells you initially to pay for travel expenses related to attending a conference. At the end of the year the CPA sees that you only have $50,000 in revenue and $30,000 in travel expenses, the CPA is likely going to back out some of those expenses. However, they often can’t help you make a good judgment call until they get a handle on totals for revenue and expense accounts at year end.

• Can I use unincorporated contractors?

1. 1. The specific rules for using unincorporated contractors vary from jurisdiction to jurisdiction but the simple answer is unless the person is incorporated and has other customers don’t bother. 
   2. I was recently asked by a government agency in Canada who provides consulting to entrepreneurs to give a presentation to their members as an expert on the technical considerations of this issue.
   3. I refused because I know the game is rigged. Ultimately the rulings are made by government employees who are given the mandate to find any excuse to rule the workers as employees because they want to collect payroll remittances.
   4. An accountant can grandstand as an expert on the subject. However, as a prudent business person you shouldn’t even go down that path without simultaneously considering how much it’s going to cost to pay a tax lawyer to go to court and get a judge to force the government to apply their own rules.
   5. Big companies have already figured out that it’s rarely worth it. That’s why most large companies will never hire unincorporated sub-contractors.

• How do I pay myself?

1. 1. Don’t use QuickBooks or ADP or some other payroll service to pay the business owners without checking with your CPA. These programs are designed to pay arm’s-length employees, they don’t help you tax plan.
   2. Tell your CPA the after tax amount that you need to live on. The household budget if you will. Then let your CPA come up with a strategy to pay the business owners.
   3. I often get asked to teach people how to do it. Unfortunately, you’re going to have to go get your accounting degree and then come work for me for 3 years if you want to get good at this subject. 
   4. Obviously that’s not a good idea for most business owners. However, most business owners underestimate how much a good strategy is worth and end up paying too much tax.
   5. I strongly suggest just giving your CPA the after tax monthly household budget and letting them come up with a strategy for you.

• What accounting software should I use?

1. 1. Your business will not succeed or fail based on the brand of software you use. The person you hire to oversee your accounting is far more important.
   2. I recommend using whatever brand of software your CPA likes best and if that means switching software when you switch accountants so be it.
   3. I’ve seen CPA offices where they use every brand and version of software under the sun. In my opinion those office are far less efficient than the offices than the offices who specialize in specific software.
   4. It’s like hiring Lebron James to play on your basketball team and then telling him what type of shoes to wear.

• When should I pay tax?

1. 1. Different types of tax will have different deadlines. Generally monthly, quarterly, or annually depending on circumstances.
   2. Payroll withholding tax should be sent in as soon as you pay your employees. Trying to use these funds as a short term operating loan until the deadline is like Russian roulette. Just send it in as soon as you deduct it.
   3. For all other tax payments we recommend having your CPA devise a monthly tax payment schedule. Ideally you want to keep your monthly tax payments as even as possible to smooth out cash flow with the goal of owing $0 at year end. Even if you do have the option to defer payment to the end of the year, we recommend paying every month, to avoid getting behind.

• How often do you have to meet with your accountant?

1. 1. It depends on the size of the business.
   2. We meet once a month for 4 months when we start with a new business regardless of size.
   3. Meeting number 1 we ask all the questions to fully understand the financial circumstances of the business and household
   4. Meeting number 2 we give the business owner a formal financial plan that includes recommend tax payments and automated saving levels.
   5. Meeting number 3 we discuss their plans for the business
   6. Meeting number 4 we give them a business plan that includes proven strategies to achieve their goals, with realistic projections.
   7. At the end of every year we meet to go over the financial statements. We don’t email the statements. We meet in person or do a web presentation so we can discuss the numbers and ensure everyone is on the same page. We also get their goals for the upcoming year.
   8. Then we meet at least once more after the year end meeting to give you new formal plans to achieve your updated goals.
   9. Once our clients reach a certain size we meet with the owners every single month at a set time to ensure everything is staying on track.

Question:

1. 1. Do we have any examples of cash only provider scripts that we could use to help us in this process?
   2. Recording 1: https://www.dropbox.com/s/lrqllgwgw3wbzuh/Audio%20Mes1.mp3?dl=0 
   3. Recording 2: https://www.dropbox.com/s/643hllc6xib5cm8/Audio%20Mes2.mp3?dl=0