Outsourcing Payroll

With all the taxes and paperwork involved in dealing with your own payroll, there is a lot to keep track of. The government requires that you deduct certain taxes from your employee’s paychecks and send it to them along with your portion of the taxes. Most accounting packages can help you do this, but it still requires a lot of paper work and filing with the government.

For many businesses, the amount of time required to understand the payroll process isn’t really worth it. If payroll is going to detract you from working on things that actually help your business make money, you should probably consider using an outside service to process payroll.

Many local accounting firms can help handle processing your payroll, but there are also some really good firms that handle the entire transaction over the internet. Here are some things you should look for when evaluating payroll companies:

  1. Direct Deposit – By directly depositing the money into your employees bank account, you save yourself the trouble of working with the paper, waiting for things in the mail, etc.
  2. Bank Transfer – You want to find a company that can directly take the money out of your checking account to pay employees and taxes. Otherwise you’ll have to be writing and mailing checks.
  3. Login for employees – If the company offers an employee login, this can save you time because employees can check their payment details themselves.
  4. Import for Accounting System – You definitely want to use a company that lets you import payroll information into your accounting system. This helps insure that everything is accurate and saves you a lot of time over entering in each thing manually.
  5. Government Filing – Most payroll companies should handle filing the paperwork with the government. Most of the time they are setup to make these filing electronically.
  6. Experience – One of the big advantages of going with a payroll company is to minimize any problems with the IRS. You want to work with a company that has enough experience to keep you out of trouble. This doesn’t mean you shouldn’t use a smaller firm, but make sure they know what they are doing.

When you consider all of the paperwork involved in processing payroll, having another company do it can be a good deal if you don’t have the expertise yourself. Most charge based on the number of people and the number of times, you have to do payroll each month. Depending on what company you are using, here are a few things that will help minimize the amount you pay for the service:

  1. Contract – Much of the expense to the payroll company is in getting everything setup initially. Once they have you setup in their system, most of the process is automated. You may be able to get a better deal if you signup for a year long contract or some other period of time.
  2. Accounting Software Deals – Sometimes the company that provides your accounting software will have a special deal with a payroll company. Sometimes this will result in a lower cost for the payroll service, or free accounting software updates when you are using the payroll service. It is worth calling your accounting software company and asking if they have any special arrangements with payroll companies.
  3. Fewer Payrolls – Depending on your employees, you may be able to save money by going to a monthly payroll instead of every two weeks. This is especially good if you are just paying yourself and your spouse.
  4. Direct Deposit – Most payroll companies charge extra to mail a check, so if you can put all of your employees on direct deposit, it will probably reduce the cost of running payroll.
  5. Shop Around – Make sure you compare the different services. Be aware that the offerings from company to company can vary significantly. For example, a local accounting firm might charge more to do your payroll, but may give you free advice once you are their client.

Change in an Organization

Many business owners and managers assume that it is easy to change things in their organization as long as they are the boss or the person in charge. This is a very naïve assumption.

Just because someone has the authority to make a change, doesn’t mean that they have the influence to make the change effectively. A manager who just bullies their way through change is achieving short-term successes at the expense of long term effectiveness.

When introducing change to an organization, the first step is to identify who will be impacted by the change and who is likely to offer resistance. Resistance isn’t always noticeable. If you are the boss, resistance may come in passive forms that are hard to identify and notice. That is why it is important to identify resistance ahead of time instead of waiting for it to become noticeable. Some types of resistance is very hard to notice. For example, you may have someone who is resisting your change, but would never say anything. However, they may intentionally or subconsciously perform their tasks less efficiently under your newly implemented system than the old one they like better.

By identifying people who will offer resistance ahead of time, you can take proactive steps to get them on your side. Many individuals offer resistance just because they don’t feel their opinion is being valued. By including them early on, you can get them on your side if they feel like they are having a part in the process of change. Many times a conversation where you ask what they think will go a long ways toward winning over someone who might offer resistance.

There are some people who are going to resist change even if you try to involve them early on. When you have identified these people you need to take steps to minimize their impact on the rest of the organization. This might mean rolling out a computer software update in their department last after all of the other departments have been upgraded. It might mean implementing a change while they are on vacation, so they have less chance to complain during the actual change over.

It is important to realize that one person offering vocal resistance can sway many other individuals who would be supportive or at least not resistive of the change. In extreme cases it might be better to remove or reassign someone if they are going to fight a very important change.

If your change is a change to a process, it is important to implement some type of measurement system so you know the process is actually being performed in the correct manner and also, so you can tell if the change was an improvement or not.

Many managers try to implement small changes just by telling their direct reports verbally what they want done. This may work for some types of changes, but in general a more formal approach is required. There should be some type of written documentation of changes, so there is no ambiguity.

Change is an important part of managing a business. By identifying the people who might be resistant to a change early on and approaching change in a consistent planned manner, you can reduce the difficulties inherent in making changes to an organization.

Exploiting Differences in Pricing

The basic way that businesses make money is by taking advantage of differences in prices. For example, Wal-Mart makes money by exploiting the difference between the price the can negotiate with suppliers and their selling price of an item.

Import businesses exploit the differences between what an item costs in a foreign country and what it costs locally. Restaurants exploit the difference between the cost of raw ingredients plus labor and the amount people are willing to pay for a meal.

When you start to think of businesses as simply exploiting price differences, you will start to see opportunities in new areas. Instead of looking for a traditional business, you can look for the underlying concept behind business. This type of mindset helps keep you from getting stuck in a rut and helps you redefine the idea of business based on how they make a profit.

If you can identify areas where your cost of obtaining a product or service is less than the price most people are willing to pay for that product or service, you’ve identified a potential business idea.

Setting a Reasonable Fee

Many businesses go under because they don’t charge what they are worth. When I was a teenager, my brother and I mowed lawns during the summer. We set our prices by looking at a yard and deciding how much we would want to pay to have it mowed. We did a better job than many of the other people who mowed, so we had a lot of clients who were doctors or lived in the country club addition.

Unfortunately our method for setting prices kept us from making much money. We would do a lot of extra work to make sure the yards looked perfect, but we weren’t charging enough. We finally quit because it wasn’t worth it to keep mowing the yards.

What we should have done is concentrated on the customers who were willing to pay a premium for our service. Mowing half the number of yards at double the price would have been a better use of our time.

Instead of focusing on how much mowing the yard was worth to us, we should have focused on how much it was worth to the customer. To a doctor who makes $100 per hour and hates to mow, our service would have probably been well worth $40 so he wouldn’t have to mow himself.

When setting prices for your services or products keep in mind how much it is worth to the customer. You want to go after the high margin business where your product is worth the most possible.

This type of mindset is especially true if you do consulting. If you focus on selling your time, you are likely to drastically undervalue yourself. If you focus on the value you provide for your customer, you’ll arrive at a much better fee. For example, if you can do 20 hours worth of work for a client that provides them with $100,000 worth of savings every year, does $50 per hour ($1000) seem like a reasonable price? For the customer it is a steal. A more reasonable price to charge would probably be $20,000 to $50,000. For the customer it is still a good deal. If you provide them with $500,000 worth of savings over the next 5 years and only charge them $20,000 they are getting a great return on their investment.

Non-commodity products should be priced in the same way. If you sell a product that your customers can’t get anywhere else you need to make sure you understand the cost of going without your product. Light switches that automatically turn off when people leave the room are a good example. When there were only one or two companies that made them, their price could be based on the amount of money they saved the customer instead of on the cost of the components.

By focusing on the value to the customer of your value or service, you will be in a better position to set appropriate prices.

Running your Business on Free Software

Open Source software gives business owners a way to run their business without needing to pay for expensive software. Of course no software is actually free, you have to spend a considerable amount of time learning to use every system. If you are starting a business with very technically employees, it might be less expensive to purchase the software they are currently familiar with to lower the learning curve.

Still many businesses can benefit from free software. This is especially true of businesses that need general office computers to access email, browse the web, and create documents like spreadsheets, presentations, and word processor documents.

If you are considering using Open Source software, here are several questions to keep in mind:

  1. How will you get support? If you have a technically savvy employee, they may be able to provide support for you. There are also many companies that offer support for Open Source software.
  2. Who will set it up? Once a computer system is up and running it will probably require very little maintenance. However the setup is important to make sure you have the networking configured, a way to back things up, etc.
  3. What standards do you need to be compatible with? If your job involves exchanging a lot of information with people who are using Microsoft Office, will your system be able to read their files. If you will receive many appointment requests will your mail program be able to read them.
  4. How will you handle training? You need to have a plan for how to train people. Maybe it will just be informally teaching your employees in the office or giving them a book. Perhaps it makes sense to send them to some sort of training class. What every you choose make sure you have a plan in place ahead of time.
  5. What is your backup plan? Make sure you have a plan in place to recover your data if one of your computers is stolen or suffers from a hard drive crash.

Pass-through Entities

The government has created some special types of corporate entities for small and medium sized businesses called pass-through entities. These types of organizations pass their profits on to the owners every year, so they don’t have to pay any income tax as a corporation.

The main reason this can work out to your advantage is because the money that is passed through to the owners isn’t subject self-employment taxes because it is treated as passive income. This means you don’t have to pay Medicare and Social Security taxes on the profits from the company.

If you run a business as a sole proprietor under your own name or as a DBA, you’ll have to pay self-employment taxes on the money you make because it all shows up as your salary. By using a pass-through entity you can pay yourself a reasonable salary (which you’ll pay all the regular taxes on) and then take the rest of the profit out as investment income (which you won’t pay self-employment taxes on).

The two types of pass through corporations are Limited Liability Corporations and S Corporations. An S Corporation is similar to a regular corporation, but it is structured for smaller businesses. There are specific rules about who can own and S Corporation and the number of owners allowed. However, it can work quite well for a small to midsized business. Another advantage of an S Corporation is that it can easily be converted into a regular C Corporation.

LLCs are a newer type of corporate entity and they aren’t available in every state. Usually LLCs require less record keeping and fewer corporate formalities than a corporation. In many states the cost to file for an LLC is slightly higher than that of a corporation. LLCs allow you a bit more flexibility in how voting rights and ownership is assigned.

Pass through entities aren’t always the best choice. There are some restrictions placed on these types of organizations especially in the area of fringe benefits. As always it is best to talk with an experienced tax advisor in order to make the best choice.

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Technology to Create a Business

As we’ve previously discussed, the basic idea behind business is exploiting differences in pricing. With this concept in mind, technology becomes a way to enable businesses that couldn’t exist without technology.

For example, websites that offer free classified advertising for individuals and are supported by a few ads from large businesses or an advertising network like Google Adsense, couldn’t have existed before the internet. The cost of printing and distributing newspapers containing just classified ads was high enough that a free model just wouldn’t work. However with the Internet, the cost of “printing” and delivering the ads becomes close to nothing.

There are other businesses that are using technology to lower there prices because they are able to get efficiencies that were never before possible. One example of this is the growing number of businesses that consist of just one or two people. In the past, many of these businesses would have needed a large support staff to handle accounting, billing, etc. With modern technology, these businesses are able to do much of the work themselves using specialized software and outsource parts like payroll to companies that rely on technology to offer services at a lower price that would have ever been possible before.

When working on your own business, try to identify the work done by employees that could be done by technology instead. Sometimes it is more cost effective to use real employees. For example, getting a computer to answer your phone will probably not help your bottom line. But setting up a computer that automatically keeps track of inventory based on data from your point of sale machines could reduce the need for costly manual inventory audits.

The key thing in choosing technology is to make sure you are focused on a realistic payback. A technology investment that has a payback of 10 years, is probably not a good investment because your processes will have changed in that time.

Most businesses have many areas that are “low hanging fruit” where a very modest investment in technology can create tremendous savings. The successful business person practices identifying these areas.