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.

Home Improvement Loans

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.

Using an Automobile for Business

An automobile is one of the most common tools for use by business. Since it represents such a large expense, it is good to understand how the IRS allows you to pay for the business use of your car.

If your business buys a car and uses it exclusively for business, then all of the car expenses can be classified as business expenses. However for most small businesses, it is rare that a vehicle is used exclusively for business use.

The IRS allows you to keep track of all the vehicle expenses on your personal vehicle and then divide them between your business and personal expenses based on how much the vehicle was used for each category. For example, if you used the car for 25% business and 75% personal, and you spent $5,000 on the car for the year, you can deduct 25% as a business expense, but the other 75% is considered a personal expense and is not deductible.

If you use a vehicle owned by your business for personal use, the IRS requires that you pay taxes on the business use of the vehicle as if it were income to you. There are several ways to calculate the value of personal miles on a business car. The most used method is to use an IRS table to determine the leased value of a vehicle. The employee would pay taxes on the leased value based on the percentage the car was used for personal use. The employee could also use the cents-per-mile valuation where they would pay taxes on the personal use based on the IRS standard mileage deduction rate.

If you use your own vehicle for business use, your business can reimburse you for the vehicle expenses at the standard mileage rate. If you drive a lot of miles for business and have an older vehicle, this can be a very good arrangement because often the reimbursement more than covers the cost of gas and maintenance on a vehicle. Since the payment is a reimbursement, you aren’t required to pay any taxes on it.

For more information on how to account for business use of vehicles, visit the IRS website, or ask a reputable accountant. With a little planning, you can find a method that will work out to the best advantage for you and your business.