As a shop owner, there are plenty of things you can do with your hard-earned money that will help you grow a more profitable business, but, along the road you will find that there are also countless ways in which you can lose a fortune. In working with thousands of shop owners over the years we have seen some very common mistakes that far too many shop owners make, so I wanted to share them with you to ensure that you’re able to avoid these pitfalls.
No. 1: They skim money off the top.
Not only does operating this way put a shop owner at risk of a costly and time-consuming audit, but if the Internal Revenue Service discovers that the underreporting was intentional, it can lead to charges of fraud. As you can imagine, charges like this can ruin the shop owner’s reputation—it can put them out of business, and, in some cases, it can even put them behind bars. Additionally, when it comes time for them to sell their shop, they’ll typically try to support the poor sales by telling a prospective buyer that the shop is more profitable but, in reality, but they are just “under-reporting.” Unfortunately, this sends a strong message to any legitimate buyer that the owner is the type of person who is willing to cheat the government, which raises concerns that the owner may cheat them as well. Accordingly, under-reporting is one surefire way to kill the value of a business, scare away any potential buyers, and turn an otherwise good business into a 24/7 nightmare with the IRS. The takeaway? The cost of skimming money off the top is far greater than the benefit.
No. 2: They pay their employees under the table.
In doing so, the shop owner is obviously looking to reduce their expenses, while providing their employees with non-taxable income. Just as skimming off the top sends a bad message to a potential buyer, paying under the table sends a message to the employees that the shop owner is willing to cheat the government. If this isn’t bad enough in itself, it also puts the shop owner in a position where their employees can extort them over the practice, it puts them in a position where they can be criminally charged, and it sends a clear message to the good employees that ethics aren’t nearly as important as they should be. Lastly, even though the employee may feel that it’s a financial win for them to be paid under the table, when it comes time for them to apply for credit for a car, home, or anything else, the only income the lender will put faith in is the reported income. When the dust settles, there are no winners when employees are paid under the table.
No. 3: They are using the wrong accountant.
As is the case when choosing the right auto repair shop, when choosing an accountant, you get what you pay for. The more research you do, the more you will discover that the low-priced accountants will typically cost you the most in the long run, and the higher-priced ones will end up saving you a fortune. A question I have been asked hundreds of times over the years is, “How do you find the right accountant?” The answer is pretty simple. All that you need to do is ask your doctors, your attorneys, and any other high-income earners you know for referrals, because people who are higher wage earners need accountants who have a profound understanding of tax law and of how to minimize tax liabilities. Please bear in mind that your accountant is not a bookkeeper, but rather someone who should have just one goal in working with you: to help you reduce your tax liability. The best accountants know how to skillfully do this. When the time comes for you to sell your business, or if you use it to collateralize a loan, you can demonstrate strong sales, and you can point out what your accountant has done with your expenses to minimize your tax liability. You’ll find that this not only impresses potential buyers, but any lender will appreciate how you operate an above board business. Without question, if you want to build a really great shop, you need a really great accountant.
No. 4: They turn to their accountant for the wrong advice.
As I mentioned above, your accountant needs to be held responsible for one thing, and one thing only, and that’s to reduce your tax liability. Where most shop owners get in trouble is in turning to their accountant for operational advice, rather than limiting their responsibility to tax reduction. Consider this: very few accountants have run top shops. So, in reality, when it comes to the industry benchmarks, the KPI’s, the best practices, and what needs to be done to bring about change, they have little, if any, expertise. This is why any advice you receive in business operations needs to come from your business performance coach, or from any peer groups you may participate in (but only if you’re confident the peers in the group are operating top shops). Your account needs to be an expert on tax law, so pay them to help you reduce your taxes, not to serve as a business consultant.
No. 5: They put money ahead of people.
In operating your business, there will be countless times where you could easily charge far more than you should for a service, and the customer would never know otherwise. On the other end of the spectrum, there will be times when you need to decide whether you’ll take a financial hit of some kind to satisfy an unsatisfied customer. Additionally, there will inevitably be times when a vendor is unaware that they undercharged you, and there will be countless times when you need to make financial decisions regarding your employees. The good news is this: If you live by the principle of doing the right things for the right reasons, and if you never put money ahead of people, then a few things are inevitable. You will grow a more profitable, successful business, you’ll be able to sleep at night, and you’ll know in your heart that your family is proud of you for being the person that you are.
Bear in mind that business isn’t complicated when you have clearly defined goals, the right people, and the right principles.
