The Price of Reinvesting

I've recuperated from the presidential race. A lot happened between my last post and election day that made my decision much easier.

During that time, my last post also inspired a debate -- heated at times -- in the comments section. And because of the questions it generated, I feel the need to elaborate on something I said about leaving money in the company and having to pay taxes on it.

That point is right out of the tax code and any knowledgeable CPA will verify this. If you are a C Corp, you pay personal income tax on the money you pay yourself, and any remaining profits are taxed at the corporate tax rate (which could be more or less depending on that year's tax code). If you file as an S Corp, all of the income of the company flows to you personally and you pay personal taxes on it.

The reason that many people do this, including myself, is to avoid the double taxation that occurs when you sell your company. If you are a C Corp and you sell your company, you will pay taxes on that money -- again. Mr. Krubner asked about income taxes paid on money reinvested in the company. Just because a person "reinvests" money in the company, it does not mean that they don't have to pay taxes. Profit is profit. Whether you pull all of it out, whether you pull some of it out, it's profit and you are supposed to pay taxes on it.

If this doesn't make sense to you, please talk to an accountant. I have always enjoyed an advantage in this part of my business, since I have an accounting degree.

Thanks for all your input.

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Anyone Else Feeling Conflicted About this Election?

This election has me tortured. I belong to a business group that consists of seven business owners. Because I'm the lone Democrat, I take a lot of grief. But at our latest meeting I had to confess, "I think I'm becoming a Republican."

Why? Well, McCain's social policies still make me sick, scared, and disgusted. And I still can't believe that STUPID Paris Hilton ad that he approved. But I also can't believe how naïve O'Bama is. His "tax the rich" routine is going to cost me big money -- money I don't have because I heavily re-invest in my company. He clearly doesn't understand how small businesses work.

Like many other business owners, I have a Subchapter S corporation. That means I pay taxes on my income regardless of whether I take it out of the company or reinvest it in the company. If he raises taxes as promised, it will mean I'll have to pay even higher taxes on money that I'm not seeing. That will force me -- and a lot of other business owners -- to take out more and reinvest less. That's how you strangle a business -- and ultimately the economy.

I really don't know what I'm going to do on Election Day. I think I'm having an identity crisis.

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How Do You Stop Being an Entrepreneur?

On some level, there are obvious hazards to being an entrepreneur -- going broke, working overly demanding hours, accepting fiscal and legal responsibilities, and the like. But there's another implied meaning to occupational hazard -- things that you carry to your personal life from your work life: A psychiatrist who can't resist analyzing his or her date. An insurance adjustor who sees risk in everything. A nutritionist who can't let his or her kids enjoy a double scoop ice cream cone.

I think entrepreneurs have their own set of hazards that they carry with them. Whether it's from years of conditioning or it's why they are entrepreneurs, they can be quite different. I find myself frequently coaching people on how they can get into business for themselves. What's wrong with that? The reality is most people don't want to be in business for themselves.

I find myself explaining to people how to use financial leverage to get ahead, to borrow money -- not too much, not enough to keep you up at night, just enough to make it hard to go to sleep. But the reality is many people can't handle borrowing money.

I find myself in other people's businesses giving suggestions on how they can improve their business. But the reality is they either don't want to hear it or they will never get around to it. Not too long ago, I went into a small, struggling sandwich shop near my business. The owners asked for advice. I gave it to them. One of my comments was that their sign was missing a letter in the name on the door. That was six months ago and it's still missing. My conclusion: I am not "normal."

Does anyone else share these concerns?

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How Much Risk Is Too Much?

When I started my business at age 22, I had no mentor. My business grew very quickly, and I was desperate to find some "models" of good retailing in Chicago that I could learn from. I settled on four that I watched. They shared incredible market presence, and they were legendary institutions of Chicago.

I watched how they handled their customers, their marketing, their product and service offerings. It helped me envision how I should shape my company as it got bigger. Thirty years later, three out of those four legendary institutions are gone. Victims of a change in business climate? To a degree. But, mostly, I think, victims of their own hubris. They got big. They needed to get even bigger, and they needed to do it fast. They initiated major expansion plans. They borrowed and invested money. They got away from the core of what had made them successful.

You see it all the time. It happens in really big businesses; it happens in smaller ones. My guess is that one of the prime culprits is usually a lack of fear, healthy fear. It's the same thing happens with race car drivers -- they might take a risk of a little crash but they don't want to take the risk of a big one.

But for a business, how do you decide how much risk is too much? Here's my determining factor: Can I afford to take the hit if things go wrong? Or am I betting the ranch? I don't know if you can be prepared for the perfect storm, but you should at least be prepared for a storm.

How do you decide?

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Are Our Health Plans Fair to Employees?

When I started in business, health insurance cost me something like $30 per person per month. It was fairly insignificant. Now, it's anything but! It is one of the biggest expense lines in most businesses once you get done with labor and cost of goods sold. It's even more difficult for a small business owner than for a large corporation because corporations have the economies of scale to manage it better.

I now pay about half of the premiums for my employees, and they pay the balance. I once read that insurance runs 10% to 20% of payroll for a typical company. Obviously, your average salary would have an effect on this percentage. A professional office with higher salaries would have a different percentage than a company with mostly factory workers. But here's the thing: It seems to me that in most if not all companies health insurance premiums are inherently inequitable.

People with families are going to cost the company more than people who are single. People who are on their spouses's policies are going to cost the company less. Basically, people doing the exact same job are getting different levels of benefits. That certainly wouldn't be tolerable for pay scales or vacation time. Why is it tolerated with health insurance benefits? Does anyone think this is a problem? Does anyone have solutions or suggestions?

Some other questions: Has anyone had the stomach to charge their employees for more than half of their premiums? Will that fly? Are any owners still paying the full premium? I'm wondering what the typical percentage is for smaller companies. Could you please weigh in (if it doesn't make you too sick)?

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The Key to Doing Good in a Bad Economy? Cash Flow

I've been in business for 30 years and have lived through three or four recessions. It's easy to tell people, "Keep spending." But that's not always the right call. How do you know when to spend?

Here's my observation: When the economy goes bad, companies start to pay attention to things they should have looked at before. I think you have to take into consideration how the economy is affecting your business and start thinking short-run instead of long-run. For instance, maybe renovating your building will have a good payback over the next ten years but the cash flow will put you in a bad spot. Maybe you hold off a year.

On the other hand, buying a labor saving machine might be a good purchase because you can finance it and the payments will be less than the savings. The knee-jerk reaction of "stop spending money" can be very dangerous. It can hurt more than the recession itself. People start making bad decisions like downgrading their service or quality. That can have long-term and short-term consequences.

The key is to watch your cash flow carefully. Failing to do so can put you out of business. Profits are going to be down either way, but you can pick up some of that ground next year. There can be a huge difference between cash flow and profits depending on your bank debt, receivables, and inventory. Recessions can actually have a positive effect on your business long-term. It can shake out competitors to leave you a bigger piece of a smaller pie. I've read numerous articles about companies that didn't pull back during recessions and got a tremendous reward afterwards.

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Are You a Leader -- Or Just a Cheerleader?

Leadership isn't the same thing as management. Leadership is about providing vision as to where the company is going. It's about inspiring and motivating. It's about instilling a certain amount of comfort that someone wiser than you is going to figure a way out of a mess.

Of course, everyone knows there is such a thing as a bad leader. These leaders tend to do the opposite of everything I just mentioned. There are also leaders who may not be bad but who don't really provide much leadership. And then there's one more category I've spotted -- leaders who don't know the difference between leading and cheerleading. That's when the "leader" is always positive. Always motivating. Always bouncing around. Always telling people how great things are even when they are not.

Don't get me wrong. I think everyone wants a fearless leader. But I also think there's a fine line between sounding positive and sounding delusional. You lose credibility. Done in the proper manner, an honest "negative" appraisal of a difficult situation can be positive if it leads to a good plan of action. It is an opportunity to show the staff that you are critical of yourself and take responsibility.

I've had some difficult years where "mistakes were made" or business just took a dive. I was able to explain the situation and present a plan of action. I believe I calmed any anxieties (except for mine, of course) and have been successful in getting everybody to pull in the same direction. Here's the ultimate difference: Cheerleaders just yell the cheer and do their thing to rile up the crowd. It's all outgoing. Good leaders keep their eyes and ears on the crowd, being sensitive to their needs, to their moods, and to particular situations. Actually, it's not such a fine line.

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The Fallacy of an Open-Door Policy

When I started in business and the phrase "open-door policy" was thrown around, it sounded very progressive. It was also very confusing to me.

While it certainly makes sense, I couldn't understand how a company could operate when there are always people walking into the offices to talk. The answer is simple: In in a well oiled machine, there are regular meetings and opportunities for people to speak up with complaints, comments, and suggestions. In less evolved companies, people are afraid to voice their opinion because they are afraid of being fired. An open-door policy is a good thing. The reality, though, is you need to do more than just use the phrase.

You need to create an environment where people can speak up in any venue. I've had some of my most important communications with employees driving in the car, standing in the lunchroom, or walking through the shop floor. While I have always had an open-door policy, I have come to accept that when you get bigger, very few people at the lower levels are going to take the opportunity to walk through that door -- no matter how often I tell them it's open. Or, have I let myself off the hook too easily? Am I doing something wrong?

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