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Is it Better to Lease or Buy a Business Vehicle?

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One of the large business expenses available to business owners is the auto expense. Many business owners have been advised by their accountants to purchase a vehicle to reduce their tax liability. While this advice may have merit, it almost never makes sense to buy something you do not need in order to reduce your tax liability.

When it comes to getting that new vehicle, you can either buy or lease the vehicle. For this article, I am going to assume that you understand the difference between buying and leasing.

Tony Robbins is quoted as saying that the quality of your life is determined by the quality of the questions you ask. 

The problem with the question here is that “better” is different for different people. So instead of answering, which is better, I am going to explain the things you should be considering as you approach this type of decision.

The first concept to understand is that when analyzing a purchase or lease decision it all comes down to the comparison of the present value of the transaction in today’s dollars. If we look at a benefit of a purchase that you have an asset to sell later when you are ready to dispose of it, that future sale needs to be translated back to today’s dollars.

Whenever calculating present value, we need a factor to use or the presumption of interest that you could accrue in lieu of using the funds in this way. Typically, if we look at regular market returns that factor would be between 8-12%. However, business owners may have a much larger factor, say 25%. Why? Because they can turn a cash investment inside their business into something much more.

So, a rapidly growing business will likely be better off keeping as much up-front cash while a slow growth business may be better off spending the cash up-front.

The second concept to consider are the tax implications of the transaction. I didn’t use the words “tax benefits” because not all implications are beneficial.

In a purchase with a loan, you will be able to potentially accelerate the depreciation of the vehicle, creating an up-front tax savings. You also will deduct interest expense. Finally, when you sell the vehicle, you will likely recognize a gain or a loss.

A lease on the other hand, is much simpler. You deduct the lease payments as a business expense.

All these tax implications need to be brought forward to present value so that it can be compared to the lease option fairly.

The third and final concept affecting this decision is that it is not all about the money. There are non-monetary factors at play as well and these should be considered carefully.

How often do you want a new vehicle? – Leasing will most often get you replacing vehicles more often.

How much do you drive? – Leasing is best for people who will keep below the annual mileage allowance.

Life stability and status – Is your life situation likely to change soon? Will leasing cause you to get a vehicle you cannot afford or allow you to drive around in a vehicle that makes you feel important even though you really cannot afford it?

So, when we evaluate the buy vs. lease decision, we need to remember that buying will require more up-front cash but also carries more up-front tax reductions. Leasing will take less initial cash and lower monthly payments freeing up more capital for re-investment in the business.

If you would like help determining the best course of action for your own situation, reach out to us, we can calculate the best option based on present value for you.

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A Tax Refund is not Necessarily a Good Thing

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I recently had a conversation with a prospective client and he said, “Will you get me a better refund than my accountant last year?” This person was asking the wrong question.

The question stems from a misconception many Americans have on how our tax system works. A tax refund is not an indication of paying less in taxes, it is only an indication that you paid too much in advance for your tax liability. Allow me to explain…

The US Tax System is a pay as you go system. As you earn money, you have a responsibility to pay taxes on the money earned. Typically, if you have a job with earnings reported to you on a W2, then taxes are withheld every paycheck. If you are a business owner or independent contractor then you are obligated to make quarterly estimated tax payments, 4 times each year.

Herein lies the source of the confusion and the inherent problem. Due to circumstances that can change throughout the year and each person’s eligible tax credits and family tax situation, the actual amount in taxes owed for the year are not actually determined until you prepare your tax return 2-4 months after the year is over.

Therefore, all taxes paid through your paycheck withholding or estimated taxes are simply deposits with the government to settle your ultimate tax bill. In other words, a refund simply means you gave them too much money during the year and if you owe money, it means you didn’t withhold or estimate enough during the year.

The real measure of how well you are doing from a tax perspective is if you calculate your effective tax rate or the amount of tax you had to pay divided by the amount of income you had. The lower the rate, the more tax efficient you are.

So, is a tax refund good or bad?

This depends on a few things. First, was it done on purpose? Some people lack the discipline to save and find overpaying their taxes a good way to ensure they have the funds for a family vacation in the spring via their tax refund. From a financial advice perspective, why would you give the government a free loan? If your household budget is tight all year but you get a $6,000 refund at tax time, how much easier would life had been if you had $500 additional income each month?

The good news is you get to decide.

If you need help correcting your situation of consistently overpaying or underpaying your taxes, then we can help.

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Using the Home Office to Allow Massive Auto Deductions

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One of the most highly audited business deductions is the auto expense. The regulations require documentation of every trip taken by car and justification that it is a business expense. If you opt to take the direct expenses method, you could accelerate the depreciation of a large SUV and get a massive business write-off. However, the write-off is only to the extent that the vehicle is used for business.

Many business owners, like most Americans, do the majority of their driving between home and the office. The trip between home and the office is considered commuting miles and they are specifically excluded from being taken as a business deduction. However, if the drive from your home to the office is a trip between two work locations, it is a valid business trip.

In a previous article, we talked about the fact that the home office needs to be exclusively used for business. So how do we make your home a business location, even if you do not have the space to dedicate to a home office.

There are 3 key points that set the stage for using a tiny 1 square foot spot in your home as a home office unlocking massive auto expense deductions!

  1. No Walls Needed
  2. Break for Small Homes – “de minimis”
  3. The 1 square foot office

No walls needed – Although the area must be exclusively used for business, it does not need to be a separate room, nor does it need to be partitioned off.

The IRS and the tax courts have allowed office space where the personal use is “de minimis” this means that the office can have an area where you walk through for personal use. For example, in Hughes v. Commissioner the court allowed a walk-through closet to be a home office even though the taxpayer had to walk-through the office to get to his bedroom.

Don’t be tempted to stretch the meaning of de minimis though. The IRS and the tax courts have specifically denied storage of personal items and occasionally hosting family meals as de minimis.

Here is how to create the 1 square foot office: Buy a storage cabinet or filing cabinet that extends all the way to the floor. Use it to store business items only, such as business files and business supplies. When you perform work at home, pull a chair and a table or desk next to the cabinet and perform your work. When you are done, you can put the table or desk and the chair back. Claim only the space for the cabinet. This will not create big deductions for the home office itself but will unlock big deductions for your auto expenses.

Last week, we covered what type of work deems the home office a valid office, make sure that you follow those guidelines, so it qualifies.

As you can see from this 3-part series of articles, something as simple as the home office deduction is actually quite complex and can have a significant amount of untapped benefits.

I encourage you to consult a tax professional such as myself so that you do not end up paying more than your lowest required amount in taxes.

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Maximizing the Home Office Deduction

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What if I told you it was possible to write-off half of your personal residence as a tax deduction? You’d probably ask me if that was legal and was there jail-time involved. Here’s the great news, it is entirely possible to do and within the framework of today’s tax code. For a resident of metropolitan NYC, this could translate to deductions of $30-50,000 or tax savings in the 5 figures!

Last week, I made the case for 2 compelling reasons to maintain an office in your home. One reason is for the home office deduction itself and the second reason is for the auto expense benefit. This article will cover how to maximize the home office deduction if you want to have a dedicated room or multiple rooms in your home for your office space. Next week, we will cover how to take the deduction with the smallest possible space for the purpose of unlocking the auto expense deduction benefit.

There are two very important rules to cover. The first is that the home office must be exclusively used for the business. This means that you cannot use a guest room that only has guests a few times a year, the personal use a few times a year, removes the exclusive use requirement. There are of course exceptions to every rule and a day care and storage are the exceptions to this rule, please consult a tax professional like myself before claiming a mixed use space.

The second rule is that it must be the principal place of business. This rule causes a lot of business owners to think they are not eligible to claim this deduction if they have another office elsewhere. In IRC Section 280A(c) the tax code uses this language “as the principal place of business for any trade or business of the taxpayer” and then clarifies with this statement:

For purposes of subparagraph (A), the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.

If you use your office in the home as the primary location for any administrative or management function for example bookkeeping or HR activities then it qualifies.

Now that we know you can maintain an office in the home and qualify to deduct it as a business expense, let’s talk about how the allocation of home expenses gets allocated.

In IRS Publication 587, the IRS says that “you can use any reasonable method to determine the business percentage” of your home that you use for business. The publication provides 2 examples of such methods:

Gross square footage: Divide the area of the home used by the office by the total area of your home.

Number of rooms: If the rooms in your home are all around the same size, you can divide the number of rooms used for the business by the total number of rooms.

One method that I end using for many of our clients is not listed in the publication but is a common method for accounting for space and is the net square footage method. In this method, you calculate the interior area of each room in the home, excluding bathrooms, hallways, etc. You then total the usable areas as the denominator and use the area used for business as the numerator. This very often results in the best outcome because you have eliminated the space between the walls, the hallways, bathrooms and closets which were included in the denominator in the Gross square footage method.

If you have a home with 3 floors and your downstairs is not used for personal use and is finished as one big open area, using the net square footage area, that one floor which is 1/3 of your home could end up being 50% of the usable area of the entire home, creating a very lucrative tax benefit for you.

As you can see, there is a lot of thought and calculations that go into something that seemingly seems basic like the home office deduction. Without this knowledge, you could follow the form instructions and end up leaving a lot of money on the table. It pays to have a tax professional that is willing to take the time and ask the right questions to create these tax saving opportunities for you.

I will close the article with one final point. If your business is setup as a S-Corporation for tax purposes, then you cannot deduct the home office deduction using the tax forms on a personal income tax return. The method that should be used is the employee reimbursement method. Some may advise you to use the rental method but this would be a mistake. If you fall into this category, give my office a call so we can help you take the deduction correctly.

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Not Claiming the Home Office Tax Deduction Could Be Costing You a Lot of Tax Dollars

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Let me tell you about one of the most overlooked tax strategies of small business owners. First, however, it would be prudent to define who is a business owner. If you receive income as an independent contractor and are issued a form 1099-NEC at the end of the year then technically you are a business owner. If you operate a sole-proprietorship, partnership or corporation then you are a business owner.

In this article, we will discuss the advantages of having a home office for tax purposes. In the subsequent two articles we will discuss how to maximize the home office deduction for writing off your home as much as possible and how to maximize the vehicle deduction benefit even if you don’t have space for a full-room home office.

In 2017, President Donald Trump pushed forward his agenda of tax reform and the Tax Cuts and Jobs Act was the result. In this new tax reform, some changes were made that adversely affected New York and New Jersey taxpayers in a big way. The deduction for state and local taxes were capped at $10,000 and at the same time the standard deduction was increased to what is this year $27,700 for a married couple filing jointly. This eliminated the tax advantage of owning a home.

However, business owners have a way of circumventing that by creating a home office. The home office allows you to allocate the mortgage interest, real estate taxes, utilities and depreciation to the business for the part of the home used for the business. This creates a great opportunity to take an expense that offers you no tax benefit right now and create a potentially significant tax benefit from it.

Just for illustrative purposes, a home with 10 rooms and 1 room is used for the home office (there are primarily 3 ways to calculate the home office allocation, sum of rooms is one of them and can be used if all rooms are similar in size). This allows for 10% home office allocation. Let’s assume the home was purchased for $500,000 ($350,000 for the house and $150,000 for the land – you cannot depreciate land) and carries a mortgage paying $8,000 of interest along with property taxes of $15,000. The monthly gas, electric and water bill is $400. The homeowners insurance policy is $1,200. Repairs were made on the heating and A/C systems totaling $1,200. This is how the home office expense would be calculated:

A business owner pays 15.3% self-employment tax, let’s assume you are in the 22% federal tax bracket and you pay 8% in state income taxes. This is a total of 45.3% in taxes. If you write off $3,906 that saves you $1,769.42 in taxes!

There is one more benefit to maintaining a home office and it relates to your business vehicle expense. Without a home office, when you leave your home and head to work you are commuting and the drive is not allowed to be deducted as a business expense. With a home office, you are now traveling between two places of business and this trip is now considered a business expense. This can have a significant effect on your vehicle expenses especially if you claim direct expenses which follow the percentage of business use for your vehicle. If most of your trips are between home and the office then this will swing the percentage of use from nearly 0% to nearly 100% business use.

To illustrate, let’s assume that your office is 10 miles away and you drive 20 miles round trip each day between home and the office. Let’s also assume that you do this 5 days a week for 46 weeks. That is 4,600 miles (20 x 5 x 46). At 65.5 cents per mile that is an expense of $3,013. Using the above tax percentage of 45.3% this creates a tax savings of $1,365!

Bottom line, not using the home office deduction could be causing you to pay significantly more taxes than necessary. However, there are a lot of rules surrounding how this deduction is taken and calculated and I encourage you to discuss your personal situation with a tax professional.

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5 Ways to Move Your Business from Stuck to Growing Again

The ultimate guide to getting your small business to consistent $10,000 months

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I started my business the same way as many others: while working a job and balancing a very busy family life.

Initially, I made some progress and quickly earned my first $10,000 in revenue. That’s when I hit my first brick wall. I couldn’t get to the next level. All I wanted was to move to the 4-figure per month club.

Be careful what you ask for, because I figured out the next steps and I hit that mark. I soon discovered that there was another brick wall in my future. Once again I was stuck, this time at about $60,000 in annual revenue.

At that point I was wondering why some people seemed to have it all figured out, making it look so easy.

What was I doing wrong?

I started to question if I had what it took to make it with my business. It is a recipe for disaster when you start doubting your own abilities.

I set out to find what I was doing wrong. In this process of self reflection, testing and learning from others, I discovered 5 key ingredients causing novice entrepreneurs to struggle. The sooner that you and I can get past them, the faster our businesses can grow into one with routine 5-figure months.  Move Your Business from Stuck to Growing Again in 5 Days!The 5 key ingredients? Here they are:

  1. Expound On Your Why, Your Ideal Client, and The Problem to Solve

    The truth is, this is a lot and can really be three separate steps – heck, probably three separate posts. As a matter of fact, there are books written on each one of these.    What are they, you ask? Let’s start with your “Why”. The “why” is the innate purpose of the business you are building. It is the vision that you have that goes beyond money. It is ingrained in the fabric of the business, employees, and customers.

    In his book Start With Why, Simon Sinek gives the example of the well known company Apple, who decided that their purpose was to “challenge the status quo,” their whole existence was suddenly different. Customers know that their Apple product will be different and unique and challenge the boundaries of where technology has gone before. Your business needs a core reason for its’ existence, the purpose it was started in the first place.

    The ideal client, sometimes referred to as your target avatar or buyer persona, is the person or people you most want to target with your marketing campaigns based on your current business situation. Your current clients aren’t always necessarily your ideal clients.Most likely, you reading this blog post, are a small business owner who has yet to reach 6 figures in revenue. I can make this assumption because I targeted my ideal clients by starting the post talking about my experiences at that stage in my business. The intention was for people who related to those feelings to identify with the material and keep reading. That was me putting targeting my ideal client into practice.

    Finally, the question that you must ask: What is the problem that your ideal client has that you are trying to solve? What are their frustrations? What does their perfect future look like? Ryan Deiss, the CEO of Digital Marketer, calls this knowing your client’s “Before and After State”. Since I love that terminology, I’ll be using it here.

    These 3 key pieces of information – Why, Ideal Client and their Before and After State – are the pillars or foundation of all the marketing you do for your business. This will drive the conversations that you have and the products you create.

    I found that that I had these all wrong. I had approached the problem by asking myself, “What do I want to sell,” instead of figuring out what my ideal client would need, to have the straightest path from their Before State to their After State.

    This brings us to our second point:

  2. Choose ONE product or service

    When we start our business and release our first product or service, we begin to attract buyers. However, sometimes the buyers want something different than what we have to offer, so we expand that offer to include what they want. What also happens is that we don’t see fast enough growth and in our minds we blame the offer (the positioning of the product/service i.e., price, scarcity, features, etc.) for not being attractive enough. So we add more products and services in the hopes that more offers will bring in more business.This is a huge misstep that I made and I see others frequently making as well. It makes sense that we would react this way, however, it is just as easy to see why it is a mistake.You only need one product to get to 5 figures per month. If it is a high ticket product, say a $2,000 per month offer, then you only need to sell five of your product and you’ve reached your goal. Conversely, a lower priced offering would need a greater volume of sales (for example a $100 product would have to be sold to 100 customers to achieve the same $10,000 of revenue). Assuming that there are enough potential customers seeking your solution, this also seems very doable.

    Now that we established that this is easily doable with one offer, let’s analyze what the problem is with multiple offers. Every offer you create requires a sales message to close the deal. It then requires fulfillment and support on the back-end. James Wedmore, one of the great online marketers and business acceleration coaches said that you should be spending 80% of your time selling. To be able to make that happen with a small team or no team at all, you need to be able to replicate the efforts to service one client so that less time is spent servicing future clients.

    With one offer, you can standardize the sales conversation, formalize the proposal and then create a standardized process for delivering the product or service and supporting the customer. The key at this stage is doing as little work as possible on the fulfillment side of the business so that you can focus on selling.So how do you choose the right one?Choosing the right service or product becomes a lot easier when you have properly identified and gotten to know your ideal client. Remember that the goal is to provide a straight path from their current, “before” state to their desired, “after” state. You can understand this by mapping out the journey your client needs to take, and, after understanding their needs, you create a product or service that takes them past those first few steps of their journey.

    For example, the natural first step for my ideal client, the struggling or stuck new business owner, is to go through the steps on this page and then implement the changes. I do this with a free, live five-day challenge that guides them, people like you, through these 5 steps in a basic form. I then offer my Six Figures in a Year membership program designed to provide step-by-step direction and support through their journey.

    Okay, you’ve narrowed down your offering to one single solution. Now how do you sell it?

    Click Here to take our 5-Day Business Growth Challenge

  3. Choose ONE Marketing and Sales Plan

    Similar to number 2 above, the focus should be on finding a marketing and sales plan that works and then sticking with it. You’ll have plenty of time to get fancy later. The key to understand here is that when it comes to the marketing and sales strategy there is a difference from the exercise we just did regarding the product or service.

    With selecting a product or service, YOU are the expert, so you are the one who knows exactly what they need, no guessing involved. When it comes to marketing and sales, you have to keep testing until you find something that works. One mistake I see very often is that the metrics (or data) are not interpreted properly, and, as a result, the wrong analysis is made.Let’s say that you decide to sell a product or service through a challenge, as I described earlier. For the purpose of this example let’s assume that a good rate of conversion is 3%, which means that for every 100 people signed up for the challenge, there are 3 sales made.

    Now you run your very first challenge and you get 30 people signed up for the challenge and you make 2 sales. Many people would say at that point, “I put in all this time and effort and only got 2 sales, this doesn’t work.” They then scrap the efforts and try the next plan.

    What they don’t see is that they converted at a rate of 6.7% (2/30 = .067), more than twice the average conversion rate!

    The right next move is to figure out how to get even more people to participate in the challenge and run it again. Instead, most of us will pivot and try something else instead.

    There is another common error that is made when the data is not yet statistically relevant. Now before your eyes glaze over, bear with me for a moment. Using the challenge example from above, let’s say nobody purchased. This looks like a 0% conversion rate, which nobody wants. The problem is that the average rate is exactly that, an average. Sometimes you get 0/100 and 6/100 on two separate attempts.

    The second lesson here is that you may need to try enough times that you went through a large enough sample set (statistical jargon for the total number of people). For our example, you probably want to run enough challenges to have between 500 and 1,000 total participants before making a decision about whether or not it is successful.

    In order to do this right, it is imperative to have the right numbers and then understand your metrics, bringing us to numbers 4 and 5.

  4. Run the Numbers

    Picking the price point of your offer is not arbitrary. You need to run your business like a business and make sure you’re bringing in the money that you should be. When discussing the size of your business, I’ve focused on the top-line revenue, but what good is earning $10,000 in a month if it cost you $11,000 to get it?

    Figuring out the numbers means identifying the price point of your product and testing the profitability based on a series of assumptions. Being a Profit First Professional, we will use the author of Profit First, Mike Michalowicz’s, formula. Profit First guidelines for a business with less than $250k in revenue dictates the following breakdown of every revenue dollar:

    Profit – 5% (.05)
    Owner’s Compensation – 50% (0.5)
    Tax – 15% (.15)
    Operating Expenses – 30% (0.3)

    As long as we know one of the 5 variables, we can determine the remainder. The simplest one to determine is the Operating Expenses. For example, let’s assume, for simplicity, that advertising expenses are 50% of total operating expenses. We can further assume that a lead will cost $4 (this is an example, the cost for a lead or referral can be far less or greater and varies tremendously from one business and industry to the next).

    If we anticipate a 3% conversion (3 out of every 100 leads will purchase), then each sale will cost $133.33 ($4/.3), in advertising dollars, and, therefore, $266.66 ($133.33 x 2) in total operating expenses. Now we can easily fill in the rest of our numbers:

    Revenue (Price) – $888.87 (266.66 / 0.3)
    Profit – $44.44 (5% of Revenue)
    Owner’s Compensation – $444.43 (50% of Revenue)
    Tax – $133.33 (15% of Revenue)
    Operating Expenses – $266.66 (already calculated)

    Given our cost assumptions, we have determined that the product must be sold for $889 which could be rounded to a nice marketing figure of $897. Here’s the test: does your product provide at least $897 of value? If your product is a simple baby pacifier then probably not. However, if the pacifier miraculously does sleep training for an infant, it may very well be able to command that price.

    Another way to look at this is to think of your ideal client and ask yourself, is this product or service worth this price to them if it delivers the promised result, taking them further on their journey to their After State.

    Many entrepreneurs skip the simple mathematical calculation above and arbitrarily choose a price for their product or service. Thousands of dollars later, they wonder why they can’t make money no matter how many units, hours or packages they sell. Worse, they are making money but not enough that they cannot get the benefit from their business that they desire.

    Move Your Business from Stuck to Growing Again in 5 Days!

  5. Reverse Engineer the Metrics

    You’ve come this far and this is the final piece of the puzzle. The metrics – assuming you focus on the right ones – dictate to you exactly where to focus your efforts. Many entrepreneurs spend a lot of time on things that will not directly drive the results of selling their one product or service. Although it is possible that much of what they are doing will be necessary, at this stage, getting the business to 5 figure months is far more important.

    1. Yearly Financial Goal:
      The first thing you need is a financial goal for the year. Let’s assume that the business is brand new and wants to be at $10,000/month by the end of the year. So we have a clearly defined year-end goal.
    2. Quarterly Financial Goal:
      Now we need a quarterly goal. Quarterly goals are critical because you should not focus your day to day efforts on a result that can only be measured more than 90 days in the future. We are all human and you have a very high likelihood of giving up before then.The simple method to calculate the quarterly goal would be to divide the yearly goal in 4 and arrive at a quarterly goal. However, at the beginning of the process there is a lot of testing and failing before succeeding. Therefore we want to be realistic and assume that growth will snowball over time. Instead, as a rule, I assume percentages to completion as follows:

      Q1: 5%
      Q2: 15%
      Q3: 30%
      Q4: 50%

      Translated into dollars for our $10,000 per month goal, here is what our monthly revenue should look like at the end of each quarter:

      Q1: $500 ($10,000 x 5%)
      Q2: $2,000 ($10,000 x 15% + Q1)
      Q3: $5,000 ($10,000 x 30% + Q1 + Q2)
      Q4: $10,000 ($10,000 x 50% + Q1 + Q2 + Q3)

    3. Determine the Number of Units to be Sold:
      Once you have a financial goal, it is time to work backwards using the selling price we arrived at in the previous step. For our example, our selling price is $897. Using the numbers above we need to sell the following number of units per Quarter:

      Q1: 1-2 units ($500 x 3 months = $1,500 / $897 = 1.67)
      Q2: 6-7 units ($2,000 x 3 months = $6,000 / $897 = 6.69)
      Q3: 16-17 units ($5,000 x 3 months = $15,000 / $897 = 16.72)
      Q4: 33-34 units ($10,000 x 3 months = $30,000 / $897 = 33.44)

      Note: The above calculations were done this way to avoid confusing you, however, the quarterly dollar amounts were the end of quarter targets, therefore, you may not see the unit numbers listed until the following month.

    4. Determine the Action to be Taken Today that can be Measured:
      Now that we know how many units need to be sold, we can back the math into the promotion we want to run. Say for example we are running a challenge. Let’s also assume, the same number as earlier, that 3% of challenge sign-ups will become buyers. If we need to sell 2 units, we need to get 67 (2/.03) people into our challenge. If we need to sell 16 units we need to get  533 (16/.03) people into our challenge.

      Now we know that our one and only job is to figure out how to get 67 people signed up for our challenge in Q1.

      To get people to buy we need to have them participate until the end. We could take these examples further by analyzing our advertising metrics, email open rates etc.

      At this point, you need to pat yourself on the back. The last 2 key points were very math heavy and you could have gotten lost. You’re still here, so you followed me through.

Now you know exactly how to get your business on the growth path again. You also do not have to go through this process alone. Simply join our 5-Day Business Growth Challenge and you’ll have a whole community of entrepreneurs traversing this journey with you!

Click Here to Take our 5-Day Business Growth Challenge

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1008 – Profit First straight from Mike Michalowicz

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Mike Michalowicz the author of Profit First along with Toilet Paper Entrepreneur, Pumpkin Plan and Surge; joins us today for an interview about his new book being released. If you had questions about Profit First, we probably got them answered here! Complete show notes can be accessed at http://dreambuilderfinancial.com/1008.

Join us for an exclusive webinar with Mike Michalowicz. Head on over to http://dreambuilderfinancial.com/mm for all the details.

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1007 – How to Take Your Profit First and the Secret Ingredient to Savings

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The key to determining savings amounts for savings goals is the length of time available for saving. Time value of money can be a very strong participant in meeting financial goals. Understanding Profit First is the first step but here you will learn exactly how to implement it. Show notes and links can be found at http://DreamBuilderFinancial.com/1007.

Intro:

In the personal finance section this week, we’re going to talk about how to look at goals, and how to look at the logic behind setting savings amounts for the goals. We won’t get into specific numbers or calculations for how to do this for yourself yet, but rather will look at the concepts behind the big picture.

The time value of money is what happens over the course of time if you put money to work for you, and its basis is compounding interest. Also, there are two factors that affect the growth of money: the rate of return, and the length of time available. I explain all of this in the podcast, but I’ll write out an example of how compounding interest works in case you’re more of a visual learner.

Compounding Interest Example:

Let’s say you start with $100, and you can earn 10% interest or return over the course of a year.

At the end of a year, you’ve earned $10 (10% of $100).

Without compounding interest, at the end of 10 years, you’ll have earned $100 ($10 per year times 10 years). Your account balance will be $200.

With compounding interest, you earn interest on the amount in your account at the beginning of each year. Since you started year 2 with $110 in the bank (the initial $100 plus the $10 interest you earned), you’ll earn $11 that year, bringing your balance to $121.

The next year, you’ll earn $12 dollars, bringing your balance to $133. In year three, you’ll earn $13 dollars, bringing your balance to $146.

By the end of the ten-year example, with compounding interest, you’ll have $259. After 40 years, it would turn into $4,526.

 

In the business section, we move onto part 2 of implementing profit-first in your business. We’ll cover the how-to in this episode, but for much more detail, get a copy of Profit First by Mike Michalowicz.

Implementing profit-first methodology is a five-step process, which I discuss in the podcast. For easy reference, here are the five steps:

  1. Get crystal clear on your motivation for implementing this system.
  2. Open a separate bank account and immediately deposit 1% of your business’ cash into this account. This is now your profit account.
  3. Open seven bank accounts, five of which should be at one bank, and two at another.
  4. Fill out a grid (Profit First Instant Assessment) using information from last year’s P&L, personal tax return for every owner, and your year-end balance sheet.
  5. Resolve the discrepancies on your Profit First Instant Assessment over the course of six quarters (a year and a half).

There’s no tax section this week or next week because of our focus on profit-first methodology.

 

Show Notes:

[01:46] – Moshe introduces what the show will cover this week.

[02:18] – The first thing to understand with saving for any goal is the time value of money. Moshe explains the importance of compounding interest with a clear example.

[05:16] – Moshe discusses the two factors that affect the growth of money: the rate and the time.

[07:03] – We learn how this relates to savings goals, which we’ve already broken into short-term goals, mid-term goals, and long-term goals.

[08:49] – Moshe offers a specific example to illustrate what he’s been talking about.

[14:36] – Most of the monthly savings amount in his example was for the short-term goal, Moshe points out.

[15:42] – Next week, we’ll cover strategies for how to save for these goals, and cover the logistics of how to calculate how much to save for each goal.

[17:17] – We kick off the business section of the episode.

[18:16] – Moshe dives into implementing profit-first in your business, which is a five-step process.

[18:24] – Step one is to get crystal clear on your motivation for implementing this system.

[19:23] – We move onto step two: opening a profit bank account.

[20:28] – Step three is to open seven bank accounts. Moshe explains in detail what each of the seven is for, and why they’re divided between two banks.

[25:25] – Moshe takes a moment to address the question of bank fees when you have so many accounts. There are several solutions to this, including CapitalOne’s Spark banking unit.

[26:32] – We learn about step four. To make this easier, text howtoprofitfirst to 44222, or get a copy of the Profit First Instant Assessment online.

[30:41] – Moshe offers an example using babysitting to explain the concepts he’s been talking about.

[31:55] – Moshe lays out some specific rules, and explains how to calculate your real revenue.

[32:57] – We learn the next steps of filling out the Profit First Instant Assessment, after having calculated the real revenue. He also discusses the difference between owner’s pay and profit.

[35:39] – Now that we’ve filled out the actual column, we move onto the TAP (Target Allocation Percentages) column.

[37:39] – The next column is just column A multiplied by column B. Moshe walks us through this as well as the final two columns.

[39:08] – You’re likely to be pretty sad when you look at the results, Moshe explains, because most businesses are way off on these numbers.

[39:43] – Step 5 involves resolving discrepancies gradually, because abrupt changes tend not to be sustainable.

[42:11] – Moshe introduces a new concept, the CAP (Current Allocation Percentage).

[44:32] – We discussed the 10-25 rule in the last episode, and Moshe now explains how you’re going to use that in your profit-first system.

[45:16] – The last part of this step is sending estimated tax payments.

[46:28] – Mike Michalowicz has graciously offered a special gift for listeners, as you’ll learn here. To sign up, go to this link.

 

Links and Resources:

DreamBuilder Financial

Facebook.com/dreambuilderfinancial

Profit First by Mike Michalowicz

CapitalOne Spark Business Checking

Profit First Instant Assessment

DreamBuilder Financial Episode 1006

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1006 – Financial Goal Setting is the key to Wealth Creation and Profit First is the key to Business Cash Flow Management

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Last week in the personal finances section, we introduced the personal financial statement as the starting line you can later look back on. This week, we’re talking about goals — the finish line that you’re set on getting to.

With the release of his Freedom Journal last year, John Lee Dumas introduced the acronym S.M.A.R.T., which stands for specific, measurable, achievable, realistic, and timely. Your goal needs to meet these five criteria or it won’t be achievable.

Specific – you need to have a specific end in mind.
Measurable – you need to have a quantifiable way of measuring your goal.
Achievable – your goal needs to be something that is achievable from a general perspective.
Realistic – your goal also needs to be achievable for you.
Timely – there needs to be a finite end; a date by which your goal will come to fruition.

When you don’t have a goal, you’re in what Michael Hyatt and Daniel Harkavy call a “state of drift” in their book Living Forward.

To set your own financial goal, try this five-step exercise:
1. List all your wants, desires, and must-haves.
2. Estimate a dollar value for each item on your list.
3. Organize the items on your list by priority. For each item, list a length of time until you need to reach that goal.
4. Divide your list into three categories based on the time length for each:
a. Short-term goals (within 18 months)
b. Medium-term goals (18 months to 5 years)
c. Long-term goals (longer than 5 years)
5. Within each time frame, organize the goals by the priority you’ve already determined.

In this episode’s business segment, we’re going to talk about the concept of “profit first,” a concept from Mike Michalowicz’s book of the same name.

As Moshe explains, most entrepreneurs get into business to try to fulfill a specific dream or motivation (such as having more time with family, or more money). Often, a few years into the business, they and their business are still just making it by month-to-month. This is often due to Parkinson’s Law.

Moshe also talks us through owner’s pay. If all you bring home is the amount that you would pay someone else to run your business, you aren’t actually making any profit. The value of your business is what’s left after someone (you or someone else) is paid to do your job.

Profit-first methodology flips the formula around: instead of “sales – expenses = profit,” it’s “sales – profit = expenses.”

If you ask any health or fitness coach how to change the way you act, they’ll tell you to eat smaller portions — and to do that by using a smaller plate. Profit-first strategy works similarly, as Moshe illustrates. You’ll set aside profit first and make less money available for expenses, in effect eating from a smaller plate.

Moshe starts the taxes section by talking about income tax, which is the most complicated tax that most people need to face. The government uses this to control some of our behaviors, so it builds in things to give us credits based on certain actions. Other types of taxes include sales tax, property tax, VAT, FICA, and many more.

For most of this segment, Moshe focuses on health insurance and the Affordable Care Act. One of the problems, he reveals, is that the plans available through the ACA aren’t necessarily great. He also discusses the tax penalties involved in not having health insurance for the entire year.

Show Notes:

[01:31] – Goals are the destination, or finish line. We learn about the acronym S.M.A.R.T. and what it means in terms of goals.
[05:45] – Without a properly formatted goal, you’re at risk of falling into a “state of drift.” Moshe explains what this means in some depth.
[06:49] – Moshe clarifies the importance of various aspects of setting goals, using the example of a runner. He then offers another example: weight loss.
[09:40] – This works the same way from a personal financial perspective. This time, Moshe offers himself up as an example.
[11:15] – As the availability increases, our demand for that resource increases at the same degree, Moshe explains.
[12:14] – How do we go about setting financial goals for ourselves? Moshe gives a five-step exercise to help.
[18:48] – Moshe pulls up an exercise that he did a while ago, listing his short-, medium-, and long-term goals from around 2014.
[26:25] – Launching into the business section, Moshe talks about the book Profit First. He then shares his own relation to profit-first methodology.
[27:52] – There was a specific problem that profit-first methodology was created to solve. Here, Moshe explains what it is.
[29:18] – Parkinson’s Law indicates that as the availability increases, our demand for that resource increases at the same degree. This is the crux of the problem, Moshe explains.
[30:54] – Moshe discusses owner’s pay, which is the pay that you would pay someone else if you walked away from the business and had them run it. He also explores the difference between owning and running a business.
[33:42] – Profit-first attacks this system and allows the owner to escape this pattern, and Moshe talks about how this works.
[36:17] – Moshe talks us through the four principles involved in implementing profit-first. He uses the example of weight loss (and gain) to illustrate his point. The first concept is using a smaller plate.
[38:47] – The second principle, using the same example, is to eat your vegetables first.
[39:38] – The third concept is removing temptation.
[40:48] – Finally, the fourth principle is establishing a rhythm.
[43:04] – A frequent question that Moshe gets from business owners is this: “What do I need to know about business taxation?” Fortunately, he has the answer! To get a copy of his free guide with five tax tips every business owner needs to know, you can text “5taxtips” to 44222 or go to dreambuilderfinancial.com/5taxtips.
[43:52] – Moshe talks us through income tax, property tax, and sales tax.
[45:35] – We learn about VAT, or value-added tax, in a fair amount of detail in terms of how the tax functions and its impact on the final price of the item.
[46:47] – In the United States, we have a FICA tax, which Moshe explains fairly briefly here.
[47:25] – Moshe rattles off lots of other tax types that he hasn’t yet covered.
[47:55] – For the rest of this show, Moshe will focus on the Affordable Care Act. He starts off by explaining the basics of how the ACA functions, both for individuals and insurance companies.
[49:58] – The plans available through the healthcare marketplace aren’t typically that great, Moshe explains.
[50:33] – Going without health insurance results in penalties, which Moshe lays out in detail.
[51:45] – There are a few exceptions for people who would be exempt from the penalties
[52:03] – You need to use caution with the premium tax credit.

Links and Resources:

DreamBuilder Financial
Facebook.com/dreambuilderfinancial
Freedom Journal by John Lee Dumas
Living Forward by Michael Hyatt and Daniel Harkavy
Kiplinger’s Retirement Savings Calculator
Profit First by Mike Michalowicz
Parkinson’s Law
5 Tax Tips Every New Business Owner Needs to Know
The Affordable Care Act

Posted on

1005 – Compelling Reasons Why Business Ownership Leads to Wealth

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This week, the personal finance section of the show deals with the often-overlooked personal financial statement. Even though many people neglect to complete one, this statement is integral in knowing your net worth and assessing whether you’re making progress. It’s so important, in fact, that Moshe recommends making one every three to six months.

Basically, a personal financial statement is a snapshot of your total net worth, broken down into assets and liabilities. By subtracting your liabilities from your assets, you can determine your total net worth.

A personal financial statement offers several benefits. It can help with long-term goals by giving you a snapshot of your starting point. It also causes you to start paying attention to how much of an impact various things have on your net worth. Finally, it gives you a point of comparison when you make another one later, which allows you to track your progress over time.

The easiest way to create a personal financial statement is with a spreadsheet. You’ll have separate columns exploring your assets (including liquid assets, investments, property, and retirement accounts) and your liabilities (including credit card balances, student loans, medical bills, money owed to the IRS, mortgages, and so on). For a template and example, go to dreambuilderfinancial.com/pfs.

Of course, you’ll need to gather quite a bit of information to make your personal financial statement. You can do this manually, of course, or with software. Moshe mentions Mint as a free option, or YNAB (for “You Need a Budget”) as a paid option. For an old-school desktop application, Quicken is still around.

In the business section of the show, Moshe discusses why you should start your own business. He offers some pretty compelling reasons. For example, when you have your own business, you have unlimited income potential, meaning the sky’s the limit. Having your own business also encourages you to give the venture everything you’ve got, something you’ll never fully do when you’re working for someone else.

By starting your own business, you’ll also be creating an asset that can later be sold. In addition, your business can be a potential income source for other family members; you can hire a spouse, your parents or siblings, or even your children. It may even save you money, as expenses that you’re incurring anyway can become business expenses.

When you’re deciding whether to start your own business, one of the most important questions to consider is how to do it. Will you quit your job to focus on your business full-time? Will you continue working full-time while starting the business as a side hustle? Will you reduce your work hours and spend half your time on the business? There is no one right answer, so Moshe shares his own experiences. For him, working a full-time job and starting his own business on the side was the way to go. He then talks about Pat Flynn, whose book Let Go describes the very different path he took. Zach Spuckler took yet another path, as did Jon Acuff.

Finally, regarding taxes, Moshe provides a basic explanation of our tax system. Taxes are an earn-as-you-go system, he explains, which makes it easy to have too much or too little withheld over the course of the year.

If you’re employed, your employer withholds taxes and sends them to the government. If you’re self-employed, you need to send in estimated taxes every quarter. Either way, most people are going to overpay the IRS, and then have money sent back to them in the form of a refund.

Getting a large refund is basically giving the government an interest-free loan. Some people think this isn’t necessarily a bad thing, because it’s something like a savings plan, but Moshe explains why that’s a misconception. Whether you overpay or underpay, you should correct the situation to be as close to accurate as possible, and Moshe wraps up the episode by giving some information on how to do this.

In This Episode:
[01:17] – In the first segment of the show, Moshe will explore the personal financial statement. He begins here with an explanation of net worth.
[02:19] – Why is it important to have a personal financial statement?
[05:17] – Moshe lists several other instances, outside the realm of what he’ll be covering in depth, in which you might need a personal financial statement.
[06:35] – Now that you know what a personal financial statement is, how do you create it? Moshe gives listeners an overall view of how to create one. To download a template and see an example of how to create your personal financial statement, go to dreambuilderfinancial.com/pfs.
[09:43] – Moshe discusses how to gather all of the information you need.
[13:07] – What should you include in the asset and liability columns?
[20:59] – Moshe, who had been talking about assets, moves on to the liability section.
[23:14] – We move onto the business section of the podcast, with Moshe providing some great news: he’s offering a flowchart that walks you through the steps you need to take to get your business going the right way. To get the Entrepreneur Blueprint for free, text “entrepreneur” to 44222 or go to dreambuilderfinancial.com/entrepreneur.
[23:53] – Are you thinking of starting a business? Do you already have one? If so, and you have questions, head over to the show notes page at dreambuilderfinancial.com/1005 and let Moshe know!
[24:23] – This business section will cover why starting a business is a great wealth-building tool. Here, Moshe lists some reasons.
[27:55] – The next reason belongs in the tax section, but it’s important enough that Moshe can’t skip over it, so he talks about it briefly.
[32:02] – The biggest challenge when you’ve decided you want to start your business is deciding how to get started (whether you should keep your job full-time, for example, or quit and dive fully into the business).
[36:46:] – A frequent question that Moshe gets from business owners is this: “What do I need to know about business taxation?” Fortunately, he has the answer! To get a copy of his free guide with five tax tips every business owner needs to know, you can text “5taxtips” to 44222 or go to dreambuilderfinancial.com/5taxtips.
[37:30] – Moshe moves into the third section of the podcast — taxes — by beginning with the basics of tax-related topics (and misconceptions).
[40:36] – What is the tax return?
[42:03] – Getting a large refund is actually a bad thing, not a good thing, and Moshe explains why.
[44:36] – Moshe gives advice on how to prevent getting a large refund, now that we’ve established that this is a bad thing.
[45:48] – What should you do if you had too little money taken out, and want to fix that for next year?

Links and Resources:
DreamBuilder Financial
Facebook.com/dreambuilderfinancial
dreambuilderfinancial.com/pfs
The Entrepreneur Blueprint
Mint
YNAB
Quicken
Pat Flynn
Let Go
Zach Spuckler
Jon Acuff