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With 40% of Revenue in Payroll, This Small Biz Was Suffering

After years of working for others, in the mid-1990s a husband and wife started a chimney sweeping company, focusing primarily on residential chimney sweeping and lining. Life was good in the first few years, and they were able to put 20 people on their small business’s payroll.

These small business owners were spending 35% to 40% of their revenue on payroll expense, far too high for most businesses, including their company. But the economy was strong and the company made good money. Of course, the owners spent most of their profit, with much of it going to personal expenditures.

It was hard to notice as money flowed in, but these payroll and spending habits affected the cash flow of their small business. In the early 2000s, when the market corrected itself, the husband and wife continued their “normal” practices, despite slowing sales.

The owners of this chimney company did not perceive any real issues, though they received a letter from the IRS concerning some payroll tax issues. Their accountant didn’t respond to these letters, and the owners eventually sought the help of a small business consultant.

What Their New Small Business Consultant Found

John, their new small business and tax consultant, did a general review of the company and learned about the owners’ lifestyle, which included traveling and gambling. Profit from their business funded this lifestyle.

John saw how their revenue had tailed off the last several years. He also found that their small business’s payroll expenses steadily increased each year, with employees receiving annual raises despite the drop in revenue. They also steadily spent an excessive $15,000 to $20,000 on advertising every year, primarily on Yellow Pages ads. And, of course, their non-business expenditures continued.

Solving This Small Business’s Cash Flow Problems

With a strong understanding of their chimney company, John suggested that the husband and wife make some big, important changes. They were spending too much money, and the first step was making this clear. They also needed to address their notice from the IRS, which asked for requisite documentation that was not received.

More informed and aware of their cash flow problems, the owners made some tough decisions and reduced their number of employees to nine. Payroll expenses now accounted for roughly 25% of revenue – a much better figure.

They also cut their advertising expenses by 75%, down to $8,000 a year, investing in efforts that would actually bring in new business, such as building a website and developing a strong online presence with customer review sites.

Lastly, John helped them prepare the reports they had failed to present to address the IRS’s needs.

In working with this small business consultant, the husband and wife now have a better grasp on what it takes to maintain healthy cash flow and how to budget their business expenses. They’re not lavishly spending their profit, nor are they causing cash flow problems by putting 40% of their small business’s revenue into payroll.

Learn how to take control of your small business payroll to protect your bottom line.