Tax season offers opportunities to hone business operations

It's Tax Season! Not the normal time to party, but the perfect time to do a little more for your business than just hand over the receipts to the CPA.

Food for thought: this year, when you are gathering all the leftover bills and receipts to prepare for the annual tax event, take a few minutes to look at your books from a different angle than you do during the rest of the year.

Starting with the profit and loss statement, is gross margin slipping a little bit? That can be an indicator of a lot of things, primarily related to pricing and purchasing. I like to break those down and simplify each for a specific kind of business. Remember, a dollar saved in the purchase of an item equates to at least a buck in gross profit.

So you might want to focus on purchasing issues and ways to tighten that up. For example: whenever purchasing products or services and you have negotiated to the final figure, ask the last question, "Is this your best price?" Be obstinate about this one. It can ultimately reduce your costs to what the government or even Wal-Mart pays!

Now consider inventory ... Let's have a group groan here. It's not just for tax purposes! Everyone hates to take inventory, but it's a necessary evil. I've seen service trucks that are loaded with parts and pieces go out everyday, loaded with everything imaginable, only to have the technician call to order a part that he already had on board. What a waste. The existing part was already paid for. Now it's becoming aged and it probably can't be returned. The lesson is: Know your inventory.

Also, from a retail perspective, carrying inventory over time creates a cost to the business. Think GMROI or gross margin, return on investment. If you sell one item a year with a $200 gross margin or 600 mechanical pencils with a 50 percent markup at $1 each, which one made you more money? This flows to gross margin, but being aware of these kinds of things will make you a more successful business person.

It also helps to look at last year's P&L. Compare it to this year's and ask the tough questions of yourself and your staff. Anything greater than a five percent variance from last year needs to be reviewed. Five percent can be kind of tight, but once you get all categories into that bracket, it gets easier to manage and you automatically zero in on the flyers. This applies to gross margin as well as all expenses.

Did something happen that may have crept into an expense line that would indicate a problem? My favorite here is personnel costs/wages. They should track right along as a percentage of sales. If they don't, it's time to get your head in the game! More specifically, you will need to focus on scheduling of employees for peak periods as well as slack times. If you have a register that tracks transaction times, you can chart peak sales with personnel/hours. Deviations will jump out at you.

And now, everyone's favorite: utilities. When was the last time you really looked at a utility bill? Most of us just do a glance and groan, and then pay the bill. I really like to compare this year to last year's costs. Here's where that 5 percent variance comes in again. What happened last year or this year to make it better or worse? (Most likely worse.)

If you want to tighten utility bills, request the meter reader check in with you when he comes to read the meter. Make your own chart and get him to show you the numbers he is taking down. After the second month, you should have the same usage reading he does. The only question then becomes the rate charge, and that can bump up or down with the way you load the utilities. Let's say you typically operate your business with the heater set at 70 degrees and the vending machines are humming along while the lights are on and its pretty steady. Your business is at a set usage rate.

Now there's a cold snap. The office manager plugs in a space heater, a sales rep demonstrates a new furnace and you have a company turkey dinner in the break room. Your utility usage just spiked to a new high, but the next day everything is back to normal. Too bad, you just jumped to the next usage rate and that rate is applied for the whole month. Oops!

You may be able to talk the utility company down, but most likely not. If you really want to push back to the utility company, hire an energy auditor. Have her go through your utility rates and charges for at least the last two years. If there are any indications of a problem or strange charges, have her investigate on your behalf. She can also perform leakage tests on all lights, outlets, appliances, etc. The good firms can also use an infrared camera to detect heat loss from damage to the building or poor construction. It's money well spent.

I've kind of traveled down the proverbial rabbit hole, but sometimes searching out the variances is like that. The devil is in the details. But if in doubt, call your local SBTDC specialist. For a list of counselors and where to find them, visit www.missouribusiness.net. We can help!

- Barry White, Director, SBTDC, Missouri University of Science & Technology

This story was featured in the Mar. 2010 newsletter