Craig Olsen is the Senior Community Development officer at the Island Institute.
Think about the fishermen who seem to do well when prices drop or bait and fuel costs go up. They always seem to do OK while others struggle. This doesn’t mean they necessarily fish harder or always have the perfect place to set their traps. I would bet money that their secret is that they have structured their business in a way to plan and manage expenses so that the business is easier to run. With a plan in place, all they need to concentrate on every day is one thing: fishing. You know that to make the most profit in a season you need to be efficient, you need to be safe, and you need to treat well those who work with you. You keep your boat in order. You know it doesn’t magically repair itself over the winter, your traps don’t clean and fix themselves, bait doesn’t magically appear. You have to do the work. You need to do the same with your business. A good business structure puts the parts in place to let the owners do what they love every day.
Record keeping is an essential part of a successful business. On a weekly or bi-weekly basis you need to know where your business stands financially. You should never base business decisions on the fact that you have a positive balance in your checking account. It’s all about cash flow. Will you have the money in your account when a planned expense comes in? You must train yourself to realize that abundant cash in your account does not mean that you should make an unplanned purchase.
So how do you get there? First, keep your personal expenses separate from your business expenses You may not have started that way when you got your first boat. It is so easy to deposit those checks in your personal account, pay for bait, fuel, your sternman, and groceries — all in the same day, all from the same account. Keep personal and business expenses separate. I’ll say that again: Keep personal and business expenses separate. The best way to do this is by setting your lobster business up a separate business entity, a topic covered in last month’s issue, and opening a separate bank account for the business.
A separate checking account is all you really need once your business structure is established; everything written from that checkbook should be a business expense. Get a debit card and make as many purchases as you can through that card. Bank statements will tell you where you spent money, receipts will back it up. If you’re tech savvy, and many of you are savvier than you think, look into some of the receipt-capturing tools out there. Services like Quickbooks and Expensify have apps that allow you to snap a picture of the receipt and have it directly entered into your accounting software. It’s hard in the winter to look back at a receipt and remember why you spend $375 at Hamilton Marine — was it line or was it life jackets? The more information you can capture as you go, the better you will be at running your business.
Second, hire a professional bookkeeper or accountant. Once you’ve met with your lawyer and set up the business structure that works best for you, find a bookkeeper or accountant. If you already have that person, they should be part of the discussion with your lawyer. If they are already filing your income taxes, quarterly withholding estimates, or doing any other financial management, your costs for those services may even drop in the long run. With your business now separated from your personal life, your bookkeeper may spend less time on your finances because part of the job won’t be separating (and proving) what is a business expense and what is a personal expense.
Third, work with a payroll service and pay yourself as an employee. Many lobstermen just draw money from the business as they need it to cover expenses, and some pay themselves as a contractor. However, there are many advantages to setting yourself up as an employee and paying yourself regularly through a payroll service. Federal, state, and other taxes shift on a regular basis. Trying to determine withholding rates, making sure employment taxes are paid on time and all the other details that go with having employees are too complicated to do yourself and do well. The great thing is, you can pay yourself any salary you’d like on any schedule you would like and the funds are deposited directly into your personal account. Taxes are taken care of, Social Security and Medicare are paid, and you can even set up a retirement fund or a health savings account (HSA) as a business expense and spread those costs out over the whole year. It will also eliminate that tax time terror when you realize you may not have enough money in your account to cover the withholding taxes you owe.
My final piece of advice: don’t rely on your spouse or partner to be responsible for business finances. Nothing creates greater tension in a marriage or partnership than repeated questions or concerns about money. Don’t elevate the tension inherent in running a business within a family by adding another level of complexity. Your bookkeeper or accountant is a much better sounding board for your questions and concerns and should challenge you about why you are booking certain expenses to your business. That’s their job. Your partner’s may work in the business with you, but don’t saddle them with the additional stress of being your financial manager. Work on those issues with a professional.
So, in short, track your expenses now, leave the technical process of managing the financial side of your business to professionals, and don’t saddle your life partner with the burden of keeping the books. And finally, never forget that even though your time is worth more fishing than doing anything else, you have a responsibility to yourself and those who depend upon you to manage the health of your business. Once you get started you’ll wonder why it took you so long.
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