Category Archives: Small Business

Lavish Spending, Merciless Cost-Cutting (But Secretly This is About Pricing to Infinity and Beyond)

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A few weeks ago I played lagged-out, totally-delayed-to-where-I-couldn’t-participate webinar host to Ramit Sethi (of I Will Teach You To Be Rich) while he taught YNABers interested in earning more money on the side about…earning more on the side.

Participation was impossible since I was about 20 seconds behind the live performance. That gave me the opportunity to scan the comments as they came rolling in throughout the presentation. Wow, did the comments roll in.

I should have written this post the next day, because my memory isn’t as fresh now, but I’ll give it a shot anyway.

$9 on Chips — Even in New York That’s “Pricey”

Ramit opened by saying that he purchased a bag of chips, didn’t check the price, and was floored to see they cost nine dollars. In a hurry, he purchased them anyway. Long story short — he loved the chips. He now purchases them regularly. He said they could cost $20 — he’d still buy them.

The other example he gave — a $300 shirt.

The comments began rolling from everyone, just dripping with incredulity. I watched, mildly amused, and wondering just how good those chips really must be. And what color the $300 shirt is.

Ramit closed by repeating something that he repeats a lot. And it’s good he repeats it, because it’s an important lesson:

Spend lavishly on the things you love, and cut costs mercilessly on the things you don’t.

And I find myself wanting to write this as the next sentence:

Here are a few of my lavish spending sins...

Because I want to confess. And I want to use the word ‘confess.’ But that right there is wrong. By using the words ‘sin’ and ‘confess’, I’m implying that lavish spending is wrong. And then we all get to decide what’s lavish.

Congress called. They want you as part of their Lavish Spending committee…

…which is my way of saying that it’s futile. And a waste of time. And probably a bit lame for all of us to judge everyone for how(ever) they use their money.

As long as they’re thoughtful about it. Conscious about it.

Lavish on Purpose

Ramit’s use of the word ‘lavish’ is a bit to blame here because lavish–just the word itself–signifies that it’s a bit over-the-top. It’s kind of saying that you’ve perhaps gone overboard a smidge or two. And I don’t think Ramit’s use of the word ‘lavish’ is a coincidence. I think he’s using that word to drive home the point that YES it can be lavish and there doesn’t need to be any guilt associated with your purchase because you’re proactively planning and choosing what you want to do with your money.

You’re budgeting my friend!

The fact that some of you spend lavish amounts of money on fishing tackle just blows my mind. Really? For fishing?

And you ladies out there that own 437 different stamps used for scrapbooking. Really? A little lavish don’t you think?

You just don’t need to feel guilty about those 437 different stamps. Or those 90 lures that all look the exact same (to me…). You planned for it. You paid cash for it. You get to be lavish about it. Whatever that means.

Merciless Cost Cutting and Snooty Restaurant Choices

If you noticed recently that you’re only watching network television anyway…cancel the cable. If you noticed that you aren’t going to the gym…START GOING :) If you’re not using all of your minutes, downgrade your plan. Cut costs mercilessly.

Look at the value you’re getting. Look at what you’re paying. Make sure those two things make sense. Both sides of that equation matter!

Here’s something snooty to chew on. I will not eat at the following restaurants: Olive Garden, Chili’s, Applebees, TGIFriday’s, Outback, Texas Roadhouse, McGrath’s, Joe’s Crabshack… the list goes on. Julie can cook those places into the ground. Every time I went, I would walk out feeling slightly sick and completely unsatisfied. I’d rather begin a fast than eat at those places. You could call me and tell me that you want to take me to lunch (great!) and it’s all on you (even better!) and you want to go to Chili’s (nOoOoOo!!!) and I’ll tell you just to come over to my house and we’ll split the difference ;)

Because I’d rather pass four times on Olive Garden to go once to Bambara’s.

It’s just about conscious decisions. No guilt. Just planning. Thinking. And no more knee-jerk reactions.

So those of you that were a bit incredulous at the $9 chips… you’re doing that too! You’ve got your lavish thing. Enjoy it. You planned for it.

[Enter the business connection postscript here, so read on if you want to get insights into the pricing aspect and the Big Tie-In that I think was missed.]

Later on in the webinar Ramit was talking about targeting your niche. Really targeting it. Where you decide on a very specific demographic/end client case and you target that person. All of your language should be that target client’s language. If they say “allocate” instead of “budget”, you should start saying “allocate.” If they’re always talking about how they want more “time”, you should stop selling them on the flash-bang feature that does this-or-that and talk about every feature through the lens of time savings.

I’m remembering the example Ramit gave about having a newborn baby where you’re picking between two photographers. One takes pictures of everything (and does a great job). But this other photographer, his whole site has great pictures of newborns. Every single line of copy on his site talks about photographing newborns — about the different nuances taken into account…all of the details he mentions (that you didn’t know you cared about until now)…

The specialized photographer makes the sale nine out of ten times. And you know that’s true!

So…with the photographer pricing for people that know they really, really want his service. Or for the bag of chips that is remarkably delicious… doesn’t price become basically moot?

And that’s where you can price to infinity and beyond.

A Wording Change, More Downloads (We Love Free Stuff)

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Based on a recommendation by Pamela, I’ve been doing some splittesting of our homepage. I know most of you read this blog to hone your budgeting skills…but this test result has larger connotations (and may help some of you small business owners out there!)

Our prior button that would take you to the download page:

And when we changed the ‘Download Now’ phrase to be ‘Free Trial’:

The results were cool:

We’re constantly running tests like this and the results are quite surprising. Comment if you want me to post tidbits like this on occasion and I’ll keep ‘em coming!

You Should Ship Now (not sooner, or later)

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I shipped YNAB Basic…

–When it was a spreadsheet celebrating the color spectrum of the rainbow:

–Before the Four Rules existed (they were actually in there, I just hadn’t discovered or articulated them).

–Before I knew a single thing about web design:
Launching of YNAB Basic 2.0

Taylor and I shipped YNAB Pro…

–Before we had ever met in person.

–Without doing any betatesting(!).

–Without the ability to have multiple accounts.

We shipped YNAB for iPhone…

–Before meeting the developer (Sebastian, our iPhone guru) in person.

–With the bare minimum of acceptable features (some would disagree here).

When Facebook launched, they were only available to college students.

When the iPhone launched, it was only available on the Edge network (and, at the time of this writing, it’s still only available on AT&T — after several years!)…didn’t have multi-tasking…had a 2.0 megapixel camera…

The Hardest Part

The hardest part about starting something is shipping. It’s so easy to refine..”perfect”..and never actually push anything out the door.

You never actually call a potential client and try and make a sale.

You never put up a “Buy Now” button for people to purchase your idea.

You just sit there and refine.

What’s Holding You Back?

Fear?
Perfection?
Some big roadblock related to the human condition?

Set an unrealistically close deadline to ship. Hit that deadline.

With YNAB 3, it was 2010. I think we shipped…some time in December of 2009. By the skin of our teeth. Taylor was literally working 18-20 hours per day for weeks. Despite superhuman effort, we still made some concessions. The app was slower than we wanted (a pleasure to work with now though!), and we had to drop features that still haven’t made it into one of the later iterations (goals, drag and drop moving of money between categories, error-checking for on/off-budget accounts, and many others).

Deadlines work. Set one and hit it. Launch with errors. Launch with bugs. Launch with less than your moving-target ideal. Just launch it already!

The Advantage of Shipping Now

Two HUGE advantages come to mind if you’ll just ship now.

One, you’ll learn in an instant what you should be working on next (and it probably wasn’t what you were going to spend the next six months working on!). You’ll discover areas of improvement right now — making your next iteration even better (multiple accounts in YNAB — what a novel idea!).

Two, you’ll be motivated. I am oh so grateful to that first person that purchased YNAB in its ugliest form of existence. Although I had to refund their purchase (they were on a Mac and it wouldn’t work for them), I knew I had something that at least one person was mildly interested in (which meant there had to be more!).

So no, nothing about YNAB 1.0, or 2.0 was very pretty. Sales were slow, but *just* enough to keep me motivated to work on it further. *Just* enough to make me want to devote free-time hours to this little “side project” (the goal of the side project being to pay our $350/month rent payment).

Launching will amp you up more than reading about launching.

Publishing will motivate you more than reading about how to be published.

Shipping will teach you more than reading about shipping (stop reading this–go ship!).

I’d rather ship a dozen products “prematurely” than never ship that one product still on the road to perfection.

Hey Small Business Owner. Your Frugal Self Called. They Want Their Money Back.

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It’s deductible.

Oh, I run that through the business.

This is a business expense.

90% of you small business owners say something like the above to justify spending money on who knows what.

Marketers know this. If you have a value proposition for a business, you can instantly command a higher price because suddenly you’re talking about the hopes, dreams, aspirations, and burning desires of the small business owner…

If I were ever to package up YNAB for Small Business…I’d probably double the price. Products leveraged in a business usually create more value. You see this all the time.

But you, as a small business owner, need to be painfully aware of the fact that you are weak when it comes to resisting purchase that are “for the business.”

Your Cost Radar is Skewed

If your business is bringing in $300,000 gross, but your take home from that is $60,000 you deal with two very different psychological cost radars. Evaluating a $300 purchase through the lens of your $300k gross business is entirely different from evaluating a $300 purchase through the lens of your household (where you likely compare it to the $5k/month of take home you have).

You see what happens there? You’re simply less sensitive to pricing. Is there something beyond the difference in price sensitivity that drives your reckless business spending? Yes there is.

Business Money is “Special”

For some reason, you treat that money as special. Once it hits the household, oh sure, you watch those nickels and dimes like a hawk. But if it’s in the business account? And somebody comes knocking, selling you the next best thing to revolutionize your business…you go for it hook, line, and sinker. Because hey, it’s deductible, right? I mean, it’s a business expense. It won’t affect your household at all…

And you really like shiny things. So every chance you get, you upgrade your business phone to the latest and greatest because hey, it’s a business expense. It’s deductible.

(To compute the value of a deduction, multiply the cost of whatever thingamajig you’re buying by your marginal tax rate — that’s the tax you pay on the next dollar earned. Your CPA can tell that to you and some tax compliance software will give that to you in a summary report. The tax considerations of business expenses are legitimate. If your marginal tax rate is 35%, that’s a 35% discount on whatever you’re purchasing that can be fully deducted. However, the purchase needs to make business sense first. That’s your litmus test.)

You Report to…Yourself?

Another nice thing about the business coffers is that you don’t have to answer to your spouse to nearly the same level of detail when it comes to your purchases. So…the iPad you just bought (you’re going to be developing some software for it, so you needed one)…no need to talk to Julie your spouse about it. It’s a business expense.

The netbook you purchased to do testing of your software on netbook resolutions…that doesn’t go through the home budget so…Julie your budget doesn’t need to know about it.

The business account is like your personal playground where you don’t have to answer to anyone.

And you need to change that.

Your Business Needs A Budget (YBNAB…oh dear that doesn’t work)

Revolutionize your business finances by putting your business on a budget.

Apply the same YNAB Rules that you have personally, to your business. Magic will happen:

  • You’ll be pickier about where you spend your money.
  • You’ll glean insights into your strategy. If you want to know the strategy of a business, just follow the money.
  • You’ll be accountable to something besides yourself (because we know how well that works).
  • Doing the monthly books will force you to look at reality. Perhaps you’ll see that you need to change direction radically to stay in the game.

And maybe you could share the books with Julie your spouse and have them ask questions. Get a different perspective. Be forced to defend your purchases!

Be aware of the fact that your Business Self and your Home Self may be two entirely different people and your Business Self may very well be flushing hard-earned dollars down the toilet :)

A Small Business Tax Crash Course (Two Tactics & a Clarification)

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Taxes are, far and away, the biggest excitement-sucking, demoralizing, make-me-want-to-cry, soul-crushing expense that I experience as a small business owner.

Typical conversation:

Me: Wow! Things are looking really good! I think we should maybe hire a developer to build YNAB for the [insert your favorite device] platform.

My Accountant: Yeah…about that. Quarterlies are due.

Me: Oh. I’ll go get the checkbook. YNAB on the [insert your favorite device] platform will have to wait.

[Crying begins]

I could cry and whine here for the rest of this post, or we could talk about how you can handle the cash flow ramifications of what is likely your single largest expense.

[Crying ends]

In this little Small Business Tax Crash Course, we’ll cover a few very important topics:

  • Quarterly taxes
  • Profits vs. Distributions
  • The Self-Employment Tax (FICA) (and how to minimize it a bit)

Quarterly Taxes

If you’re familiar with the YNAB Way, then you know that Rule Two calls for us to “Save for a Rainy Day”. Oh what a rainy day it is on January, April, June and September 15th!

If you’re an employee, your employer withholds your taxes from your paycheck. You determine how much is withheld by filling out the W4. At the end of the year, you get your W2 that tells you how much you were paid, how much you had withheld, etc.

If you’re a self-employeed small business owner (ranging from an Avon rep to a Zebra Whisperer), you don’t have an employer to withhold the taxes for you. You’re required to withhold them yourself. You do this with quarterlies. Quarterlies are basically estimated tax payments. You figure out what you’ll owe for the year, divide that by four…and then pay that amount when the quarterlies come due (on the 15th of January, April, June, and September).

YNAB saves the day here, because we know exactly what to do with those larger, less-than-monthly expenses. I don’t want you realizing suddenly that quarterlies are due and you have virtually no funds left in your checking account!

At the beginning of each month, you’ll do your monthly bookkeeping. One of those tasks absolutely must be to make sure you’re squared away with your quarterly filing. Here’s how:

1) Go to Reports -> Net Income/Net Worth and find the month’s Net Income:

2) Multiply the month’s Net Income by your average tax rate (Total Tax / Gross Income from last year…you could also let your CPA figure this out).

3) Budget the answer from #2 into your Quarterlies category.

4) When quarterlies are due, pay the balance of your Quarterlies category.

If you follow this, you’ll be well-equipped to handle the acid tax rain that comes four times per year. Do things this way and your cash flow will be zipping right along without any issues.

Profits vs. Distributions

If you’re a sole proprietor, you are the business. Whatever profits the business makes, those are your profits. Done. A piano teacher is paid $80,000 and has $20,000 in business expenses. The teacher’s profits are $60,000.

If you’re running things as an LLC, you’re not the business. You’re a member/owner. If the LLC makes $80,000 and has $20,000 in business expenses, the LLCs profits are $60,000. What if you decide to live frugally and you only pull $30,000 of the $60,000 out of the business as a “distribution”? You still pay tax on the $60,000 in profits. The business passes through its profits (all of its profits), to you.

You’ll hear people that don’t know, acting like they do know, and they’ll say something like, “Yeah, just don’t take as much of a distribution and you can keep your taxes low.” Wrong. When you’re dealing with a pass-through entity such as an LLC, you’re taxed on profits. The IRS doesn’t care about what you took out of the business.

The Self-Employment (SE) Tax

At the time of this writing, the Social Security tax is 12.4% and the Medicare tax is 4.9% — 15.3% in total. The employer pays half, and the employee pays half.

Remember: this tax is above and beyond the income tax. If your income tax rate is 15%, and you’re self-employed, you’re really looking at 30% (give or take, it’s not quite that exact because you can deduct half of your self-employment tax)!

The profit from your LLC has the SE Tax levied against it. If you’re a sole-proprietor, you pay the SE tax on your profits as well. However, if you’re an S Corp (or an LLC electing to be taxed like an S Corp), your profits are not subject to the SE tax. This is a big deal. Here’s why.

Let’s compare two scenarios where the only difference is on paper:

How’d we suddenly save $7,650 in SE tax? We took 50,000 of the 100,000 in profits from the S Corp (or LLC taxed like an S Corp) and made them a wage–the kind you’d get on a W2–for you, the owner. The other 50,000 we left in there to pass through (from above, remember Profits vs. Distributions…) to your tax return as self-employment income.

This is just a reclass of income when it comes down to it. Your taking $100,000 of general income and classifying $50,000 of it as a wage (subject to the SE tax) and the other $50,000 leaving as profits that simply pass through. This is where the difference between a distribution and profits really matter.

Now imagine that! You save $7,650 because you change things on paper just a little bit! (You actually need to run payroll — that is, pay yourself as an employee of your own business).

What will the IRS look for? Excessively low wages. You can’t have $100,000 in S Corp profits and pay yourself a wage of $10,000 unless that’s considered “reasonable”. Whatever’s reasonable is your call.

What We Covered

Quarterlies. Use YNAB as it’s intended and plan for those large, soul-crushing outflows in advance!

Profits vs. Distributions. They’re likely the same when it comes to taxes…unless you’re operating as an S Corp.

Self-Employment Tax. This is a big cahuna. Minimize it if possible by making yourself an employee of your S Corp and managing your wage (subject to SE tax) there.

If you want to get a better grasp of taxes overall (high-level, fairly entertaining stuff), check out YNAB’s Tax Insight course. (Free & Fun). And if you’re wanting some serious insights on taxes that go into the nitty-gritty, Casey, my tax advisor, writes some great stuff.

YNAB's Backstory (the long version) and Tips for Small Business Owners (Whiteboard Wednesday)

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Today’s Whiteboard Wednesday set a record for the longest ever in the history of earth. I’ve broken it up into four parts.

Today’s WW is largely the backstory of YNAB. How it came to be… how it has evolved. Mistakes I’ve made in the past. This has been requested for a bit and I thought I’d give the brief version. It turned into a 30-minute endeavor :)

After relating the YNAB story I focus on a few key principles for small business owners (and esp. for those aspiring to get something started! Key word there being ‘started’).

Enjoy. I promise brevity going forward. Right.

Small Businesses that Would Benefit in a Big Way by Using YNAB

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Just a short list I threw together based on applicants to my Small Business Initiative:

IT consultant
graphic designer
personal trainer
CAD drafting
musician
internet marketer
psychic
cosmetologist
financial adviser
web developer
petsitting
search engine optimization consultant
attorney
educational therapy
web hosting
avon representative (or any other similar situation such as Nuskin, Noni, Amway…)
physical therapist
security consultant
database administrator
photographer
business coaching
software developer
realtor
patent consultant
bookkeeper
voice coach
life coach
jewelry distributor
piano teacher
electrician
acupuncturist
pilates/yoga instructor

This list is by no means exhaustive. Could you implement YNAB’s powerful principles into your business? Do you find 90% of your current bookkeeping software’s functionality lying dormant because you just need “something simple?”

Can I Help You One-on-One with Your Small Business Finances — for free? (Whiteboard Wednesday)

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Today we discuss a new initiative I’ll be working on over the next 4-6 weeks. YNAB for Your Small Business.

Please watch the Whiteboard Wednesday and then, if you’re a small business owner (even the smallest of small businesses, full- or part-time! Consultant, freelancer, designer, programmer, realtor, loan officer, etc.), fill out the survey below.

You may be selected as one of six participants. I’ll work with you individually to help you implement YNAB into your small business. This is completely free. I’m doing it for very selfish reasons — I want to learn how I can help people implement YNAB’s principles into a small business setting. The best way to learn how to help is to start helping!

YNAB transforms personal finances.

It can transform business finances.

Click here to apply!

UPDATE: Thanks to those who have already applied. Just from reading through the applications I’m getting very excited! We will be able to do some great things for your respective ventures! To those who haven’t yet applied, go ahead! It shouldn’t take more than a few minutes :)