When it comes to turning a profit, restaurants and other retail oriented businesses are at a slight disadvantage due to the extra costs associated with their merchandise. But, while these additional expenses can certainly put a dent in your profits, there are several strategies that you as a small business owner can utilize to recoup those losses. In episode #123, Gene Marks and Elizabeth Larkin advise restaurant and retail business owners how to calculate all their expenses, so that they can effectively price their products and generate the profit margins they desire.
Executive Summary
1:53—Today’s Topic: How Do Merchants and Small Retail Businesses Calculate Profits?
2:28—Generally speaking, restaurant and retail store owners need to consider scaling or opening multiple establishments in order to make significant profits.
6:07—To find out whether you are budgeting your business efficiently, you need to have a clear sense of your direct costs and how much you spend on materials. Then, calculate the profit margin for all these expenditures. Typically, you should be making 30-40% gross profits off of your direct costs, so that you can afford your overhead.
9:18—You also need to be aware of labor, rent and utility expenses. Once you determine this information, you can calculate your daily overhead; this cost will serve as the minimum amount of money you need to earn in order to sustain your small business.
13:32—Upselling, or offering products and services at an additional cost, is one way for small business owners to increase their profit margins.
18:43—If you ever consider opening multiple franchises, make sure to get a gross profit report from every location.
21:10—Business owners need to incorporate their own salary into the overhead.
21:34—While profit forecasting can help you budget accordingly, it is not always a reliable guide.
25:35—Gene advises small business owners to check with their accountants to find out whether they qualify for a Research and Development tax credit.
Links
Transcript
Elizabeth: Welcome back to another episode of the Small Biz Ahead Podcast. I’m Elizabeth Larkin. I’m here with Gene Marks, our small business expert. Welcome, Gene.
Gene: Have you seen Fargo?
Elizabeth: The movie? Yeah.
Gene: No, the TV show.
Elizabeth: No, I’ve heard it’s good though.
Gene: Yeah. You know I watch a lot of TV, right?
Elizabeth: Mm-hmm (affirmative).
Gene: Highly recommend it.
Elizabeth: While avoiding socializing with people.
Gene: Yes, that’s correct. Highly recommend Fargo. It’s on FX, but it’s also on Amazon Prime actually. You don’t actually have to buy it.
Elizabeth: Does this have something to do with today’s topic?
Gene: Absolutely nothing at all. I was watching an episode on the way over here today and was thinking like, “You know, I got to tell you that it’s just a great show, you got to watch it.”
Elizabeth: Good tip.
Gene: Yeah, sure.
Elizabeth: A couple episodes ago we were talking about calculating profits. You had mentioned that it would be a whole new podcast to talk about how merchants and restaurants calculate profits. You know what, I think we were actually talking about job costing. So today we’re going to be talking about how merchants and retail oriented businesses, not just manufacturing or service oriented business, can cost out their jobs and calculate how much money they’re making per sale, I guess it would be.
Gene: Correct.
Elizabeth: All right. So we’ll hear Gene’s take on that right after we hear from our sponsor.
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QUESTION: How Do I Calculate Profits for My Merchant or Retail Business?
Elizabeth: And we’re back. The last time we were talking about a business like yours, you were walking us through-
Gene: Service business, projects.
Elizabeth: … How do you cost out a job? How do you cost out a project?
Gene: Right.
Elizabeth: But if you’re a coffee shop, I know I use that one all the time, but I just feel like it’s so universally-
Gene: There are a lot of coffee shops around.
Elizabeth: … understandable.
Gene: Sure.
Elizabeth: Or, if you are a-
Gene: Restauranteur or a-
Elizabeth: Restauranteur-
Gene: … a merchant, a nail salon owner, right?
Elizabeth: Yes.
Gene: You know. Right, it’s a whole-
Elizabeth: Barber shop.
Gene: … different ball of wax-
Elizabeth: Hair salon.
Gene: Hair salon. These are all, it’s a different ball of wax. These are different kinds of small businesses. They’re not project oriented or service oriented. So, there’s a couple things. First of all, big picture, Elizabeth, do you ever walk by a coffee shop and you think to yourself, like, “How are these guys earning a living?” You know? I mean, you see a coffee shop and you’re like, are they really, you know … And you’re right to ask that question, because they’re probably not earning much of a living.
The numbers, when you look at running a restaurant, a retail store, typical ones, the profit margins, the net income is so low for these operations. They are among the lowest, least profitable businesses that you can go into. There’s a company called Sageworks and they do a bunch of statistics and data, and when I was actually doing a little research on this before, they were talking about the most profitable businesses in the country. Most of them are service-related businesses.
Elizabeth: Accountants.
Gene: Accounting firms are like really profitable-
Elizabeth: Architects.
Gene: Yeah. I mean, and among the least profitable in the country are restaurants and retailers. You’re looking at like a two to three percent margin at the very bottom.
Elizabeth: Well, here’s the difference, though. People become restauranteurs and coffee shop owners because they’re really passionate about food and coffee. No one is passionate about accounting.
Gene: Yeah, well listen, that’s another conversation for another day. I have met lots of nerds and geeks, like myself, who are a little passionate about it, enjoy what they do and the services they provide.
Elizabeth: Oh, I’m sure of that, but they’re not like, you know, no one is sitting home watching Anthony Bordain shows about being a CPA-
Gene: No kid ever said when he was 10 years old that he either wants to be a professional baseball player or an accountant, right?
Elizabeth: Okay, I do have a cute story about that. My friend is an accountant, and her daughter is five, and she went to visit her at work, and then the next day in school, the teacher said, “What do you want to be when you grow up?” And she said, “I want to be an accountant.”
Gene: Good for her. See, that kid is, she has got her feet on the floor. She’s very realistic.
Elizabeth: But then the teacher said, “Why?” And she said, “Because my mom has a lot of snacks at her office.”
Gene: All right, well that’s a good answer. Being an accountant is also very profitable besides that. That’s how you can afford all those snacks. But I guess the point that I make is that the average merchant, the average restauranteur, the coffee shop owner, the average small business owner makes anywhere on average between $40,000 to $70,000 a year. $70,000 is definitely on the higher end.
Elizabeth: And that, you have to include paying your employees with that.
Gene: Yeah, no this is actually what they take home.
Elizabeth: Oh, what they take home.
Gene: So this is after, okay?
Elizabeth: Okay.
Gene: It’s not bad, it’s a living, don’t get me wrong, you know what I mean? But it’s not Wall Street earnings. It is what it is. Now, the people that I know that run retail stores, coffee shops, restaurants, the people that make money, like real money at it, is they scale.
Elizabeth: Okay.
Gene: So, having just one … We’re gonna talk in a minute about profitability in a store and how to calculate your profit, but just bear in mind that when you only have one coffee shop, you’re just not gonna make that much money. But if you’ve got three, four, five, six coffee shops, now you’ve got scale. You can purchase stuff at a volume, right? You can share resources for everything, from management, marketing, accounting, whatever. You can have employees that are shared between the location as well, the same system-
Elizabeth: Yeah, if someone’s out sick, so this person goes there. Yeah, that’s a lot easier.
Gene: You’ve got more bargaining power when it comes to leased space. So, I just want to just make sure that I’m clear on that, that just owning one coffee shop or restaurant or a store is okay, but you really want to make some money, you gotta be thinking about scaling, okay?
Elizabeth: Okay.
Gene: So that’s point number one. More importantly, point number two is calculating your profits. It’s so important because again, profit margins are so slim, again, you’re only making two to two and a half percent of your revenues when all is said and done, I mean a few dollars here and there really does make a big difference in your business.
So, you’ve got to really have a handle. Just a few bits of advice for you. Number one is, you’ve got to have a big handle on your direct costs. So what I mean by direct costs is these are your costs of materials. This is your biggest cost in your store or in your restaurant. The cost of your food or the cost of the clothing that you’re buying from your suppliers. The cost of your … whatever products that you’re selling in your store. You need to know your direct costs, and you need to know what they are as a percentage of your sale.
So, whatever you’re selling stuff on, you have to make a certain percentage, your margin, to make sure that you’re covering your overhead. So people ask for rules of thumb, like you should be doing. Whenever I talk to people that are in these businesses, the rule of thumb is, is that if you could be making anywhere from 30-40% gross profit on your direct costs, that will get you pretty far to cover your overhead.
Elizabeth: Does that include labor?
Gene: No.
Elizabeth: Okay.
Gene: So that’s just your direct food costs that you have.
Elizabeth: Oh, okay. Sorry. I zoned out for a minute.
Gene: No, that’s okay. So then what you have to is you then have to then calculate what you’re bringing in here, which is labor and overhead, okay? So, if you’re shooting for 40% as a margin, and that could be on the lower end, but you shouldn’t really accept much less than that, then whatever you’ve got left over is what’s gonna go to contribute towards your overhead of your store, or your restaurant.
Elizabeth: I’m just thinking about right now, like a nail salon. So you’re doing manicures and pedicures, so your direct costs would be the nail polish, the nail polish remover-
Gene: It would be. But believe it or not, the nail salon’s a little bit different, because that’s really more of a service business in a retail environment, isn’t it? I mean, your nail polish really doesn’t cost that much.
Elizabeth: Yeah.
Gene: What I’m talking about is you’re at a restaurant, and you’re selling food, you know?
Elizabeth: Oh, okay.
Gene: So your direct costs of your … everything that goes into making a hamburger, you know what I mean? Like what’s the direct cost of that hamburger? So if your costs for that hamburger are $3.00 between the meat and the rolls and the whatever, then your selling price has got to be at least 40% more than that, and I think a lot of restauranteurs will tell you that it should be even higher than that, because obviously the higher your selling price, then the higher margin that you’ll have, and the more that you can cover your overhead. Does that make sense?
Elizabeth: Yeah.
Gene: Okay. Same thing if you’re in a store. You’re a merchant and you’re selling clothes, for example. If you’re selling dresses in a dress store, your markup should be at least 40% above that, but again, a lot of merchants will tell you that 40%, it should be a lot more than that, because the more that you can have-
Elizabeth: What, like 60?
Gene: Sixty, 80, as much as you can possibly get.
Elizabeth: Oh, okay.
Gene: But it depends on what the overhead is in your store or in your restaurant, which gets me to my next point, okay? What you have to figure out is what is your labor in your store, what is the cost of your rent, what is the cost of your utilities, what is the cost of any other sort of out-of-pocket expense that it takes to run your store or your restaurant. And I like to break it down on a daily basis.
So when I look at, if I’m running a store, and I look at all my expenses during the course of a month, and again, I add them all in. I’ve got this amount of staff, I’ve got this amount of lease, my rent for the month, my overhead for the month, what not. I then figure that out, then I divide that by 20 or 25, depending on the number of working days there are during the month. And I come to a daily overhead, okay, for running my store.
I know that my margin on sales has got to at least cover that overhead on a daily basis if I have any chance of making money. So if you figure that your daily overhead is $100 a day, okay, that’s your daily overhead, what do you have to sell at a 40% margin so that you’re covering that $100? Do you follow what I mean?
Elizabeth: Yeah.
Gene: So you have to be selling enough products that are in excess of that $100, so that you’re at least gonna net and cover what your overhead is. And the more margin obviously that you can get, the more profit you’ll be left over during the day.
So if you’re running a store or you’re running a restaurant, you’re running a coffee shop, calculate what your daily overhead is. Figure out what you want, what your average margin should be, and I think it should be at least 40% if not more, and then you back into what you need your daily sales to be so that you can cover your overhead. And then anything over that, you know that you’re making profits. Does that make sense to you?
Elizabeth: Yes.
Gene: That’s what I’ve seen smart restauranteurs and merchants do. And they track it on a daily basis. I mean, at the end of the day, when they put the closed sign on, on the door, they’re like, okay, what were our sales this day? Okay, it was 200 bucks. Okay, 200 bucks at even a 50% profit is $100 of gross profit we made on that $200 in sales, and we know that our overhead, our daily overhead is $80, we made $20 in profit that day. Does that make sense?
Elizabeth: Yeah.
Gene: Okay. That’s the kind of mindset that you have to have on a daily basis to be able to make money in this business, because the margin is just so incredibly low.
Elizabeth: Why would anyone go into a business like this?
Gene: I know. Well, you had mentioned earlier about when you’re in this business, a lot of people do it out of passion. And I get that. You’re a restauranteur, you’re really into it. Or maybe like a whole thing about coffee, and you really want to be in the coffee business. But in the end, the number one thing that brings down businesses is not their passion or their desire to do hard work, it’s they don’t have a financial acumen for the business.
Elizabeth: Yeah. I will tell you though, I go to a nail salon that charges a little bit more than the other nail salons around where I live because they just do a better job and their customer service is better.
Gene: That’s great.
Elizabeth: So you can compete.
Gene: You absolutely can.
Elizabeth: You can raise your prices and compete.
Gene: But let’s talk about the numbers in your nail salon. What’s it cost to get your nails done? Like what do they charge you?
Elizabeth: Oh my gosh. I actually haven’t been in a really long time.
Gene: I never ask my wife that, ’cause she gets her nails done, but I’m assuming, what, to get your nails done has gotta be, what, like $5, $10? Guys don’t understand. Okay, what-
Elizabeth: I think it’s like $15.
Gene: Ugh, $15?
Elizabeth: Yeah, and then I tip like 20%, so-
Gene: Yeah, but we’re not gonna include the tips because that’s gonna be kept by your employees. So I guarantee you that nail salon owner knows that out of that $15, they’ve got direct costs of whatever the nail polish is.
Elizabeth: Three dollars, I’m gonna assume.
Gene: It’s gotta be really de minimus I think for her. But okay, so say, so she’s left over, say, with 12 bucks, and she knows, that person knows that if she has got $120 of daily overhead in her place, she’s gotta have at least 10 customers paying $12 during the course of that day to just be making money for that day. Does that make sense?
Elizabeth: Yeah.
Gene: And anything more than that, if she has a higher volume, she can charge a little bit less, but maybe she’s in a place where she doesn’t have that high of volume, so maybe she charges a little bit more to make up for it and provides that much more of a quality service.
Elizabeth: So I have a better example for you, ’cause I actually just did this. So I went and got my hair colored, and it was $65 I think, which is very inexpensive. I used to pay way more than that when I-
Gene: Please don’t tell me that, ’cause I-
Elizabeth: … lived in New York.
Gene: … I don’t understand all … Don’t take this the wrong way, but everybody that … all you women with the hair and the nails, it’s a fortune. I mean, I don’t know how everybody affords it. It’s a fortune. Sixty-five bucks even is like a lot to get … you know what it costs to cut my hair? The three hairs that I have on my head?
Elizabeth: You barely have any hair, Gene.
Gene: Twenty bucks. But anyway, go ahead.
Elizabeth: Anyway, so it’s $65. In that model, I believe my hair stylist has to buy her own dye.
Gene: Yeah, okay, so that’s a different model all together, ’cause a lot of times the hair stylists have, they have independent contractors that are actually doing the hair. So it’s almost like they’re renting out space to all the hair stylists, and that’s a different model all together.
Elizabeth: But the reason I bring up a hair salon is that we did have, we did a little series on hair salons and barbershops on Small Biz Ahead, and one of the things we talked about was there’s so many ways to upsell people in salons, and I see big businesses doing that. Like if you go to an Elizabeth Arden salon, and you call, and they’re a national chain-
Gene: Yeah.
Elizabeth: You’ve even heard of them, right?
Gene: Of course.
Elizabeth: Okay, so if you call, they’re like, “Well do you want the … you want your hair colored? Do you want a scalp massage with that? Do you want like the warm compress?” They’re constantly trying to upsell you. That’s something that small business owners I don’t think do a lot in hair salons.
Gene: Right. Well these people, they get it, they sell. And what they’re doing is once they get the customer in the door, and assuming that they’re covering their overhead, by whatever the volume of customers come through the door is, they know that for every other additional service or product that they sell, that just goes straight to profit. So, that’s what we should all be doing as well.
That’s why good restaurants, they have their specials for the day, they get their waitstaff together before the evening dinner shift starts, and they’re like, push the veal parm tonight, you know?
Elizabeth: Ah, veal is terrible.
Gene: But they pick out certain dishes that are certain types of profitability to them, and they say, we’re gonna charge two or three-
Elizabeth: I thought it was just because that’s what the chef wanted to make.
Gene: No, it’s not. I mean, the chef may want to make it, but it also has to do with how much the waitstaff is going to be pushing it, because they’re profitable to do. And that’s why the waitstaff also-
Elizabeth: They choose the specials based on how profitable they are?
Gene: Many restaurants do that, of course.
Elizabeth: It’s a good thing I’m not a business owner-
Gene: It’s a business. Yeah, it’s a business.
Elizabeth: … ’cause I’d be like, “Oh, we just really like the spaghetti, so-“
Gene: No, it’s the same thing with drinks as well. A lot of businesses, restaurants, they push because those are very, very high margin things as well. What a good restaurant does is, is they look at not customers, but checks, and they look at what the average check is for a diner or a party that comes to the door, ’cause they know-
Elizabeth: So, same things. They’re just looking at their direct costs.
Gene: Correct. So they look at the average check, and they’re like, okay, for this average check, the actual direct cost of food for this was 60% of the check value, or 50% of it. So we have a 50% margin to play with. And then they look at their overhead daily, and they’re like, we need to have a certain amount of checks of this amount on average coming through each day to cover what our overhead is.
Elizabeth: And then they get upset when they get to the big … let’s say it’s like a huge party, and no one orders any alcohol.
Gene: Yeah, right.
Elizabeth: They’re like, oh man.
Gene: Right, they’re losing out. But to your point though, Elizabeth, you said that, they do instruct the waitstaff to keep pushing stuff. You know, would you like another drink, how about desserts? Would you like some brandy with your coffee? I mean, they’re always selling, selling, selling, because what separates the really great business owners, the great restauranteurs and the great merchants is that they don’t just settle for making their nut on the one sale and covering their overhead. They’re constantly pushing other products to people so that they can make more profit.
Elizabeth: Yeah. So tell me how McDonald’s does this. Do they do the same thing that a small business should do?
Gene: So McDonald’s is sort of a different animal, because they have got their direct costs down to the penny in their organization. I mean, each bit of food has been weighed and measured out. And by the way, that’s one of the things that vexes restauranteurs, is wastage on food. Different chefs … how do you figure out a direct cost of a hamburger when you have one chef using six ounces, another guy using six and a half ounces or somebody else … you know what I mean? Whereas at McDonald’s, everything is, it’s delivered from corporate, it’s made it out, it’s weighted out, it’s exactly what it should … so they know what their direct costs are per the dollar.
They also know exactly how much it’s going to cost them for employees to run a franchise. So they know what their overhead is per store. It doesn’t vary from region to region. I mean, there are a few dollar variations because of say wages might be in a certain, or certain rents might be more, but they adjust their prices to cover that.
Elizabeth: But they do basically what you’re advising small business owners do. They just do it on a much larger scale.
Gene: They do. And you know what’s funny is that I was listening, it was Howard Schultz, who’s the CEO of Starbucks, I think he’s stepping down soon, but he was interviewed by Alec Baldwin on a competing podcast to ours … Alec Baldwin’s Here’s The Thing, which is a great podcast. And Howard Schultz was saying-
Elizabeth: Don’t compliment other podcasts.
Gene: Right. He gets, Howard Schultz, as a CEO, to this day, he gets a gross profit report on every single store in Starbucks.
Elizabeth: Wow.
Gene: But what he does is, he looks for the ones that are on the margins, on the extremes, the ones that are making less than what they would expect on a store by store basis, or making a lot more than what they expect on a store by store basis. And he gets it every single day, he said, across from all the stores around the world-
Elizabeth: How many Starbucks are there?
Gene: Thousands around the … you can imagine the size of this report. But he takes the time to look through it, and he knows, because they know how much coffee is going into a single cup of coffee. They know every single product that they sell. They’ve got the direct cost down, and they know exactly on a day by day basis what their overhead is, so they know what their net profits should be in their stores every day.
Elizabeth: Based on this, what would be a good … like let’s say we’ve got a business owner out there who’s like, eh, I kind of know the numbers, but I don’t. Let’s set a goal for them. Like let’s say by next month, you want to know your direct costs on everything you sell.
Gene: I would say this. I would say that your first goal is to know what your daily overhead is.
Elizabeth: Okay.
Gene: That should be it. And again, to do your daily overhead, you want to add up your rent, your employees that you have during the course of the day, any utilities, any out-of-pocket expense that you have to run your place. Just to turn the lights on and open the doors, what’s the daily overhead. And you can figure this out on a monthly basis and then just divide it by the number of days that you’re open.
Then you know, then you know how much money you gotta bring in so that you’re at least covering your overhead every single day. And the money coming in is from the products that you’re selling, and it’s not the sales price, it’s the margin, the price after … what you’re left with after your direct costs. But at least you know, look, I know if I can assume that I’m making 50% on every product that I sell, and my overhead is $100 a day, then I know that I’ve got to sell at least $200 of products every day to at least cover my overhead, stay in business.
And by the way, we talked many episodes ago about paying yourself. Smart business owners, they build in their salary into the overhead, so that in that daily overhead calculation, at least you’re also covering you as well. And you’re like, listen, if I want to get paid and also cover my expenses, I need to sell at least this amount. Anything over that though, that’s your profits.
Elizabeth: Okay, so a longterm goal, then, would you want a retail, like a store owner or a coffee owner or someone like that, in the longterm, after they get this under their belt, to be able to say, “I project that on a Saturday, I’m gonna bring in this much money.”
Gene: That’s such a great question, because the smartest business owners that I work with are looking ahead and are knowing it.
Elizabeth: So they can say like on a Tuesday, I typically make this much.
Gene: Yes, but I will tell you this much. It’s funny. I learned this from all different ways. I have clients, and my daughter, for the past six months now has been waitressing at this pretty popular restaurant in Philadelphia, and I have restaurant clients as well, and it validated what I saw from my clients. This restaurant has been in business like 20 years, and like I said, they’re popular. She, not infrequently, will get sent home early because there’s not enough work. They’ll staff up expecting, and I think to myself, wow, I have clients, and the guy I know who even owns this restaurant, you would think after all this time, he would know that on the second Tuesday in July, it tends to be less busy, and he would staff accordingly.
But you can’t know it all, do you know what I mean? The forecasting is very, very helpful, and it should tell you something, but in the end, it’s not … you’re still kind of making a hunch. Isn’t that amazing-
Elizabeth: That’s kind of a bad position to be in for a worker, like if I show up for my shift and you send me home halfway through-
Gene: Happens all the time. Doesn’t that stink? Doesn’t that stink?
Elizabeth: That really stinks.
Gene: And that happened to her and her other employees, and that’s just the nature of the restaurant business. So, if you’re doing that as well, although I’m sure it feels terrible to do that, it’s just reflective of what your revenues are, but you’re not alone. That’s a very common practice in the restaurant industry.
Elizabeth: I used to work at a pizza place, it was called Planet Pizza, and it was-
Gene: The one from like, Toy Story?
Elizabeth: No, they were not very well-run, and so they started doing that, sending us home, and then-
Gene: People got annoyed and quit?
Elizabeth: … we all quit. Yeah. I remember one week I showed up and I was like, “Oh, I actually made plans for this afternoon, so I’m planning to leave.”
Gene: Yeah. Well the reason why this restaurant in particular can get away with it is because when they had good nights, they were really good nights.
Elizabeth: Yeah.
Gene: So people are like, I’m not gonna quit because, you know, she’s had some really good nights. But it does amaze me, and by the way, this goes across all industries and all business owners I meet. I meet people that have been in business for a thousand years, and yet they still are making hunches on things. They still don’t know. Well yeah, you really think you know at this point, but you don’t.
Your point, though, is really well taken. If you do forecast out, if you do your daily overhead, and if you start tracking your sales on a daily basis, and you keep records of that, you should be able, at least on a monthly basis, if you do this for a couple of years, to know, you know what, November tends to be a slower month. Or August tends to be-
Elizabeth: Or just be able to, on a Sunday afternoon at a coffee shop, be able to say, “We’re having a really good Sunday.”
Gene: Yes. Also true. Also true.
Elizabeth: Or, “Hey, we’re really not having a good Sunday. What did we do last Sunday? What were the factors?”
Gene: Well, a lot of times you’re like, we’re having a great Sunday today and I’m not really sure why. That happens. I hear that a lot as well.
So the best you can do to sort of minimize that question mark, the better.
Elizabeth: Okay. Or just open an accounting business, ’cause that seems to be easier.
Gene: Yeah, right. That’s the most amount of money.
Elizabeth: All right, we’ll be right back with Gene’s word of brilliance.
WORD OF BRILLIANCE: Research and Development
Elizabeth: And we’re back with Gene’s word of brilliance.
Gene: Three words. Research and development.
Elizabeth: Okay. Let’s go for it.
Gene: So, the tax laws changed a few years ago. We had a big change last year, but then even a couple years before, there were some changes to it, and I just have to tell you, if you’re in a business that makes stuff, it can be any kind of stuff, you really want to talk to your accountant about the research and development tax credit. It has become a lot easier, and a lot more open for businesses to use and take advantage of. It is a tax credit that is a credit, Elizabeth, which means that when you calculate this credit, it goes right against whatever you owe for taxes.
So when you do your taxes at the end of the year, or your accountant does your taxes, and you owe $100 in taxes, if you have a $10 credit, then you only owe $90 in taxes. So credits are really valuable. And the research and development tax credit is a huge, huge thing. It is not that easy to calculate, so you might want to get your accountant or more importantly, you might want to ask your accountant or Google for accounting firms that specialize in calculating the research and development tax credit.
But listen, if you’re working on new product lines, you’re sending out samples, you’re developing a new line of service. You’re doing any type of innovation work like that, and a lot of companies do that, then whatever costs are going into that, if you have in-house a chemist, a scientist, an engineer, anybody like that capacity, or even if you’re outsourcing that person, you can take that person’s cost, and the materials they might be using in their work, and any overhead associated with them, or even if they’re outside of the company, and they’re an independent contractor, you can take that too. All of that goes into the R&D tax credit calculation, and I’m telling you, it can turn into serious money being saved.
So, you don’t have to be a pharmaceutical firm or be in like the science business or something, you could be a boring old manufacturer located anywhere, but you’re developing new stuff, you’re introducing new products, and you’re employing people that are working on that stuff. You too can take advantage of the R&D tax credit. Talk to your accountant as soon as you can.
Elizabeth: Great. That’s a really good tip, Gene.
Gene: That’s my word of the day.
Elizabeth: All right. We’ll be back. In our next episode, we’re gonna be talking about starting a business with friends. We actually talked about starting a business with family in another episode, so this will be similar, but totally different.
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