Rocky Lalvani joins us to discuss the ironic twist that businesses need to focus more on profits and Stephen Patterson tells us how to guide your business through a recession.

Episode Transcript

Intro:

Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.

Disclaimer:

The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.

Chip Franklin:

Well, welcome to another edition of Practical Tax with Tax Attorney Steve Moskowitz. I'm Chip Franklin, and this is where we talk about issues surrounding taxes, and obviously that's a wide area, and it covers everything from individuals to multinational corporations and everything in between. And also, of course, you'll find this on our Ask a Tax Attorney segments, there are spaces in between that we try to fill in the cracks on the show, and Steve does a great job, and we love having great guests. Our next guest today is someone who can talk a little bit about what we love to talk about, which is profitability. And he's taught this to business owners for years. He teaches them how to ensure how they get paid and make a profit a priority. As a certified profit first professional, he implements these profit first systems and we'll talk about that coming up in just a second. Rocky Lalvani joins us here on Practical Tax. I'm laughing because I hope I got your name right. I didn't ask you in advance. Did I get it?

Rocky Lalvani:

You did wonderful, Chip. Thank you.

Chip Franklin:

Well, that's good because I took me a while for Moskowitz, but I don't mess that up anymore.

Steve Moskowitz:

You did perfect, Chip.

Chip Franklin:

All right, so let's talk about, you said the profit answer, man. Let's kind of jump in with a question, and obviously profit comes first in business. You can't stay in business long without a profit, but there's also growing pains, hard times and salaries. How do you balance that? How do you balance the need for profit with the people and everything else that goes alongside that?

Rocky Lalvani:

We have a simple saying, profit is a habit, it's not an event. And I think too often for business owners in the back of their mind, it's always I'll be profitable when, right? I'll be profitable when I hit maybe a certain dollar amount in revenue or I'll be profitable in three years. But if they don't have a plan to get there, then I think that's a major, major problem. Yes, we have to pay our bills, we have to pay our employees, but we also have to pay ourselves. And I think this is much more of an emotional issue than it is sometimes a numbers issue because the business owner wants to pay everyone else first and they kind of leave themselves to last. And that's one of the things we're trying to say, "Hey, you as the business owner also need to get paid and you need to get paid well for your efforts. You took the risk to start the business. You put probably in more time than anyone else into your business. And yet, why are you leaving yourself to last?"

Chip Franklin:

Huh. Steve, when you get small businesses approaching you for help and consultation and tax, obviously advice, are they usually starting out or are they switching from another firm? Or did they just decide to you bring in money and grow?

Steve Moskowitz:

All over the map. People that are just in every phase that you've mentioned and then some.

Chip Franklin:

And obviously that's a great point you made because some people just love the business so much. And I think of restaurants, they love having their friends.

Steve Moskowitz:

Yeah, that's where you really have to be careful because most people go into business to make a profit greater than they would make in wages. But the ones that go in, because here's what I've seen, somebody says, "You make the best souffle in the world." And he said, "I just love making those souffles." And they open up a little restaurant and they're making souffles and they're losing all their money. And I remember I had a client that, fortunately they asked me before they signed anything, and I looked at the restaurant they wanted to rent and the rent and I said, "Well, assuming you do multiple seatings in a night and assuming you work seven nights a week and assuming every seat is filled, this restaurant is so small that you won't even cover your rent. You can't sell this product in this space. It physically doesn't work."

Chip Franklin:

You guys ever see-

Steve Moskowitz:

You can't put a gallon of water in a pint [inaudible 00:04:27] container.

Chip Franklin:

There's a great movie, if you haven't seen it, called Midnight Run with Charles Grodin and Robert De Niro. It's a comedy. And De Niro keeps talking about wanting to open a coffee shop. And he's like, "No, you don't want to open a coffee. It's just a horrible thing. Everybody loses their money." But we're so inspired to have our own businesses.

Steve Moskowitz:

It's the American dream, have your own business.

Chip Franklin:

Right, but-

Steve Moskowitz:

And it turns into the American nightmare because unfortunately almost all small businesses go out of business and they usually take all their savings and everything they could borrow from friends, relatives, a bank or anybody else who will lend money with them.

Now, I went into my own business over 30 years ago. I believe in it. And when clients say to me, "I am firm believer in going into your own business." But there's things you can do. For example, when I opened my first attempt, I had some money coming in on the side, I had a corporate job for a while. I was doing tax returns on the side and the business got busier and I couldn't do the corporate job anymore. So I was a professor at night, so at least I had some money coming in before I said, "Okay, I feel confident enough that I can rely on the business a hundred percent for earnings." And I was able to do it doing taxes. But you take a look at other things. Sometimes somebody's married and one spouse has the business and one spouse has wages. Sometimes they're older and they have a nest egg and they say, "Okay, I'll risk part of it." And some people just jump in and see what happens.

Chip Franklin:

Yeah, you know Rocky, it's funny because-

Steve Moskowitz:

Those of you, the ones don't pay their taxes.

Chip Franklin:

Well that, yeah, but it's funny too, the word profit for people that aren't self-employed often makes them feel resentful. This kind of that word has gotten an unfair shake in the last 30, 40 years. Why do you think that is, Rocky you?

Rocky Lalvani:

I think it come, we said-

Chip Franklin:

I mean, you must know what I'm talking about, right?

Rocky Lalvani:

I know exactly what you're talking about. I mean, we had that internal struggle when we market our company because it's profit first and you get people who look at you and go, "Oh, you're evil." But at the end of the day, if your business isn't profitable, how are you going to pay your employees?

Chip Franklin:

Boom, boom.

Rocky Lalvani:

How are you going to make the souffle? How are you going to pay the rent?

Steve Moskowitz:

And it gets even worse than that because that's what I was talking about before. People don't pay their taxes, they do pay the employees, then all of a sudden they have a horrible debt that they can't pay and they go out of business. Whereas if they said, "Well wait a minute, but before you get in the hole of signing a 10 year lease and not paying your taxes and having other debts you can't pay, to try to, they are not going to eliminate it. But you want to try to minimize those risks and yeah, you do have to pay your taxes and you do have to pay your rent, but could you get a best possible deal? What can you do?"

Chip Franklin:

A lot of people, a lot of small businesses get in trouble by not paying their taxes and I mean not a sort of a, they don't do it with the evil intent, it just happens. They get to a part where they've overextended, how do you save for taxes and still make that money work for you? And that's a question for both. I'll start with you Rocky.

Rocky Lalvani:

So what we do for our owners, as soon as money comes into their business, we have them set a percentage aside for taxes.

Steve Moskowitz:

Perfect.

Rocky Lalvani:

So hopefully they've sat down with the CPA and they've projected, "Hey, if this is what we do this year, this is about what our tax bill is. So we know the percentage." Whatever that percentage is, every month we have them take that percentage and we put it aside. So it builds a little bit of an emergency fund, it builds a little bit of cushion. And when the CPA calls and says, "You owe taxes." They look at their tax account and they go, "Okay, I can cover it." And this is really weird, but what business owners tell me is number one, it takes away so much anxiety because they're like, "Whatever my CPA tells me, I feel confident I have the money to pay it. And I don't feel stuck over that." So I think that's a big part of it. And then the second thing is they're just proud that they have the ability to write that and stroke that checkout and that they don't have to worry about it.

Chip Franklin:

That's a great point, right Steve?

Steve Moskowitz:

I couldn't agree with Rocky more, and this goes back to what you and I have talked about before, it's the old envelope system.

Chip Franklin:

Yeah.

Steve Moskowitz:

And what I say to clients is, "Look, you have a minimum of three checking accounts,