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Finance issues are common problems for businesses, especially new businesses. Financial literacy is important whether personal or business. Capital, taxes, expenses, insurance, and more should be thoroughly understood and make sure you have financial professionals that can assist you.

Personal Vs Business Expenses

Separating Expenses

A common mistake that business owners make is failing to separate personal and business expenses. This mistake could jeopardize the protection of your business so keep all business expenses and personal expenses coming out of separate bank accounts. Any income your business receives needs to go into a business account initially along with any expenses that need to be paid out. Some business owners will sell their business at some point ,and well done financials will help prevent hassles.

Knowing what expenses to classify as a business expense could help you save on taxes and more. Common expenses for businesses include:

  • Rent or mortgage costs
  • Equipment and tools
  • Advertising costs
  • Payroll costs
  • Utilities
  • Taxes
  • Insurance
  • Legal fees
  • Loan and interest payments
  • Licenses and permits

If you need help determining what else could be a business expense, reach out for professional help.

Tax Purposes

You need your CPA to easily calculate taxes and be accurate on how much you owe and can save on taxes. Keeping everything organized on the front end will correctly determine income taxes, sales tax, and other taxes.

If your expenses are not organized and kept separate, it will be more expensive for your CPA to fix it on the back end. Also, there is a chance that your CPA may not catch every expense accurately.

Liabilities

Liabilities can cost your business more money than you anticipate if you’re not careful. If you join an existing business, carefully analyze what liabilities the business has at the moment.

A small business client had purchased a restaurant in New Orleans. Instead of transferring the assets of the business, the sale was the exchange of membership interests of the LLC that operated the business. What that means is the new owner assumed the existing business, which includes the assets but also equipment, liabilities, and debts.

The new owner believed there were no liabilities or debt when purchasing the business. Also, the owner was not represented by the attorney at the time of purchasing.

Several months later, the owner was hit with a citation from the New Orleans Alcoholic Beverage Control Board. The owner received an order to appear in front of the control board and argue why the restaurant’s alcohol and liquor permit should not be revoked.

The letter from the city included instructions for arranging a settlement conference. The client, nor our firm, knew exactly what the charges were brought against the business. We scheduled the settlement conference because whenever a business receives these kinds of letters, it provides the opportunity to access evidence of a violation.

During the settlement conference, it was stated the previous owner settled a violation approximately 3 years ago. Due to the previous situation, the board did not want to be lenient this time around as a violation happened again while the previous owner operated the business. It was absurd to the firm and the client because ownership had changed since the violations occurred.

Our firm argued that previous infractions were not the actions of the current owner, but that was not sufficient. The city attorney was adamant that violations followed the business, not the owner. Therefore, the current owner was penalized for previous violations of the former owner.

In the end, the owner was able to settle the dispute without losing their license. The new owner learned a valuable lesson about doing due diligence to make sure previous actions in an existing business don’t affect them if they were to buy-in. Hidden liabilities could negatively affect your business finances.

How to Find the Right Partner

Starting a business comes with complicated formalities, taxes, accounts, and finances. Having a business partner could help make handling these much easier. The first thing you should determine is whether you need a partner or if you should hire an employee.

A business partner is not necessarily someone who owns a part of the company and helps you run the business. Strategic business partnerships can be so much more. You can form the business with another company whose business goals align with yours and who is willing to help you grow. A company as a business partner is not equal to a merger because both companies stay independent. In the partnership process, they provide essential services to one another and either share their income or pay commission.

Great ideas often turn into a success when friends, college buddies, or family members become business partners. Those relationships tend to be innovative and creative, but quickly become problematic when formalities are left on the side.

Before you get into business with your partner you should work together on small projects, so you can give your partnership a test run. If you make a great team, you can start talking bout your common visions for the business.

The criteria for a good business partnership consist of different things but one of the most important would be how well the skills you both have that complement each other. Strengths should be different from one another.

Understanding their financial situation is necessary before officially partnering with others. Discussing finances could save you from trouble later on.

Here’s how to get started:
  1. Reach out to your network professional network a compile a list of candidates
    Using your connections or referrals of colleagues is a great start.
  2. Evaluate your chosen candidate
    Take the time to learn about their personality, values, experience, and background. View resources like their social media, company websites, former partners, and other references.
  3. Respect boundaries with your partner(s)
    Once you decide on your partnership, be sure to set up the operating agreement and allow each other to handle the responsibilities defined.

Partnerships with Spouses and Loved Ones

Choosing a family member or close friend is often the obvious choice. Even though they might make it easier to raise capital, they can’t always bring the necessary skills to the table. If something raises an eyebrow, communicate and address it. Establish frequent reviews to keep the communication open and transparent.

Sometimes partnering up with a family member can be beneficial especially when you share many values that will keep the business growing. Regardless of your relationship to someone, there should always be an end goal you both are aiming for. The direction of the business needs to be clear from the beginning.

Friends and family members who are in business together often disregard the need for formalities. This is why partnerships between friends and family could be risky. Friend and spouses tend to neglect the planning aspect of building a partnership more than people who have no previous relationship. Strains can sometimes be put on the personal relationships you have with these kinds of partners.

Going into business together is the ultimate compatibility test for every couple. Becoming business partners allows you to get to know each other. In the process of building a business together, it’s important to have the same motivations while maintaining a healthy work-life balance.

If this kind of partnership works out, sharing every part of your life makes it easier to have common priorities when it comes to caring for your household and business. Achieving these goals and celebrating successes together will build on the business and personal relationship.

A spouse partnership can be beneficial as most couples have a deep understanding of their partner’s:

  • strengths
  • weaknesses
  • communication style
  • emotions

Strategic Business Partnerships

Business partners should always acknowledge personal boundaries, praise, and criticize appropriately, show respect, and be open to honest discussions. As leaders of the company, they must confront any challenges and clear up any confusion or resentment. Putting out small fires, in the beginning, will keep you from wasting your energy on managing negative emotions later on.

The benefits of business partners include:

  • Reducing costs
  • Increasing income
  • Expanding the customer base
It’s best to get business partners for the following business needs:
  1. Sales Representation
    Partner up with sales reps who have a network in your business industry. They could help land contracts with bigger businesses.
  2. Fulfillment
    Partnering with a fulfillment house could help with warehousing and shipping.
  3. Manufacturing
    Letting another company manufacture products for you can increase efficiency.
  4. Marketing and Promotion
    Targeted advertising can be the responsibility of a CMO or marketing director to increase outreach.

Other aspects such as white labeling, distribution, and licensing can also be skills you or your business partners should have.

The biggest cause of partner conflict would be the lack of thorough planning. And even the planning process can’t ward off all disagreements, but it will improve people’s odds of succeeding.

Systematically going through a list of issues both interpersonal and business is the key to avoiding conflict. Challenges will be much easier to overcome in the future because partners can routinely fail to share expectations of one another. Make an effort to create expectations of your partner and yourself to have the conversations you need to have.

Partnerships You’ll Want to Avoid

Who doesn’t know Ben & Jerry’s ice cream? It’s not only one of the most popular ice cream brands because of its taste, but also because of the successful business partnership between Ben Cohen and Jerry Greenfield. They became partners in 1978 and over four decades later they still work together and oversee the direction of the company. What makes their partnership work is they complement each other’s talents and share a common vision.

However, in worst-case scenarios, you’ll find yourself in court over failed partnerships. Initially, there should certain types of partners you need to avoid.

  1. Mr. Employee
    Mr. Employee is a first-time entrepreneur with a pristine resume and an abundance of references. He enjoys collecting a weekly paycheck, health benefits, and eating dinner with his family nightly at 7 p.m. Unfortunately, Mr. Employee isn’t self-sufficient and doesn’t know how to move the business forward without you instructing his every move. Plus if your investment deal doesn’t pan out soon he is going to need to find a “real job” to pay the kids’ college tuition.
    Tip: Individuals who do not share the priorities that you do will not be productive partners. Pass up individuals who cannot commit equal time, energy, and financial resources.
  2. Mr. Perfectionist (also known as Mr. Procrastinator)
    Mr. Perfectionist needs every “i” to be dotted and “t” to be crossed before he schedules an official product launch date. He enjoys researching competitors, building industry case studies, and improving his 150-page business plan. Mr. Perfectionist wanted the new business to be up-and-running by now but still feels something isn’t quite right. He plans on putting together another comprehensive survey to send to all of his colleagues, friends, and family in the next few weeks to help flesh out the concept further.
    Tip: A good plan today is always better than a perfect plan tomorrow. Steer clear of excuse-prone procrastinators. Seek out self-starters who run with the ball and make things happen.
  3. Mr. College Buddy
    Mr. College Buddy had a stroke of genius while out at the bar one night, wrote it on a cocktail napkin, and asked you to help him “make it happen”. He enjoys bragging about his great idea and giving you directions on how to execute (he’s not into the “heavy lifting” thing). The issue: he’s moving across the country to start med school in the Fall. But fear not, Mr. College Buddy will make himself available by phone when he’s not studying, working, in class, or on a date. He’ll be sure to forward you the address where you can mail his 50% of the profits.
    Tip: Never assume all of the risks in exchange for half the reward. Ideas are worthless without proper execution. Before you bring a co-conceived idea to fruition, make certain that your partner plans to be around for the long-run. Napkins are not legally binding. Always execute an operating agreement.
  4. Mr. Inventor
    Mr. Inventor thinks he’s created the next billion-dollar widget. He enjoys giving two-hour dissertations on Chinese electrical engineering standards to investors and making business decisions based on ‘nice people’ and ‘gut feelings’. Mr. Inventor doesn’t understand the phrase ‘in the black’ but feels it’s imperative to spend all of the company’s investment proceeds on research and development.
    Tip: Brilliant academics are not necessarily brilliant businessmen. In place of a partnership, first, consider licensing deals or strategic partnerships. If you decide to go ahead with a partnership, be sure your agreements clearly distinguish the differences between product control and operational control.
  5. Mr. Right
    Mr. Right will be the first person to tell you that he is never wrong. His favorite phrase is ‘my way or the highway’. He will rarely discuss his decision-making process because he views such discussions as a weakness. He enjoys demeaning partners who don’t agree with him and making decisions without telling them. The funny thing about Mr. Right: he always seems to blame everyone but himself when his plans don’t pan out.
    Tip: Communication is the key to a successful partnership. Find a collaborator, not a dictator. No one is always right.
  6. Mr. Dreamer
    You’ll hear Mr. Dreamer say this line a lot: “One day when we’re millionaires.” He loves talking about retiring by 29 and how he intends to spend his hypothetical millions on a gold plated yacht that he’ll dock off the coast of his private island. One small problem with Mr. Dreamer: he doesn’t seem to know how to keep the business above water next month.
    Tip: Big paydays come from years of hard work and persistence, not excessive rambling and daydreaming. While your partner must be both positive and optimistic, it is equally important that he or she is grounded and focused.
  7. Mr. Spender
    Mr. Spender can’t possibly survive without a six-figure salary, lavish office, and an in-house cigar roller. Price is no object when it comes to entertaining a client or flying first class. If you’re lucky, Mr. Spender might even invite you to one of the extravagant dinner meetings that he charges on your company’s corporate card.
    Tip: There is no such thing as an unlimited checkbook. Partner with fiscally conservative, financially responsible individuals who strive to make every dollar benefit company growth and development–not their lifestyles.
  8. Mr. CEO
    Mr. CEO feels compelled to tell everyone that he is a CEO within 30 seconds of meeting him–even if his company is worth less than the paper on which his business card is printed. He loves cocktail receptions, his name written in fancy fonts, and stacks of luxury car magazines neatly piled on a coffee table in plain sight of customers. The only thing he doesn’t seem to like: real work.
    Tip: Successful companies are not built on titles, talking, and toys. Keep away from selfish, egotistical individuals who want to talk the talk versus walk the walk.
  9. Mr. Vacation
    I’d tell you more about Mr. Vacation, but I don’t know much about him. He never seems to be around.
    Tip: No-shows are dead weight and eat away profits. Make sure that your operating agreement clearly outlines partner responsibilities and vacation days.And the partner to avoid like the plague is.
  10. Mr. Personal Issues
    Mr. Personal Issues always has a sad story. On the same day as your company’s keynote presentation at the big conference, his son’s wisdom teeth need to be pulled and his dog died of pneumonia. He would love to attend next week’s investor meeting, but his divorce hearing might tie him up all day. Unfortunately, Mr. Personal Issues can’t afford his legal bills, so he’ll need to pull a little more money out of the company this month to avoid his ex-wife from taking 50% of his equity in the settlement. Thankfully, this will be the last time he needs money.
    Tip: You’re not in business to be a babysitter or a psychiatrist. Know everything there is to know about a prospective partner before you sign on the dotted line. Discuss everything from business to politics to family life to finances. If a potential partner seems to have a few screws loose, run as fast as you can in the other direction.

Contributions

Sole Owner Contributions

Making contributions varies between sole owner businesses and multiple owner businesses. It’s much simpler to make contributions to business when you’re the sole owner. It’s just a matter of transferring funds from your personal account to your business account.

Multiple Owner Contributions

Multiple owner businesses are more complex and can be done in a couple of different ways. Tracking the contributions will be important just in case the business dissolves. Every member’s contributions could be different therefore the business would need to be dissolved as such.

Contributions could be easier to track when they considered being loans. Instead of changing the percentage of ownership when a member contributes certain amounts, the member could create promissory notes.

Preparing for a Recession

When the economy is affected, businesses must have plans in place to handle a recession to prevent financial loss. A good game plan consists of having proper insurance and knowing how much you should profit to maintain your life.

Understanding Personal Expenses and Spending

Again, business owners make the mistake of not knowing how much their business should profit by understanding both personal and business expenses. The main reason why is because people have a habit of not knowing their spending habits and personal finances to begin with.

Use Resources to Help You

To help those who struggle with personal spending and finances, try an app called You Need a Budget (YNAB). The basic idea is to assign a job to every dollar earned into different categories. Some expenses could be monthly and some expenses could occur just a couple of times yearly.

Here are some categories you could start with and add as you go:

  • Housing (rent, mortgage, HOA fees)
  • Utilities (water, electric, gas, internet/TV/phone)
  • Insurance (home, car)
  • Groceries and household items
  • Transportation (gas, car payment)
  • Entertainment

Use the app to plan for big expenses you need to prepare to pay. For example, a semi-annual car insurance payment you could budget for by assigning â…™ of the payment monthly to that category.

We see this app being compared to other apps like Mint, but it shouldn’t be compared. Most other apps track your spending for you. However, a good budgeting app helps you plan for future expenses and not just tell you where all your money goes.

Planning For Profit First and Then Expenses

After establishing your desired income to maintain personal finances, factoring in the business expenses will allow you to determine what the business needs to bring in. You should be able to price what you offer appropriately so you can cover everything business and personal.

Failing to plan for the desired income is a business mistake we see time and time again. Prices are set not based upon the actual expenses of running the company, but what they think they should charge.

These business owners wind up skimping on other expenses just to make ends meet. The common behaviors our firm has noticed has been:

  • Business owners hold off on purchasing necessary insurance
  • Employees are classified as independent contractors to lower payroll expenses when they should be classified as employees
  • Business owners underpay themselves and create a more stressful situation

If you find yourself questioning how much you should pay yourself, you need to determine how much money it takes to maintain your lifestyle. From there, account for all monthly business expenses you will have. Once determining your personal and business expenses altogether, it will be easy to set earnings goals with your business.

Our firm recommends reading a book called Profit First. The book details an accounting system that shows business owners how to pay themselves before paying expenses and taxes. The book helps you understand why it’s useful and how to have the mindset to separate income into owner’s pay, taxes, operating expenses, and profit.

By separating income in these categories, it’s easier to understand the business’s budget. It will be much easier to determine financial moves such as knowing how to increase income or reduce expenses to make the business work.

Insurance

Business Interruption Insurance

A business interruption insurance policy generally helps protect against lost income after a covered peril affects a business. Covered perils include:

  • Theft
  • Fires
  • Natural disasters (i.e.: floods, hurricanes)
  • Fallen objects and lighting

Companies are adapting their policies to include modern-day perils like cyber attacks.

This type of insurance is usually separate and apart from general commercial liability insurance, or even a business owner’s policy. You’ll have to ask your insurance agent specifically about it.

Some business owners have indicated that their business interruption policy carries exclusions for pandemics, making it hard for companies to be covered in times like these with the virus. Travel bans in place from the US government, state and local governments closing businesses or issuing a state of emergency, and other factors have caused business income loss coverage to apply.

Always read your insurance policy to understand what coverage you have, and coverage you don’t have and might need.

Short Term Disability Insurance

Short term disability is insurance coverage that pays a percentage of the employee’s salary when they are unable to work because of injury or illness. Employees can receive typically 40 to 60% of the wages for 9 weeks to a year. Coverage usually kicks in no more than two weeks after the employee is unable to work. The employers can cover the gap with sick days but specifics vary by policy. Long term disability kicks in after a year of receiving coverage.

Employees must elect to receive this coverage before they become unable to perform work and cannot sign up afterward to be covered.

Taxes

As already mentioned, taxes are important to understand in and out. Certain taxes are also business-specific and should be carefully considered to make sure you are taking care of all taxes your business is legally responsible for. Louisiana has some taxes and programs that you should know about and see if they apply to you.

New Orleans Occupational License Tax

Every business operating in New Orleans must have an occupational license issued from the city. This is an annually issued license that permits you to operate in New Orleans. The tax you pay is based on the revenue your company generates.

Since the occupational license must be renewed annually, the tax is due January 1st of every year. If tax payment is not made by March 1st, the tax is considered delinquent and subject to penalty and interest.

Please note that the occupational license has plenty of ordinances that may change depending on the industry your business is classified under the city. Make sure you make time to check on your occupational license among your other business tasks.

Louisiana’s Digital Interactive Media Tax Credit Program

One of the most convenient things about the tax program is there is no minimum investment. Therefore, a small project can also qualify if other requirements are met. There is also no maximum investment, whether per project, for the company, or overall.

Qualified expenditures such as labor, hardware, and leases receive an award of 18% as long as the work is done in Louisiana. The reward cannot be received if work is out of state, or associated with administrative, clerical, marketing, or distribution.

For every Louisiana employee that you hire, you will receive a 25% tax credit on payroll expenditures such as salary, wages, and benefits.

Another benefit is there are no fees to apply for the tax incentive. There is also no requirement to have spent money on the project or begun the project. You can also apply for the credit as an individual company rather than as your company. It could make it easier to track production costs and tax credits awarded.

Louisiana Economic Development (LED) has advisors that can help you through the application process. If your project is eligible to receive the program’s tax incentive, then Louisiana Economic Development will send you a pre-certification letter upon the determination of qualified expenses. The letter will provide guidelines for the certification process.

When the project has been completed, you will need to submit a cost report performed by a CPA to Louisiana Economic Development. LED will issue a final certification letter that will officially issue the tax credit. You’ll need to work with a designated representative from the Louisiana Department of Revenue to redeem the tax credit.

Sidewalk Cafe Tax

The sidewalk cafe tax is something the city of New Orleans put in place for restaurants and cafes to pay fees for using public sidewalks to accommodate their diners. The city of New Orleans estimated that the tax would bring in $800,000 per year. However, others believe it will do more harm than good.

The Green Goddess co-owner Paul Artigues argues that his business only has 12 seats inside the restaurant. Without the sidewalk space outside his restaurant on Exchange Alley, he’d have trouble making it as a restaurant.

The problem is that Exchange Alley is owned by the city, so the issue is about using a public right of way. To use the right of way, the business must pay a franchise fee which varies in costs based on square footage used and for how long.

As you might imagine, there are probably more than a handful of sidewalk cafes not paying the sidewalk tax. It prevents money from going to the city and makes it very unfair for those businesses that do pay the tax.

Applying to Occupy City Sidewalks

Only restaurants that are validly licensed in New Orleans, and other places such as Baton Rouge can apply. The restaurant must have either a standard or cafeteria restaurant certificate of occupancy. The director then makes a recommendation to the city council which issues a revocable franchise for the placement of tables, chairs, and umbrellas.

The application consists of:

  • The location and hours of the establishment
  • Location drawing
  • The $250 application fee (not including costs for putting the application together)

The location drawing will have to be approved by the Planning Advisory Committee, CBD HDLC staff, HDLC staff, Vieux Carre Commission, or the Downtown Development District. Based on your business location will determine who needs to approve it.

Expect to pay a minimum of $2.00 per square foot per year either quarterly or in advance. The requirements don’t stop there. The ode details the clearance space requirements, liability and insurance requirements, and conditions and restrictions. It’s not as simple as placing some chairs and tables outside.

Consequences exist if the restaurant sets up outside without paying the sidewalk cafe tax. However, don’t expect them to be all too extreme. The director of the department of public works must give notice to the restaurant to remove tables and chairs. If the restaurant doesn’t promptly respond, they could face fees for labor, transportation, and storage if the city has to remove it.

However, the problem we see is the ability for the city to monitor unpaid fees. A restaurant could probably go days, weeks, months, or years with tables and chairs on the city sidewalk without paying the franchise tax. The city would need more people on the payroll to monitor businesses using the city sidewalk.

However, imagine the difficulty keeping track during Carnival, where extra seating and tables are needed outside these establishments. Not only that but then the inspector needs to determine where the city sidewalk ends and where private property begins. Trust us, it is not as easy as it may sound.

A better way to handle this would be taxing any business with city sidewalk access. It would greatly encourage businesses to make good use of their taxes and utilize the area, and not necessarily just chairs and tables. For more upscale restaurants, it could be an area for patrons awaiting their table.

That method is more favorable than trying to monitor for infringement or dismissing the tax. It could increase revenue for the city and the businesses without leaving the burden on the city.

Importance of Accounting Software

Not everyone is in favor of using QuickBooks, but it doesn’t mean accounting software should be disregarded. It will keep accounting costs lower by easily being able to track business finances. We’ll cover some reasons why, but if you want to try another platform other than QuickBooks, look into other software like Xero or HoneyBook.

Necessary to Prove Damages

A client came to us before with a possible BP claim. To file a claim, BP needs to have monthly profit and loss statements from the previous four years. The business had not used accounting software and was surprised by the need for those reports. However, using accounting software the records could have been downloaded, saved, and sent within an hour.

Another client came to us with a potential lawsuit. One of the claims for damages was the loss of future profit. Unfortunately, the business owner had not been using accounting software and could not produce detailed reports of revenue and expenses. I explained that the portion of damages he was seeking would be nearly impossible to prove without those records. It could be very costly to hire an accountant to help obtain this information. We decided not to take the case due to a lack of access to reports and the owner may not have been able to cover accounting and legal costs.

Bank Statements

We recommend filing bank statements every month to keep them accessible at any time. The thing is most people think they may be able to access bank statements from their banking website at any time. However, these websites can have expiration dates for files available for download, or some older statements and transactions can no longer be viewed.

One business owner needed bank statements that were over 2 years old. Capital One didn’t provide them on the website and charged $15 per old statement. Unfortunately, the client needed 5 years of statements so that was $900.

Remember that all companies do not have the same policy on old statements and files. Here are a few we do know about:

  • Discover Card: Every statement dating back at least 5 years is available on their website for free.
  • Chase: You can also obtain statements from Chase free of charge that date back several years.
  • Gulf Coast Bank: Only statements for the previous 12 months are available for download.
  • Capital One: The previous 13 months of bank statements are accessible online. Any statement older than 13 months is $15 per statement.

Be sure to print or download your statements and file them because you’ll never know when it will be resourceful to have. It sounds like plenty of work to keep accurate records, but this is why accounting software is necessary. You could also get a freelance bookkeeper to help you on sites like elance.com and upwork.com.

Earnings

What a business owner does with earnings can make or break a business. It’s important to be very professional and responsible for compensation in addition to knowing how to categorize it.

Client Deposits

There are times when a business is compensated in advance for work, especially event businesses. There could be instances that arrive that may prevent you from completing the work. The client could cancel at the last minute, or tragic events could happen.

Our recommendation is to have non-refundable deposits in all events or service contracts. The reason being is because service businesses reserve time for clients. If a client decides to cancel the last minute, then it could be difficult to replace that time with another client. The cancellation can result in loss of future profit for the business.

In addition to no-refund clauses, we urge clients to purchase event cancellation insurance. However, most people tend to not want it and bypass it.

There are Times to Make Exceptions

A videography company in Colorado gained attention when they refused to refund a $1800 deposit after a wedding was canceled due to the bride’s unexpected death. The groom requested a refund shortly after his bride’s death, but the videographer stuck to the contract and refused.

Other vendors had granted the groom a refund for the wedding but ugliness ensued when the videographer did not budge. The groom told the story to the local news TV station and the videographer had to deal with nasty calls, emails, and negative feedback.

Even though the videographer could legally keep the $1800 deposit, was it worth all the backlash? The backlash could cause a decline in business.

Based on our experience, the real reason they probably didn’t want to refund the groom is that it may have already been spent. If the business was flushed with cash, why couldn’t they just give them $1800 back to retain their reputation? A little empathy could go a long way.

Just because your contract says you’re entitled to something doesn’t mean you can’t make behind-the-scenes exceptions on a case-by-case basis for the sake of moral ethics.

Don’t Spend Money Until You Earn It

Our typical suggestion to our clients to hold onto deposits until the work is completed. It should be considered unearned income. The same goes for any business collecting funds before performing services, even us lawyers.

Most businesses take deposits from clients, and then spend it on delivering services to their current clients. They will keep repeating the cycle, and that’s a Ponzi scheme.

Categorize Earnings

The responsible thing to do is separate income for different things. In the book called Profit First, a core concept of the book is having separate accounts for different purposes.

There should be a separation of client deposits and earned deposits. Deposits would initially go into a client deposit account and as you begin to provide services then it can be transferred to an earned deposits account.

Money in the earned deposits account can then be distributed to:

  • Profits
  • Owner’s Pay
  • Taxes
  • Operating Expenses

Your business will be in a better cash position, but you’ll also be in a better position to deliver excellent customer service. So if you ever have to refund the client due to a tragic event out of your control, it will be in a client deposit account unspent.

Don’t be one of the many businesses that lack the financial literacy to survive. Stay on top of financials by reaching out to a CPA or bookkeeper.