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When the IRS Calls . . .

What DO you do when the IRS calls?

The Taxpayer’s Lifeserver is a step-by-step guide to what you can do yourself, and when you need a professional.

How Fast Should Your Business Grow?

I recently viewed a video called Forty-Five Days. It was about the short, hellish life of broiler chickens that have been genetically engineered to put on weight much faster than normal chickens. The poor creatures had trouble standing on their spindly little legs, whose growth does not keep up with their bloated bodies.

During the 20 years I´ve worked with start-up businesses, I´ve seen too many that were rather like those poor chickens. Take as an example two fictional, but representative business owners, Misty and Julie, both of whom have been working as real estate agents for four years. Both have decided to get a broker´s license. Neither Misty has ever owned a business before.

Misty has obtained a total of $400,000 in loans — $100,000 from family members; $150,000 from vendors from whom she has purchased equipment, including a $45,000 phone system and elegant furnishings for her $6,000 per month suite of offices; and the remaining $150,000 from a home equity loan. Her goal is to bring at least 25 agents on board within her first year in business.

Julie, on the other hand, is going to continue working with the broker she has worked under for the past 2 years, while accepting listings of her own. Her broker has agreed to this plan. Julie plans to move slowly, signing up only one agent at first and taking on additional agents only as she feel comfortable doing so.

My experience tells me that, of these two women, Julie is the more likely to be successful over the long term. Misty may very well get her 25 agents, and her gross revenue for the first year will be many times greater than Julie´s. But I´d be willing to be that Julie´s bottom line will be healthier than Misty´s. If Misty follows the all-too-common pattern, she will not keep adequate accounting records; she will feel rich with all that money rolling in, and she will spend too much on employees the business does not really need, on clothes, on a fancy car, on making the payments on all that debt. When April 15 comes around the following year, she will be shocked to find that she owes taxes. “But I don´t understand!” she will wail. “I don´t have any money left. How could I possibly owe taxes?”

Having access to credit is a good thing, and going into debt to finance business expansion is sometimes appropriate. However, I have observed that debt is almost always a bad thing for beginning business owners. It would be far better to start the business on a part time basis while holding down at least a part-time job; or for one spouse to start the business while the other spouse works at a full-time job; or to save enough money to get the business started without having to take on debt.