If there were such a thing as a business horror movie it’d probably start calm and cheery as 2014 did for me and my small business. There was money, great clients and everyone was getting along. Conversations tended to focus on our personal lives and the wonderful projects we were tackling to change the world. If anything life was actually a little too good.
The reality was that even though our clients were well served our business was neglected. We were focused on delivering great software and had passed the core of the business into the arms of a Certified Public Accountant that we hadn’t vetted and failed to properly check-in with. They paid our bills, recorded our spending, filed taxes; everything. Of course, we’d occasionally talk but the conversations were mostly about family, the weather in Greenville, tech… someone might toss out a number with “gross” or “net” but it didn’t register much and they didn’t insist that it register. We had no idea that CPA could easily stand for something much more dangerous.
The plot turn was precipitated by our growing profits which, as an LLC, stacked significant tax liability onto the partners’ personal tax returns. This acute personal pain is what made us finally venture into the dark unknown of our business’s finances; There had to be a way out of such high taxes. So we called our CPA and asked them to fix the issue. They suggested that moving to an S corp would be easy and should result in a dramatic reduction of personal tax liability: We’d save money. Sounded good to us; our CPA was great! We grabbed our failure-prone flashlights and gamely followed along.
At this point, our naivety had already placed us in serious danger and just like a movie we were clueless. If I could look back and watch it all on my TV I imagine this would be that squirmy moment where the outcome is so clear, the blind trust so impossible, and the tension so high that you yell “go back!” to the poor on-screen sap that’s about to get whacked.
But we didn’t turn back or even ponder the situation. We didn’t seek the advice of others or ask questions or even bother to glance at our own books. So over the course of a few months, the LLC was legally closed, the S corp opened, and, critically, we welcomed a new year. Now turning back wasn’t really even possible.
When we finally noticed the gun it appeared in the form of a phone call on tax day. We owed around $50,000 in estimated tax before the end of the day. No, they weren’t sure what the final return would look like. And, no, there wasn’t a clear path forward. Bang! The screen went dark.
We woke up over the next few weeks in the business equivalent of intensive care, forced (it seemed) by treachery to fight for our lives. Our Certified Professional Assassin hadn’t actually been tracking our expenses consistently. Most transactions were egregiously miscategorized. Our misplaced trust had allowed our books to become a messy trap spring-loaded by the ill-planned move from LLC to S corp and finally tripped by the requirement to file taxes.
The recovery period was long. Our expenses ballooned while we struggled to make sense of what happened and how to fix it. We were crushed by more massive tax payments for bad decisions that could easily have been avoided. We refiled previous returns but the reincorporation meant we couldn’t go back and correct the biggest issues related to the transfer of capital from the old LLC to the new S corp. We shouldn’t have moved the LLC directly into the S corp and we certainly shouldn’t have done it with shifting ownership while cash-rich. It was a costly mistake.
We lacked experience and perspective to make sense of all this because we’d never taken the time to gain a feel for our accounts or business. We quickly fired our CPA but we didn’t have any replacement so in the early stages of recovery we were alone, in pain, and woefully underprepared. Getting the numbers right was one thing. Understanding what they meant in a business sense was another. Most elusively was a true understanding that it would take months of careful monitoring and educational conversations for us to become aware enough to feel our own financial pulse.
The process was overwhelming and the first thing left behind was our nascent sales function which evaporated precisely when we needed it the most. Instead of boldly cashing in on the great work we’d just launched we were timid and distracted. The compounding difficulties exposed cracks in our working relationships and eventually, partners left triggering more expenses in the form of necessary buyouts. Perhaps worst of all, we were now working harder than ever just to survive.
During our recovery, I took notes so that I could later reflect. If nothing else I wanted to learn from the experience and be able to help other people avoid the CPAs in the dark woods. If you run a business and can’t, right now, off the top of your head recite basic financials you’re already in grave danger. By basic financials I mean gross/net income and primary expenses (typically labor or cost of goods sold).
If you’re out there and it’s been a while since you’ve felt your financial pulse or, even worse, wonder if you’re blindly following a Certified Professional Assassin; maybe this is the moment where the audience wants to yell “turn back!” Maybe it’s not too late.
Mark Ovaska is a Product Manager with 20 years of business and software development experience who enjoys sappy metaphors and asks forgiveness for the use of nautical references.
All Images © Copyright 2018, Mark Ovaska