The Tale of the Incompetent Business Owner
Liz Farr’s chilling recounts of accounting and basic business practices gone awry continue, with this week’s tale of a small business owner who simply did everything wrong.
What do you do when a business owner clearly has no clue how to run their small business? Hopefully, you manage to get out before everything collapses!
Way before I became a CPA, I took a part-time job at an alternative health business in Madison, Wisconsin. I was between jobs and needed something to tide me over until I figured out what the next chapter of my life would be. The owner, who I’ll call “Daniel,” had two separate but related businesses: a storefront where he sold alternative health remedies and books, and a mail-order homeopathic pharmacy.
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The homeopathic pharmacy business was a venerable institution, founded in Chicago in 1912. Daniel had purchased the business sometime in the late 70s and moved it to a warehouse in Madison.
At its prime, the business manufactured and distributed homeopathic remedies across the country. At the time I joined, the machinery had long since been sold and what remained was thousands of gallon-size jars of identical-appearing tablets and a library of leather-bound medical textbooks from the early 1900s.
I worked mostly at the warehouse, where I prepared orders to be mailed out. My elderly co-worker, Art, packaged those orders for shipping. Art had had worked for the homeopathic pharmacy his entire working life, since his teen years.
Art spent a few hours a day carefully wrapping the small glass jars of tablets and packing them into small boxes for pickup by UPS. According to Art, some of the tablets in those jars had been manufactured more than 50 years earlier, but the nature of those remedies meant that they never lost potency. Art’s workload was pretty light, and once the daily orders were out the door, he dozed in a recliner in front of a TV.
My first hint that something was a bit sketchy with Daniel came from the friend who connected me with the job. She cautioned me that sometimes his checks bounced, so I needed to be sure to have enough cash in my account to cover any possible shortfall. And, I should always make the point of picking up my paycheck in person on payday. “Never trust him when he says ‘the check is in the mail’ because it won’t be,” she cautioned.
The next clue came from Art. He groused to me that he was only getting minimum wage, but I was getting $2 more per hour, even though I was a brand-new employee.
Daniel had told him that was because I had a BS in biochemistry, so that made me more valuable. Never mind that a high school education was barely required to perform my job duties.
About all I was doing was filling glass bottles with tablets and typing the names of the remedies on the labels. It made no sense to me that someone who had spent his life working for this company was only being paid minimum wage.
Another hint came from the chaotic way Daniel ran his business. It seemed like he never ordered supplies until he was completely out. That meant he had to pay extra for overnight delivery. He seemed to careen from crisis to crisis.
He also had a huge list of backorders, which could have brought much-needed cash into the business. However, it was the long-standing policy of the company to ship first and collect money later. He was holding orders for his slow payers. The next very clear hint was when the IRS came calling.
One morning, Daniel and I were at the warehouse, where he was frantically scurrying around, trying to address whatever daily crisis had erupted. A man in a suit carrying a briefcase knocked on the door.
“Good morning. I’m from the IRS and I’m here to examine your payroll records. This company is three quarters in arrears in filing payroll tax reports and four quarters in arrears in paying payroll taxes. We have contacted you by mail several times, but have not received any response.”
Daniel spoke to the agent through the half-opened door, but didn’t let him in. As I listened, he lied to the IRS agent. “I’m sorry, but there aren’t any records here. All my business records are at my other location.” This was not true, there was a file cabinet not 10 feet from the IRS agent with a jumble of receipts and timesheets.
“I’m in the middle of computerizing my business records,” Daniel continued. “I’ll get those reports filed as soon as I can.” That part was doubtful, to say the least.
This was 1989 and computers were just being introduced to small businesses. Daniel had an early model Macintosh at his storefront location and proudly told me about how he was in the process of computerizing his business.
As far as I could tell, though, about all he did with his Mac and Apple ImageWriter was to print labels for some of the remedies he made at the store. My paychecks were hand-written and were accompanied by a small slip of paper that showed his calculations from hours worked to net pay.
Fortunately, I found a better-paying job at the university and left Daniel and Art to manage the orders without me. Daniel held on for a few more years, likely banking on the glacial speed of IRS processes.
I later heard that the IRS had seized Daniel’s mail order business and put it on the auction block. With that, the much-respected business died.
Some Clues for the Clueless
Daniel was not much different from many of the small business owners I worked with years later as a CPA. Here are some things that would have helped him (and any of your clients that may sound similar to Daniel):
- Require customers to pay upfront for their orders. Besides speeding up the cash cycle, he would have saved the $500 he paid my friend every month to type up and send out invoices.
- Cash-flow projections. Giving Daniel an idea of the timing of cash coming in and the cash going out would have helped him plan for expenses like tax deposits.
- Take over the payroll. Daniel was a nice guy, but was in way over his head in trying to run two businesses. Letting someone else deal with the paperwork would have helped him focus on what he was best at and might have saved his business.
- Take over the bookkeeping. Bookkeeping was performed a bit different in 1989 than it is today, but having a professional monitor his revenues and expenses might have helped him steer clear of the problems that cost him his business.
- Have basic business education. Daniel was passionate about natural health. But, like many other entrepreneurs who follow their passion, he had no clue how to run a business.
Ironically perhaps, Daniel enjoyed a reputation as a successful business leader in Madison. However, my experience from actually working for him painted him in a very different light, to say the least. I’m just glad that none of my paychecks bounced!
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Liz Farr, CPA, spent 15 years in tax and accounting at small firms in Albuquerque, NM. Besides tax returns of all flavors, she worked on audits of governmental entities and not-for-profits, business valuations, and litigation support. Now she's a full-time freelance writer specializing in content marketing for accountants and bookkeepers around...