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Transcript:

Michelle Grasek: Hello Emily, how are you?

Emily Bowie: Hello, how are you?

Michelle Grasek: I’m doing well. Good morning. Thank you so much for joining me.

Before we get started, do you want to introduce yourself to the audience?

Emily Bowie: Sure, my name is Emily Bowie:. I am one of the partners at Thorn Advisors and it is a small boutique accounting firm where we’re really looking to help business owners turn profit into cash, reduce their taxes strategically, and then build wealth for today and legacy for tomorrow. And we’re just doing things a little different over there and we’re really, really proud of it.

Michelle Grasek: Yeah, one of the things I noticed is that you work really hard to answer people’s questions without ever making them feel stupid for asking because it’s so easy to feel dumb asking questions about bookkeeping and accounting. I feel like, am I allowed to ask this question?

Emily Bowie: And that’s my policy when I have conversations with people. No question is a dumb question. One, because there’s probably underlying things that you might be asking this question, but then I can hone in on something that you may or may not know you’re asking.

The true question behind it. And then the flip side of it is we, both my business partner, Andrea and I, we grew up in big accounting firms. I was in public accounting, big four accounting.

She was in public accounting, more of a mid-size firm. And we know what it feels like to be in that environment. And so we’re trying to do things differently, not only for the business owner, but the accountant that thinks the only way to go is big business, but rather small business provides so much more flexibility.

Michelle Grasek: Yeah. So what is the big four? What does that mean?

Emily Bowie: Oh, yes. It’s that accountant ease that they talk about. Big four are the four largest accounting firms that kind of compete with each other.

They are, you know, one that is most, it’s the one I worked at, but one of the more reputable ones is KPMG. So if you’ve ever watched golf, there’ll be golfers that have KPMG on their hat because they sponsor them.

Michelle Grasek: Wow. I didn’t even know that that was a thing, that there’s four major never would have known that.

Emily Bowie: Well, and it’s an evolution thing. There was eight, I might be wrong with the number, but it’s evolved over time as more fraud happened. Some of those companies combined, some of them disappeared, those types of things.

Michelle Grasek: Gotcha. I see why you didn’t want to work there anymore.

Emily Bowie: Well, it’s one of those things where I appreciate the time there because it built work ethic. It literally taught me how to think on my toes because we were working in very complex situations, working with people who didn’t want to actually change the way they were doing things. So I had to figure out how to present things in a way that felt good for the other end.

And I feel like I use that skill all the time now.

Michelle Grasek: Yes. But sometimes things must be changed. Yes, for sure.

Emily Bowie: And I think it’s hard because, and we were kind of talking about this before we hit record, when you started your business, you started it to be great at the thing you do. You did not start it to become a business owner. And then all of a sudden you flip that light switch and now you are the marketing director, the accountant, you’re the head of operations but you just wanted to do acupuncture.

Michelle Grasek: Yes. Do you know what’s funny is I always think of that. I feel like, wow, I don’t mind being a business owner. I really like being an entrepreneur. But accounting is, it’s like a foreign language. If I’m pulling a report from my EHR at the end of the year, and it’s asking me questions, are you using the cash method?

I think to myself, am I? It sounds good to me. I don’t really know what that means.

Emily Bowie: Well, and I think too, as an accountant, often it comes natural to us. So we don’t always stop and do the accounting 101 with people. And I think that what I’ve realized over time, that’s usually step one, when we start talking about goals, helping people understand what they’re actually looking at.

And I think that can also be really difficult. And even if you’re a seasoned business owner, a lot of times you’re only looking at your profit and loss, but your balance sheet is telling a whole different story. And not knowing what those two things mean really can be detrimental in being strategic.

We don’t spend enough time explaining that to people.

Michelle Grasek: And that’s a great place to start. So we have profit and loss, which I think people, even if they’re not super familiar with it, they get it from the name, big picture. But then why is the balance sheet different?

Emily Bowie: This goes perfectly aligned with why people say, how do I have such high net income, but no cash in the bank? This is first how you tell that that’s the case. So on your profit and loss, in the business world, everybody really talks about that top line revenue.

It’s, hey, make as much money as you can. They don’t really hone in on the importance of managing your expenses that come out of that revenue. And then, so it’s your top line revenue, less your expenses, get your net profit, hopefully, and not net loss.

Hopefully. And so that net profit should be essentially what’s in your bank account. And you don’t see that unless you look at your balance sheet.

And so when you go into your balance sheet and you look at your bank account and you see those numbers don’t match, and you can’t figure out why, that is where you know where you need to spend your time to understand how your cash flows. So there are certain things that will show up on your profit and loss that do not show up on the balance sheet and then vice versa. One good example is if you’re utilizing debt to pay for a lot of your expenses, your expenses are going to show on your profit and loss statement, but on your balance sheet, you’re going to have that loan.

And when you actually go to pay that loan, there’s a timing difference of when those numbers and the cash actually leaves. And there’s other complexities like interest will be on your profit and loss, but you won’t see the principal payment to the loan on your profit and loss. So there’s things like that, but then there’s even things such as how you pay yourself.

So if you’re not yet a W-2 employee, or even if you are, sometimes we just take money out of the business. That all happens on the balance sheet. That doesn’t actually happen on your net profit and loss statement.

Michelle Grasek: Gotcha. I also think about the people who are taking insurance and how much later they sometimes get paid. They can be chasing payments for months.

So we don’t take insurance. When I first opened my first practice many years ago, I took insurance for about four years and then I felt, never again. But I shudder to think of how complex that can look because you don’t always know when those payments are coming in.

Emily Bowie: It’s really hard to get predictable cash flow in those scenarios because you don’t know what the terms of how they pay you back and how much of it and all of those things. A lot of times I think people will eventually opt to not take insurance for those reasons because there’s also a lot of compliance stuff that gets involved too, which is an additional cost. So not only are you waiting to get paid, but then you have to check all these boxes too.

Michelle Grasek: f we are solopreneurs and we’re trying to sort through this, how do you want us to use those two things to stay organized and not get overwhelmed?

Emily Bowie: Simply put, your profit and loss is going to tell you about the activity that has happened in the month or in the period you look at. So if it’s January 1 until May 31st. Then on the balance sheet, it’s how much your business is worth essentially today.

So whenever you pull your balance sheet, it’s as of that day, that’s what your cash looks like. Unless you tell it, oh, on the 31st, I want to know what it is. But it’s an as of.

So it says year to date, lifetime to date, this is what the value is. And it’ll go through your assets, your liability, and your equity. And your equity is really what shows you what your business is worth with some caveats.

Gets a little bit more complex as to valuation of a business. But simply put, that’s how I would categorize the two. So if I was using my income statement, I would look at it.

OK, this month it was busier. I see that I sold more of this service versus that. I had a big insurance expense, maybe prepaying liability insurance or something like that.

I can see all of that in my activity on my income statement, profit and loss used interchangeably. But then on my balance sheet, my cash is really low. Did I take too much out of my business?

Because what can happen is when you’re in business for multiple years, you might only have made x, but you have cash reserves from prior years. And you could take all the cash plus some for the current period. And unless you’re monitoring it, you wouldn’t really know.

Michelle Grasek: Gotcha. So this sounds like something that you walk people through. Because I am sure that you get those people who come to you and say, I’m making over $100,000 a year.

How am I paying myself? I don’t know, $30,000. Where is my money going?

And so this is what you’re sorting through with them.

Emily Bowie: Yeah. And so there’s usually my two bread and butters that I have them look at from a cash flow standpoint. If we work together, usually we walk through the end-to-end customer journey and I can identify where there’s leaks in the system.

Because I’ll understand you’re either leaving money on the table here, you’re losing efficiency here, you didn’t ask them to renew there, that type of thing. But in that I start and usually the most impactful thing is showing people their pricing analysis. And so what we do there is we show how much your service is and then any direct costs associated with it.

And usually if it’s you doing it, you don’t even count that.

Michelle Grasek: Right.

Emily Bowie: And then from there, we get a gross margin number, which is just money in less direct cost out. So it’s usually labor, tools, lotion if you use it, whatever, the case might oil probably more so than lotion, that type of thing. And then this is the tricky part is we come up with your overhead percentage, which is basically all your expenses to turn the lights on that day.

And we apply that percentage to help you figure out what your true net income for that service would be. And oftentimes it’s very low or negative because we did not consider that every dollar that comes in, a percentage of that has to go to simply turning the lights on.

Michelle Grasek: Okay. I think about this a lot for the microneedling service that we offer at my office because while it is the most expensive service that we have over $300, it’s also the most expensive to execute because we have to buy new, I mean, we had the pen was an investment to begin with the microneedling pen. We also need disposable needle tips and a specific amount of oil for the face and a whole bunch of cotton pads and blah, blah, blah, all these supplies versus just doing cosmetic acupuncture.

It’s something I think I calculated it as supplies cost $12 for $150 service, whereas microneedling is $70 for a $350 service. And then calculating, okay, here’s the percentage that I pay my associate to do this so that I think, okay, whatever is left over is mine. But, ooh, that’s not true because whatever is left over a percentage of that, like you’re saying, actually has to go to the overhead of the clinic to turn the lights on.

And then whatever’s left over after that percentage, that might actually either go into savings for the business or be money that I could pay myself.

Emily Bowie: That’s exactly right. And I think often what we think in our mind versus what’s on paper are usually two totally different things. I spend a lot of time in the personal finance space as well.

And I’ve noticed that we either go one of two ways, but we never get it right. It’s usually we’re either over optimistic about our financial position or we’re very pessimistic and it’s not as bad as we think it is. But very rarely do I have a conversation with somebody who doesn’t have their numbers written down that they hit it nail on the head because it’s quantitative when it’s numbers, whereas in your mind, you’re adding meaning to it.

You’re adding additional things that are not reflected in the number piece of it.

Michelle Grasek: That’s so interesting. Yeah. Do you have examples of other cash leaks?

Emily Bowie: Yes. My favorite cash leak to mint very quickly are your expenses. And so doing a solid expense audit every quarter is what I recommend, but mostly people do it every six months to a year and looking at some very specific things like software.

Software is usually the biggest cash leak because you started out with this cheapy tool because it was inexpensive, but then you forgot to cancel it when you bought the newer tool. And so there’s this dual action situation where you have two expenses for the same tool, but it’s also recurring along those same lines, free trials that turn into three years of you paying for something, which everybody thinks that would never happen to them. But I can tell you being in this world, as well as the personal finance world, it happens all the time and we just don’t recognize it because it’s usually $5 at a time, but $5 over 12 months for five years, that’s pretty significant.

The other thing is operational efficiency is, I can’t tell you how many times we do the same things over and over, but we’ve never actually written them down. And the act of writing them down helps us really reorient how it should all work. And it is the most avoided thing that I think people try to stay away from because it’s uncomfortable.

It’s uncomfortable to hear that maybe you’ve been doing it a little less than perfect over the whole span of the business.

Michelle Grasek: Yeah, it almost sounds like you’re recommending writing out SOPs, right? Standard Office Procedures, because I know that for my office, writing stuff out, I realize how complex I’ve made things and wow, it is not necessary. So totally aside from the money piece, it helps to look at a procedure and say, let’s skip steps two through five.

Just go from one to six. There’s no need for all of this or there’s something that could automate it for free. And I think it just makes everyone’s life easier.

Just reducing complexity is always a good thing in a business.

Emily Bowie: Ruthie And I think too, along that same line, is that things change, technology changes, more options are available. What tool worked before might not make sense now because there’s this new tool that does more things. And so doing that assessment and setting it up, putting it on your calendar is huge.

The other thing along those same lines is the commingling of expenses that are personal as well as professional. What I have seen, first and foremost, we do not recommend you having your personal expenses in the business. But also you have no accurate picture of what the business is doing if your personal expenses are coming out of your business too.

Michelle Grasek: So it sounds like you mostly work with small to medium businesses, so $100,000 range or above. And can you talk about what is an S-corp election?

Why would we want that and how does that potentially save us money? And to throw a wrench in there, one more question. After what amount of income does become effective in saving money?

Emily Bowie: Yeah. So I love talking about this because reactive tax decisions are also a cash leak, right? Where you already had the whole year happen and you think, well, maybe I should have done X, Y, and Z.

And you can’t do those anymore. So that said, for the S-corp election, first, it is just a taxable election. So you can still be a PLLC that is taxed as a sole prop, which is the pass through to your Schedule C, your normal individual tax return situation.

Or you can elect to be taxed as an S-corp. That S-corp election allows you different levers to pull that you can’t pull as a sole prop. And so what we recommend, and there’s a lot of, we’ll say, controversy as to when to do it.

Some people will say $60,000 to $40,000, and we couldn’t disagree more. We believe that your net income, so that bottom line net income, not your revenue, but that after your expenses net income, should be at a minimum $80,000. But we really like to see that at $100,000 or more to get the maximum benefit.

Because when you choose that election, you have to start paying yourself on payroll. And what can happen is that becomes a cash flow nightmare sometimes if you are below that net income. Because you’re just not generating enough revenue throughout that time period to make it make sense to pay yourself a steady, reasonable salary, which leads me into the specifics that come with an S-corp.

And the biggest one is reasonable comp. So S-corps are the least audited entity, tax election entity, by the way. From my auditor hat, I think it’s because there’s so many things you have to register and you put your earnings into them and you’re already pre-paying your payroll tax.

So you’re doing a lot of the things that they don’t know you need to have done when you’re a sole prop. I think that’s why. The flip side of it is that if you do get audited as an S-corp, it’s usually a reasonable comp audit.

And so reasonable comp is the compensation you pay yourself through your W-2. It needs to be comparable to you paying somebody else to do the same job duties as well as the same hours you work. So if you are a part-timer, you know, you only work 20 hours versus 40 hours, your comp is going to look different.

Often there’s a survey you can take to figure it out. But that is probably one of the most important compliance things, I would say, related to S-corp. And then the second would be, and probably equal to it, is registering with your state and your licensure.

So if you have licensing requirements, that also is important to take into fact when you are determining whether or not an S-corp conversion makes sense for you because there’s additional requirements, additional things you have to pay, all of that jazz.

Michelle Grasek: Well, I’m really glad that I had someone else set up my S-corp because acupuncturists, we do have to be licensed in our state and I have no idea how that fits in. I just assume they must have done that.

Emily Bowie: Bekkah And we work with a lot of people that are professionally licensed. So it’s kind of part of our checklist to say, okay, what does this specific license in this specific state need to happen in order to become an S-corp?

Michelle Grasek: So can I clarify something? You said that for you, your threshold that you prefer would be 80 to 100,000. You said net.

Is that profit?

Emily Bowie: It is. It is that net income equals profit. Those are interchangeably used.

But when you think of the word net, it means less expenses. So income less your expenses, you get that net income or net loss or profit or loss. They’re kind of all used interchangeably because depending on your type of business, that statement is called different things.

Michelle Grasek: Okay. And then the benefit of the S-corp is that you get taxed differently. You’re not paying both personal and business taxes.

So your overall taxes are reduced.

Emily Bowie: Kind of. You are no longer on all of your earnings paying the Social Security, Medicare side of it. You’re doing that only on your W-2 earnings.

And then you are taxed ordinarily on the rest of your income. So by simply eliminating that piece, it saves you. But this is why when someone becomes an S-corp, I always recommend them to do tax strategy that year because there are so many more levers you get to pull when you change that taxable election.

You can do reimbursables from your personal expenses from your business. That all has to be documented well. And so that is next option.

The other thing that a lot of people will utilize is the Augusta rule where you can rent your home back to yourself for you to have team meetings and different things like that. But it’s another way to cover some of that income so it’s no longer taxable. But there’s lots of rules around it.

There’s required documentation. So I always recommend people do that with a professional to make sure they have all their boxes checked. But the high side of it is if you don’t have a lot of complexity, you can take that strategy and just use it year over year until your situation changes.

And then at that point, I always recommend coming back in because tax strategy is super helpful for running scenarios. So if you have big purchases or you want to hire somebody or you want to say, hey, I have all this profit. I’d like to reinvest in a short term rental.

What would that look like? You can run those scenarios with your tax strategist. And instead of everything being reactive, you get to be proactive about making those choices.

So when we talk about questions and stuff like that, you are never oversharing with me because there’s probably something here for you from a strategy standpoint.

Michelle Grasek: I love that. So that’s all stuff that you do. You would help someone set up an S-corp election.

You would help them look at their tax strategy. I really enjoy that if you get to the end of the year and it’s April and there’s been no tax strategy, sometimes you’ll call what happens an autopsy instead of a strategy. It’s April.

It’s really too late for you to make any of these decisions to improve your tax situation. However, in the upcoming year, we can make it a strategy instead of an autopsy.

Emily Bowie: Yeah. And when you put it next to a real life example that we understand, it helps you take something that feels really complex and look at it from a different lens. Oh, that does make sense.

That’s why when I go to get my taxes done, they’re not actually helping me save taxes. And that is one key thing I want to point out to the listeners is not all CPAs, well, not all people who do taxes are CPAs, step one, right? And then two, not all CPAs that do taxes help you with strategy.

So you always want to look out for somebody that does the strategy piece. And what we identified, my business partner, Andrea and I, is that the other thing that’s a big gap in the market is that people don’t know you need to have cash to do tax strategies. And so that’s why we married them and our main offer, because we realized if I can go through your whole process and find all your cash, then we can utilize that cash to build wealth, plan for legacy, and do all of that from a tax strategic standpoint.

Michelle Grasek: Awesome. It feels nerdy, but that feels really exciting. Ooh, how can we invest and build legacy?

Let’s do that.

Emily Bowie: But I think that’s it. That was the big thing we felt people were ignoring in the accounting field is that nobody got into business to just pay taxes. We got into business so we could have balance so that we could be present with our families while we’re building something, while we can choose to go travel or whatever it is.

And we totally forget that when we get into strategy. Strategy is where that has its rightful place. And that’s what I feel like makes us a little bit different than other accounting firms.

We always start with goals and we’re not just looking for the current year. We’re looking for 5, 10 years, because let’s just say you’re a business owner and you’ve been in business for two years and you show no profit at all. It’s going to be really hard to get a mortgage if you want to buy a home.

It’s going to be really hard to get a line of credit if that’s what you need to lke buy equipment to then scale or whatever the case may be. And so that’s really important to us that we know what the goals are. And that’s not to say they won’t change.

That’s why we always do a little tune-up every couple months to say, I know this was the intention, but what actually happened? That makes a big difference in your strategy. And we noticed a lot of people were skipping that step when they were offering strategies.

They’ll say, just go buy a vehicle. Do you need a vehicle? Do you need that money to reinvest in your business?

You do? Then that’s not the strategy for you.

Michelle Grasek: Well, you have given us so much to think about. I have one last question for you before we wrap up and I ask everyone this question. And that is, what is your definition of success?

Emily Bowie: So I think about this a lot with what I’m doing because I really love helping people make impact. But I want to make sure that anytime I’m doing that, I have this ability to be present and peaceful no matter where I’m at. My mind, my heart, everything is where my feet are planted and not anywhere else.

And so success for me really is that where I can make an impact in my business, help other people do more of what they do, but then also be able to turn it off and be present with my three kids and say, hey, we’re going to go do a dance party in the rain today and not be worried about everything else.

Michelle Grasek: Oh, I love that. Well, how can people connect with you? Where can they find you online?

Emily Bowie: Yes, yes. So you can find us at thornadvisors.com and then we are thornadvisors on Instagram. And we just launched our podcast, which is called Prosper and Get Paid Playbook.

And so we’re talking about all of this stuff all the time and trying to keep it digestible, simple, but very relevant for people that just want to understand more when it comes to accounting. And then what we did do is we built out this cash leaks guide for you all. And so if you go to thornadvisors.com forward slash cash leaks, it will show you the five most common cash leaks. We kind of went over them and then it will show you the five missed tax deductions. So it’s actually a very helpful guide if you feel like you might not be ready to make any strategic moves yet. These are five things cash wise, five things tax wise that you can do today to start assessing, maybe I need to do more or maybe there’s something I can do on my own.

Michelle Grasek: Awesome. So we will definitely link all of those in the show notes. And just for anyone who is listening, thorn is spelled with an E on the end.

So thornadvisors.com. Awesome. Well, thank you so much for being here.

I really appreciate it.

Emily Bowie: Thank you for having me. I really enjoyed it.