Quickbooks Online vs. THUT Accounting

As Certified QuickBooks Proadvisors we have met many clients who have intended to do their books on a daily basis, but life gets in the way, and depending on how many transactions occur on your synced accounts, even failing to match the transactions after a couple days can lead to a mess.

And if you made 2 sales and deposited the proceeds together at your branch in one lump sum, Quickbooks Online (QBO) is not smart enough to match the 2 received payments to the 1 deposit.

Even as ProAdvisors, if we set up all the “rules” in Quickbooks, you as the user will still need to click “match” when your bank says 1 transaction found.  If you never “lump” your deposits together (more than 1 sale physically deposited into the bank), this will minimize your problems. (meaning, 1 deposit for each sale)

QBO is still not entirely automated and is only as a good as its user.  The categorizing of programmed transactions is automated, but in addition to clicking match, you will need to do monthly bank and credit card reconciliations.  We need to reiterate that 1 error in matching or doing the reconciliation wrong will compound errors throughout the file.

Summary for QBO
  1. Never lump deposits
  2. Never let your account be disconnected from your bank (or you will lose transactions which automatically downloads and you would need to manually type in each one)
  3. Daily: match transactions
  4. Weekly: keep in touch with your ProAdvisor with any problems before they compound
  5. Monthly: account reconciliations
  6. You’ll still need another vendor, an accounting provider (plus if they are a Certified Quickbooks ProAdvisor) to compile the corporate tax return.

While QBO is the most popular cloud accounting solution, THUT Accounting is a 3-step Software-as-a-Service:

  1. Data capture and coding: THUT extracts data from receipts, bank and credit card statements. Cleansing algorithms allow it to extract transactional data that is 100% accurate (no error-prone and costly manual input).
  2. Computing: We use mathematical optimization algorithms to save you money. As with all convex mathematical functions, there is only one minimal value that describes the combined taxes in terms of its variables.
  3. Reporting: Promise kept – you receive your clear and thorough reporting package in PDF with full-text search and we file everything with the Canada Revenue Agency- on-time and with the best result.  You will receive unlimited support and access to business advice including Grenzplankostenrechnung (GPK) – German accounting to effectively price your product or productized service.  We immediately respond to questions and concerns. After we save you thousands in taxes, what will you do with the money?​

 

Which one is right for you?

Use your pre-tax income to calculate your pre-tax hourly rate (since Accounting is paid for with pre-tax dollars).  If THUT Accounting’s SaaS cost less than your hourly rate than THUT is for you.  If THUT Accounting costs more than your hourly rate than Quickbooks Online is right for you.

Once you make more than the average person ($95k/year in Edmonton or $50/hour), it does not make sense for you to specialize in something that is not directly related to your ability to generate revenue. This is because of the minimum efficient scale.

 

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3 reasons why I started a business in Edmonton

I run an Accounting Sofware-as-a-Service business based in Edmonton. Accountants are all about cost-cutting, but the truth is that it’s all worthless compared to the big 3: taxes, housing, and payroll. Our mission is to reduce costs by 15-25% for businesses with recurring revenue. Please reach out to us at help@christianthut.com

1. Taxes

Combined, the corporate and personal taxes in Alberta amount to only 15% of earnings for $300,000 in income (compared to 20% in Switzerland and 45% in Germany). In Alberta, you can earn more than $20,000 per month after-taxes and become a multi-millionaire within a short time. Making more money has a bigger impact on your financials than reducing your spending since there is a ceiling to cutting costs, you can not go below 0 while there is no ceiling to earning.

2. Housing

Until you have the cash to optimize your taxes and your mortgage interest you should be keeping your cash flow down by renting. It is a common mistake to think that buying a house saves you money. Buying an asset with debt is merely renting money you don’t have.  In addition to the interest, buying a house has more costs:  property taxes, home maintenance, repairs, upgrades.  A $700,000 house can be rented for $2,550 CAD, so the price-to-rent (P/R ratio) is 23 (700k/ (2550*12)). You should only buy if the P/R ratio is less than 15  unless you are optimizing your opportunity cost of other assets (a scalable business).  Focus on delivering value, and you’ll see the priorities in building a scalable business since real estate does not normally add comparable value except in gentrification during times of shortage.

3. Conflict

Conflict is the raw material of natural selection and pushes evolution forward toughness, heroism, and social utility. Canada is big enough and diverse enough that without learning to scale on an international scale, there is enough opportunity to inject small amounts of stress in your life to push yourself to self-improvement all the while avoiding stress from real problems like feeding yourself.

Only through conflict do humans force themselves to be the best version of themselves.  As the Roman statesman said, “Comfort leads to waste.” Hostile and diverse surroundings (both climate and humans) challenge us both physically and mentally every day, forcing us to get stronger and smarter.

1 Thing Switzerland does better than Canada

In Canada, we have a socialist system where the cost of health care is built into our taxes and dependant on our income and not on our risk optimization like in Switzerland.

In Switzerland, you can pay out of pocket for everything under your deductible. Costs above your deductible are taken care of by your insurance policy to which you pay a monthly premium.  You can reduce your monthly premiums by reducing your deductible.  The Swiss system is more sustainable since there is less asymmetry (where the largest cost to the Canadian health care system is also the smallest contributor).

If you want to maximize your life, read on. I run an Accounting Software-as-a-Service (SaaS) company based in Edmonton.  Accountants are all about cost-cutting, but the truth is that it’s all worthless compared to the big 3: taxes, housing, and payroll. Our mission is to reduce costs by 15-25% for businesses with recurring revenue. Please reach out to us at help@christianthut.com If you like this article, you might like:

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  • Part 1: Get Lean before Bulking  What happened to THUT? At its height, we employed 6. Today, with more and larger customers, there is only 1 employee.  In order to grow, older companies (4+ years) need to get lean first: downsize until the marginal costs of outsourcing exceed the cost of doing it internally. Staying lean is key to operational efficiency.  For […]
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We are focused on the following 3 customer groups:

  1. E-commerce
  2. Fast food
  3. Nail salons

How much taxes should I expect to pay?

  1. Remit the net of the GST you collect on your invoices less the GST you pay on purchases every quarter (or if you are eligible and it works out for you remit 3.6% of your total invoices every quarter in accordance to the quick method accounting.
  2. Prepare to pay 12% corporate tax on your net income.
  3. For personal taxes, the rate changes depending on how much money you transfer to your personal account.  Below, you’ll find the rates listed beside the amount of money transferred to your personal account within 1 fiscal year:
  • 3% on the first $30,000 of money you transfer out
  • 14% on the next $11,000 your transfer out on top of the $30,000
  • 20%  on the next $9,000 you transfer out on top of the $41,000
So you if you take out 30k in the year it costs you $872 in taxes, $41k costs you $2450 and $50k costs you $4266.  Try not to take out more than $50k out in a single year per spouse but email us if you are at this stage and we will send you some analysis.
  1. You can optimize your 2 biggest expenses: taxes and housing by balancing your draws from your corporation
  2. Once you have a business you love (1st) and a home that you love (2nd since your business determines where you’ll live),
  3. 3rd you prioritize health and fun. Assuming you have a spouse you can pay yourselves a combined $100,000 = $250/day in after-tax spending.  With a mortgage out of the way, $50k per year on basic living expenses and $50k per year on extras everything is possible without having to write-off corporate vehicles
  4. You can expect to pay an overall 16% on $200K of profit and less with each additional dollar of profit. Here is the math:
Corporate Income $300,000.00 $200,000.00
Small business tax @ 12% -$36,000.00 -$24,000.00
Net cash retained after-tax $264,000.00 $176,000.00
Dividends payable $100,000.00 $100,000.00
Net personal tax on dividend -$8,532.00 -$8,532.00
Net cash to Shareholders $91,468.00 $91,468.00
The total taxes -$44,532.00 -$32,532.00
Net cash to Shareholders $91,468.00 $91,468.00
% of combined taxes of net cash 48.69% 35.57%
% of combined taxes of earnings 14.84% 16.27%
Corporate Income $300,000.00 $200,000.00
Wages -$100,000.00 -$100,000.00
Co. portion CPP -$4,603.50 -$4,603.50
Income before taxes $195,396.50 $95,396.50
Small business tax @ 12% -$23,447.58 -$11,447.58
Net corporate cash retained after-tax $171,948.92 $83,948.92
Personal T4s $100,000.00 $100,000.00
Income Tax -$22,542.00 -$22,542.00
CPP -$4,603.50 -$4,603.50
Net cash to Individual $72,854.50 $72,854.50
The total taxes not including CPP -$45,989.58 -$33,989.58
Net cash to Individual $72,854.50 $72,854.50
% of combined taxes of net cash 63.13% 46.65%
% of combined taxes of earnings 15.33% 16.99%

Rather than staying upset, let’s keep things in perspective and even without vehicle write-offs, we still have it better:

$50,000 has $6,857.50 cash advantage to being earned as a T5 vs T4 (viewing CPP as a tax)
Personal T4 $50,000.00
Income Tax -$11,271.00
CPP ($2301.75 each paid by employee and company) -$4605.50
Net to employee $34,125.00
Corporate Income $50,000.00
Small business tax @ 12% -$6,000.00
Net cash retained after-tax $44,000.00
Dividends payable $44,000.00
Net personal tax on dividend -$3,017.00
Net cash to shareholder $40,983.00

The more you personally pay yourself the bigger the advantage of earning dividends rather than a salary (up to a point). As with all convex mathematical functions, there is only one minimal value that describes the combined taxes in terms of its variables. Our job is to find the global minimum of this function, that is, we find the point such that f(x ) < f(x) for all in the domain of the function.

THUT anticipates changes rather than reacts to them. Optimising combined corporate + personal taxes depends sensitively on draws, income, and dividend-salary mix.

 

Part 2: Get Big, Stay Lean: A How-To Guide For Clean Bulkers

Before looking to grow you need to get lean first.  Once you have downsized until the marginal costs of outsourcing exceed the cost of doing it internally, you are ready to get big.

Contrary to popular belief, you can get big without becoming inefficient. Here’s how to get the best results from your bulking plan!

Spend more!

Most people focus on cutting costs, but since most people are unsuccessful, logically you should do the opposite.  In the case of a scalable business, spending more money should result in you earning more money.  Proper scale dictates your earnings increase exponentially as you increase your spending anything that saves you time (employees & outsourcing everything where you don’t have the greatest competitive advantage).

Other than payroll, the only other costs that are worth your brain cells is optimizing your taxes and mortgage interest with your corporate draws.

Target 1 or 2 niche markets and hit it hard!

Spend more specifically targeting paid advertising to dominate niche markets.

  1. Influencers
  2. Word of mouth – referral program
  3. Facebook/Instagram
  4. Google

Choose similar markets 

It is important that when you scale to adjacent sectors, that you are “selling” to the same type of customer you dominated earlier.  Our biggest mistake in business was at the onset of Alberta’s downturn we aggressively marketed our high-end service to the mass market customer.  Mediocre customers are looking for motivation and a magic pill to cure their predicament rather than dealing with the cold truth – that they alone are responsible for their situation. Similarly, our clients that have had success selling to the masses would not be able to upmarket their product with the same marketing and pricing.

Both our new target sectors, together with the first 3 sectors we dominated, have the ability to scale to more employees and more capital assets.  Scaling compounds in favour of these 5 segments since the fixed costs of creating the output are being spread over higher and higher revenues to yield increasing pricing advantages for their inputs, which leads to the same elite customer:

  1. Disciplined and definite people that do the single best valuable thing they can focus on rather than being a “Jack of all trades, master of none”.
  2. A compelling and focused mission that leverages proprietary skills/equipment too hard for average people to acquire or learn from youtube.
  3. Minimum 20% pre-tax margins on annual revenues in excess of $400K.
  4. $1M valuation based on a 2.5x-5x earnings multiple

All easily accomplished with

  1. E-commerce
  2. Fast food
  3. Salons

 

 

 

Part 1: Get Lean before Bulking

What happened to THUT? At its height, we employed 6. Today, with more and larger customers, there is only 1 employee.  In order to grow, older companies (4+ years) need to get lean first: downsize until the marginal costs of outsourcing exceed the cost of doing it internally.

  1. Staying lean is key to operational efficiency.  For a company with healthy revenues, the fastest way to increased profits is to cut costs.  You’ll need to eliminate product lines/customers that are responsible for a disproportionately small part of your revenue.
  2. Getting lean first sets your company up for better scale. Efficiency compounds so you will grow exponentially faster if you get lean first and improve your margins.

For us getting lean, meant realizing no one has ever gotten rich doing everything for everyone: In 2016 we cut down our contacts because it made no sense to corrupt our Dunbar’s # when half the people we dealt with only generated 10% of our revenue.  2017 we have improved where  14.67% of our revenue comes from 37% of our customers.  But it clearly makes more sense to give up $115,000 of revenue (14.67%) if we can save 37% of our time, hence we have eliminated even more.

Now in 2018, we slashed product lines to focus on being the best platform designed to meet the needs of recurring revenue. The best being defined as precision, ease of use and comprehensiveness.  Now, we are a fully integrated blockchain solution that brings together payroll, bookkeeping, accounting, corporate taxes, personal taxes, banking and wealth management.

Lessons in staying lean:

  1. Business plans, financial projections, budgets are all a waste of time – simply reframe your focuses as a function of time and get better every day.   Prioritize maximum effort and make sure taxes, payroll and housing are planned for – no other cost-cutting matters compared to those big 3.
  2. 80% of your time should be in delivering your product and only 20% on support and marketing.

Check out the archive and like us on Facebook to continue our journey to financial freedom in an increasingly complex world.

 

Math to Escape the Middle Class

Being part of a certain profession, or earning a certain amount of money does not ensure your exit from the middle-class.  Most people are stuck there because of math.

We focus on the only 3 sources of negative cash flow that matter: taxes, housing and in the case of a scalable business – payroll.  Even the highest earners stay middle-class if they don’t focus on taxes and housing.

Taxes: Everything you pay for really costs you 1.5x-1.8x more since you would be paying for it with after-tax dollars rather than pre-tax dollars. The only expenditures exempt from this rule are business assets and expenditures bought inside a corporation.

Housing: In combination with the taxes above, depending on your tax bracket, your mortgage and your interest rate, a $1 million house will cost you at least $1.5 million (no mortgage and extremely low level of living requirements) and as much as $4 million of gross earnings.

Now Here’s the Math

Regression To The Mean & Bimodal Extremes:  How is that so many high-earners are trapped into the middle-class mediocrity of trading their limited time for money?  In any group, people of high-value/high net worth/high IQ are dragged down by people of lower-value/lower net worth/lower IQ due to osmosis.  If you take advice tailored to the middle-class, by a middle-class advisor, you should not be surprised if you end up middle-class. You need to find someone who is living a life that you want and take guidance from there.  So in short, ignore anything average, and advice from/for average people are to be avoided at all costs. The solution is bimodal approaches from the extremes.  90% safe investments + 10% high-risk investments vs. a mediocre portfolio with limited upside and a possible unlimited downside.  Or mediocre jogging vs. extreme high-intensity training. Other bimodal strategies with exponential benefits: intermittent fasting. The framework to pursue bimodal extremes involves ranking your options in descending order of optionality and open-endedness of pay-offs.

Dunbar’s Number & Via Negativa: The solution to this is to be mindful of the upper limit to how many interpersonal relationships your brain can process (150).  I can never have more than 150 contacts (this does not apply to mass-market businesses, but something so sensitive as advisory to HNWIs can never be mass-market). Most problems are better addressed with subtraction (Via Negativa – Nassim Taleb) To keep negative osmosis from happening in my life, I removed the bottom 50% of people from my life and doubled-down my time on the top 50%. I repeated this process many times until I was down from 1000+ to 150 contacts.  Everyone in my life is either moving up or moving out of my life.  This eliminates the negative osmosis that would otherwise cloud my thoughts with middle-class thinking.

Chaos Theory Feedback Loops: Its nearly impossible to remain middle-class if you focus your actions on receiving a recurring benefit. The best way to start is to reframe all your problems as a function of time and improve year over year (YoY). This means you will get richer due to superior/scalable abilities and your riches will beget more riches. This will result in a knee in the curve non-linearity compared to the linearity of the middle-class.  All decisions compound (both for and against you), and this makes money eventually become perpetual so the path is clear: prioritize the maximum effort to get compounding on your side (make sure your inflows compound more than your outflows).

Chaos Theory and Dynamics: The middle-class think in simple terms of cause and effect, when the reality is that the outcome in sensitively depending on initial conditions, so the cause will result in empirically complex 2nd, 3rd, 4th, …. nth steps. It’s better to fix systems  Via Negativa – Nassim Taleb, since the middle-class solution to add more things to their life make things worst.

Inversion: A famous problem-solving technique in mathematics can be easily used to re-frame everyday problems.  Whatever question you ask yourself – ask yourself the inverse question. The path to success is not as clear as the path to failure. So by doing the opposite of the path of failure ensures you survive, and as Taleb reminds us you first must survive in order to succeed.

Pareto’s principle: The majority of a given effect is due to a minority of the possible causes.  You have a limited store of attention and time, so to create the aforementioned feedback loop you need to prioritize high-impact activities. Maximize the results by minimizing the stuff that doesn’t count: don’t check your e-mail more than 3 times a day, stop watching TV, surfing the net,  playing video games, and taking unnecessary vacations.  Make your own life great instead of engaging in escapism.  Make your life so good you don’t need a vacation. The more you shift your attention/time to high-impact activities the higher your overall benefit due to the compounding.

Game Theory and the Prisoner’s Dilemma: Will allow you to recognize and exploit the irrational decisions of others.

Calculus: Marginal cost bisects average cost at the minima of the average cost. The optimal point of production in terms of profit by maximizing your output variables can be determined by cost and revenue functions.

Here are some more math hacks for your scalable business.