Man’s best friend: Dog Not Wolf (Employees vs contractors)

“If one holds his state based on mercenaries, he will be neither secure nor peaceful; for they are divided, disloyal, ambitious and without discipline… they have neither fear of God nor are loyal to fellow men.” – Niccolò Machiavelli

Substitute state with company and mercenaries with contractors as you see that there is a misalignment of goals when you use contractors.  As with all decisions in life when in doubt choose the path that is more difficult in the short-term vs the path of least resistance.

  • Hire employees in your main revenue generating activity that you know best. 
  • Hire contractors for supporting activities that require a specialized targeted skill set and economies of scale (robo-accounting, plumbing etc).

After analyzing the CRA’s definition of employee vs. contractor, it is clear that contractors are independent tools you use to do a specific task, but in order to run a scalable business, you will need employees as gears in your machine, not just free-standing tools.

Life is about discipline or regret. You need the discipline to hire employees, discipline to manage your workflow as you have to pay employees even if you don’t have work for them.  This means you may need to sacrifice your short-term income/cash flow if there is not enough work for you plus your employees.   You will need to make the required payroll source deductions every time you pay them and remit these deductions in addition to your company portion contributions to the CRA in a timely manner.

50% of your costs (money/time) should be incurred in taking your product from conception to your customer.  Simplify your business into a process (see our 3-step robo-accounting system).  Be clear what your customers can expect and say no to anything that falls outside your process.

No one has ever gotten rich doing everything for everyone:

  • In 2016, we cancelled our #1 most popular category because the customers in that category (half of our total customers) was responsible for only 10% of our revenue.
  • In 2017, we went further to give up another category because we can save 37% of our costs (time/money) by giving up 14.67% of our revenue.  When you are dealing with high-value multi-year accounts of recurring revenue you must account for Dunbar’s #.
  • Today, 95% of our revenue comes from companies that are in the sweet spot of revenue: $300,000 to $6 million per year. Anything less does not scale and can not compete with the “working at Weatherford”, or the like. Anything more, as we have learned the hard way during our oil crash, is less anti-fragile.

Train disciplined people to handle the process. Hire 2, work them like 4 and pay them like 3.  The best employees have families (read: responsibilities including mortgage and SUV payments).  The 8 hour day was a product of the 18 century, so construction trades which remain fundamentally the same can continue with the 8 hour day, but knowledge workers should use the focused 5 hour day.  We had the focused 5 hour work day from 2010-2013 and started it again with one employee in March 2017. We have seen first hand that our focused 5 hour work day reduces absences, stress and increases efficiency.

Shifts under 5 hours, employees are not entitled to any breaks.  Lunch and breaks during the typical workday are not used to re-energize or restore attention.  In our office’s case, they are spent eating lunch late at our desks in front of the computer, while other workplaces time is lost strolling in late after getting caught in line at Tim Hortons. Back in 2010-2013, as owners, we worked 10+ hour days and we were much more efficient running two employees on separate 5-hour shifts (8am-1pm and the second person from 1pm-6pm).

Calculating the wage. If you pay someone $20 per hour, the employee should also “pay you” at least $40 per hour ($20/hour to pay for themselves and $20/hour for your).  You have to account for the payouts you are responsible for when you have staff: statutory holidays, 4% vacation and eventually termination pay.  Profit-per-employee is an important metric to keep your business on the right path.

Retention. A bonus, x should be paid contingent on a job well done. At the end of the year and an amount equal to x is put into a reserve which you invest risk-free.  After y-years of building the reserve, the employee is allowed to withdraw 1/yth of the reserve.  If they leave they could be walking away from y-years worth of bonuses sitting in the reserve.

Industry examples. 

  1. Restaurants (dozen+ of our customers were awarded Golden Fork awards)- should hire employees and contract out hood fan/duct cleaning (every 6-months), Robo-Accounting.
  2. Manufacturing/Engineering/Construction should hire employees for everything except the specialized trade work (plumbers, electricians etc.)
  3. Salons– hire employees and if they pay exclusively commission they can contract out the cleaning to ensure the tools, equipment and furniture and cleaned and sanitized properly.
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Các Bước để Thanh Toán PD7A Online

Bạn phải thanh toán báo cáo PD7A của mình vào ngày 15 của tháng tiếp theo. Ví dụ: báo cáo PD7A cho tháng 2 phải được thanh toán trước ngày 15 tháng 3.

Chúng tôi khuyên bạn nên thanh toán PD7A ngay sau khi bạn nhận được nó từ văn phòng của chúng tôi, do đó bạn không cần nhớ phải trả tiền sau.

Bạn cũng có thể đăng ký để nhận được một email nhắc nhở để thanh toán PD7A của bạn đúng giờ. Bấm vào đây.


 

Đây là một lời giải thích về lý do tại sao bạn phải trả PD7A mỗi tháng cho nhân viên của bạn.  Ví dụ công ty lớncông ty nhỏ

 


To pay your Payroll Source Deductions (PD7A) Các hướng dẫn để thanh toán PD7A Online

  1. Click the link CRA My Payment System
  2. Click “PAY NOW” button
  3. Click “PAYROLL SOURCE DEDUCTIONS” under the “Businesses” heading
  4. Click “REGULAR REMITTANCE”
  5. Enter account number EXAMPLE: 123456789RP0001 (Không có dấu cách hoặc dấu gạch ngang)
  6. Enter all of the required information from your PD7A report you received from our office (Nhập tất cả thông tin bắt buộc từ báo cáo PD7A bạn nhận được từ văn phòng của chúng tôi)
  7. Click “NEXT”
  8. Confirm the account numbers and amounts are correct
  9. Click “CONFIRM AND PROCEED TO PAY” or select the radio button to modify payment.
  10. Click “PAY NOW”
  11. Choose your bank and enter in your banking login information and proceed to pay/confirm

Math Hacks for Your Business

Location

Due to mathematical clustering and conformity, the closer you are to your highest-grossing competitor, the more likely it is you will get half their customers upon opening. If you follow the rest of the advice in this blog and have multiple sources of income, to begin with, you ride out the zero-sum game until you are the only one left.

Your competitor’s revenue can be estimated by multiplying their traffic and their average ticket price.

Is it worth hiding cash/claiming questionable expenditures?

Risk<Reward x Probability of getting caught

In 2018, the answer is a clear NO.  The reward (~20% combined income & sales tax saved on underreported income) is far less than the risk (100% penalty of the taxes evaded + the taxes) multiplied by the high probability of getting caught by the Canada Revenue Agency’s advanced algorithms. Your accountant should be able to tell you which of your financial ratios/metrics would flag your return for a limited review.

Investing

the estimated benefit x the probability of gain = value of the transaction

You must take the chance of a 100x return if you had a 1/10 chance of success.  So if you have a 1/10 chance of something that would make you $100,000 better off, the value of the trade is $10,000.  For this reason, it is worthwhile to understand the underlying technology of crypto assets.   As an exercise, I  even built my own blockchain in Python.

For crypto assets, it is fairly common to have a 10% chance of a 100x return. Even at only $10,000, the value of the trade is $1,000. Even if you value your time at $500/hour, it will take less than 2 hours to set up your accounts on Kraken/Binance and begin buying.

In contrast to crypto investing, due to the normal distribution Brownian function of the stock market, unless you are “playing” with enough money it is often not worth your time.  If you lose 25% you need to gain back 33% just to break evenIf you are young, you are better off dollar cost averaging into CIBC’s balanced index fund (the one without the S&P 500) and anyone would benefit by loading up on small caps after a crash.

 

 

How many hours should you work?

Age 40 and up:

  1. 10 hours/day: If you want to increase your net-worth by 14% each year worked.
  2. 7 hours/day: If you want to increase your net-worth by 11% each year worked.
  3. 5 hours/day: If you only want to increase your net-worth by 7% each year worked.

Age 30-39:

  1. 10 hours/day: If you want to increase your net-worth by 10% each year worked.
  2. 5 hours/day: If you only want to increase your net-worth by 7% each year worked.

Age 29 and under :

  1. 10 hours/day: If you want to increase your net-worth by 7% each year worked.
  2. However, if they learn how to scale, a good engineer could possibly double the aforementioned percentages since an engineer can do the work of 10-100 accountants.

Its an inefficient use of time to advance your wealth beyond a certain point since money eventually becomes perpetual.  Earning pre-tax $70/hour does not make sense when one earns a guaranteed 3% post-tax on $3 million.  As we get older, health, attention, and time are the priorities.

  1. Health: prioritize good sleep, quality food, physical fitness, outdoor activities, research a quality doctor and get regular blood work done.
  2. Attention:  spending 1 hour QUALITY time in the gym and later with your kids, interacting with them and reading to them is much better than spending 2 hours with them fatigued in front of the television.
  3. Time: outsource everything where you don’t have the greatest competitive advantage, use robots whenever possible and get your groceries delivered on weekly and biweekly schedules.

Solution: Reduced Hour Workday

The derivative shows with each additional minute over 5-7 hours (depending on the work being done), your productivity will not increase pro rata with the time.

NEW OFFICE HOURS & PICK-UP OPTION

Our new office hours are Monday to Friday 8am to 1pm. If it is inconvenient for you to drop by during our office hours you can also arrange a time for someone to pick-up your documents after 1pm. (Edmonton area only)

After 12+ years our blog is still the least influential financial blog on the internet, and our 135 subscribers is a tiny fraction of millions of small business corporations in Canada.  We are not driven by money and popularity, rather we driven by legacy, greatness, and hyper-focused on adding value.

We are focused on the following 7 customer groups:

  1. B2B technology
  2. B2B trades (plumbing, electrical, etc.)
  3. CNC machine shops
  4. Single-idea restaurants
  5. Salons
  6. Consumable product subscriptions (Skincare, Makeup product of the month, etc.)
  7. High-end gyms, country clubs

To protect our clients from ever-increasing fraud and audits, we have redundant security elements in place including the same encryption technology used by Swiss Banks and the most secure layer (SSL) Certificate Authority.  However, with over 40,000 employees, the CRA will be the reason your information is compromised.  What ultimately protects our clients is the fact there are only 3 humans working in our office (all family), so we build genuine relationships with our clients which keeps them safe.

 

Choosing Your Market & Pricing

There are only two markets you need to know:

  1. The top 20% (controls 70% of Alberta’s wealth)
  2. Average women

Where is the average men? They simply don’t count in Alberta– their women control their money -so unless you are targetting the high-end market direct your efforts directly to women!


How do you pick your market?

A) If each transaction does not require a material amount of an individual’s time then you can enjoy the largest market- the average people. They come in, they order your soup, which is prepared in a large amount, they pay, they leave. Businesses that can enjoy the mass market: online sales and restaurants.

Big money is made in this market, but few clients can tap into it because many of the times this involves producing junk- think Walmart, Starbucks, big Pharma. THUT 2.0 was the robo-accounting service we tried to deliver to everyone, but it failed. Unless it is online sales or mass production, the masses will slow you down.

B) If each transaction requires a material amount of an individual’s time then you are better off focusing on the top 20% of the population. This was our strategy to enter at the high end of the market: Edmonton’s oil and gas industry, where earners who were in the top 1-5% of the population were prepared to pay a premium, and we used that money to develop cost efficient robo-accounting solutions for other sectors. But we didn’t have enough of these lucrative clients to survive off of doing accounting for a few big CNC oilfield shops.

Sometimes you do what you have to do to get yours: 10 years ago on the time-money continuum we had no money but we had the youth and energy to each work 80 hours in a week.

  1. We did personal tax returns for $20 each no matter the complexity. People came for 10-15 minutes, paid us, and left.

  2. We exercised the same procedure for small businesses charging $2,000 for a nail salon.

As clients grew in complexity, the amount of time required also grew. Those average people simply dragged us down as we could not recover the time spent on each file. So as we progressed on the money-time continuum we dropped clients to reach equilibrium.  Simultaneously, we were still banking money from the 1%ers and using the money saved to drive down the market to higher unit volumes and lower prices with each successive category until we can economically service the span of the higher 1%-20% of the market.


Raising prices

High-end services (tech, constructions, salons) would be better off having the end goal of catering to the top 20% of income earners that control 70% of the wealth in Alberta. That will lead to more satisfaction and less headache in the long run.

Successful price increases help you acquire better customers who are more serious about enjoying your offering and less likely to churn. When we had lower prices, we had customers that changed accountants, looking for a better deal, never mind that it will cost them more in the long run in taxes and/or penalties. Our current fees dramatically improve the lifetime value of our customer which in turn boosts lifetime value to customer acquisition cost ratio. It has allowed us to have a more sustainable business model without having to spend years working 80 hours a week each. The success of our price increases lies in the transparency. Everything is listed on our website and customers know exactly how much it costs and what is included. We know most accountants charge more than us, but our goal unlike theirs is not revenue maximization. Our goal is sustainability, and that involves selling something that our customers need.

  • $2M revenue and $200K profit is worse than
  • $1M revenue and $400k profit

When we include more features, like including bookkeeping, this drives the demand for our offering over other accountants and creates an opportunity to extract the added value in the form of higher prices. 


Signs you are ready to transition to cater to the higher end market

  1. Customers and prospects tell you how cheap you are. For example, customers have told us they are surprised we make money and that they appreciate the value.

  2. You create a very high ROI. You should aim to capture 10-20% of your economic value. If your construction build will save $100K over PCL’s you deserve that extra $10-$20K (your customer still saves $80-$90K). At the cost of 1%, we reduce customer costs by 15-25% (taxes + accounting).

  3. Many companies use a 5% annual price escalator so 2 years without raising prices would mean you fell 10% behind your competition.

  4. You included new value without monetizing them. Customers are more open to price increases when you can show a track record of using that extra money to invest in improving your offering. For example, we started doing everyone’s personal taxes at no additional cost, and unlimited CRA correspondence/audit support for free to create goodwill with customers. We continually go to businesses who get audited.


Implementation

  1. Offer customers a discount for them to refer a family or friend. We give our customers one month free off their service plus one month free for anyone they refer. While many customers were quick to refer someone, many simply paid the higher price. So we raised the average price without driving away customers who might otherwise seek out a “cheaper” alternative. The effort involved with making a referral makes deal-prone customers feel like smart customers- and smart customers are happy customers.

  2. Give them alternatives. We used to only offer 2 categories. Now we offer 5 categories. We convince salon owners to downsize staff and do more work themselves so that they retain more of their income, while their lower revenue keeps them in a lower price category for accounting. Likewise, customers who are already financially independent and look to their business as more of a passive income want to pay us for a more expensive category as a consequence of maximizing their volume.

  3. Make your offerings look more valuable. A nail salon could put a bunch of nail-care and beauty products in a pretty box and sell it at a premium. The idea is to get customers to compare the price to a day at your salon- so in comparison, the package is a good deal. Because most people are illogical and lazy, they will return to your salon just as often, and they got no additional value from the package but you have increased your income. Likewise, restaurants may package a number of foods together, encouraging customers to compare the price to dinner at their restaurant thus raising the perceived value of the packaged treat. Nail techs/restaurant staff and tradesmen should all wear uniforms: scrubs or coveralls. Contractors should have vinyl decals on their van/truck.

  4. Make peace that you won’t convince 100%. We can help you with the math on a price increase so we can determine how many customers you will lose and still break-even. Keep in mind that some of those lost customers eventually come back once they try an alternative and realize the grass wasn’t greener on the other side.


Hiring out work

Unless you are financially independent, you should be working rather than hiring out the work. No one will ever do a better job than you, and no one will ever care about your big picture as well as you.

Only farm out things that can be completed more efficiently through unique skills and economies of scale (Accounting, bookkeeping vs. doing it yourself). Due to minimum efficient scale, the cost/technology would not make sense for an individual to specialize in something that is not directly related to their ability to generate revenue.


Restaurant Specific Advice

  1. Choose fast-casual rather than higher end dining or fast food. Eating out was one of the first things to get cut back in many Albertan households when the oil price crashed. Among clients, sales on average rose 4%. But there is a sector where sales rose 9% last year. It is the sector above fast food, but a step down from fine dining: that middle, ground fast-casual restaurants. While the minimum wage increase hurts fast food places, the fast-casual sector will remain unaffected. As the population gets older, and as the economy remains uncertain this trend will continue to favor fast-casual rather than more costly dining.

  2. The average food cost in restaurants is 30%. Fast food places operate at 25% and the finer the dining the higher the % up to a maximum of 35%.

  3. If one item in your meal is priced at 40% food cost, then the second item needs to be at 20% to maintain your 30% average. Mix low priced rice/noodles with high priced meat.

  4. The staff should ask if customers are interested in any appetizers, side dishes, and deserts. The simpler the preparation the higher the profit.

  5. Consider paying your servers on commission. Any increased wages you pay out to them should mean more profit to you.

  6. Descriptive words on the menu are better than pictures.

  7. Customers find restaurants on their phone. Make sure you have a solid digital footprint: Facebook, Google, Instagram, Yelp. Your consumer base will return on average 1.7 times per month for 2.7 years, for repeat sales.  Accordingly, you should value your customers based on their lifetime value 1.7 times per month for 2.7 years.

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WCB Coverage in Alberta

WCB insurance provides your employees with benefits and services after an injury happens. You may have to sign up for WCB coverage for your employees. Please contact WCB Alberta to find out if WCB coverage is mandatory for your corporation. If so, you must open an account within 15 days of hiring your first worker.

If your corporation is an exempt industry you can voluntarily apply for WCB coverage for your employees.

As a business owner, you are not automatically covered by WCB but coverage is available and automatically renews every December 31st. Please remember to base your coverage on your actual EMPLOYMENT EARNINGS (earnings before taxes). If injured you will need to provide records to prove your employment earnings such as your T1 general or T4 slip.

ANNUAL RETURNS

Annual returns must be submitted before the last day of February each year to avoid penalties. At the beginning of the year, you will receive a letter from WCB with your Annual Return Password. If our office prepares your payroll please remember to forward the letter to our office so we can help you file your return on time!

Steps to Starting your Canadian Corporation

Once you have decided to get incorporated there are a few steps you must take:

  1. Get incorporated by a lawyer or registry office with these steps listed here
  2. Forward us the documents you receive from your lawyer or registry office so we can apply for a business number for your corporation or apply for your business number yourself by following these steps
  3. Make an appointment with your bank to open a business bank account – remember to bring the documents from your lawyer/registry office
  4. Visit the City of Edmonton website to apply for your business license (if required)
  5. Contact WCB Alberta to open a WCB account (mandatory for some industries)  – if we do your corporation’s payroll please remember ‘to forward us the letter from WCB with your Annual Return Password. Click here for more information about WCB coverage