When Strategic Funding was in its early days we began to look for bank lines of credit so that we could expand our financing of restaurants and small businesses. The banks liked the idea because working with an alternative lender gave them a way to finance these Mom and Pop businesses indirectly without having much risk. In this arrangement, Strategic became the borrower and took responsibility to pay back the banks not the individual small business. That was the first hurdle to access to working capital for these people who banks looked down upon for credit. It was still important for them to evaluate all those merchants that we had funded so they could determine credit quality and how we underwrote the applicants.
The banks wanted to understand what our typical restaurant customer looked like and how sound their businesses were. In reviewing the portfolio, the bankers were shocked to see how many of our customers were operating well, yet had tax delinquencies, liens and judgments against them. This was unfathomable to a button down banker who was used to financing only top tier AAA customers. As a natural response, they tried to limit our ability to finance restaurant customers with sales tax issues, because they believed they were a bad risk. We had to convince them that we understood these customers well and could help many of them with tax issues through education and often an injection of our working capital. But the message was clear – far too many small businesses have poor cash management skills, particularly when it comes to taxes.
When I owned my first restaurant a hundred years ago, I experienced the wrath of the taxing authorities when I missed successive tax payments as I was trying to survive my maiden voyage in this business. I was so busy managing, cooking, covering vendors, paying utilities and keeping the place clean and well staffed that I didn’t pay much attention to the mounting taxes. I, like many other naïve newbies, thought I could deal with it over time. Hell, I thought the state would offer me an easy and manageable payment plan and be happy to charge me fees and interest without getting too aggressive. That was just delusional on my part.
One day just before Christmas, I got a call from my bank telling me that revenue officers had come to the bank and levied my accounts. They grabbed everything in them and everything I had just deposited from the previous business day – including that big fat holiday party I did. Holy crap!! I had never even heard the word “levy” until that day. I had no money for my vendors, liquor or payroll. I was dead in the water. All my credit card receipts were being processed and were going directly to pay the taxes. By this time the judgment amount had doubled my balance because of the punitive fees and Louie the loan-shark interest rates that they hit you with. As a new restaurateur I was in trouble and realized this was a dumb move that I vowed would never happen again.
Years passed and I opened up more and more restaurants. I was particularly successful with my casual theme concept named the Rattlesnake Southwestern Grills, which expanded through Connecticut, New York and New Jersey. Each state had its own taxing system to collect sales tax and of course you always had the Feds to deal with on payroll taxes. Regardless of the state or the payment schedules, I put procedures to prevent this costly error from ever happening again. I tell restaurant owners every time I run into one that has danced the tax dance.
RULE #1 – IT’S NOT YOUR MONEY!!
Get this through your thick skull! Many restaurants charge and collect sales taxes as they are required to do. Most accurately account for these revenues through their electronic POS systems and know what was collected. The real stupidity enters the equation when restaurant owners use the sales tax revenue as part of their operating capital. They float their operations with sales taxes money to keep them from going negative. They do this until taxes are due and hope the funds will be available when they have to file. Well guess what? Very often they can’t scrape together everything they owe and end up either not filing the return (really bad) or filing the return and sending a partial payment (better – but still bad).
This behavior is dumb, really dumb. This is like ignoring discomfort in your chest while exercising! First off, you are collecting this money on behalf of the state. I will say it again -this is not your money and it should not be comingled with your operating funds. You are technically not “paying” taxes – you are merely collecting it for the state and turning it over to them at prescribed times.
If you need to use this money to steady your financial boat then you really need to evaluate the health of your business. The sales revenue you earn from the sale of food and beverage should be enough to cover your expenses, payroll and direct operating costs while yielding you a profit. If you are using tax money you aren’t making it and need to take a hard look at your business and how to fix it.
The sales tax practice that I used and recommend is to immediately separate and impound the sale tax funds in a dedicated “tax account” – every single shift / meal period. That means when you close out lunch for the day and ring out the POS system or cash register – identify the sales tax charged customers and collected by your staff. Take that amount in cash and prepare a deposit (and slip if your bank uses them) and put that amount directly into the tax account. That includes any amounts charged to a credit card for that shift even if you have to write a check to cover it. Do the same for dinner and any other meal period you have. Breaking these payments and related information into smaller components and tying it to distinguishable deposits lets you control your taxes, your staff and your finances easier than if you lump everything together. You want it to be easier to track, audit and account for.
Resist temptation. Do not raid this account if your operating account is short. It’s easier and less costly to work it out with your bank and pay their fees and charges then risk being short on tax payment day. Liability from tax delinquency will also follow you personally even if your business fails and you have to file bankruptcy. Taxes will never go away and will compound at an astronomical rate. A very expensive mistake.
A good tax policy and strategy will help your business stay healthy and grow. If you want to discuss your business questions, you can email me at firstname.lastname@example.org.