Last year a client asked the following question:
I recall that earlier in 2010 an accountant at your firm suggested that I could reduce my payroll taxes if I change my business status to a S-corp. I don’t recall if that was officially done, although I recall providing some information for paperwork.
Recent surveys show that the survival rate of new businesses average about 20% over a five-year period. In other words, if you start 100 new businesses today, 20 of them will still be in business five years from today. The other 80 will have gone out of business sometime during that five-year period. These are generally well-known statistics. What isn’t as well known, however, is that of the 80% of new businesses that failed, over 60% were profitable when they went down!
How can that be? It sounds counter-intuitive that a profitable business would fail. However, it becomes easier to understand when you consider the impact of “payment terms.” Payment terms are a measure of the number of days between the time a service is provided or a liability is incurred and the time payment is actually made. What are the average “effective” payment terms in a typical small business?