Price and Value

Price is where we can make our mark on the world, by riding for the Brand. Before the application of a Price, there has to be a crystal clear Vision of purpose.

Branding IronsThere is a chorus from a song by the Zac Brown Band that might be apropos to the discussion of Price and Value:

“Save your strength for things that you can change — forgive the ones you can’t. You gotta Let It Go!”

Our frustration comes from believing that we are in control of Value and that customers are in control of Price. Quite simply, that is ‘bass-ackwards’.

Value — just like their worldview — is our Customer’s perception of it. Only, they determine the amount of Value they see in us and the Product, or Service, we provide to them.

Price — determined by the entrepreneur — is where we can make our mark on the world, by Riding for the Brand. Although chic in our business terminology, a Brand is multifaceted in design and purpose.

What is ours?

From the earliest days of cowboys in Montana, brands marked possession, of cattle, mostly. Yet the ranch brand was found above entryways, chiseled into fence posts, worn on belt buckles, and otherwise displayed to the world.

Are we so bold?

When brands are applied to the hide of cows and horses, there is pain — to the animal and to the cowboy. Hair is burnt, skin is scarred, and the cowboy grits his teeth to apply the mark artfully. It is a permanent relationship between him and the animal.

Are we as caring?

Before the application of Price, there has to be a Vision. One which is crystal clear in communicating: Why we are in business, What we represent, Who we want to serve, How we intend to do it, Where our boundaries are, and When we intend to begin
— Riding for the Brand.

A Better Business Plan

This is a blueprint for how to begin building dreams into reality. Literally, in 5 Minutes, you can understand the cornerstones of a brilliant Business Plan!

BlueprintsBlueprint For Success

A seasoned carpenter shared this secret to success: “You must begin — and, begin again.”

For the dreamers among us, the question is: “Where do I begin?”

The purpose of this article is to provide the parameters for a quick analysis of an idea to determine its possibility, and probability, of actionable success. As with any legitimate construction project, we build it on paper, first.

This is our blueprint.

Owner Compensation
The concept of beginning here is novel for a Business Plan. Yet, this number will keep our attitude right and provide the Retained Earnings for business expansion. One of the principles of success is: Begin with the End in Mind.

Debt Service
Unless adequate funds are available for start-up, the early years will include a Banker for a partner. The goal is to buy them out as quickly as possible to retain their share of profits, which are paid out of our business as Interest.

Self-employment, Federal income, and State income taxes must be paid timely. Because of severe penalties for non-compliance, governmental entities are a bad source of financing.

This is the delivery system of providing value to the marketplace. It is everything from the brick-and-mortar to indirect expenses. It is the price we pay to have a Company.

Direct Costs
Each project and customer will want, and need, something different. The flexibility to “Wow!” them requires additional expenditures.

Productive Units
All of the above is accomplished by understanding the finite number of units available for distribution. For service enterprises, this will be a reservoir of “Hours”; for a products company, this will be the capacity of the “Shop”; and, for an inventory business, this will be the “Goods”.


Net Income = (Owner + Banker) / (100% – Tax Rate)
Value to Customers = Net Income + Overhead
Sales Price = Value to Customers + Direct Costs

Example Variables:

Owner Compensation: $80,000 ~ [For the Family, after taxes]
Debt Service: $40,000 ~ [Loans $200,000; 5 Year maturity]
Tax Rate: 40% ~ [S/E 15.3%, FD 20%, ST 4.7%]
Overhead: $144,000 ~ [Ads, Insurance, Rent, Utilities, Etc.]


(Owner $80,000 + Banker $40,000) / (100% – 40% Tax Rate)
Is same as: $120,000 / .60 = $200,000 Net Income
$200,000 Net Income + $144,000 Overhead = $344,000 Value

For those providing Services to the marketplace, the final step is to divide Productive Units into the Customer Value. Full-time employment is 2,000 hours per year. Entrepreneurs will work much more than that — with only a percentage actually billable to Customers.

If our Start-up Enterprise team can be 86% productive (after allowance for duties of internal and external management) each Employee has an annual reservoir of 1,720 billable hours.

$344,000 Value to Customers / 1,720 Hours = $200 per Hour: Price for Value

Those providing Products, or Inventory, for sale to customers, will factor in the Direct Costs. In fact, they will consider the number of meals (if a restaurant), or suits (if a boutique), as their Productive Units and establish their Mark-up, accordingly.

Now, step apart from the crowd and consider the most important variable of all: “What is my passion — the one unique thing about me, for which the world waits?”

The rest of the story from our successful builder, quoted at the beginning of this article, “Find something you love to do and do a lot of it.” If we are able and willing to tap into that passion and grasp the foundational principles of a Business Plan, we are simply minutes away from A Better Business Plan — and, a new beginning!

Price We Pay

Every business wants to be competitive in the marketplace and they know Price is one measurement of Value, subject to the perception and judgment of Customers.

The Magic FormulaBy eliminating variables, we arrive at one thing certain.

This is a story of three entrepreneurs: Eric the electrician, George the geek, and Lorna the landlord. The mystery for us to solve: Although unrelated by blood and marriage, how can they all have the same big sister, Iris, who requires their support?

Lucky for us; we have The Magic Formula as a guide to the answer. It is available by clicking the image above, or this Link. Much more than a guide, the Magic flows from an awareness of our resource choices: Time and Money.

Eric is an industrious fellow, who has a passion for service. He has completed years of formal training; has worked his way through the ranks of Apprentice, Journeyman, and Master Electrician; and, now wants to live the dream of being his own Boss. Captain of his own ship, Master of his own destiny, a Servant of the people: taking care of his very own Customers.

Since Eric has all of the tools and seed money necessary for starting his Company, there is no need for a Banker, as a partner. Based on the household budget, he knows that his family needs $40,000 per year, after taxes.

As a self-employed individual, he will pay both halves (Employer plus Employee) of Social Security and Medicare taxes, for a combined rate of 15.3% on all net profit of his business. Much trickier are Federal and State income taxes, which are calculated on a progressive scale. At the lower brackets of income and with benefit of tax credits under current law, income taxes are of minimal concern. He anticipates an effective total tax rate of 20%.

In business, Overhead is a gracious way of saying: There is a price for Eric’s dream. Technically, Overhead is the delivery system of value from provider to consumer. For the joy of having that magnetic sign on the side of his truck and walking into his shop each morning to switch on the lights, at a minimum, Eric will pay $60,000 each year.

Now we’re ready to do 4th Grade math. We will simply Add, Subtract, Multiply and Divide.

Because taxes take 20% of Eric’s total Net Profit “pie”, his after tax $40,000 must be 80% of that same pie. Thus, we Divide $40,000 by .80 to know that Eric needs $50,000 of Net Income for the year. To prove that this target is accurate, we double-check the numbers: First, we Multiply $50,000 by .20 to find that, indeed, Taxes are $10,000; then, we Subtract $10,000 from $50,000 to breathe a sigh of relief in knowing Eric has $40,000 for his family.

Before Eric even gets to Net Profit, he must first make Sales to Customers of $60,000 each year, just to cover his Overhead and “keep his lights on”. Therefore, we Add the amount of Net Income ($50,000) to Overhead ($60,000); Eric knows exactly his sales target for the year, which is also a representative value of his time to provide quality services: $110,000.

Remember that needy sister, Iris? Your suspicion is right. Her nickname is IRS, the Internal Revenue Service; the one in need of that $10,000, above!

Now, the fun really begins, because we are to the point of this story: Who pays taxes? Is it, really, Companies and Businesses, as the Governor of the State of Montana believes? What happens when Big Sister decides she “needs” twice the amount of support and will use new tactics to take it?

Let’s answer these questions by reviewing the components of The Magic Formula. Does Eric need $40,000 for his family? Yes. Is the effective tax rate under current law approximately 20% for those in Eric’s income bracket? Yes. Does every business have expenses of Overhead in delivering value to the marketplace? Yes. Since these are all accurate variables, we find ourselves with the ultimate question: From where does the money come? Answer: Customers.

Who are customers? That would be: You and Me.

We pay Eric for the value he provides to us: the value of understanding the dynamics of electricity and how to bring it into our homes for the benefit of our families. He, in turn, shares portions of this Price with Vendors, Government and his Family.

At this point in our story, some may ask the question: “Why doesn’t Eric just keep on working for his current Employer?” For those individuals who are unemployed, the answer is obvious. For the ones still employed, the answer is two-part:

1.) Eric has discovered a better way to light up the lives of Customers, which his current employer is unwilling to accept.

2.) Because of the Universal Financial Principle above, Eric’s base compensation from any company is limited to, approximately, one-third of what he produces for an employer; Taxes and Overhead take the rest.

Prices are not arbitrarily set by businesses. Every business wants to be competitive in the marketplace and they know Price is one measurement of Value, subject to the perception and judgment of Customers.

Now, what happens when big sister, Iris, wants more? Not just a little more, a lot more!  In fact, she wants to double her consumption. Let’s do the math.

Eric still needs $40,000 for his Family and he still has Overhead to pay. So, by using the structure of The Magic Formula, we can solve for the amount of Taxes and the new Price his customers will pay. $40,000 divided by .60 is $66,666 (Net Income) multiplied by .40 is $26,666 (Taxes), which leaves $40,000 for Eric and his family. If all of Eric’s business expenses (Overhead) remain at the $60,000 amount, his Customers will need to pay $126,666 for the value of his services.

From $110,000 to $126,666, we (Customers) pay $16,666, more!

Remember the rest of our cast of characters: George and Lorna? George provides computer services to Eric; and, Lorna provides the building space for his shop. What do you think George and Lorna will be doing to the price of the value they offer to the marketplace?

If they want to stay in business, they will be doing what Eric was forced to do: raise their prices, too. George and Lorna are part of the $60,000 in Overhead that Eric needs to pay each year. When that $60,000 amount increases, who pays? Yes, once again, the answer is: We the People!

This is for certain: We pay a price for everything.

Of, By, For the People

Government must never be allowed to reign supreme above the People. I’m reminded of Pogo’s observation, “We have met the enemy and he is us!”

Abraham LincolnThe Saga Continues

This is Part II of what, currently is a three act play. Part I was a request for relief from hardship on behalf of a Montana business woman.

It seems that there is widespread confusion as to what Government is. I’m reminded of Pogo’s observation, “We have met the enemy and he is us!”

The basic purpose of government is to accomplish, for the greater good, those things requiring a united body of effort. It is not an entity separate and apart from the people; the individuals who provide the resources.

Most importantly, our Country was founded on the belief that Government must never be allowed to reign supreme above the people.


Dear Commissioner:

Thank you for your letter dated June 21, 2010, which clearly communicates the position of the Montana Department of Labor and Industry (DLI), in regards to Independent Contractor status. Since your letter, also, graciously provides the opportunity for suggestions to improve Department procedure, I have one which I believe can achieve the mutual goals of Montana Employers and DLI.

Over the span of thirty years as a Certified Public Accountant, discovery has been made that: “Communication is what the listener does.” We can hear; yet, not understand. We can see; yet, not comprehend. Your letter emphasizes the efforts of Transmission by DLI; an important first step. Steps two and three are Reception and Feedback. Montana Employers and Hiring Agents have not fully understood and comprehended the seriousness of the issue.

As professionals, you and I work very hard to communicate clearly. For instance, the purpose of the “Mr.” in the signature block of my email to you dated June 13, 2010, is to remove any confusion about my gender; yet, your letter to me is addressed as, “Dear Ms. Foard”. One of your Field Representatives copied me on a letter dated February 11, 2010, using “Ford” as my last name, when it is actually “Foard”.

My point is this: We learn by doing. As professionals, we want the opportunity to correct our mistakes. Montana Employers, simply, want the opportunity to learn from theirs, too.

Montana Employers work very hard to start businesses, stay in business, provide value to the marketplace, support their communities and offer employment to others. Granted, we are a nation and society founded on the Rule of Law. Furthermore, there is the premise so eloquently articulated in the Gettysburg Address:

… that this nation, under God, shall have a new birth of freedom; and, that government of the people, by the people, for the people, shall not perish from the earth.

This is my recommended solution to equitably resolve the audit issue of Independent Contractor vs. Employee:

  • If the Employer has never before been audited in regards to this issue, then, they need the opportunity to establish a more formal relationship with their non-registered Independent Contractors.
  • For those individuals who have received payment during the period of audit and are able to demonstrate their independence, by successfully registering under the Point System and Signed Affidavit referenced in your letter, the Hiring Agent is acknowledged by DLI to be in compliance with those individuals, retroactively and for the next two years.

The benefit for the State of Montana is that these newly registered Independent Contractors are affirming that they have paid all taxes in the past, and will continue to do so into the future. If not, then, they can accept full responsibility and be held accountable by our Government.

By using this approach, Montana Employers have the opportunity to actively learn by practicing the compliance efforts to hire only Employees and Registered Independent Contractors. The Employers, in turn, teach others about the importance of this Montana law. Additionally, a sense of parity, and fairness, is achieved when considering those activities currently exempted from the harshness of this strict standard, as referenced in my earlier correspondence: Payments to the Directors of Bank Boards.

I, respectfully, ask that the consideration above be offered to Montana Employers; so that we have the freedom as good citizens to participate in a Government which fully understands the source of its strength and resource:

… of the people, by the people, and for the people.

If I can be of value in further explaining the merit of this approach, please advise.




Here To Help You

Do our Public Servants understand that they work for you, me, and that group, so eloquently defined by President Lincoln as, “We the People?!”

One on OneUpon hearing an auditor remark, “I’m only here to do my job.”; I always wonder, “Who wrote the job description?” And, do they understand that they work for you, me, and that group, so eloquently defined by President Lincoln as, We the People?!

This is a story about our Government in action. It is a real story told through my correspondence to the Commissioner of the Montana Department of Labor and Industry. Brace yourself; Truth is stranger than fiction!


Dear Commissioner:

The purpose of this correspondence is to ask for your assistance in providing relief from hardship being incurred by Montana Small Business, as a result of audit efforts by the Department of Labor and Industry.

Recent experiences with small business owners clearly demonstrate that their treatment by the Montana Department of Labor and Industry is different than your public message:

Our mission is to promote the well being of Montana’s workers, employers, and citizens, and uphold your rights and responsibilities. We, at DLI, do this by remaining steadfast to our core values of customer focus, individual responsibility, individual growth, ethics in the workplace, and continuous improvement.

Quite simply and to clearly communicate the seriousness of the matter, without your intervention to promote an equitable approach to a relatively new law, Montana employers will not be able to continue in their businesses. At a time of historical high unemployment, I ask for your patience as I present this issue for your consideration.

The Issue: Employee vs. Independent Contractor

As foundational information, please refer to my recent Blog Post: Have Your Papers

Of the many Montana Small Business owners who are working hard to be in full compliance with labor laws, we will examine the fact pattern of one, who has reached out to me for help.

This small Company has provided employment to at least a dozen Employees for the last fourteen years that it has been incorporated. Its history of service and value to the Billings community goes back many years prior to that. To properly manage its business obligations, the Company uses the most recent release of QuickBooks accounting software and pays extra for the Enhanced Payroll Subscription. In recognition of the Company’s excellent employment practices, the DLI has assigned a Zero unemployment tax rate for the year of 2008.

In audit, the practice of this Company in hiring independent contractors (in addition to its Employees) is being challenged in ways far beyond a test to the actual Montana Law, and Administrative Rules. This business owner, an older lady, is having her core persona attacked.

She has diligently received contract documents from those holding themselves out to her as independent contractors, asked for invoices and statements of account, and furnished Forms 1099-MISC to these contractors. The technical aspects of the AB Test have been met.

The only thing, of which she was unaware and lacking in this story, is the Independent Contractor Exemption Certificate.

Before moving forward to take a look at the requirement for an Independent Contractor Exemption Certificate, let’s consider two activities which appear to require a Certificate; yet, are not being challenged by DLI.

1.) Bank Director Fees
2.) National Guard Recruiting Fees

In preparing many personal income tax returns for the Directors on the boards of Montana banks, I know for a fact that they receive Forms 1099-MISC reporting their remuneration as Non-employee Compensation. That income is, then, properly reported within their individual income tax returns on Schedule C, Profit or Loss from Business.

This last tax season revealed another twist to compensation paid to a Montana Guardsman by an Alabama company. This young man enlisted in the National Guard. He was encouraged to get his buddies to sign up, too. The “compensation” for doing so was reported on a Form 1099-MISC as “Non-employee Compensation” from a Company who, evidently, provides services for the U S Military.

The question that begs to be answered:  “Why is it OK for a multi-million dollar company to make payments and report them as Non-employee Compensation to a Montana resident; yet, a small Montana Company is being accused of improprieties?!”

On behalf of the small Montana Company, I ask for fairness in negotiating through the audit issues of the past, to provide this business owner the opportunity to continue to be a good citizen and a great employer.

The Facts: Government vs. Montana Company

1.) This new law was not administratively practical (ARM 24.35.141) until August 12, 2005.

2.) There is still ambiguity for Hiring Agents. Specifically, please, see the first two cites for the Montana Supreme Court Decisions applicable to this issue. Montana employers are given the impression that they can rely on the Independent Contractor Exemption Certificate; yet, “an employer has the obligation to make an initial good faith inquiry to determine whether the worker is an independent contractor in fact, as opposed to merely in name.” (If the State of Montana, with all of the taxpayer resources at its disposal cannot decisively make that determination, after asking for a sworn affidavit from an applicant, what hope is there for the Employer?!)

3.) Yet, the Montana Company, above, did just that: they made a good faith inquiry and determined that those whom they hired as Independent Contractors did, indeed, meet the factual test in more than name, or certificate.

4.) The audit representative for DLI expressed the Department’s approach by stating, “While we acknowledge this is a relatively new law and provided a grace period for the years 2006 and 2007, we are now putting the hammer down.”

5.) The lady in the story, above, and her Company have never before been audited.

6.) Of those she compensated as contractors for the years of 2008 and 2009, the majority have, now, obtained their status as Registered Independent Contractors, recognized by the Montana Department of Labor and Industry as such.

7.) Since the UI Contribution Rate for her Company is Zero, the real issue is the assessment of Worker’s Compensation rates, Social Security, Medicare, and other Federal taxes against payments she made to other Business owners for the value of their services, who have reported and already paid the taxes on their business income.

Our country was formed in revolution against “Taxation without Representation”. An even greater curse is “Double Taxation through Misrepresentation”.

The solution to all of this is to use the Audit Process to educate, not to punish.

In your words:

“We, at DLI, do this by remaining steadfast to our core values of customer focus, individual responsibility, individual growth, ethics in the workplace, and continuous improvement.”

That’s all I ask for the benefit of Montana Employers. I am available to facilitate an equitable resolution in the case above.




Have Your Papers

There are only two legitimate classes of workers in the great State of Montana: Employees and Registered Contractors.

Passport & GavelAre You Prepared?

There are only two legitimate classes of workers in the great State of Montana: Employees and Registered Contractors.

Yes — that is a Period.

No exceptions.

A recent communiqué from one of the national Payroll Services identifies four areas receiving vigorous audit activity:

  • Worker Classification Issues
  • Fringe Benefits
  • Reimbursed Expenses
  • Compensation of Owner-Employees

Every business is at risk for increased scrutiny.

These issues are at the forefront of a Federal Government effort to raise billions through tighter enforcement. On a local level, the Montana Department of Labor and Industry is the auditing arm of the Government’s long reach.

From a recent article:

The IRS audit program is just the beginning of what will be “a new era of compliance,” says Gene Zaino, president and CEO of MBO Partners, a services firm that specializes in the independent contractor market. “Most states are now sharing data with the IRS, and many have set up task forces specifically [to address] misclassification. It used to be that if a business ran into trouble with a state labor department or with the IRS, the issue was isolated. Now, any kind of audit or compliance finding can set off a domino effect where the other agencies will get in on the action.”

Simply stated: The action is less than pretty, unless you are prepared and in compliance.

As a business owner in the State of Montana, you have two choices:

  1. Hire employees, pay required taxes, and provide legitimate benefits.
  2. Contract with individuals who can provide their Independent Certificate.

If you choose Option 2, the fun begins here: Independent Contractor Central Unit

A related Link on the right side of the Website above can be used to determine whether an individual is, indeed, registered. Or, click here for Independent Contractor Search.

For those individuals who need to register the Independent Contractor Exemption Certificate Affidavit with the State of Montana, click here for Application.

Dovetailing with this Worker Classification issue are two other facets of compliance:

  • Reasonable Compensation
  • Form 1099-MISC Reporting

For those businesses employing Officer-Shareholders, the odds are good that an auditor’s definition of “Reasonable Compensation” is anything greater than the Montana Unemployment Insurance annual taxable wage base. For the year 2014 that amount is $29,000. If owner-employees of the business are being paid less than that amount, be prepared to explain, “Why.”

Stealth IRS changes came close to requiring, starting in the year 2013, that all business payments for services, or purchases of goods, exceeding $600 in a calendar year, on a per Vendor basis, to be reported to the Internal Revenue Service on Form 1099-MISC. Since the law was changed before implementation, the only question is, “How long before we are required to play the game with this new set of rules?” Research has estimated the average cost for the typical small business to prepare these forms at $6,000 per year, if done manually.

The best word of encouragement is to start now in finding the Right Tools and a Coach who cares about your success!