One of the most crucial things to understand about service-based businesses is that they operate very, very differently from companies in other sectors. Nobody would ever confuse the normal daily operation of a private healthcare practice with that of a factory floor — but having said that, there are still major differences that most people are unaware of.
Chief among them is the fact that a service-based business sells mainly its time and its expertise, as opposed to a more product-oriented environment like a manufacturer. Sure, a doctor's office has assets like medical equipment that they use on a daily basis. But they're not selling patients access to something like an X-ray machine — instead, they're providing them with an invaluable level of care and service that they wouldn't be able to find anywhere else.
There are other differences, to be sure — like the fact that the financial structures of a service-based business will vary wildly from their more "traditional" counterparts. This is true in many key ways that are certainly worth deeper exploration moving forward.
Specific Advice for Your Specific Industry: Breaking Things Down
With all of this in mind, we sat down and asked a series of financial professionals a fairly straightforward question: How does your advice for service-based businesses (think: doctors, architects, attorneys, etc.) differ from more traditional small business clients like retailers and manufacturers? Below are some of their insights.
"A service-based business will operate differently from its more traditional counterparts and, because of this, is able to price differently and take advantage of certain strategies at different times in its history," said Joshua Standley, EA, ABA of DKK Accounting. But he also indicated that regardless of the type of business in question, you still need a clear financial picture to help guide your decisions at any given moment. "With a clear financial picture," he said, "you'll be able to see where you are at, what you can change and what tax-saving strategies you can or should implement."
Arthur Rubin, EA, MBA, CFE of Accountants and Counselors had similar advice. He said that "retailers and manufacturers place controls on inventory, purchases and the cost of goods sold. Attorneys and architects, on the other hand, do not always place controls on billable time and analysis of what is billable versus what isn't." He said this is a very precarious line to walk: "If an hour of time is lost, it can never be recovered. This is unlike a retail establishment that has inventory, so if a sale was not made on one day, there is an opportunity to make more sales on another day."
Dmytro Arshynov, EA, CAA of DMA Financial Management, LLC said that things have gotten particularly tricky for your average service-based business over the last few years in particular. "Due to the Tax Cuts and Jobs Act, professionals like doctors, architects and attorneys are limited to the amount of the new 199A deduction they can take, if they can take it at all." He went on to say that "I highly suggest planning their financial life as early as possible to reap the benefits of the new 20% deduction."
Brian Dela Cruz, CPA, MBA of Take Flight Business Solutions, LLC said that "service-based businesses have a different set of problems when compared to other organizations like retailers and manufacturers. Service-based businesses are generally more about people and are more time-sensitive, whereas retailers and manufacturers place a greater emphasis on production, products and inventory."
He said that in his estimation, the best advice he would give a service-based business at that point would be vastly different because of the different issues and topics involved.
Finally, Ronald Flores of Curious Finance noted that "service-based businesses have a unique need in terms of tax planning that traditional companies don't have. Doctors and contractor businesses, most of the time, also have tax benefits that others don't have — like exemptions for their building's properties."
He finished his thoughts by echoing something said by so many others: "Understanding the needs and goals of the client is the most important thing of all for financial professionals everywhere."
Indeed, that may be the most important takeaway from all of this: the fact that there is truly no "one-size-fits-all" approach to proper financial management. The decisions you make to that end need to be dictated not only by the specific business you're running, but by the rules and requirements of the particular industry you're operating in.
Only by following the one right path for you and you alone will you see your way to financial prosperity, creating a rock-solid foundation upon which to build something truly remarkable moving forward.
About Lee Reams II
I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.
