Business owners may be surprised to learn that there is such a thing as “bad income.” There is also such a thing as good expenses.
Most of us who own businesses are automatically inclined to assume that all money coming in the door is good, and all money going out is bad. This is not always the case.
Real-World Example
I once worked with a client who provided a service to homeowners. Let’s call him Joe the Window Washer. (No, that’s not his real name or profession.) Joe was able to charge about $1,500 per job for his services here in Iowa.
One day Joe gets a call from someone in Connecticut who had seen Joe’s website and wanted Joe to come wash the windows on his house in Connecticut.
Joe said “sure!” and off he went. Joe packed up his equipment onto a trailer, hitched it to his pickup, and off he went to Connecticut. Two solid days of driving to get there, one day to do the job, and two days of driving to get back to Iowa.
Because the cost of living is so much higher in Connecticut, Joe was able to charge $6,000 for that one job.
I remember Joe telling me about it, and how proud he was that he made so much money off of one job.
Then, about 4 months later, Joe calls me and tells me he’s fed up and burned out with his business. He says he wants to shut it all down.
Well of course Joe was burned out. He was serving customers all over the place. Connecticut. Ohio. Indiana. Texas. And all the states that border Iowa. This was in addition to serving customers here in Iowa.
And here’s where we get into “bad income.” Yes Joe made $6,000 on that one job in Connecticut — but that was bad income.
You may be wondering how that can be — $6,000 for one job, versus $1,500 for one job in Iowa. But let’s look at this more closely.
Joe was gone for 5 days to do that one job. If he had stayed in Iowa for those 5 days, he could have worked 4 days, slept in his own bed each night, and brought in $1,500 per day for a total of $6,000 — and not had any of the travel hassles or expenses.
And speaking of the travel expenses, when you factor out hotels, gas and meals, Joe could have stayed home instead, worked 3 days here in Iowa, made $4,500 and probably netted out ahead.
Conclusion
These are things a proactive accountant and proactive client will think about. There really is such a thing as bad income.
As for good expenses: good expenses are things that help the business operate more efficiently. But that’s a topic for another post on another day.