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Rethinking Business Model Due To Employee Expenses

Small Business Finance - Small Business Ideas Forum - www.smallbusinessbrief.com
Hello, this is my first post and I hope it's in the right forum. I've been having a dilemma with my business for some time and need some ideas or feedback. Thanks for anyone who replies.

First off, I apologize for my lack of business vocabulary as I have no formal training and am actually not very good with the financial aspect of things.

So this is the snafu:

I run a pet sitting business that I started in 2011. In 2013, I injured my back doing dog walks so I hired my first employee. We had about 100 clients at the time. Since then, I've always had between 1-4 employees and we currently have almost 300 clients. We have a solid reputation and are adding new clients at the rate of 1-3 per week now.

Problem is, the employee costs are very high and I'm not sure it's a sustainable business model. However, I can't do all the work myself anymore.

From what I can tell, labor cost is around 75%. I'm not sure if this is normal for a home-based service business but I know in the restaurant business we tried to stay under 18%. Here are the main contributors to the labor cost:

-- Payroll taxes. This is California, so these are high. We use Intuit.

-- Worker's compensation insurance. Required in California and based on payroll.

-- General liability insurance and bonding.

-- Mileage. California state law requires a business to reimburse employees for travel time.

Other than a few minor administrative costs, these are the biggest financial obligations in the business.

I know that when trying to increase profit margins, businesses look into cutting costs and raising prices (increasing productivity I don't think is an option). Obviously, I can't cut the employee costs. Wages are standard. Prices are standard.

An important point: Prices in this business are kept low because of app-based services (Rover, dogvacay, etc. similar to Uber in the taxi industry).

Here's how some other pet sitters get around this problem. They hire independent contractors, which avoids payroll taxes, worker's comp, and mileage reimbursement. Some do provide general liability insurance and bonding, but a lot probably pay under the table too.

I suppose the biggest problem is that I'm not willing to do these things. My business reputation depends on continuing to provide top notch service and to do that, I need to train and supervise (not allowed with contractors according to the IRS but many, many pet sitters cheat and some get caught).

This post is probably as circuitous as my problem, I'm sorry. I'm thinking about selling the business and getting into something else. But I just adore this business, my clients, and employees.

Ideally, I'd like to find a way to make this business model profitable enough to continue expanding. But the more employees I add, the higher costs are.

Is it time to cut and run?
Date: Jan 10, 2017   


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