Category Archives: Hawaii Business Smarts

Just say “No” to increasing the General Excise Tax on Hawaii Island

The General Excise Tax (GE Tax) is a tax on the gross sales of a business. Currently, it is 4.166% for Hawaii Island businesses and an additional half a percent higher on Oahu. There are very few exceptions: it is collected on basically all goods and services including clothes, food, rent, automobiles sales and just about everything else. It is a very broad tax.

Recently Mayor Kim has floated the idea of adding a half percent to the tax, which would be restricted to in use road projects. He would then reallocate the funds that he had budgeted for roads for other County of Hawaii services. This is will grow the county budget 6-9%.

It is a bad idea…a very bad idea.

It’s bad for businesses

Let’s assume a business is a perfect monopoly; that is, they have 100% complete control over their sector of the economy. There is no competition. Adding a half percent to the GE tax would result in a direct pass through to the buyer/consumer of .5%. The consumer pays more, but the business would, in theory, suffer little, as buyers have no choice. They could, though, consume less if the prices become prohibitive. The power company, HELCO, is the only company I know that has no competition—a perfect monopoly.

I think this is the model Mayor Kim has in mind: businesses on the island are perfect monopolies.  Increasing taxes won’t hurt businesses that much because we don’t have much choice. Tourists will come regardless of prices and local businesses will not suffer because they will just pass on the tax to consumers and other businesses.

This is where our mayor’s incomplete understanding of business shows.

Every business, with few exceptions, competes globally. The small shop that sells souvenirs likely buys the products from a distributor in Oahu that collects and pays the GE tax when it is sold to her store. The owner then collects and pays the GE tax when she sells the items. At some point, the cost of item becomes prohibitive and Hawaii becomes prohibitively expensive to visit. Restaurants, hotels, vacation rentals, taxis, tour providers and so on will all suffer when increased taxes make them too expensive for travelers. That’s the tourism sector.

Now let’s look at any business that retails items to individuals or businesses that live here. Add a half percent increase in the price of nearly ALL goods and services and life here becomes more expensive.

What has been the biggest trend in consumer behavior the past ten years? Buying online. When goods and services become too expensive in Hawaii, people will buy off-island. This has already had a huge impact on the ability of many businesses to survive and will only become more pronounced with an increase in the GE tax. Businesses will go out of business and consumers will have less ability to keep their money on the island by buying local. Almost every business competes globally–from a small fabric store to our vacation activities providers. Become too expensive, and people will look elsewhere.

It’s bad, really bad, for low-income residents.

Let’s also take a look at consumers. Poor and lower-middle class families have no choice to spend the majority of their income on basic consumer products like bread, milk, clothes, and rent. Many of these people are living paycheck to paycheck, so it’s going to have the biggest impact on them. They might spend 95% of their income on necessities; whereas, a wealthy person might only spend 30% on necessities. Another .5% is a lot when you’re living with no disposable income. This is what they mean when they say the GE tax is high regressive: it places a bigger burden on the poor than the wealthy.   

So, what’s the solution?

To me, it seems to be abundantly clear: cut or reallocate spending. That is, live within our means.

If the public is clamoring for new and better roads, we should find ways to cut other parts of the budget. Our economy and all the associated taxes – real estate, gasoline, vehicle registration – are adding millions a year to our County’s coffers, and this trend will continue. Hold expenses where they are, and there will be many millions of dollars added to the County’s budget every year. This is inevitable if the other taxes are unchanged. We can simply grow our revenue keeping rates as they are, as the increase in property values and the growth in our island population and tourism will, over time, provide millions of dollars of extra revenue.

We can do what every family does–set aside money over time and save up the money for big projects. We can make priorities. As a consumer and business owner, I appeal to our leaders to exercise fiscal restraint.

Think and Behave like an entrepreneur

First, let me note that I work with hundreds of entrepreneurs a year and have worked with thousands over the years. I have seen remarkable success and complete failure; winners and losers at the game of business. What I write here is not about any one Kona Impact client; instead it is an amalgamation of traits and behaviors I have witnessed over the year.

Successful entrepreneurs (defined as those that can make a decent living with their business):

1. Don’t focus on low-value activities. In other words, they spend their time on the things that add value to their business. We’ve had clients spent ten+ hours on their business cards. Imagine if they spent two on their business cards and eight hours contacting potential clients? Or, if they spent 8 hours on the content of their website? We had one client sketch his logo on a napkin, and probably spent another ten minutes looking our design concepts before deciding. He received an excellent logo, one that is easily recognized in our community, because he knew ideas and concepts and paid us to handle the details. It’s still, to this day, one of best logos we’ve made.

2. Treat people well. If you’re a grump and don’t like people, don’t hire them and don’t work with the public. The people I know who are the most successful entrepreneurs in West Hawaii have achieved this success, in part, because they are exceptional with people skills. From the top to the bottom of their organizations they show respect for their employees and customers. They attract the best employees, and have very little turnover.

3. Seek a high level of a quality, but don’t demand absolute perfection. Quality is key in any business, but perfection, for most, is wasting a huge amount of resources for perhaps a five percent improvement. If you have 95-99% quality, be happy and move on to the next project. Micromanaging and incessant focus on that last bit of quality means that you are missing many opportunities for achieving more.

4. Look forward, not backward. When I was working at my part-time job in high school, I pushed a dolly into a glass door. The window shattered. The owner came over, looked at the door, and said to his son, the manager, “call the glass company.” That was it. Back to work. It took me some time to realize that getting angry or firing me would not have been productive. After all, it is not a mistake I would ever make twice. Spilt milk, as they say. I see forward-looking business owners all the time, and they are, overall, much more successful than what I call the could-of-should-of-would-of entrepreneurs.

5. Innovate with caution. Every day we are bombarded with software, machines and ideas that are supposedly going to revolutionize our businesses. I find most of the successful entrepreneurs take a very measured approach to change. Most do not seek out technology with the idea of changing their business dramatically; instead they seek new products or ideas as a way to evolve—to change over time—what they sell or what they offer.

entrepreneurship

I like to think of entrepreneurism as a process of becoming. There is no point where one can usually say, “I’ve done it. I am an awesome entrepreneur.” Instead we need to look in the mirror, seek feedback and strive to evolve and get better every day. Lots of base hits: few home runs.

At Kona Impact, we strive to support business owner—new and experienced—as they navigate the waters of business.

Five Ways to Grow Revenue for Your Kona Business

In the last post, we looked at how reducing costs 10% for your Kona business can have a large impact on how much your business is able to generate in free cash flow. Another way to increase your free cash flow is to increase sales. Note, however, sales at any costs, especially when expenses are uncontrolled will not have as big an impact as reducing costs.

So, we’ll use the numbers from the previous example: a Kona business that generates $300,000 in revenue with 80% expenses, resulting in a net profit of $60,000. If you increase sales 10%–a good number for a mature business—you’ll see about $6,000 in profits more at the end of the year ($300,000 x 10% = $30,000 additional revenue – 80% costs = +$6,000).

How can increase sales 10% for your Kona business?

Add new products or services. Take a look at the competitive landscape for your business in Kona. Are there businesses that are doing a poor job of meeting their customers’ needs? At Kona Impact, we went into several business areas due to the lack of reliable providers in our community. Another place to look is at similar businesses on the Mainland. Are they offering products or services that you could add? I’m not a fan of chasing fads, but if you can find products or services that will add long-term value to your company, consider growing by expanding your offerings.

Increase prices. There is always a fine line between charging the right amount and charging too much for your products or services. Too much and you’ll lose loyalty and run the risk of a lower-cost competitor entering emerging. Too little, and you’re leaving money on the table. From our experience at Kona Impact helping hundreds of businesses over the years, we find that businesses, especially startups, often charge too little out of fear of losing (or not gaining) customers.

kona business

Grow your online presence. Truth be told, most Kona businesses do a poor job with their online visibility. The cardinal sin, of course, is having no online presence. An old, outdated website is another big problem for many local businesses. The gold standard: modern, dynamic website that is mobile friendly is not met by most Kona businesses. Getting your online presence right can make a huge difference in the number of new customers you attract.

Expand your marketing. It’s easy to become complacent when times are good. Many companies reduce marketing expenses because business is good and they are running near capacity, so additional customers or sales are thought to be unnecessary. There might be some truth to this, but it is a bit myopic; the future is certain to bring ups and downs in our economy, so preparing for the bad times now is a prudent strategy. Even more important should be the goal of landing high-profit, low stress clients. For example, Kona Impact would love to see more convention and hotel business and less sole proprietors that want a business card design. We want both, but one is certainly going to add more to our bottom line. Expanding to direct mail, every door direct mail, online advertising, event sponsorship and getting some help with your marketing are sure-fire ways to do this.

Reach out to existing customers. This, in our conversations with hundreds of business owners a year, is one of the biggest misses for local businesses in Kona. It is much easier to sell to a business that knows and trusts you, than to prospect to new clients. Simple things like a call, a newsletter or thank you notes can go a long way to helping you sell more to existing customers or clients.

Kona Impact has been helping businesses in Kona, Hawaii grow for over ten years. We take a common-sense practical approach to dealing with the design and marketing needs of our clients. We don’t chase rainbows and ground our advice, services and products in what works. If you’d like to some help, give us a call at 808-329-6077.

Five Ways to Reduce Business Expenses for Your Kona Business

Small business success in Kona, Hawaii is often a matter of shifting percentages. If your Kona business is bringing in $300,000/year and your expenses are 80%, you’ll have $60,000 left for your efforts. Now, imagine cutting your expenses 10% (to 72%): you‘ll see an extra $24,000 a year in your pocket, which will raise your profits by 40%.

How could a small business in Kona, Hawaii save $24,000/year on $300,000 revenue?

Aggressively track expenses to maximize deductions. Track mileage using software like MileIQ or just keep a notebook in your vehicle. This can save you thousands every year. If you donate money or supplies to non-profits, c heck to see how you can deduct those items.  Remember, you don’t need to give any extra money to Uncle Sam; tax evasion is illegal, but tax avoidance is smart!  Possible savings: $2-5,000.

Take your bookkeeping in-house. For many small businesses that I know if Kona, bookkeeping and payroll fees are often upwards of $10,000 a year. Programs like Quickbooks can help you manage these tasks with much less effort than ever before. Possible savings: $4-$10,000.

Look carefully at how you can reduce costs with your supplies. At Kona Impact, we used to use a just-in-time system for ordering our printing materials. This kept our inventory costs low—a good thing—but we paid for it dearly in FedEx costs. We now are willing to tolerate higher levels of inventory if we can buy a palette of materials and save greatly on shipping. Consider buying paper in bulk at Costco and find ways to buy in bulk to reduce unit costs. Possible savings: $1-$10,000.

Kona business expenses

Focus on reducing at office expenses. Hawaii’s electric costs are 2-3 times those of the Mainland, so consider turning off office equipment at night and on weekends. Put your water dispenser on a timer.  Turn on the air conditioner for later in the morning and turn it off earlier in the afternoon. Consider room/zone air conditioners. Use natural light to reduce electricity costs. Consider changing to LED lighting. Water delivery is about $8/gallon, $832/year for two containers a week. The water dispenser in Wal-Mart charges $1.25 for five gallons, $130/year, and it’s the same water you’d get from a delivery service. Call your internet and phone providers; chances are there are plans available now that offer better products and less costs. Possible savings for your Kona business: $1-$5,000.

Have the right people do the right jobs. All employees don’t have the same skill sets and costs. Consider hiring a young, low cost employee for the some of the manual labor or small tasks. Many small business owners have a hard time delegating and letting low-cost workers do low-margin work. As a result, they end of doing a lot of tasks that add very little to the business’ profitability. Possible savings: A lot!

Just for the sake of comparison, if you increase your sales 10% for your Kona business, you will only see $6,000 in extra in your pocket ($300,000 x 10% = $30,000 additional revenue – 80% costs = +$6,000). Compare that to the $24,000 if you can lower your expense 10%! All things being equal, cutting expenses and maintaining revenue will have a greater impact on your financial success. The best outcome, of course, is to grow revenue and cut expenses!