What is “TIFORP,” and how does it affect your financial planning? The acronym TIFORP contains six components that are seldom prioritized to serve the best interests of business owners.
T is for taxes
Business owners want to minimize taxes to keep more of the money they earn. Tax laws change, and business decisions are often driven by the potential tax effects without regard to the need to show a reasonable profit on financial statements.
I is for interest
The interest rates a business will pay on debt and earn on investments are related to the quality of its work and the ability of management to manage revenue and expenses. Interest rates are often viewed as disconnected from performance.
F is for food
The business must be nourished in order to remain strong and to grow in volume. Debt is the primary tool for growth, but earnings may also be reinvested to support that growth.
O is for operations
The earnings of a business, and its ability to grow, are directly related to the way its work is managed. The selection of customers, quality of the work, and caliber of employees will determine how efficiently the operation earns money.
R is for return
Investors in the business demand a return on their money. Whether stockholders are family members, employees or outsiders, they will withdraw their support if the business does not earn enough to reward them.
P is for personal
The personal lifestyle of the owner and his or her family is directly related to the financial performance of the business. The ability to sustain that lifestyle is often a low priority during the daily management of the business but can become a determining factor affecting the retirement of the owner and leadership succession within the company.
What do these components have in common? Look closely, and you see that the rates of taxation and interest, potential for growth, operations, return on investment (ROI), and personal life of the owner are all supported by the ability of the company to generate earnings. Unfortunately, they are listed in the wrong order. For the owner of an electrical contracting business, the priorities should be reversed.
If you are paying yourself last, digging into your own pocket to make up deficiencies in cash flow, and sacrificing your vacations, then why are you running a business? The quality of your personal life and the security of your family should be your first concern. The ROI to stockholders maintains this critical source of capitalization, and reduces your dependency on lenders.
“Operations” functions as the business’ engine that generates the benefits for owners and investors, so your projects and customer base must keep that engine running efficiently and sustaining the organization into the future. Efficient operations generate enough earnings to keep you and your investors happy and also feed the growth of the business.
If you have managed the first four components, interest rates will be less important, since most of your money will be internally generated and debt will be manageable. You will also be more likely to interest lenders who can offer lower interest rates. Taxation is last because you have little direct control over regulatory processes, but it is your professional duty to take advantage of legal loopholes. The satisfaction of knowing that higher tax payments result from earning more money may reduce your natural resistance to paying the government.
By now, you may have noticed that reversing the acronym “TIFORP” produces the more familiar “PROFIT.” But, do you know what profit really means? It’s the bottom line, the first thing you probably look for when you review your financial statements, and it is a source of relief when it is positive. But it means much more, and you can actually plan for it.
In his “E-Myth” books (www.e-myth.com), Michael Gerber advises anyone starting a business to immediately establish the price and date for selling that business. This drives all other planning, including the targeted profit level.
For example, if you set your expected profit above the standard for electrical contractors, you will have to be precise in marketing to high-quality customers, choosing a very specialized niche and maintaining a high level of quality and service. If you are content with a lower level of profit, you may be able to grow quickly, but you risk your lifestyle and will have to plow more profit back into the business and raise your debt level.
In short, profit is more than just a positive difference between revenue and expenses. It is the basis of your lifestyle, a way to attract investment, the driver of your operations, the food for growth, and the basis for interest and tax levels. Keep those priorities straight, and you will reverse your TIFORP.
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at firstname.lastname@example.org.