It’s not how much you make, it’s how much you keep
When I opened my first restaurant, a wise friend said to me “It’s not how much you make, it’s how much you keep. If it doesn’t contribute to your bottom line, you have two choices: ditch it or do it as efficiently as possible.”
Sales tax falls into the “do it as efficiently as possible” bucket. Mismanagement of sales tax can be disastrous to your bottom line.
Let’s do the math
For our example, let’s say that your restaurant or business generates $50,000 a month in gross sales. Your sales tax rate is 8% across the board. At 8% you collect $4,000 in sales tax each month. However, when it comes time to pay the state, you already spent the $4,000 you collected because you needed it to cover costs elsewhere that month. This missed payment deadline will result in a late payment penalty of 25% or $1,000 (though at least one source says the average is really 30%). Excessive? You bet. Impacting your bottom line? For sure.
Restaurants typically earn a 3-5% profit (source)
Here’s where the numbers tell a hard truth. Industry sources say that full-service restaurants earn around 3-5% profit. Let’s say you run a tight ship and earn 5% or $2,500 profit on that $50,000 of revenue each month. This means that the $1,000 penalty from paying your sales tax late is 2% of your gross revenue or 40% of your profit. That 5% number just shrunk to 3% or $1,500. Worse yet, if you don’t run a tight ship and only earn 3% profit, that $1,000 penalty cuts your profit by 66%, meaning you only net $500 that month. That’s not much to show for your hard work.
Paying sales tax late can quickly remove 40% of your profit
The moral of the story is that it’s not what you make, it’s what you keep. Run a tight ship, avoid costly sales tax penalties, manage your cash correctly, and use technology where possible.
DAVO Sales Tax ensures that you’ll never miss a sales tax payment
I’ve personally lost a lot of money in my career due to late sales tax penalties, which was the driving force behind starting DAVO Sales Tax. DAVO puts sales tax on autopilot, automatically setting sales tax funds aside daily, and then filing and paying them to the state when due. We only charge $49.99 per month per location, which is a fraction of that $1,000 penalty in the example above. Even better, if you’re lucky enough to have your business based in one of these 27 states, you’ll earn money back for paying on time, making DAVO even cheaper.
Spend more time growing your business and keep more of what you make
The best part of DAVO is that, once you set it up, you never need to worry about sales tax again because DAVO fully automates everything. Stop wasting your hard-earned profits on late penalties and spend more time growing your business while keeping more of what you make.
Sources for 3-5% profit:
Source for 30% sales tax late payment fines: