Your Financial Health and Your Start-up

Thinking of starting a business?  One of the most important things to take into consideration is how financially healthy your own finances are.  Why is this so important?  If you are in debt, not cash flowing your current monthly expenses, and don’t have an emergency fund then that impacts how you grow your business.  You have less room to take your time and do it the right way, there is no cushion to make mistakes.  So what why is that bad and how do you go about starting a business and having personal financial health?

Why is growing a business quickly under financial stress bad?  First, it is just plain stressful.  Stress is bad for your health, which ultimately affects your business.   Second, a business that is rushed due to lack of money will make poor decisions.  It becomes harder to make good decisions and not seem desperate to clients and vendors because you are worried about the house payment.  These bad decisions can range anywhere from pricing your products or services wrong, to selecting the wrong niche (or none at all), or bad financing.  What does it matter if you make a bad decision?  We will use picking the wrong niche as an example?  The wrong niche, or a more common problem no niche, makes marketing harder and more expensive.  If you are marketing to the wrong clients your growth is slowed because your customers don’t know they are your customers.  For example if you choose to market to the world instead of narrowing it down to mothers who suffer migraines your message will get lost on those who don’t have migraines while migraine sufferers who are moms may not stop to read your message.  You select no niche because you think you can get more sales faster, but it takes more money to reach your market because they are not looking at you! The brilliance of small business is that you can change quickly to fix mistakes, however too much change and too much radical change puts you back near the starting point and confuses your customers.  This costs you even more money, money that you did not have to start with.  So do yourself and your business a favor, start it when you are financially healthy.  How?

There are two ways that I recommend you start a business with financial health.  The first is to start your company on the side of your day job.  This will force you to start it slower because you have less time.  It also allows you a steady stream of income and will allow you to test the market to make sure the concept will work.  The biggest caution with this is ensuring that it does not cause trouble with your employer.  Don’t let it affect your performance at work and make sure if you are doing the same line of work that you don’t violate policies or lose your intellectual capital to your company.  The last thing you want is a legal battle or bad blood!

Second, you can take a couple years to focus on getting yourself on solid financial ground before starting your business.  Scale back on living expenses, pay down debt, and save up emergency funds and start up money.  Then when you are set, make the jump to owning a business.  This does not mean you don’t have to set the business off to the side.  While getting your finances together you can still write your business and marketing plan, start designing a website, or get some marketing materials ready you just won’t launch until the money is right.   

By being financially sound on the personal side you empower yourself with the time to build your business with thought, time and care.  Making it that much more rewarding and enjoyable.

Stimulus summary for small business

A quick summary for those of us too busy to know all of the ins and outs of the stimulus!  The benefits to small business owners all had to do with taxes!  I put the different provisions into four categories: Reorganizing of the business, expensing/income timing, estimated tax payments and hiring incentives. 

First is the reorganizing of the business.  There are two provisions that dictate when and how you are taxed if you sell small business stock and the taxation of your business if you convert it to an S corporation.  If you either sell or convert your company to an S corporation during 2009 or 2010 you may be eligible for reduced taxes on the gains.  Check in with your CPA if you are considering selling or reorganizing your business, this year might be the year to do that!

The second issue has to do with the timing of certain expenses and income.  Two provisions have to do with the purchasing of items that are eligible for depreciation.  One allows you to deduct the full cost of some item up to $250,000 and the other allows you to take extra depreciation the first year you buy it.  If you are considering making a major equipment purchase during the year talk to your CPA to see if it qualifies for either type of accelerated expensing, it may help you make the decision between buying it this year or next! Another provision allows you to carry back net operating losses over five years instead of 2 years.  You will want to talk to your CPA to determine what the best course of action is for your 2008 taxes!  Finally there is a provision for those businesses that are having debt cancelled.  When you have debt cancelled or they take less than you owe this is considered income in the year it happens.  Some businesses will be allowed to claim that as income over a 10 year period versus one year.  So it may be very wise to touch base with your CPA on all the provisions that came from the stimulus bill and how you can incorporate them into your business.

The third issue has to do with the amount of your estimated tax payments if more than half of your income is from a small business and is less than $500,000.  Normally you are required to pay in 100% of the prior year’s tax amount due.  This year the stimulus package allows for you to only pay in 90% of 2008’s tax due.  You do need to be careful with this as it does not mean that all taxes won’t be due it just means that you can avoid penalty for underpaying if you paying at least 90%.  Talk to your CPA if you handle your own quarterly payments.

The final provision that may affect small business is the incentive to hire unemployed veterans and disconnected youth.  This allows you to claim a tax credit of up to 40% of the first $6,000 in wages you pay to unemployed veterans and disconnected youth.  An unemployed veteran is someone who was released discharged or released from active duty within the past five years and has claimed unemployment money for more than four weeks in the past year.  A disconnected youth is anyone between the ages of 16 and 25 that have not been employed or in school for the past six months.  When hiring remember to tell your CPA if any of your new employees fall into one of these categories!

Now is a great time to sit down and review where you are at with your business and how these and other economic issues may be affecting you. So grab your CPA, attorney and business coach and make plans!

To save Detroit or not?

With all the talk of bailouts and Detroit I think it is time we really evaluate if it is good for us to give Detroit any money.  I believe it is time for a BIG change in Detroit.  If small business ran their companies like the big 3 run theirs we would have been out of business a long time ago.  Inefficiencies, large payroll costs, lack of forward thinking have killed them and if they can’t fix that then why let them stay in business (this is not a new issue that they are facing).  The result of them closing would be bad at first, but the American economy and people will move on and prosper!  Let them suffer their own bad management, why throw good money after bad money.  Not only that but if we do let one of them go down for their poor management then maybe the other two would wake up and try to really reform their businesses.  If nothing else it will alter the supply and demand equation thus making it easier for the other two to survive.  Give it a thought do you want your tax money going to companies that are poorly run and most likely will not change that fact?