Archive for the ‘Financial Management’ Category:
I recently read this article at Entrepreneur.com and was struck by one of the “flubs” cited by the featured startup. #2 was “Instead of setting up a business account, they used their own money and ended up with an accounting mess.” This is so easy to do when starting a business. You start using your own cash in the very beginning, since you may not have your entity registered yet and can’t open a business account. However, opening your business bank account and setting up your accounting software should happen immediately after you have your entity registered. Don’t wait!
Mingling personal and business funds can cause all kinds of headaches — from not knowing exactly how much you have put into the business, not knowing how much you have spent, and not having accurate records at tax time. If your business is based on a partnership, these headaches are multiplied exponentially…leading to disagreements as to how much each partner has contributed and how much each deserves.
Using a real business accounting software from the beginning helps you keep track of all your income and expenses, all your owner contributions, and makes growth so much easier. We include Peachtree Accounting as a part of the LaunchX System (a complete business startup kit) because getting your finances in order from the beginning is so important, and Peachtree allows for easy, GAAP compliant growth.
Starting a Business? Start Here. Go Far. LaunchX.com
Just came across this article How To Calculate A Return On Investment – ROI Calculation at Entrepreneur.com. Calculating ROI is one of the startup financial calculations that is easily mis-calculated and mis-stated. Use this quick and dirty calculation to estimate the ROI for your startup or to evaluate the plans of people requesting an investment in their startup.
Starting a Business? Start Here. Go Far. LaunchX.com
One metric that every business should know is the cost to gain a new customer. This is important because it lets you determine if your marketing efforts are cost-effective or if they need to be changed. It can also let you know if you can lower (or need to increase) your prices based on the cost of making that sale.
To calculate the cost per customer, you will need to know exactly how much you spend on sales and marketing (preferably by source) and how many new and returning customers you get from each source. For example, if you spend $500 on per-click advertising and get 25 new customers and 25 returning customers (ask them during checkout how they heard of you), then your cost per customer is $10. This is great if you make an average profit of $1,000 per customer, not so good if the average profit per customer is $5.
Keeping track of cost per customer by marketing source will help you manage your marketing budget and focus your resources on the avenues that will give you the best bang for your buck!
Starting a Business? Start Here. Go Far.
Everyone wants to know how long it will take to be making the big money before they decide to launch a business. And, there are hundreds of scam get-rich-quick programs out there ready to exploit that concern. They claim you can turn $500 and no work into thousands of dollars per week, and it will happen immediately! Of course, that’s not true (99% of people who buy into MLMs and no-work programs never even recover their minimal investment), but thousands of Americans throw away perfectly good startup cash on these “opportunities” every day. Still, these folks do have it half right – entrepreneurship is just about the only way to increase your personal wealth. But you have to do it the right way.
The amount of time it will take to turn a profit at all, much less become rich, depends entirely on a series of factors. The product and market are major factors. If your offering is brand new, it will take some time to convince people to try it. If you are entering a crowded market, your customers already know they need the product. You just have to convince the market to try your improved version – much easier and faster than starting from scratch. The amount of resources you are willing to commit is another major factor. Startups require significant time and money to get off the ground, and having less of one means you need more of the other. If you are starting part-time, it will take far longer to grow than if you can commit most of your time to the business. If you have to bootstrap your expenses as you go, it will require more work and more time than if you have deep pockets of startup capital. Other factors include the specific setup requirements of your business idea, how much capital you need to launch (and where you will get it), and your marketing plan (if you will rely on print ads in magazines, there is generally a several-month lead time), among other things.
To figure out how long YOUR business idea will take to become profitable, you need to thoroughly plan out your startup idea. A good plan will take into account your product’s place in its life cycle, the behavior of your target market, your own resources, your marketing plan and schedule, your sales and financial forecasts, and dozens of other details that, when taken together, will give you a pretty good road map of where your startup is going and how long it will take to get there. While you are not likely to get rich overnight, every day you put off getting started is another day you aren’t headed in the right direction. Remember, time is going to go by whether or not you launch your business idea…so you might as well jump on the road to success today!
The LaunchX System is designed to speed the startup process, and the one-on-one coaching that comes included with every LaunchX package will keep you on track and motivated. Don’t wait to start your road map to success, and let LaunchX show you the way.
Start Here. Go Far. LaunchX.com.
Successful entrepreneurs are creative. From finding the right niche to innovating marketing techniques, thinking outside of the box is often the difference between those who make it on their own and those who fail. That creativity is necessary from the start. An enormous number of would-be entrepreneurs claim to have a great business idea but NO money to fund the startup. You cannot launch a successful business with NO money, but you can find creative ways to find the cash you need to succeed.
In our experience, those who claim to have no cash or access to cash haven’t really looked that hard. The first thing to do is look at your current income and expenses. There are ways to cut costs – eat out less, cut out the premium cable channels, reduce the minutes on your cell phone plan. If you just can’t see any way to cut, you aren’t looking hard enough. Keep track of everything you spend for a week – you’d be shocked at how much cash is spent outside the things you actually need. What if your salary was cut in half today? What would you cut out then? If you are serious about starting a business, take a long, hard look at your current expenses and develop a plan for cutting costs. That’s right, set an actual budget, with money set aside for your startup, and stick to it. If you can’t find the drive to do that, running your own business properly will be too much.
Once your budget is set, consider what you would do if your car blew up or your television broke…where would you find the money to fix those? If you have a way to cover those expenses, you can find the money to plan your business the right way – the way that reduces risk and all but guarantees long-term success. Look around your house for things you don’t need. Craig’s List and Ebay offer great opportunities to unload your junk and make a little cash. Think about your own skills. Are there any side jobs you can do to bring in extra cash? What about a part-time job? Can you fit a night or two per week into your schedule to earn money for your startup?
Entrepreneurs have all kinds of stories about the great lengths they have gone to scrape together capital. One former business executive was so dedicated to going out on his own that he mowed lawns during the planning stage to stay afloat. Another provided tutoring to a few neighborhood kids. One family held a yard sale and traded everything they did not use or could replace for their company’s seed money. Still another asked every person he knew to lend him $100, to be paid back in one year at $110. Not only did he raise enough to buy the tools to plan his business the right way, he also found an amazing support system of people who wanted to see him succeed…and ultimately one of the $100 investors decided to fully finance his well-planned, viable startup!
If you have a great idea and are serious about starting your own business, you will find a way to get it done. Every aspect of a startup requires creativity, commitment, and sacrifice from the entrepreneur, and the first steps are no different.
Verizon Wireless is aggressively marketing their new MIFI product – a portable wireless internet hotspot that can link up to five laptops on the go. A very cool product and definitely an excellent purchase for many types of businesses. However, their latest commercial features a catering company as the example of how this gadget can help small business. A catering company? I can’t even imagine a situation where five employees of a catering service would need to be online in the same room. What are they doing, checking the Top Chef website for recipes? I can tell you that if I hired a caterer and found five of them playing Mafia Wars in my kitchen, I would be one unsatisfied customer.
The point is that just because cool gadgets exist, it does not mean they are right for your business. Entrepreneurs do tend to be on the leading edge of technology and innovation, but if it doesn’t improve your bottom line, you don’t need to waste precious capital on it. Once your company has grown into a bloated corporation with too much profit to spend, then you can splurge on the unnecessary but fun toys. But the only way to get there is to watch the pennies. For those of you looking forward to the top-of-the-line lifestyle that comes with entrepreneurial success, keep in mind that the work has to be done to get you there. This means you are probably stuck with your three-year-old flip phone and six-year-old pickup for now. However, by restraining yourself from falling for the convincing ad telling you that your entire culinary staff needs wireless internet access now, you have a much better chance of actually building that thriving company.
Startups do require you to spend money, but the money should be spent sensibly. Before you make any purchase, objectively consider the value it adds to your bottom line. If it doesn’t make your venture better, faster, or stronger, you can probably add that item to your wishlist. Caterers with MIFI…can you think of a less sensible way to spend your startup budget?
Start here. Go far. LaunchX.com
With the bleak employment outlook extending well in to 2010, there will undoubtedly be extra federal dollars pouring in to economic development not-for-profits (NFPs) and SBAs near you. No question, the next six to twelve months are an excellent time to launch your great business idea, and the extra cash likely to be distributed by the government will make for some great opportunities. If you are planning to take advantage, you need to begin preparing now.
A good idea, by itself, won’t even get you in the door. To qualify for grants or loans through any NFP or SBA program, you must have two things – decent credit and a well-developed business plan. The SBA requirements on credit score are very stringent and, with most SBA programs, you still have to find a bank to loan you the cash. Each local NFP is likely to have their own standards, but in order to get the federal money in the first place, they are often required to have strict credit policies for direct grants as well. If your credit score is abysmal, you are not likely to qualify, no matter how good your idea is. The first thing to do is pull your free annual credit reports from each of the three credit reporting agencies. You can order them once per year at www. annualcreditreport.com. Review the entire report for errors and dispute them immediately. If you have multiple negative entries, you can try to fight them through the basic disputing methods and sometimes it will work (if the company can’t verify the debt, if there are enough inaccuracies to question the validity, etc.). In general, however, negative entries that are valid aren’t going anywhere until the seven years are up. DO NOT spend one dime on “Credit Repair” – the Federal Trade Commission says they have “never seen a legitimate credit repair company.” Guess why?
If your credit is pretty good, but not perfect, consider contacting your creditors to see if they will work with you. Sometimes they are willing to remove a single late payment entry, especially if you are generally responsible about your debt. Once you have cleared up any errors, request your FICO score. This, by itself, will usually cost under $10 and don’t be roped in to any package deals. There are multiple versions of your credit score – each credit agency has their own calculation, FICO is the original, others pop up every so often – but FICO is still the most commonly used, particularly by government agencies. A score over 680 is good and will give you a good chance of securing a loan. Below 620, not so much. Consider looking for informal routes to financing your startup through friends and family, your own funds, etc.
In addition to decent credit, you will need a comprehensive business plan to qualify for any startup assistance. A formal business plan is more than just plugging some broad ideas into a basic business plan template. The purpose is for you to actually plan the business. Doing the work of developing a solid business plan will create a virtual road map of your company. Done right, the creator of a formal business plan should have a complete vision of the ins and outs of how the business will actually run, how money will be made, and how money will be spent. If you are serious about starting your business, there is no good reason to have someone else write your business plan. You need to understand everything that goes in and be able to justify every decision and every number you submit. Business plan services (that write the plan for you) are the second biggest modern scam, right after credit repair. Take the time to do the work yourself. You will not only have a clearer picture of what your business will be, but you greatly reduce the risk of startup by researching, analyzing, and determining the best options for your venture on your own.
If your credit is good and you do the work to really develop your business idea, your chances of securing grants or loans are greatly increased. Begin working on both requirements as soon as possible as it will take several weeks to several months to be completely prepared. Check in with the SBA and economic development NFPs (sometimes called business or community development) to find out the opportunities and requirements as you may need to incorporate certain issues into your business plan. This is an excellent time to launch a business – over half of the Fortune 500 companies were started in a recession!
Start here. Go far. LaunchX.com.
One of the most common reasons people give for not starting their own business is a lack of funding. The problem with this argument is that 99% of the time, these same folks have not completed a thorough business plan in order to determine exactly how much capital they need!
Planning
It is impossible to decide whether a startup is too expensive, or even viable, without digging into the details of the business idea and creating a virtual roadmap of how the venture will operate. Entrepreneurship at its finest is akin to the classic construction adage – Plan the Work, Work the Plan. Once a complete sketch of a startup is developed, it is far easier to find ways to modify the idea for cost, identify opportunities to reduce, eliminate, or delay expenses, and clarify exactly how much will be needed and when. In addition, a well-thought-out business plan will open doors to accessing cash, as the entrepreneur will be in the best position to convince potential investors of the virtues of their particular startup.
Working through the details of a business idea requires researching and considering all the options available for handling every aspect of the startup. Whatever vision of the business is already established, the process of looking at the alternatives is likely to drastically change the ultimate creation. From location (commercial property or homebased) to product line to target market, it is rare for an entrepreneur’s initial assumptions to be spot on. And, depending on their flexibility and urgency of desire to launch their own business, researching the industry, market, and logistics will provide a wide price range of opportunities to get off the ground. That is, a big idea can almost always be broken down into smaller starting blocks that will fit with the time, effort, and cash available for launch.
Informal Investors
Once a definitive startup budget is established and justifiable, securing funding is far easier than most entrepreneurs expect. In most cases, self-funding is a viable option, at least to some extent. Under pressure, most people can scrape together 5K or 10K, especially if the payoff is the freedom and opportunity to work for oneself. If not, a thorough plan provides the tools needed to convince family and friends to chip in, especially if a professional approach is taken in the process. Formal, written requests for funding should include details on the terms sought – a range of loan amounts, reasonable interest rate, realistic repayment plan. It can be a good idea to offer ranges for each term to provide the investor a sense of control. Once the deal is made, all terms should be formalized in writing and each party given a copy. Handling the process in such a manner will convince your potential investors that the proposal is well thought out and thus is more likely to be legitimate.
Formal Investors
For some businesses, the capital needs will far exceed what can reasonably be raised through self, friends, and family resources. In these cases it is critical that the owners’ personal financial affairs are in order. Specifically, the credit score must be excellent with limited debt and the owners must be prepared to personally guarantee every investment. Then, there are two routes to financing – through private investors or a bank.
Private investors will typically require a significant portion of ownership (very often more than half). Thus, owners seeking significant funding (over 100k) should expect that they will not be in charge once the financing is secured. Venture capitalists and private investors put money in to businesses that they believe will have a high payoff relatively quickly and are not afraid to put proven executives in place to make sure that happens. And, in case the business fails, these investors will have first rights to any assets, usually up to or three times their original investment.
Bank loans are just about impossible to land for a startup. An SBA guarantee can definitely help, though they are not particularly easy to secure either. However, if a business idea requires an unusually high amount of capital AND the owners have nearly perfect personal credit, the SBA is an excellent way to go. Without an SBA guarantee, most entrepreneurs end up with a personal loan secured by personal assets – not the greatest option if risk is a heavy concern. If the SBA programs are an option, it is important to check into the requirements before planning the business. Be sure all owners meet the minimum requirements and that the venture’s plan fits with any limitations on how the loan is used.
So…
The first priority is still to plan the work. Without a clear vision of the company and a detailed accounting of what it will take to get there, concerns about how to finance a startup are completely moot. Good ideas should be developed through planning without regard for where the capital will come from. A convincing, justifiable plan will be easy enough to finance through one route or another when the time comes.
Start here. Go far. LaunchX.com.
Most first-time entrepreneurs are under the impression that SBA loans are an easy, viable route to funding any startup. While the SBA is an excellent government program to assist American small business, keep in mind that it is a government program, with all that distinction means – the process is slow, the restrictions are strict, and the hurdles to approval are high. Before you commit countless hours and effort to pursuing an SBA approval, be sure you understand the realities of the programs as well as your alternative opportunities for financing your startup.The SBA is well-organized with distinctive programs to cover various sizes of businesses at various stages. The most common SBA program for entrepreneurs is the 7a Regular, which provides loan guarantees to approved businesses for startup or expansion needs including working capital, equipment purchases and the like. These guarantees are not actual loans but are intended to improve the chances of obtaining a formal bank loan. After all, if the federal government is promising to repay 75% or more of the loan if the borrower defaults then the banks should be clamoring to provide the loans, right? Not so much. In fact, banks are less and less inclined to service SBA-backed loans because of the requirements (read paperwork) set forth in the SBA guarantee regulations and the higher risk of helping out small business. Finding a bank to service an SBA loan is even more difficult if you are trying to fund a startup. The SBA requires a good personal credit score to even have a chance at a 7a guarantee, and the banks will require excellent credit plus your personal guarantee and collateral before they even think about lending the cash.
The 504 program provides cash directly to Certified Development Corporations, local area Not-For-Profits that are concerned with business development in disadvantaged communities. This program is intended to provide up to 40% of the needed capital for land and buildings for small businesses. The 504 money is borrowed from the CDC, and the rest must be secured through a formal bank loan. The requirements vary, but generally the company accepting the loan commits to job creation at a certain level, such as one new job for every 50k in SBA dollars or other specific economic development or public policy goal, such as minority business ownership. Again, good personal credit, collateral (usually the long-term assets purchased with the money), and the owners’ personal guarantee are required. The Microloan Direct program is probably the most viable option for most startups. The SBA distributes around 20M per year to intermediaries such as economic development NFPs throughout the country so they can provide loans up to 35k to businesses in their areas. The NFPs set their own approval processes with some guidance from the SBA. The average microloan is around 13k and most intermediaries also require collateral and a personal guarantee.
The recent Stimulus Plan includes incentives for banks to make more SBA-backed loans including reduced fees and increased guarantees to 90% of the total loan amount. Still, reports indicate that the banks aren’t particularly swayed by these incentives and loans to small businesses, and especially startups, remain limited. The primary reasons are the high risk (one report indicates a failure rate of nearly 12% in 2008), the high cost of servicing SBA loans (even with the Stimulus Plan discount), and the little known fact that the SBA can back out of the guarantees even after the loan has been made.
The reality of securing an SBA loan is not as rosy as many startup gurus would have you believe, nor is it necessarily an entrepreneur’s best bet. At best, these loans should be a backup plan if startup cash cannot be found elsewhere. SBA deals are expensive – even the microloan interest rates are between at least 8% and 13% – it is time-consuming and tedious to qualify, and you will be required to support your application with your personal guarantee anyway. This means that your assets become fair game for the bank if the business doesn’t work out for any reason. In addition, the chances of approval are much slimmer than most people think. Last year, just under 70,000 SBA 7a loans were funded, most of which were likely for established companies. The Microloan program distributed over $20M last year, but with an average loan value of $13,000, only around 1500 small businesses (not all startups) enjoyed the fruits of this program. In considering these numbers, keep in mind that over 600,000 new businesses with employees are started each year. There are no reliable numbers on the number of solo businesses that are also launched, but the estimates are that the total is significantly over 1,000,000 startups each year. Add to that the number of businesses seeking capital to grow and expand and the odds that any one startup will be funded through an SBA program are pretty low.
If you are looking to start your own business, don’t make the SBA loan your first choice for startup financing. Determine how much you can get done out-of-pocket and look to family and friends investors to round out the funding. Financing your business yourself and through people who know you and want you to succeed provides you far more control and can be a stronger incentive to watch the pennies throughout the life of your venture. However you decide to fund your business, the first step is to develop a detailed plan, including financials.
Start Here. Go Far. LaunchX.com
Congratulations! You have eliminated all the usual excuses for not getting started on your new business…..now what? Figuring out where to start in developing your business idea is a major stumbling block for most first-time entrepreneurs. The available advice is all over the place and often lists “business requirements” without telling you how, when, or why to do them. Simply registering your business and posting a website is not enough, and the available fill-in-the-blank business plan templates do not tell you how to dig into the details of your startup or what you should be looking for.
For every business idea, the first order of business is to actually plan your business. Merely writing down your business idea and throwing together unjustified numbers for projected financials is not a plan. Rather, you need to thoroughly define your product, identify your target market and how to reach them, determine all legal requirements, and develop solid, justifiable financial projections before you can decide whether your business idea is viable. In addition, you need to develop a complete marketing plan, from the role, design, and SEO of your website (yes, your business must have a website!) to the best routes for reaching your market through paid advertising to the role of networking in developing your business.
Quite a bit of effort goes in to a well-developed plan, but the experience will leave you completely prepared for managing your business once it is up, running, and making money. Your well-developed plan will provide you a roadmap for where your business is going and how to get there. In addition, if you will need outside investment to launch your startup, all of this research will easily develop into your formal business plan and will clearly show that you have done your homework and know your business inside and out.
With your completed plan, you will know whether you can finance the startup yourself or will need outside investment. If you can fund it yourself, the next steps are to execute the plan and open for business! Then, your responsibilities shift to the actual operations, managing employees, overseeing the financials, and planning for growth.
There is a lot to starting your own business, but the independence and flexibility that comes with entrepreneurship is well worth the effort. The process is not as complex as it seems, and the keys to success are easy to remember – Planning, Marketing and Financial Management. If you begin your business with these factors in mind, you will greatly reduce your risk and greatly increase your odds of success.
The LaunchX System is the only complete startup program on the market and includes everything you need to take your business idea through startup to a successful company. The program is designed to address every startup stumbling block entrepreneurs experience as well as the tools every small business needs to grow and succeed. The tools included in the LaunchX System are there to help you minimize your risk and decrease the time it takes to get your business off the ground. If you are serious about turning your business idea into a successful company, check out the LaunchX System.
Start here. Go far. LaunchX.com
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