Business Certifications Part II

Women owned businesses have grown at one and one half times the rate of all businesses  created in the US (1997-2002) and contribute nearly $2 trillion to the nation’s GDP.  One in 11 women are self-employed or business owners (source: Center for Women’s Business Research cited in The Boston Globe January 25, 2004).

Women are now outright or majority owners of 40% of all privately held businesses registered with the IRS, representing 10.1 million business entities (source: Center for Women’s Business Research 2008 report).

Nevertheless, a January 2008  CWBR report stated that women owned businesses receive less than 3.3% of federal contracts awarded.  Perhaps the following certification program will help the ladies  reach a few more paying customers?

WBENC

The Women’s Business Enterprise National Council is where we women go to get ours.  To be awarded a certificate as a Women’s Business Enterprise, the company must be at least 51% owned, operated and controlled by a woman (or group of women).

Evidently, the assumption is that women have money; the WBENC certification fee is about $350.00 (varies by location).  Certifications are for one year only,  so there is a yearly recert. process,  reportedly simpler than the maiden voyage.  Certification is handled by Regional Partner Organizations which seem to be SBA affiliated Women’s Business Centers (see wbenc.org).

As always, you’ll need to hand over business financial statements plus your tax returns (will somebody please tell me how surrendering your tax returns and your social security number got to be routine in this country? It is all too intrusive. Is there any wonder why  identity theft occurs? Every frigging body knows the intimate details of your life!).

WBENC claims not to evaluate the profitability and viability of a business. The objective is to know who owns and controls the company.  I do not understand how delving into your P & L and balance sheets will verify that information but hey, it’s their game.  It’s just that ownership issues are more accurately revealed on incorporation and LLC documents.  As for  sole proprietorships, they are a  one person shop.  If necessary, a gynecologist can verify the gender question!

Do businesses that are not making money, but are going for the certification as a strategy to bring in much needed clients, actually get certified? WBENC committee members side step that question (I asked). Once your documents are received,  the review committee will certify (or not) in 60–90 days.  Expect a site visit to your business.

On the plus side, WBENC is a widely accepted certification. Prime Contractors love it.  I don’t believe there are any revenue restrictions involved, so WBENC is not exclusively for small businesses.  Certificate holders must be US citizens or legal resident aliens.

CHECK OUT THE SBA

Regardless of your gender or ethnicity, a visit to sba.gov is worth your while,  if for no other reason than to find out what resources are available for free. The information is good and reliable. There are also special business development programs for Native Americans, those over 50 years, veterans, Spanish speakers and of course, small businesses in general. There is a place at the table for everyone, including white non-Hispanic males!

If you can visit a district office, check out the monthly calendar and see what workshops are offered.   If you’d like info about stimulus loans (what stimulus loans?), micro–lending and other local business initiatives, the SBA will point you in the right direction. Your tax dollars in motion!

More next week,
Kim

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Business Certifications Part I

As you weigh strategies that could  help to better market your services,  you might happen upon  special category certifications.  In fact,  some large corporations are less willing to do business with small business vendors unless a particular certification is in hand.

If a Fortune 1000 company has government contracts,  it is necessary to demonstrate that business is being done with small businesses, women owned businesses and minority owned businesses.  Hence, these companies need a certain percentage of  their small business vendors to  have a certification in one of these categories.  The Fortune 1000s can then report to the feds that they are in compliance.

HUB ZONES

If your physical business address lies within an historically underutilized business (HUB) zone, then your business may qualify for set-asides in the contract bidding process.  In general, HUB zones are disadvantaged areas in urban, suburban and rural locales.  To find out if you can apply,  go to sba.gov, click on services,  then opportunity gaps and  HUB zone.  Type in your business address.  If  in a HUB zone,  you can apply on line—but first  ask the SBA how to get the log in password.  Be prepared for a site visit at your business location by someone from the SBA about 2-3 months after you apply.  It may also be necessary to hand over certain financial records.  There is no fee.

8a CERTIFICATION

To obtain 8a certification,  it is necessary to officially state that you are disadvantaged economically because of your race or ethnicity.  The application process is a bear.  Start by calling up Dun & Bradstreet and obtaining a DUNS number.  Next, look up your business specialty codes,  sign up and create a business profile on the federal Central Contractor Registration  ccr.gov.  Then you can do the online 8a application.

At sba.gov, click on services, opportunity gaps and 8a to find good basic info that will get you started.  Furthermore,  SBA offers free workshops nearly every month at its district offices on what one needs to know about doing business with the government and special certifications.  Preparing to do business with the feds is a  Byzantine process, but government agencies will pay in 30 days and thus will not wreck your  fragile cash flow.

In the application there will be much supporting data to supply and there are restrictions.   As always, they want your tax returns, 2 years in this case. You must  have been in business for minimum two years,  you cannot have more than $250,000 in assets, you cannot be employed full time in a job outside of your business and your credit has to be good enough to finance a contract.  There is no application fee.

It’s a royal pain to get this certification and of course there is no guarantee that your efforts will yield any business.  You must still sell yourself to prospective clients.  SBA Small Business Development Centers  have on staff a Procurement Specialist who will speak with you about useful strategies to promote your business and win contracts.  It’s all about  relationship building and it takes time.

However,  the  Fortune 1000s  with the government contracts, called Prime Contractors,  like the 8a certification.  They have forms to fill out, boxes to check.   Ask  SBA who the primes are in your locale,  speak with the local procurement specialist and try to meet people.  There are trade shows to pay for and attend so you can make contact.  Also, visit fbo.gov and view available contracts.

Next week,  the spotlight will  be on the ladies.

Kim

The Best Prospects

We are all looking to expand our client base and bring in more business.  Most of us are out there spreading the word about our products and services, meeting and greeting, delivering an expert elevator pitch to whomever will listen and positioning ourselves as experts within our field.

If the gods smile, our efforts will deliver unto us a decision maker and a real sales call. How can one increase the odds of making that happen? Effective prospecting is the method.  Prospecting is a vital function for all Freelancers and business owners.  If  the goal is to have a successful business, then we must make a practice of continually replenishing our sources of potential clients.

First,  let us dispense with the myths.  Prospecting is NOT sales.  Prospecting is a tactical function of sales.   It is the process of identifying and qualifying businesses and individuals who have the potential to become paying customers.

Prospecting is NOT a numbers game. Time = money and you have no time to chase so-called prospects who have a low probability of becoming a customer. You want only those with motive and money to hire you or patronize your business.

Prospecting need NOT be hugely time consuming.  Plan to budget about 15% of your weekly or monthly calendar for prospecting.  Make the time to keep your pipeline filled.

Contrary to common belief,  prospecting is NECESSARY even when billable hours are high and sales are strong.  Because business always waxes and wanes,  it is important to use the good times to create opportunities that will sustain  in the lean times.

So let’s think strategically about the prospecting function.  Start by identifying your key customer groups.  Do you typically work within certain industries? Why not target other businesses within that industry as likely prospects? Your experience within those industries will provide the trust factor that your prospects will appreciate.  You will  know the usual priorities, concerns and preferred benefits.

Are you a member of a business association? Do you have visibility within the group? Are any of the members your clients? Have you made good referrals for any members? Think about  which member businesses could benefit from using your  products or services.  Leverage your proximity to these targets to learn more about their businesses.  Once again, the trust factor will be on your side, especially if a member or two are clients of yours or you are visible in the association.

This approach can also work with job titles.  For instance, who usually hires you–the VP of marketing, the CEO, the CFO, or the director of development? Target that title as you prospect.  Prior experience will have taught you what will resonate with these individuals, thus adding to your  credibility.

Once you’ve developed a list of targets, devise an approach.  Might any of your colleagues have contacts within these organizations? Do company names appear in the online member listing of the chamber of commerce or neighborhood business association? Is there a trade show coming up that the prospect –or company representative–  may possibly attend (trade show sponsors are ususally listed on the show’s website)?

When you meet someone at the targeted company (oh, happy day!), let the contact/prospect know that you’ve done your homework and see possible alignment between their business and your product.  Emphasize outcomes and benefits.  Aim to schedule a time for further discussion with either the ultimate prospect or someone who can substantively influence the decision.

If you are met with an objection, handle it with aplomb.  If the answer is, “we already have someone” inquire about current or recent projects.  Offer a comment or two that displays your expertise in the subject. You may discover that the objection was just a smoke screen.

If the answer is ” I have to think about it”,  let the person know that you  respect their desire to make an informed decision.  Ask what information might assist the decision, who else in the organization you might speak with and when you can follow up?

The objective is to get a dialogue going and not get shut down.  If you choose your prospects wisely and plan a good approach,  you are guaranteed to bring in at least a mid-level client nearly every quarter.  Now get busy!

More next week,

Kim

Starting A Business? Consider Your Exit Strategy Part II

SUCCESSION

The sentimental favorite!  So many entrepreneurs dream, perhaps secretly, of passing their business on to the next generation.  If you can make this stardust covered dream come true, it’s a lovely option.  Unfortunately, more often than not succession does not pan out.  I’ve read that 70% of family businesses do not survive the transition from the founder to the second generation.

Family rivalries and other dysfunction often intrude to tank the business.  Sometimes the owner refuses to cede control (like Queen Elizabeth II, whose ego prevents her from stepping aside so that Prince Charles can do the job for which he’s trained his entire life). Other times, the youngsters get a little power mad and want to take over before they know what they don’t know.

As with a business sale,  get the financial records in order, maintain business property and equipment, call in your accountant, attorney and appraiser and share information. Family members deserve to know what they’re getting into.

It will be very important to distinguish between the company managers (perhaps one child or two) and the company owners (all the children) and make sure that no one feels devalued.  Remember that you’ll want Christmas dinner to be a happy occasion!

I strongly recommend that you consult a family business specialist if you’d like to pass the business along to family members.  Being able to groom your hand picked successor is a wonderful thing.  Recruit a specialist to help you choose the candidate who is best qualified to assume the reins.

INITIAL PUBLIC OFFERING

If your business has grown substantially and is poised for still more significant growth, provided that a major  infusion of cash can be raised, then offering publicly traded stock in the company may be the best strategy.   I’ve included IPO in this  section, although the entrepreneur may remain within the company after it  has gone public (or not).

Preparing your company for an IPO is an intense piece of business.  A couple of years ago, an acquaintance of mine took his biotech company public and damn near found Jesus in the process!

You’ll need an investment bank to underwrite the offering;  a magnificent business plan that portrays your company and its growth potential in an excellent light (but does not oversell);  and a first rate IPO attorney.   The Securities and Exchange Commission governs the proceedings.

If you’ve done everything right and have fortune on your side,  your stock might even sell and bring in the growth capital that your company needs. You might even get rich:  the value of the stock sale may far exceed your original investment in the business.   However, you may not be able to jet over to Dubai and buy an island just yet.

Major investors may dictate that nearly all cash raised through the IPO must be reinvested in the business.  Moreover, a portion of the owner’s share may be held in escrow for a period of years.  If that’s not enough, the owner’s role in the business may be greatly diminished.   That may suit you just fine—or not.  Are you ready to give up control to a bunch of outsiders who may not share your vision or priorities?

So there you have it,  a business plan guide that I hope will give you the inspiration to get started on a business  venture for yourself.  I’ve left out a couple of elements,  such as Operations and Executive Summary,  but I feel that you have the tools to build a plan that will  launch a successful business.  Good luck!

I’ll be back next week with a new topic.  I hope you’ve enjoyed the series!

Kim

Starting A Business? Consider Your Exit Strategy Part I

We’ve covered nearly all elements of a business plan and we are approaching our final destination—the exit strategy. You may wonder why someone who has just begun to map out a business building strategy, filled with excitement and determined to create a business that represents all that he/she has worked hard to learn, would want to contemplate ending it all?  The answer is,  every journey has a destination.  How else can you know which path to take unless you know where you want to end up?

SELLING THE BUSINESS

If you have tangible assets and a desirable customer base,  you might want to sell the business eventually and give yourself either a retirement nest egg or start-up capital to create yet another business.  Keep your options open and start the preparations early. Whatever you decide, these actions will be beneficial for the business.

Maintain detailed and credible financial records: demonstrate profitability; show good cash flow; keep your debt to equity ratio low.  Expect to show a prospective buyer 5 years of data.  If the business owns property and/or equipment, ensure that all is well kept and in good working order.

To sell your business at a price that accurately reflects its value,  it is recommended that you consult first with your accountant and attorney, next with a business valuation expert or an appraiser and then with a business broker. Your accountant or attorney may even know the right buyer for your business.  There are four sales strategies to pursue:

I. SELL TO EMPLOYEES.   One, or several, of your employees may be interested in buying the business.  Don’t be shy about raising that possibility.  What better way to boost confidence and morale than letting valuable employees know that you trust them enough to place your treasured achievement into their capable and caring hands?  Selling to employees can be a great exit strategy.  The employees are able to invest in a business that they know and trust.  They know the challenges and opportunities that the business may encounter.  They know the customers and the customers may also know them.  They know the history of the place.  They know how things run.   If you’re thinking of moving on, why not offer those who you can see would be good candidates either a buy-out or an employee stock option plan (ESOP)?

II. SELL TO A COMPETITOR. Target one of your larger competitors as a potential buy-out prospect.  What better way to decrease competition and gain market share quickly than to absorb the entity that’s been eating your lunch? Position your business as attractive, financially healthy and possessed of a customer base that will align with the competitors’. Some entrepreneurs start a business aiming to be bought out. They believe they can grow their business fast enough to compel an industry leader to buy them out and end the battle.

III. SALE THROUGH A BROKER.  If you are unable to persuade someone whom you know to buy your business,  contact a business broker.  It’s like hiring a real estate agent to sell your house. There are brokers who represent sellers and those who represent buyers.  Be sure to get an independent appraisal on your own,  so you can be confident that the broker prices the business appropriately and that you understand the likely market value of what you are selling.

IV. LIQUIDATION.  In this instance, you are unable to find a buyer for the business, so you hold a “going out of business sale” in advance of closing your doors.   Whatever business assets exist are sold;  creditors are paid off;  the business owner keeps the net profit.

When selling your business it will be imperative to obtain an accurate appraisal. There are three methods to use and you may want to do them all:

I. ASSET VALUATION. The value of the inventory and equipment, business property, the client list and even the company’s reputation (best practices and good customer relationships are worth money in more ways than one!).

II. INDUSTRY VALUATION.   Based on the sale prices of similar businesses in your industry and geographic locale.

III. CASH FLOW VALUATION.  Based on the expected future cash flow of the company, as demonstrated by past performance.

Remember that the best time to sell your business is when both you and it are healthy! I’ll be back next week with a couple of more exit strategy options.

Thanks for reading,

KIm

Starting A Business? Consider Your Legal Entity Part II

The type of business that you are in will guide your choice of legal entity.  If you are a solo Freelance consultant, then operating as a Sole Proprietor is most likely appropriate. However,  if your business exposes you to liability, then it is highly recommended that you spend a few dollars and protect your assets by establishing a separate legal entity. Many business entities evolve as they grow, transforming from Sole Proprietorship to Limited Liability Company to Corporation.

LIMITED LIABILITY COMPANY

The  LLC is a relatively new option.  It creates a separate legal entity and may be used by a solo entrepreneur or a multi-owner business.  It is required that an EIN be obtained for the business and a certificate of organization be filed with the Secretary of State, along with a fee of about $500 paid annually.

There is no limit on the number of owner–partners in an LLC.  A certain degree of protection from liability is granted, as in an S Corporation.  It is highly recommended (but not required) that in a multi-owner LLC an operating agreement be written that names a managing partner and other specific partner roles and responsibilities.

Single owner LLC tax filing is similar to the Sole Proprietorship.  On April 15  you file schedules C and SE and form 8829 if claiming a portion of your home as an office. Quarterly estimated taxes are due on the 15th of January,  June and September reported on form 1040–ES.

Additionally,  an LLC with 2+ members must file form 1065, the informational Annual Return of Income.  Owner–partners file form 1040 with schedules E and SE,  plus estimated quarterly taxes on form 1040–ES.

Be advised that an LLC is dissolved in a bankruptcy or upon the death of a partner.  Include contingency plans in the partner’s agreement so you don’t find yourself in business with the spouse or children of the deceased, for example.

GENERAL PARTNERSHIP

A partnership is a non-corporate legal business entity that is formed by 2+ people (or entities) who desire to do business as co-owners.  GPs can be formed by individuals, corporations, estates or trusts.  This classification also includes joint ventures and syndicates.

A GP is not a separate legal entity,  so there is no requirement to register the partnership with the state.  Partners will be on the hook for any business liabilities, including unauthorized actions by partners who acted on behalf of partnership business interests.

Absolutely, write a partnership agreement.  Include the purpose,  goals,  partner contributions and responsibilities.  Management duties, decision making power, permissible and restricted business activities outside of the partnership and financial matters such as access to financial records and expense authorization should also be specified.

Moreover,  spell out how profits and losses will be distributed, the penalties for failing to fulfill responsibilities and contributions and the procedures to follow should a partner die.

Partners are taxed on the income/losses of the partnership on schedule  C, filed with their personal 1040, along with form 1040–SE self employment tax.  The partnership as an entity must file form 1065 Annual Return of Income on April 15.  Quarterly estimated taxes are due on the 15th of January,  June and September.

LIMITED PARTNERSHIP

This format is similar to the GP, with the exception that a partner(s) agrees to contribute resources to the business entity without becoming involved in its day to day affairs.  These are “silent partners”, often investors.

LPs have a share of ownership but neither operate nor manage the business or act officially on its behalf.  They have a liability to the business and its creditors that is proportional to what they have invested.  LPs and GPs receive a share of business profits/losses based on percent of ownership.  Again, it is recommended that an agreement for LPs be written.

As with  GP, form 1040 with schedule C and form 1040–SE will be filed on April 15 and quarterly taxes reported  on 1040–ES and filed on the 15th of January,  June and September.

More next week and thanks for reading!

Kim

Starting A Business? Consider Your Legal Entity Part I

SOLE PROPRIETORSHIP

The default legal identity for the vast majority of Freelance business consultants, the Sole Proprietorship is an extension of the owner and is not a separate legal entity.  It is possible to use a separate business name (dba = doing business as) when operating as a sole proprietor—registering with the state and /or city can be a good idea—and it’s also possible to obtain from the IRS a separate business tax ID (Employee Identification Number, or EIN) and open a business bank account, both of which are recommended.  Sole Proprietorship offers no liability protection.

The tax return filed is your own.  Since there will be business expenses,  you will file schedule C along with 1040.  Deduct the portion of your home used for business on form 8829 Use of Home for Business.  See your P & L for the numbers to use for schedule C business deductions.

Quarterly estimated taxes must be paid on the 15th of January,  June and September along with the annual filing on April 15.  Remember to file the self employment tax schedule SE in April.

SMALL BUSINESS CORPORATION

To form an S Corporation is to create a separate legal entity for your business.  You must file articles of incorporation;  write by-laws for the corporation;  and elect a board of directors and officers.  It is furthermore required that annual meetings of corporation shareholders and directors be held and  official minutes for all corporation meetings be written and retained.

To set up an S Corp. choose a name for  your business (check the name availability on your state website),  get an EIN number and call the Secretary of State’s office to receive filing instructions.  The fee is about $275, paid annually.  It is recommended that you trademark your business name.

This is a relatively new form of corporate status.  As in the standard corporation, called the C  Corporation, owners and shareholders in the business are issued stock (of one class only).

To operate as an S Corp., certain conditions must be met:  the business must be a small business, must be based in the US,  may consist of 1 to 100  shareholders only  and no shareholder can be a nonresident alien.  Business owners and the business will have limited protection from liabilities, providing that no owner has been proven to be negligent.  If an owner is proven to be personally negligent, the owner will be held personally liable.

The tax return filed is the owner’s  form 1040, along with schedule E (due April 15) plus form 1120S (due March 15).  As with any business, quarterly estimated taxes must be paid, in this case using form 1120W.  Shareholders file schedule E along with their form 1040. There is no separate corporate tax.

If this is the business entity that you elect, be careful to meet and maintain all of the conditions.  Meaning, even if you are the sole owner, you must still hold annual meetings and write and retain minutes.  Failure to meet these conditions can cause you to lose the tax advantages of  S Corp. status and the business will be re-classified as a C Corporation.

CORPORATION

Known as the C Corporation, this is the granddaddy of separate business entities.  C Corp. status offers more protection against liability than any other business entity.  If you run a large business, if your business has locations in more than one state,  if the business is expected to be very long lived  and/or if the business could be subject to significant liability,  it is worthwhile to operate as a C Corp.

Stock will be issued (of any class) and stock options can be offered.  It is generally easier to raise investment capital, as stock and/or options can be made available.  On the downside, a C Corp. has comparatively larger administrative expenses, is subject to more regulatory scrutiny and is taxed at a higher rate.

To do business in this fashion select a name for the business, obtain an EIN number and file articles of incorporation with the Secretary of State for a fee of  about $275, paid annually.  It is recommended that the business name be trademarked.

Corporation by-laws must be written and a board of directors and officers must be elected.  An annual meeting must be held for directors and officers and meeting minutes must be written and retained.

The corporation  must file the annual tax form 1120 on March 15,  plus estimated taxes on form 1120W on the 15th of  April,  June,  September and December.  Business owners file form 1040 with schedule E on April 15 plus estimated quarterly tax payments on the 15th of January, June and September using form 1040–ES.

Next week, I’ll be back with 3 more options for your business legal entity.

Kim

Starting A Business? Consider Your Financials Part III

Investors and lenders require significant demonstration of your ability to repay money that will be extended to your business.  Lenders will want to know when  your business can be expected to  make a profit,  so they can be shown in yet another way that you will have the ability to repay the  loan.  Investors will want to know when they can expect some ROI.

Both groups will also want to know the rationale for your financial calculations and for what purposes loan and investment capital will be utilized.  The following three statements will answer those questions.

THE BREAK EVEN ANALYSIS

The point in time when sales revenues generated equal business operating expenses is called the break even point. This is an important calculation for a new business,  perhaps  more so for those who seek funding. The Break Even analysis is also useful for established businesses that will launch a new product or service.

The B-E analysis demonstrates how much product must be sold at a given price for the business to stop losing money.  The business owner can then think about the road to profitability.  Investors will be able to think about getting paid back and eventually receiving their ROI.

Refer to your P & L  2 or 3 year projections and get the data for fixed and variable expenses and  gross revenues. Use an Excel spreadsheet to set up your B-E analysis. You will be able to experiment with different product/service prices to learn how much product must be sold at each price point to bring your business to B-E.  So now you have yet another way to help determine pricing.  Excel will also create graphs for the analyses.

FINANCIAL ASSUMPTIONS

When you have completed each of the five financial statements,  it is customary to explain your rationale for calculating things the way you did.  In a new business so much is an educated guess and in an existing business past performance points the way to the future.

Events beyond your control may occur,  an extreme example being the tanking of Lehman Brothers in September ’08 that set off our global financial crisis.  That ruined a whole lot of financial assumptions, that’s for sure!

Give an overview of the financial picture and then discuss the P & L,  Cash Flow,  Balance Sheet and B-E Analysis.  Let’em know you did your homework.  Explain and defend your decisions.

SUMMARY OF FINANCIAL NEEDS

If you seek funding for your business, then you must document for investors or the bank how you will use their money and when you will need the infusions of cash.

Will you use the loan to finance an expansion of the business? Must you buy new equipment, hire employees, increase advertising expenditures or obtain larger office space? Provide detailed info on the costs associated with making it all happen.

Creating a timetable for the roll-out will make you look very prepared, as will including references to the sections of your plan that discuss these actions.  Be convincing as you discuss how these actions will increase revenue and profits and bring in the money needed to repay the loan on time.

There are categories of financial needs:  Working Capital–money you’ll need to keep the cash flow healthy so you can do business as you should; Growth Capital–money used to expand the business and increase profits; and Equity Capital–money to be used for permanent needs, it is offered to investors who will take a risk and receive a piece of the business or dividends.

Next week we’ll take a look at options for the legal structure of your business.

Kim

Starting A Business? Consider Your Financials Part II

Learning to create the financial documents for your business  is a worthwhile endeavor.  Make yourself do it! You will gain a significant understanding of your business.  You will learn the art of financial analysis.

Retaining a bookkeeper and accountant to produce the monthly statements and prepare the taxes is not enough.   In most cases, they don’t know your business well enough to make important decisions.  They can tell you when to cut expenses, but they lack the hands-on overview that effective decision making requires.

That responsibility (and privilege) is yours alone.  Little by little, even those who may be intimidated by numbers can become comfortable with the process.  Every business owner is the company CFO.

THE PROFIT & LOSS (INCOME) STATEMENT

This statement demonstrates whether or not the business is making money.  It will be useful to generate  a P & L statement every month, to chart your progress and help you pay attention to what the numbers are telling you.  It is an excellent analytical and decision making tool.

Many entries from the Cash Flow statement will also be listed in the  P & L:  sales revenue generated from each product and service;  variable selling expenses such as raw materials, labor, equipment rental and advertising;  and fixed costs such as rent, office staff salaries and utilities.  When you’re financially able to do so the owner’s draw,  i.e. what you pay yourself, will be listed here as a fixed expense.

At the top of this statement, enter gross revenues (sales). There are also lines for beginning and ending inventory and cost of goods sold.  Subtract COGS from gross revenues to reveal the gross profit.

Fixed and variable  expenses are tallied and subtracted from gross profit earnings to give you the EBIT: earnings before interest and taxes.  Loan interest payments and all taxes are then entered and subtracted also, to reveal in the bottom line of the statement the net profit or loss.

THE BALANCE SHEET

The Balance Sheet shows the financial picture of your business on a particular date.  It demonstrates what the business owns and owes on a given date, usually at the end of the fiscal (or calendar) year.

The Balance Sheet is divided into 3 categories:  Assets,  Liabilities and Net Worth (owner’s equity).  All business assets such as cash in the bank,  equipment owned,  inventory, property owned, office furniture and accounts receivable are considered assets and are entered in the plus column.

Business debts and obligations, e.g. loans and loan interest payments, accounts payable and taxes owed are entered into the minus column.  Net worth emerges when liabilities are subtracted from assets.

THE QUARTERLY BUDGET REVIEW

The Pro Forma Cash Flow statement, which provides a projection of what cash can reasonably be expected to flow into and out of your business in a given month (or quarter), should be validated by a Quarterly Budget Review.   Also called the Cash Flow Statement, this document gives the actual cash flow numbers for your business and is created after the fact.

Now you can compare your best guesses to reality.  Are you over or under budget? What has been over- or underestimated? Do you need to trim or stagger certain expenses in order to pay the bills every month? How accurate were your sales projections? Moreover, how much are you spending to make the sale?

Needless to say it will benefit you to trim expenses wherever practical and control COGS by locating the lowest cost wholesalers and raw materials sources, to free up cash so you can comfortably pay the bills each month,  pay down business debts and  perhaps  allocate money for useful promotional and advertising campaigns. You will also want to take that owner’s draw as soon as possible!

We’ll conclude the money portion next week with a look at what investors and lenders will also want to see.

Kim

Starting A Business? Consider Your Financials Part I

So now we do the math. You will attach actual numbers to those sales projections, advertising strategies and monthly operating expenses. You will add up the items on your wish list and learn what you can and cannot afford to do.

You will see where adjustments must be made. You will develop a budget for the project,  devise a plan to finance it and greatly improve your chances of launching and sustaining a successful business. You will make your dream come true!

We’ll examine five financial documents:  Pro Forma Cash Flow;  Profit & Loss;  Balance Sheet;  Quarterly Budget Review and Break Even Analysis.  We’ll also take a look at the Financial Assumptions Summary and the Summary of Financial Needs, which are required for those who seek investors or a lender.

THE PRO FORMA CASH FLOW STATEMENT

This is the monthly (or quarterly) budget for the business.  If you run a household,  you already know how to do this.  The statement documents the expected ( projected) money that will flow into and out of your business. You as the entrepreneur will learn how much capital investment your business will need to keep the doors open and the products available for customers to purchase.  Investors and lenders will know if there is enough money to operate the business and if your business is worthy of a loan.

Accounts receivable are what customers owe you as payment for services provided by your business or payment for products sold.  Invoice= paycheck—with the important caveat that some customers will not pay you on time and a few will not pay you at all.  Accounts payable are the bills the business must pay each month.

At the risk of sounding painfully obvious, make sure that you have a very good chance of bringing in enough money each month to cover the bills, at least after doing business for 18-24 months.  Maybe this means you can’t give up your day job just yet.

If your day job is gone, then expect to dip into savings or convince friends and family to help you float the venture.  I will caution you that when it comes to friends and family, money can change the relationship, sometimes not for the better.

Refer to your marketing plan before you begin the cash flow statement.  Look at your advertising calendar and your desired ad campaigns, products that must be shipped, required travel to see clients, etc.  Determine the selling, or variable,  expenses.  These change whenever sales volume increases or decreases.

Labor is a variable expense, as it is tied to the production of what will be sold.  If you plan to open a restaurant and hire a chef, that employee is labor since he/she produces  the product.

Get a firm grip on your Cost of Goods Sold (COGS), meaning the wholesale price or the cost of raw materials needed to produce your product.  An intangible product or service also has a COGS— time and talent.  Knowing COGS helps you determine a mark-up, or profit margin, that guides your pricing strategy.  The objective is to not only cover production costs but also to generate money to sustain business operating costs and you as well.  COGS impacts pricing, which impacts  sales projections.

Fixed expenses are administrative.  They don’t change much month to month.  Rent, utilities, insurance, office supplies and wages to non-production employees (e.g. the sommelier at your restaurant) fall into this category.

New businesses producing the first few months of Pro Forma Cash Flow statements will be documenting start up costs.  If start up costs are too heavy, trim or stagger expenses wherever practical.

Quarterly tax payments,  loan payments,  loan money received and planned inventory purchases  are also documented in Pro Forma Cash Flow.  In other words, whatever you expect to spend that month and whatever you expect to sell that month,  document in this statement.

At the bottom of Pro Forma Cash Flow there is a line called Ending Cash Balance. Your mission is to have that number be positive and greater than zero.

If the numbers show that expenses will be very heavy,  do not even think about increasing your sales projections to disguise a cash shortfall! Unfortunately,  many entrepreneurs inflate projected sales revenue.  That practice will take you straight to cash flow hell when the projected accounts receivable do not materialize.  I can assure you that the accounts payable will materialize.

Your best option is to dial back on certain costs.  Consider less glamorous product packaging,  lower cost advertising,  lowering the COGS by finding another source or using less costly raw materials, or renting cheaper office space.

Nest week, we’ll examine the P & L and the Balance Sheet.

Kim