Monthly Archives: July 2015

The Cost to Start a Business

business startup costsThis is one of the most frequently asked questions in starting a new business, and one that people often get wrong by underestimating the answer.

That may not be a problem, if there is plenty of cash in reserve and sales pick up quickly, or it may be a devastating problem if there was very little reserve, the estimate was way off, or sales are much slower than expected in taking off.

Because many business owners have no experience in financial matters, however, it may seem like a difficult task to accurately figure out the cost to start a business. It doesn’t have to be, however.

It is actually quite easy to make a very accurate estimate of the costs to start and run virtually any business to the breakeven point. Most business owners don’t bother, because they either feel like they already know or they just aren’t focused on the details. And if you are starting something on the side with just a laptop, and it’s a service business, then you are probably fine not to worry.

On the other hand, if you are starting something with monthly fixed costs that you have to commit to for a reasonably long period, you better do the math or  you may find yourself in a very bad position.

I’ve had clients who started with well under $500 and others who sunk over seven figures into their businesses. The amount has a lot less to do with the success than the business itself and the related business experience of the owners themselves. My general advice- don’t start a high fixed cost business you have no experience in (hello, restaurant dreamers!).

On the flip side, try all the sub $500 investment ideas you want- eventually you will find the right mix of need and opportunity and USP and you will be on your way. If not, then maybe you weren’t cut out to be an entrepreneur, but at least you didn’t blow your life savings and go into debt to find out.

Here are the main cost considerations of starting a new business, some, none or all of which may apply, depending on the business:

Lease
This includes not only the monthly payments, from the time of taking the keys, but also a deposit that may be required, which could run anywhere from a few hundred dollars to several months worth of payments.

Leasehold Improvement
Once you have the space, you may need to make changes to the interior, including adding or removing walls, rewiring, replumbing, adding finishes, lighting, shelving, fixtures, etc. to make the space into your actual business.

Equipment and Vehicles
Depending on the business, you will need to buy or lease the necessary equipment to operate it. Don’t forget the small things, like fax machines, phone systems, computers, desk chairs, filing cabinets, etc. which nearly every type of business needs, and although no one item costs a lot, the collection will add up.

Inventory
This is includes all the products you will stock for sale on your opening day. Depending on the terms you can get with your suppliers, you may be able to finance some or all of this expense. Being a new business, however, getting good terms right from the start will be more difficult and depend on your good credit and business experience and to some extent your industry knowledge and contacts.

Staffing
You may start your business alone or with only partners, but if you need more help then you will have the cost of employees. Unless you pay them illegally, you will also have the added expense of payroll taxes, social security, etc. which adds an additional $.20 or more cents to every dollar of payroll cost.

Marketing/Advertising
You will have to spend money on whatever form of advertising you choose to do for your new business. You might be doing a mailing, put up a website, buy a sign for the front of your location, or even do radio spots, trade journal ads, Facebook ads or any of a variety of other options. Most of these expenses will be incurred before the advertising actually takes place, which means they can’t be paid out of the revenue they generate.

Insurance
There are several types you will need, depending on the size and type of your business. Generally you can pay in installments, which helps lower the startup cost.

Printing
Virtually every business requires some printing. This may be as little as business cards, or it may be much more.

Utilities and Deposits
You will need to turn on the electricity, phone, internet and any other services you need to operate. Some of these will require a deposit or hook up fee, or both, that will make the first payments double or more what a typical payment will be.

Permits/Licenses/Taxes
While not usually an excessive amount, you will need to budget some money to cover your business license, and any other permits or taxes you will be required to pay. Some states require a deposit for your sales taxes. If you incorporate or form an LLC, there may be fees and taxes associated with the formation.

Professional Services
If you use a lawyer, accountant or other professional services in getting started, there will be costs associated with their services. Most businesses can avoid these expenses, at least initially unless there is a complicated investor relationship or partnership agreement needed, although having a bookkeeper for all but the very smallest businesses is usually a very worthwhile investment.

Other Costs
All businesses have a few extra costs that are unique to their operations. By investigating your business thoroughly you should be able to uncover these and be able to accurately estimate how much they will cost your business when you get started.

Inspiring Entrepreneur Success Stories

I love to read stories of entrepreneurs starting from scratch and building great small businesses out of their guts and ideas and just a little bit of cash.

Stories like the birth of Microsoft, Amazon and Apple are good, too, but a tad harder to relate to- at least for me.

The stories I really like usually feature businesses I haven’t heard of but which make their founders plenty of money and even better are doing something positive for the niche they serve. Here are some of my favorites:

The story of Caitlin Pyle who decided to quit her job proof reading and with her husband move to Ecuador where she started a business offering to teach proofreading online instead. The first month she pulled in over $9,000 in profits and hasn’t looked back since.

The story of Natasha Lekic who left a good paying job as a book editor then spent a couple of years trying to figure out a direction, before ultimately getting back into the same industry on her own terms as a business owner rather than an employee. With less than $100 in startup costs she built a business grossing as much as $55,000 a month.

The story of Graham Cochrane, a musician who never expected to make any money but after being laid off was forced to focus on his side gig, which he turned into a more than full time income. He took his just for fun blog for music recording and ramped it up to include lessons for sale and is now pulling in between $35-$75K a month.

How about this stat, “I have now been on the road for four and a half years and have visited 71 countries.” That is from Justin Carmack who writes a popular travel blog that earns him enough money to travel the world and pursue his passions for SCUBA diving and for not having a regular 9-5 job.

You may have heard of John Lee Dumas, a fellow San Diegan, who created a huge business for himself by profiling other successful entrepreneurs on his daily podcast. He started out with just a small investment and an idea and has since grown it into a seven figure business.

Check out the story of who turned $200 into a huge public relations firm with over 70 clients and huge revenue. My favorit quote from his story hits close to home for me: “My firm was so bootstrapped in the beginning that I didn’t even want to pay for accounting software — something I lived to regret.” Yes- don’t skimp on bookkeeping! 🙂

Down to the last $500 in her bank account, this one woman business launched a clever T-shirt campaign that turned things around to bring in over $250K while she was still working from home.

 

I will keep adding to this list as I gather more of these stories. For now, have a great rest of the day!

 

 

The Secret to Beating Procrastination Starting Right Now

stop-procrastinationSometimes people get the idea that real entrepreneurs are hard chargers who never hesitate and do everything immediately. That’s not true.

There are lots of successful entrepreneurs who are just like everyone else when it comes to getting going- sometimes it is harder than others. Sometimes it is really hard.

The difference is that they have figured out strategies to get themselves going when they need to, and they aren’t held back from achieving success by a lack of drive when the time for action comes. If procrastination is holding you back, you can use the same techniques to overcome it in your own life, and achieve the same success they have reached.

There are several strategies for beating procrastination, which you can use separately or together to get yourself going. They are time segmenting, reframing, just starting, reversing priorities and good enough.

Time Segmenting

Time segmenting means taking a small chunk of time and dedicating yourself to working on whatever you need to do during this time, and then giving yourself a reward for doing that immediately after. Often procrastination is a result of the reward seeming so far away it is too hard to use as motivation. This is particularly true in starting a business, since it may be months before the business actually launches, and months more before you get and kind of real financial reward.

An example of this strategy would be to set aside thirty minutes to work, and then reward yourself with a break to watch TV for half an hour, or play a video game, or read or whatever else seems rewarding to you.

The reason this strategy works is that doing a big chunk of work seems overwhelming, so you never start, but knowing you are only doing a half hour seems much more manageable. Once you get into the work, however, you often end up going much longer than half an hour, and get more done that you expected. This strategy simply allows you to mentally overcome your block on getting started.

Reframing

To reframe means to change your mental perception of the task you have to do. In essence, your procrastination is because you don’t want to do something. But you are thinking about the thing you don’t want to do, not the results that doing that thing will get you. You have to change your mental state, and then the task will not seem a burden but a desired action.

For example, suppose you are procrastinating over writing a business plan. If you can stop think of it as writing a plan, and think of it as taking a step closer to being in your own business, it will change from being a task you don’t want to do to a task you do want to accomplish.

This may sound difficult, or unrealistic. In reality, however, all it usually takes is a conversation with yourself to realize that the negative task you are dreading is actually a positive step towards something you want. This makes it much easier to motivate yourself to do.

Just Starting

If this is about procrastination, isn’t the whole issue “just starting”? Yes, but this is different. Sometimes you don’t start something because the whole project seems like one big task, and you don’t know where to start and anything you do will hardly make a dent in the overall project.

With this strategy, the idea is to take the whole thing you have to do and break it down in a list format into very small segments. These should be things that you finish in as little as ten to thirty minutes. You may end up with a long list, but since no one item is going to take very long, you can just assign yourself a few items to work on at a time.

In this way, you only have to overcome a tendency to procrastinate for a small task, not a large one. And eventually, you will complete all the small task that once seemed like an unmanageable whole.

Reversing Priorities

Sometimes people procrastinate because they feel like all of the time they have should be going to work, and they have no free time. They want to “take” more time for other things and put off work.

By reversing priorities, you start by blocking off time for everything else you want to do- all the fun activities or other time obligations you want to commit yourself to doing. Then, whatever is left over is work time.

The reverse psychology of this approach- making sure you have time for fun before you worry about work can sometimes force you to get more done in the time you have left yourself to actually work. It is also true that in a typical eight hour work day, there are very often several hours of not very productive time.

If you think of it as forcing yourself to work under short blocks of time before you have to quit to go do things you enjoy, you may actually be more productive and get more done. You may also find yourself wishing you had more time to work, and wanting to start sooner or work longer. You might not think that you can reverse psychology yourself, but you can!

Good Enough

One of the less common reasons for procrastination is a sense of perfectionism. The way this works is, you feel as though you have to be perfect, but this is a stressful and demanding situation to be in, so you hold off on doing the project at all until the last minute. That way, at least you have the excuse of not having had enough time to do the job perfectly.

The way to overcome this is to simply realize that the perfectionism is what is holding you back. You don’t have to be perfect, and in fact, the chances are that whatever you thought was perfect will have to be changed anyway when the reality of the business world hits home. So what you should aim for is simply good enough to start with, with the intention of going back later and improving on what you have done. Once freed from the need to be perfect, you can get started without further concern.

The Best Strategy

The best strategy to beat procrastination is to simply employ as many of these tactics as you need until you feel comfortable getting started on what you need to do. First, take a minute to reframe the situation in your mind and realize not what you don’t want to do but what you will get by doing it that you want.

Then start by making your list of small tasks, small enough to fit into a time segment you can live with. Then block out all your play time, and see what is left for work. Tell yourself you just need to get it started, it doesn’t have to be perfect. And then begin. At this point, there shouldn’t be anything standing between you and getting going.

Bookkeeping Help: Fixing Your Chart of Accounts

chart of accounts messYou can think of the chart of accounts as your accounting foundation, and a lot of people have foundation problems! The chart of accounts, or COA, is the list of places you can put your money.

The goal for your COA is that it should be as detailed as you need to give you quality information. At the same time, it shouldn’t be bogged down in detail that doesn’t add value but does add to the effort of doing your books. As you may have deduced from that, there is no one size fits all, standard chart of accounts (although sometimes people will claim otherwise).

The chart of accounts is always the first place I look when evaluating a new business client and it tells me a lot in a very quick glance. I can instantly see if the balance sheet account balances are positive or negative, how many accounts there are overall, how they are named, if they use sub-accounts, if they use account numbers and just overall how organized and logical it is.

A well-ordered chart of accounts that makes sense and is logical to anyone looking at it for the first time is a good sign. The messier it gets, the more likely it are there are errors buried in the numbers and problems that need to be accounted for.

Does it feel like your books take forever to do each month? It might be your chart of accounts- the messier it is and the less efficiently it is set up relates directly to the time it takes to get your bookkeeping done. It doesn’t have to be like that!

Since the COA is never going to be cleaner and more correct than when you start the business, this is the best time to ensure it is set up right.

The default COA from QuickBooks is a good place to start. You can modify sparingly to fit your business. The bigger and more complex the business, the more complicated your COA can be, although it doesn’t necessarily have to be.

Here are the things we most often see wrong with the chart of accounts:

  • Inconsistent use of account numbers. For the vast majority of small businesses, account numbers are not helpful and actually can slow you down quite a bit. They are a tool for big company accounting – “big” as in over 50 employees and millions in revenue with many different departments and managers, etc. If you do use them, use them using the QuickBooks function for them, not by just typing a number in front of the account name as this is impossible to fix except one at a time. And if you do use them, use an account number on every account, not just most.
  • Old accounts. If you are no longer using an account, make it inactive or hide it. If you never used an account, delete it. There are a few QuickBooks won’t let you delete, but otherwise get rid of it. This is especially true of old bank accounts, credit card accounts or anything else appearing with a balance on the balance sheet. If the account is no longer active in real life, zero it out in QuickBooks and make it inactive.
  • Too specific accounts. Meals and Entertainment is a standard account in most businesses. Some people want to split Meals as one and Entertainment as another- that may make sense for your business. But you never need an account named McDonalds for your restaurant expenses. You can have a vendor named McDonalds and you may eat there twice a day every day, but your account names should not name names.
  • Specific dates. These should not be in your COA. For example, you can have an account called State Taxes but you don’t want one called State Taxes 2014. When are you ever going to use it again? Anything that is going to expire of its own accord, only be used once or twice or is specific rather than generic, is almost always to be avoided.
  • Too granular accounts. Office Supplies is a standard account in most businesses. Some people then create an Office Equipment account, thinking they will use that when they buy a printer or calculator or something. This is already going to potentially trip you up, because where does toner go? It is used with the office equipment, but it isn’t equipment itself, really. Now what if you added Office Expenses, Office Supplies Reimbursement, Office Printing and Office Supplies- Executive. How long would you have to stop and think about where to put an expense every time someone went to Staples? And would all this slicing and dicing actually help you figure anything out that would be useful? Not likely.
  • If you can’t instantly decide into which of two accounts something should go, you probably have too many accounts that are similar. Start merging, renaming and generally scaling back on your inclination to add accounts rather than pick from what you have. Just this one change can make a big difference in how fast you can do your bookkeeping. And the same thing goes for income, not just expenses. If you aren’t gaining any useful info from splitting your income into tons of segments, don’t do it. Especially if you already have the exact same info logged somewhere else. Fewer accounts is generally better.
  • Using accounts incorrectly. If you are keeping track of loans in an equity account, using a bank account for a credit card, tracking expenses with negative income entries or anything else weird, you are going to create headaches for yourself. Each account type works a certain way, and while you can force them to do other things, you are going to end up with very odd looking financial statements and a much higher likelihood of having errors in your books.
  • Relying heavily on miscellaneous accounts. If you are dropping more than 10% of all your entries into uncategorized, miscellaneous or similar types of accounts on your first pass, you aren’t doing it right. There really should be very few transactions that aren’t easy to classify and only those handful should fall into the unknown account. Even 10% is really high – at the end of a year, well under 1% of your total expenses should be in this type of account and really it’s better if none is left unclassified.

Bottom Line Solution:

Go through your chart of accounts with a fine tooth comb. Can you instantly decide what kinds of expenses go into what accounts? If you find places you hesitate, or which could go both ways, you probably just found a place you can consolidate.

If you see any of the issues listed in the bullet points above, be ruthless in simplifying and cutting out things you don’t need.

A well-organized chart of accounts is going to make doing your books faster and more painless. And the opposite is true- the longer and more complicated it is, the harder and slower the books will be to finish.

Take the time now to edit names, merge two or more accounts into one and delete unused or seldom used accounts. Adding more is easy, so start with less and try to only add when there is absolutely no way to put something in any of the existing options. If you do this, your chart of accounts will become a solid foundation for the rest of your accounting.

Evaluating the Intangibles in Your Potential Business Partner

business partner problemsHaving a partner can be the best thing in the world, or the worst.

To avoid lots of potential partner problems, you definitely want to have a partnership agreement, in writing, before you start your business.

That is not the end of making your partnership work, however.

Whether you know your partner well or have only just met, you want to get together enough times to make sure you understand each person’s strengths and weaknesses, and you see how the other one handles stress, complications and set backs, which will be a large part of what running your business will be all about.

Here are some basic, but very important discussion topics and tests you can do to see how your partner handles them, and how you handle them handling the tests:

1.      Invite your partner out to eat. Set an exact time. See if they are early, on time, or late. If they are late, do they call to let you know?

2.      Step out and while you are out, ask the waitress to bring the wrong drink, or wrong salad. You may have to tip a little bigger for this. See how your partner reacts- is it no big deal, a minor irritation, or do they blow up? Are they still talking about it an hour later?

3.      During the meal, plan to discuss the business. Ask them about their ideas on marketing, pricing or something else. Challenge their responses. Are they staying calm and presenting their position logically, or are they getting upset and defensive?

4.      Discuss your plans for how much money you each will take out of the business, and how much time you will devote to it. Discuss what should happen if any partner fails to hold up their end of the bargain.

5.      Discuss where you see the business ending up? Is this a path to something else, is it just a way to pay the bills, or is it going to grow into something much larger?

6.      Discuss personal future plans. Is anyone likely to move, get married, have kids or facing a divorce or elder care responsibilities in the near future? How will any of these situations be handled?

7.      Don’t offer to pay, or say you forgot your wallet. How do they handle it? Are they annoyed by your lack of responsibility, or were they planning to stick you with the bill? How do they react when you find your wallet again?

8.      If you haven’t before, visit your partner’s homes. How they live and how organized they are at home will tell you a lot about how neat their desk will be, and how organized you can expect them to be in their work.

9.      Suggest that each partner take the free Myer’s Briggs personality test, and then compare answers. A frank discussion about basic types and communication styles can go a long way toward better work relationships.

10.  Discuss how you plan to handle disagreements about business issues between partners. Having a conflict resolution plan in place, that everyone agrees to use, will help settle arguments quickly before they become overwhelming.

Some of this may seem unnecessary, or like overkill, but if you don’t or can’t get to know your partner(s) before you put real cash and real risks on the line in working together, the chances of things not working out go up dramatically.

Don’t become one of the statistics as a partnership that failed. Take the time to make it work before you start the business, and become successful without the hassles and headaches of a broken partnership.