Before you go spending time and money there are 3 questions I ask every prospective business owner.
- What problem do you solve?
- Who do you solve it for?
- How do you solve it?
Once you can answer these questions you may be ready to jump into this business. If not, I urge you to do more research and at least come up with a framework or plan to come up with the answers. The more focused and unequivocal about your answers the higher your odds at success.
This simple little exercise can save you countless hours and tons of cash because it’s going to help you get and keep your eye on the ball. And that ends one of the shortest chapters in writing history but it’s actually that simple.
Prepare A Monthly Personal Expense Budget
You need to determine how much you need to generate in distributions from your business to at least meet your monthly outlay. Unless you are already out of work with no other income options, you need to keep paying your bills. Don’t quit your job unless you have at least a year's worth of savings to carry you through.
The reason for this is that without a cushion you will feel the stress of having to make money and unless you know what that number is your going to feel the anxiety of not knowing. Fear clouds our judgment and drains our energy. You always need to be in tip-top shape mentally and physically, to begin with, and running a business makes it even more critical. You don't get any sick days. You're going to have enough distractions and obstacles, to begin with, and don’t need to add any self-imposed burdens on yourself. Additionally, knowing what you need is 1,000 times better than operating in the dark. Knowing your numbers is essential if you want to run a successful enterprise.
On the next page is a simple worksheet to help you to determine your monthly nut. Don’t make the mistake of omitting things like meals and entertainment, vacations, holidays, birthdays and the all-important surprises that are sure to occur like car and home repairs. If you have children leave a nice big fudge factor. This is your average, monthly expenses. It’s just an estimate so no need to go into details. Keep it simple!
PERSONAL MONTHLY EXPENSE SCHEDULE
|LOANS AND CREDIT CARD PAYMENTS|
After checking off the personal expense budget, one of two things will happen.
- Reality will set in and you will realize that starting a business is a big risk, not worth taking or to proceed with caution or-
- You want to go on to the second item on the list.
Prepare A Schedule Of Startup Cost
These are the expenses and capital investments associated with getting the business off the ground before you start generating revenue. This is another potential blow to your plans for starting a business. The reason being is that entrepreneurs are full of enthusiasm and optimism, which is needed, but also one of the characteristics that get us into trouble. Getting the numbers down on paper brings us down to earth revealing precisely what’s at stake financially. It’s also another step in learning how to know your numbers. Part of running a successful business is knowing your numbers.
BUSINESS STARTUP COST
|1ST MONTH RENT/RENT SECURITY|
Prepare A Schedule Of Monthly Business Expenses
Going back to fundamentals, you need to generate positive cash flow which is not the same as generating revenue.
Positive cash flow occurs when your revenue exceeds your expenses. Your net cash flow must cover your personal costs. If these numbers don’t work, you're going to put stress on yourself, and nothing positive comes from fear. That’s why I strongly suggest having the 1-year expense cushion.
These numbers are only estimates; your actual expenses will be different. I highly recommend overestimating these. Inevitably you will get hit with unexpected costs, both business and personal.
MONTHLY BUSINESS EXPENSES
|RENT AND UTILITIES|
|PAYROLL & PAYROLL TAXES|
|ACCOUNTING & BOOKKEEPING|
|AUTO (GAS, REPAIRS & INSURANCE)|
So, you crunched the numbers and are determined to move forward, regardless. Congratulations! You’re a real entrepreneur.
I've found that many times, entrepreneurs move forward despite what the numbers look like. I’ve done it and went through some costly lessons. Some of them turned out to be invaluable lessons on what not to do, while some worked out, proving my intuition was right all along. If you one of those that choose to move forward, despite what the numbers look like, I suggest you read my book “From Myths To Money” available on Amazon. Have Faith and Tenacity. You're going to need it!
If you don’t formally choose a legal structure, you are a Sole Proprietor by default. If you create a Not-For-Profit and don’t set it up correctly, you can face some serious legal repercussions. Before you do anything, seek the advice of a good accountant and/or tax attorney. I say accountant and/or tax attorney because most attorneys are not versed in tax strategies. Most attorneys just set up LLC’s because they are only looking at the legal, not the tax implications. Choosing the wrong structure can cost you a significant amount of money. These are your options:
- Sole Proprietor
- “S” Corp
- Not for Profit
Most small businesses should be structured as an “S Corp” for legal and tax planning purposes. If you were formed as an LLC but want to convert to “S” Corp status the IRS does grant exceptions if you meet certain criteria. Check form 8832 Entity Classification for details. For more detailed info on legal structures click here for my special report on Business Structures.
|Joe DiChiara CPA offers Small Business Advisory Services to passionate entrepreneurs that want to Start, Build and Manage a small business successfully. He enjoys being an “Out of The Box Thinker” and has helped thousands of small business owners start, build and manage their own business. In 2009 Joe discovered a new approach to business through “The Science of Getting Rich” written by Wallace Wattles and the inspiration behind the movie "The Secret".
After successfully applying the SOGR principles as well as Napoleon Hill's "Think And Grow Rich" to his own business, Joe discovered that there is a large market segment that is being overtaxed, unprotected and unfairly targeted by IRS. Every year over 3,000,000 entrepreneurs start businesses unaware of the dangers of operating as a sole proprietor with over 25,000,000 in the process of going bankrupt. This discovery inspired Joe to develop programs, tools, and resources to help stem the tide of these avoidable small business failures.
Currently, Joe is building an online school for small business owners www.bedrockuniversity.com and www.taxauditsmackdown.com which will help entrepreneurs create the books and records needed to survive any tax audit. Joe is a #1 Amazon Best-Selling Author and you can Check Out Joe’s Books on Amazon by clicking here