Expanding Your Horizons

by Robert A. Loeser, CPA

        You are nine months into your business situation.  Looking back, there were several bumps in the road that you overcame but no flat tires.  Your twelve hour business days are filled to the max and new business is knocking your door down.  More space is needed!  What to do?

        In our last segment, we addressed financing and lines of credit with your bank.  It is time to take advantage of this opportunity.  Call your banker and ask for a meeting to discuss business expansion.  The banker will want to see updated financial statements as to the condition of the business and an updated business plan and budget.  Once you explain your plan to hire an assistant or business manager, move into a new space (or expand existing space), add new computers, equipment or telephones and expand inventory lines, your banker can tell you what funds are available.

        Upon completion of that exercise, you can go back to your budget and determine what part could be added to your bottom line by having an office manager take care of the daily administrative requirements of this expanding entrepreneurship.  By freeing up 3 hours a day of your time, it gives you the additional time to sell your wares.  Simple math will show that an additional 15 hours a week in billable time at an hourly net profit of $50 an hour could add over $36,000 to your profits and cash flow, after the cost of your new office manager.  And to think, if your office manager becomes billable, this too will add to profits.

        What if the same thing can be said about expanding a line of inventory, bringing a new line into fold or adding commission sales reps.  If it can be added to the bottom line, the budgeted projections look that much better and your banker is more willing to listen and act on your request.  Your cash flow projections must include the added monthly obligations to your bank to show your banker that the added debt requirements can certainly be paid for through added monthly net profit.  As long as there is wiggle room in your budget to take into account unexpected downturns or unusual circumstances, you should be able to push forward to meet the new budget expectations.

        As the months pass, monitor your actual income and expenses to the budgeted accounts prepared for your banker.  Adjust your budgeted amounts accordingly and keep your banker in the loop.  If you periodically need to use your line of credit, do so!  That’s what it was established for.

        A good entrepreneur should be very proactive in their business and anticipate the every changing work environment around them.  That includes cash flow needs, the desire for growth and expansion and the short term and long term deficits and cash flows that will result from your good timing.  As I stated in my previous article, “be prepared, plan ahead”.

 By: Robert A. Loeser, CPA

            So, you think it is now time to get back

 into the water and move ahead in opening up your new business.  It can’t be that hard, can it?  Well, the answer is no, if you complete your homework assignment.

 Prepare A Budget

        Before you spend your first dime on this new endeavor, prepare a 12-18 month budget showing expected monthly revenues and anticipated monthly expenditures.  For revenues, you should be conservative as to growth.  For expenses, you should reflect worst case scenario.  This will give you, your advisors and bankers (investors) what to anticipate in the days and months ahead.

        At the onset, you want to include the cost of opening the business including but not limited to legal fees, business cards, letterhead, equipment, inventory, deposits for lease space, telephone utilities, and the costs of borrowing.  Include the potential growth and adding of employees and space.  Again, this will give you a better idea as to what it should cost to open your doors.

        Now that you have gotten that exercise out of the way (it wasn’t that hard, was it?), it is fine to take the next step in the maturation of your great expectations.  Show me the money!

        Knowing how much it will cost to open your business and maintaining a reserve of 4 months overhead is the key to keeping your business thriving.  Statistics show that 5 out of 7 businesses fail in the first two years because cash reserves didn’t meet cash flow needs.  Like a good scout, “Be prepared”.  Plan ahead, but how?

        The choices are simple.  Note that I said simple, I didn’t say easy.  Your cash flow needs can be met first through cash you or family members have available to front the business.  If those funds are limited, two other sources are private investors and your best buddy, your pal, Mr. Banker.

 Private Investors

        Whether it is a friend or a friend or an investment group that loans small businesses, like yours, capital to open up its doors, you want to realize the costs to you and your business cash flow, up front.  Unless you can offer security as collateral to your loan as a small percentage ownership, most investors will demand 12-15% return on their investment and a majority of investment banking groups will require 20-24% yield with minimum borrowing requirements or $50,000-100,000 and up.

  Banking Institutions

         You have put the pencil to paper and realize that you will need bank financing to open up your doors and succeed.  How should you go about this process?

         As I stated earlier, “be prepared”, plan ahead.  First, find a banker who knows about your business.  If you are in the computer field, find a bank that handles computer and IT businesses.  If you’re in the medical field, find a bank that deals hands on with doctors and the medical related industry.

         Next, be prepared to furnish your banker an updated personal financial statement along with your last two years financial income tax returns inclusive of W-2s and supplemental schedules.  They will want your budget schedule along with a business plan.  A business plan should state what you are going to sell, how you are going to sell and who is your initial market.  As time goes by, your business plan may change so you want to review and revise every six to nine months.

         Armed with all this information in hand for your banker at your initial meeting will impress them.  Being prepared will give the banker a stronger confidence in you and your business.  What a great way to start a business relationship.

         After reviewing your financial package, the banker is going to ask you how much you need to succeed.  Aim high, then you can settle for what you need.  Banking and financing have been tough to navigate over the last eighteen months.  Understand that the bank will demand collateral for the loan that may include accounts receivable, inventory, computers and equipment of the business.  They will ask for a personal guarantee and may ask you to put up personal assets and an insurance policy to safeguard their investment in you.  No, they won’t ask you to put your mother-in-law up as additional collateral.

         Once you get over this shock of, “What am I getting myself into”, and the bank has agreed to a loan amount, you must discuss with the banker how it will be paid back.  The monthly obligation and term is extremely important to the long term success of your business.  Paying back a loan of $100,000 at 6% interest over 4 years ($2,400/mo) maybe unrealistic but affording to pay it over 7 years ($1,625/mo) may just make the difference for your monthly cash flow.  Of course, consult with your tax advisor or CPA to come up with the best plan of action.

         As a final note, you may want to discuss with your banker a bank credit or debit card to assist in your monthly cash flow.  You may also want to discuss a future credit line as business grows and expansion of equipment and staff becomes a necessity.

         Keep an eye open for our next segment that will address business growth and expansion.  Until then, good luck to you and the opportunities ahead.

Eight Things You Must Bring

to Your CPA at Tax Time

By:  Robert A. Loeser, CPA

1)   Social Security cards for new additions to your family.

2)   Invoices for major purchases (cars and boats) reflecting sales tax that is deductible in 2009.

3)   Closing documents on home sales or purchases for deductible interim mortgage interest and pro-rated property taxes.

4)   Closing statements on home purchases to qualify for the $8,000 first time house buyer credit in 2009.

5)   Insurance claims and out of pocket expenditures in 2009 related to Hurricane Ike.

6)   Valuation of all IRA accounts at 12-31-09 to determine whether a Roth rollover in 2010 provides you a positive tax savings.

7)   Did you refinance your mortgage in 2009?  If so, please bring in the closing documents.

8)   Did you sell any stocks in your portfolio in 2009?  If so, please provide us with a year-end summary.

Tax Season

Making A List and Checking It Twice

By Robert A. Loeser, CPA

If you all haven’t noticed, there are only 14 days left in year 2009. You do have the ability to influence your 2009 tax situation by doing the following:

• Pay all Property Taxes before December 31, 2009.
• Pay January 01, 2010 Mortgage payment before December 31, 2009.
• Make all your charitable contributions before December 31, 2009.
• Take year-end bonus in 2009.
• Capital Gains taken in December 2009.
• Capital Losses taken in December 2009.
• Purchase of Automobile in December 2009 to deduct Sales Tax paid.

Robert A. Loeser is a CPA in Houston, Texas and can be reached at (713) 953-1272 or at TaxManBob@pdq.net.

As we maneuver through these difficult economic times, you shouldn’t forget how you got your business to where it is today.  Continue to use what “brought you to this dance”.  Referrals are always there for the asking.

1. From Current Client Base

            Ask current clients that you provide excellent service to for referrals.  You can provide the same quality service and at the same time keep operating costs down, like your computer software, by lowering the pass-on cost to the client.

2. From Current Business Professionals

            You send business referrals to an attorney, insurance agents and consultants that you work with on a routine basis.  It is time to turn the tables!  Pick up the telephone and ask these receivers to now be givers.  Ask them why they hadn’t previously reciprocated your efforts.

3. Network Your Business

            Get your name and your business (and its strengths) out to the general public by joining a breakfast club (i.e. BNI), a business organization (i.e. Chamber of Commerce, The Entrepreneurship Institute) or associate yourself with a local radio program (i.e.  The Price of Business in Houston, TX).

4. Cold Calls to Existing Clients

            Clients are impressed when you call them once or twice a year just to say hello, how is the family and how is your business in the trying economy?  Ask them if they need anything from you.  This small gesture goes a long way to gaining the client trust you desire.  Trust me, they will remember.

5. Return Your Telephone Calls

            Keep your current clients happy (for referrals) by returning their phone calls on a timely basis (2-4 hrs.).  What is important to them when they call may not be important to them tomorrow.  It shows your clients that you care about their business NOW.

6. Keep Business Promises

            When you promise your client that their job will be completed by Friday at 3:00 PM, make sure it is in their hands by 2:00 PM on Friday.  They don’t want to hear that the “dog ate my homework” and the job won’t be ready until Monday afternoon.  This also goes a long way in establishing good client relationships and ultimately, a good referral.

When you finally get that desired referral from one of the above sources, make a good and everlasting first impression.  Be prompt and prepared for the meeting.  You want this contact to become a good referral base for you in the future.

The first in a series “Ten Mistakes New Businesses Make”

You wake up in the middle of the night and can’t get back to sleep. You wonder why after 10 years you are still working for your current employer down that dead end path. You ask yourself “why can’t I do this on my own?” “It can’t be that difficult, can it?” We have all been there and done that!

Well, if it was so simple and easy, everyone would be doing it. However, in our real world, 9 out of 10 new businesses fail in the first three years of existence. You ask yourself why this happens so often? The answer is because of the mistakes that are made prior to launching your business.

After you make this life changing decision as to what you want to be when you grow up, you need to visualize this plan in a detailed written business plan. This plan includes: the type of business, when and where you will open shop, what market do you want to go after, how much capital do you need to open doors, who can help you with a new bank, your new lease, hiring your first assistant? Lastly, but probably your most important decision is to find a reliable Attorney and a knowledgeable Certified Public Accountant to help you encompass all the necessary steps in developing your business plan and launching it.

In finding that reliable attorney (not a cheap one), he or she must have business experience, a small amount of knowledge of your business or industry and can help you grow your business. He or she can setup your new corporate or partnership entity, assist you in opening bank accounts, apply for business lines of credit and negotiate lease terms. The attorney is a cornerstone to your business success.

The second major contributor and cornerstone to your business is your Certified Public Accountant. Even before you contact your attorney, you should sit down with your accountant and prepare a budget and cash flow statement for the first 12-15 months of operations along with a business plan of how to get there. These discussions should include capital to be raised along with bank contacts to setup credit lines. Your accountant will evaluate what type of entity (partnership, corporation, LLC, LLP and Sub S Corp) suits your business and tax planning needs now and in the future. Tax planning should include tax savings tips to assist in the growth of your business.

As you can see, your attorney an accountant should take on key roles in the formation of your new business venture and if done correctly, should be noticed later for its growth and success.