Reduce Debt Increase Wealth

Start A Business

June 27, 2021 MisterChuck Season 2 Episode 67
Reduce Debt Increase Wealth
Start A Business
Show Notes Transcript

Once your debt has been paid off, the need to make money work becomes important. One way is to start a business or invest in a business what to do?

Article Links:

 http://www.angelscorner.com/articles/12_rules_for_inv.htm 

https://www.investopedia.com/articles/personal-finance/120815/4-most-common-reasons-small-business-fails.asp By MELISSA HORTON

Unknown:

Hello, I'm your host, Mr. Chuck. I'm a retired accountant, turn truck driver, I have reduced my debt to zero in a short matter of time, debt reduction to achieve financial freedom takes commitment, confidence, determination. start a business, maybe that's been a goal of yours for a long time. And I'm not talking about a multi level marketing business. I'm talking about a business where you started from nothing is option one, and we'll talk about option two. Later on in this episode, everybody has a dream of being their own boss, why I'm not sure I started my business A while back out of necessity, because I couldn't find a better job in my industry. And I was a professional accountant, a certified public accountant, for professionals starting their own business is easy, because they already have the background and the education. And they just need to get started and find clients. When I got started, I started doing tax returns. On the side as I worked full time, as my got more and more clients, those clients want more and more services, started expanding my services. And I still worked from home and worked full time. I did that for about a year or two years. And then it got to a point where I didn't have time to go to work, I had to stay home and take care of all my clients. And that's when I went full time, my office was still at home. Over maybe another couple years, when I started getting a couple employees, I started looking for an office space. Luckily, I had a client that had real estate activities, and he had office space, which he gave me a deal on. So it worked out good for me. And I just grew from there. And then volley I got tired of doing the same thing year in and year out. And so after 14 years of running my own business, I say I was successful. And then I sold my business to another accountant. And that was the history of me being in business for about 14 years. But if you're gonna start something that's retail, manufacturing, or wholesale, and you're starting from the ground, you got to do a whole lot more before you get started. So you're a person that wants to get a business started, you have a great idea. You know what you want to do. But you may be this a little bit short on one item. And that would be capital or money. Before you even start thinking about a business, you got to ask yourself, why do you want to have your own business? And if you can answer that truthfully, and honestly with yourself, then you're probably ready to go. You do not want to start a business if it's out of necessity, because most likely you're going to fail. If you lose your job and you're unemployed, and you think I'll just start a business and I can make the same amount of money, most likely you're going to fail. I'm just a fair warning to everybody. Now before you get started, you need to know why you want to start a business. And you need to know what type of business it is how much you think is gonna cost to get it set up and start it started meaning running and then how much you think is gonna cost to keep it going month to month. If you're doing retail, then you'll need to have retail space, you need to buy shelving for it. You'll need a point of sale and you need inventory. All that takes capital. So if you're starting on a shoestring budget, maybe a nice clean, big retail store may not be the way to go. You may want to think of other ways to get started. Same thing with if you're wholesale. You'll need a warehouse. You need to buy whatever it is you're going to wholesale from the manufacturer. So you need agreements there and you need sales agreements with the retail People who you're gonna sell to. So not only do you need a warehouse and forklifts and shelving, and whatever else it takes, you probably also would need an attorney to draw up all these contracts, or at the lease review contracts. So it's just more than I'm starting a business, I'm gonna do it and going out and doing whatever it is, what type of business is up to you, I'm not gonna talk about that. But the most successful business are ones where somebody sees a need, and fulfills the name, and then keeps expanding on that. So there's four things you should know why business fail. And we're going to talk about that. And we already talked about the first one. And the first reason is financing hurdles. The primary reason why small businesses fail is a lack of funding or working capital. In most instances, a business owner is intimately aware of how much money is needed to keep operation running on a day to day basis, including funding payroll, pay, and fix and ferry it overhead expense, such as rent and utilities and ensuring that outside vendors are paid on time, however, owners of failing companies are less in tune with how much revenue is generated by sales or products or services. This disconnect leads to funding shortfalls that can quickly put a small business out of operation. So not only do you need to have capital to get started to get set up, you also need to have capital to keep the business running. Because every month you're going to have rent kind of be do utility is going to be due, maybe every week, you're going to have payrolls due. And if you don't know anything about payroll, you don't know anything about accounting, you need to have an accountant, somebody, go meet with them before you start the business, find out what you're in for before you get started, find out how much payroll services are going to cost, find out how much taxes you're going to have to match, the business owner matches half of the social security and medicare and then you have to pay the unemployment for federal and state, and you have to pay workers comp for this state. So there's more than this, I pay him 100 bucks, and that's it, you're gonna, if you have $100 in payroll, you're most likely gonna cost you the $100 for the employee, plus the matching taxes, plus all the other taxes, so it's going to be more closer to $125 to $130. Depending on your industry. The number two reason is inadequate management. Another common reason small business fail is a lack of business on the part of management team or a business owner. In some instances, a business owner is the only senior level person within the company, especially when a business in the first year or two operations. So if you have inadequate management, not how not knowing how to schedule your employees when to work, not knowing how to deal with employee problems, not being aware of payroll taxes, income, taxes, sales taxes, just not aware of anything, and especially not aware of how much money is coming in every day, how much money is going to the bank every day. Because if you have a cash business, you cannot trust anybody. So with inadequate management, or inaccurate and adequate controls on your cash, you're going to be in the poorhouse fairly quickly. Again, a good accountant can help you with setting up some cash controls. My advices, the owner of the business shouldn't be the only one handling the cash. And then we have the number three reason and efficient business planning. That business owner failed to plan. They did not write up a business plan. So when they went to the bank to get a loan, to keep their business floating or going, they couldn't get a loan because they did not have a business plan. They could not tell the banker, what their overall description of the business that what the employee and management needs were gonna be and what kind of threats within the market they might be facing and what their advertising strategies are or what their who are their competitors are. If you don't know those type of information, you're going to fail. And then we have Mark mishaps business owners often fail to prepare for the marketing needs of a company in terms of capital required prospect reach and accurate conversion ratio projections, what they're trying to say here, they failed to recognize how much money is needed on a continuing basis for advertising, and what type of returns that would bring them. You might spend $1,000 in advertising, and only increase their sales, or $100. That may be early on. But if you don't stick with it, people will quickly forget about you, you need to have advertising on a consistent basis, day in and day out, promoting your business, promoting your product promoting whatever it is you're doing. So if you don't have enough money to get started, they don't have enough money to stay continually running. If you have poor management or no management, marketing mishaps, no business plan at all, you're spinning your wheels, and you're wasting your money. How would you feel if you are going to invest in a business? And you ask them what your business plan? Can I see it? Can I read it? And they say, what's the business plan? Well, what's your daily sales? I have no idea. How much is your monthly rent? Well, I don't know I hadn't paid it in three months, you're not gonna invest in a business like that. Because they don't know nothing. Unless you see some other opportunity where you can get in that business, push the other guy out, take it over, take control and turn it into something profitable. Oh, that's not worth talking about here. You can do that? Yes, well, I'm just talking about you starting your business, and trying to keep your business going on a day to day basis. And I gave you my story of what I did. And I'm a professional. And I started by working out my house. But if you have a retail operation or some type of wholesale or manufacturing operation, you cannot do it in your house, you can maybe get started on a small scale for a test, see what it takes to manufacture or whatever it is see how much you can store, get an idea what's going on. But big picture, when you're up and running, and you're producing hundreds or even 1000s of these products daily, or hourly or whatever it takes. You can't do it out of your home. One your home is not doesn't have the proper zoning. And I'm sure your neighbors would probably get a little upset. Yeah, you can check out that article. That article is encyclopedia calm, most common reason for small business failures. The four most common reason for a small business failures. And I have a link to that in my show notes. If you're really serious about getting started in your business, you need to know the type of entity you're gonna be. Are you going to be a sole proprietor? Are you going to be a limited liability company? Are you gonna be a corporation, you're gonna be a corporation that elects s status for federal income taxes. So there's four major options you need to know before you get started and how you got to start it. And they all get treated for taxes a little bit different. So at the very least, you need to talk to an accountant to explain to you the different tax profiles, and you need an attorney to draw up the business organizations and file it in your state with the proper authorities secretary of state's most likely and you got to come up with a name that nobody else is using. So when you get all that done, maybe your first step of getting a business started where you can actually do it out of your home. And if you know somebody or if you can do it yourself, set up a website, and then start advertising through social media. You can get started from your home and do a limited number of sales. See what sells see what doesn't maybe see if your idea for the product that you're doing is gonna be accepted by the masses. If anybody's willing to buy it, before you go out and commit to setting up a retail store or any type of operation that's going to cost you money for the long term as such as rent, utilities, insurance, and course inventory payroll. furnitures and fixtures, machinery and equipment, so on and on we go. Getting in business is not a cheap endeavor. So even before even you have the money to do it, or you can get the money to do it, you need to have your personal finances under control, you have to have zero credit card debt, you got to have a mortgage that's affordable, because you're gonna maybe go one or two years on a reduced income, if you have a spouse that still work, and that's gonna help you a lot. If you're by yourself, and you're going to give up all your income to start this business. Do you have enough money in your emergency fund to pay your living expenses for at least six years, six to 12 months, the more you have, the better off you're going to be, the better off you are, the more less stressed you're gonna be, and the better overall, he could do and starting your business, you'll be clear, and you won't be stressed. And you won't be thinking that you got to hurry up and make some money. If you're thinking that you can get enough money to get started. And then your sales, you're gonna generate enough revenue to pay all your bills that might happen eventually. But the first three to six months, it may not. So you got to be prepared to pay all those bills with little or no income, I'm gonna go on to the second part of the episode, which is you've done good. You've got your debt under control, you got no and little debt, you got your emergency fund set up and you got a chunk of money sitting in a bank. And you need to get it to work in for you and have it in a savings account in a bank, or a certificate or deposit. And you're not a big stock market person, you got to get that money working for you and how you do it. And that's what I'm going to cover next. If you listen to this podcast using an apple podcast app, please rate and review this podcast for all your non Apple users. You can download iTunes on a Windows machine and go to the upper left hand corner, select podcast, do a search, reduce that increase Well, you can then rate and reviewed the podcast and also follow the podcast. I appreciate any feedback that I may get. The other option instead of starting a business from the ground up is to invest and a ongoing business. But you also have to do your homework, you got to know what you're getting into. And I have a article from the angels corner.com 12 rules for investment. And it's really 12 rules for investing in someone else's business. But before we even get to that point, you have to have your own money, you have to have money saved up that you want to put the work for you and improve on what your rate of return would be. I'm not talking about taking money out of your 401k or retirement plan. You got to continue making contributions to your retirement plan. This is money that you have maybe in a high yield savings account. Maybe it's in some Certificate of deposits or something where you have a chunk of money that's earning you a fairly low rate of return, say 1% entrust with inflation going up nowadays, you need to put that money to work where you get a better rate of return. Before you can invest in someone else's business. It's helpful if you know things about one that business industry first, because what else can you offer them? What else other than your money? can you offer that business owner to help them improve their business? There's got to be a reason they're looking for capital. And they're looking for it at a source other than from a financial institution. There's got to be a reason for that. So ask yourself one Why is the bank not lending the money? Maybe they already have a line of credit. Maybe they have a $200,000 line of credit and they have an average balance of $190,000 and they still need more money, but they're making all their payments. And they're doing okay, maybe they're just short on some inventory and they need some more inventory, but their suppliers wants cash on delivery and they don't have the money to pay it when the inventory arise. It could be a multiple reasons why they are struggling and why they need more cash input. Now, when you invest in a business like this, there's two ways you can do it. You can buy into the business and you get equity. If you do that, you get a percentage of the ownership, that would be something you would consider doing for a long term down the road. And the rules for investing in someone else's business is going to cover that. The other thing you can do is give them a loan and give them a loan on your terms, not theirs, where you give them a loan, maybe give them 60 days before the first payment is due, maybe 90 days before the first payment is due, maybe a rate of interest higher than the market because you're taking more risk, and a shorter period of time, say maybe five years instead of 10 years. Or you can do a combination of both. But before you give them any money, you need to know more about their business. And this is the 12 rules of investing in someone else's business, you can get a link in my show notes from angels corner COMM And you will find it plus they got other articles in here that might be helpful for you. One, don't be sold investments. You select your investments don't blindly accept a friend or family members pitch. If you haven't established your own investment goals. Do not invest in anything until you do so. Without your own goals or standards, you lack a basis for assessing the opportunity. You leave yourself vulnerable to the sales pitch that sounds good. Only get into investments that meet your criteria, check out the business plan yourself. If you do not have the ability to review the business plan, get help from someone who does. Number two, require a business plan. Well, if you don't require you're not going to be able to read it. If you don't read it, you don't know what it is, and insist on seeing the business plan of anyone proposing that you invest in his or her business. Never even consider an investment without a business plan. The business plan should provide enough details for you to determine whether the business is feasible and is likely to succeed, it should make clear how the business will make money and provide a return on investments to investors three, calculate your down size risk, determine what the various outcomes might be, under the circumstance where the business is safe. Under the circumstances will it fail? What is needed for the business to breakeven? If the business needs more money at some point, would that money be available? Where? Or will the business fail for lack of additional cash? Will you be willing to reviews to provide additional funding and see the business collapse? Do not accept any representation that that cannot happen? determine for yourself? What can happen? Can you afford to lose your entire investment? For any assets be left for you if the business fails? So you got to look at all circumstance. What are you gonna do if the business fails? What are you gonna do? If the business has seeds? How long are you gonna stay with that business? You have an entry strategy, and you have an exit strategy. Maybe they're looking for ownership, and then your contract your agreement? There should be an exit in there of who would you sell your share the business to and outsider or to the current business owners. It may be a family business, maybe you're part of the family, maybe you're not. So you got to look at everything. What could happen and what will happen is two different things. You just need to plan for every scenario you can think of for consider tax consequences. What are the tax consequences of this investments? Can this investment be structured provide a tax benefit to you if it fails? Well Be investment be a purchase of stock and a small Corporation under an eye Internal Revenue Code 1244 allowing you to get ordinary tax treatment for the sale of stock or a failure of the business. If the investment is structured as a loan, remember that the loss on a loan to a business is treated by the IRS as a non business loss, unless the capital loss can be utilized to offset capital gains you have from other investments, the maximum capital loss can be deducted from ordinary income is $3,000 per year, and that can be carried forward and can be carried back is the entity an S corporation, limited liability company or other pass through entity? If so, remember that the tax consequences will be passed through to you these tax consequences can be from profits, loss, capital gains, etc. Make sure you can deal with these tax consequences. You may find that you can't take advantage of losses because they are passive losses, which can only be used to offset passive income. If you may not have another potential problems being taxed on profits that are not distributed. A pass through entity, you are a tax on your portion of the taxable income, whether or not any cash had been distributed to you, can you afford to be taxed on undistributed profits? If profits are reinvested in the business, there may be no cast to distribute it to the investors who must pay the taxes. That would be a Subchapter S corporation, that'd be a limited liability company or a partnership with the you would have that problem, you would get tax on your percent of ownership. If it's a profit. Five, use your influence get what's best for you have the investment structure the way you want it or don't invest. Are you a key investor? Are you the only financial backer if you're just one of several investors, what power we have to influence the management of the business. Don't overestimate the values of the founders management contribution or underestimate the value of your financial contribution. Without your money, the founder may have nothing without the founder, you would still have your money in you would find another investment we have the investment structure to give you control, you need to protect your investment. If your investment is an equity investment, make sure you have the voting power you need and protection from dilution of voting power, have the ability to elect a number of directors necessary to control the board of directors, or at least have a veto power over certain actions by the board. Don't fall for the idea that the founder should have control of the business. If you prefer to provide a loan instead, buy in stock a loan is intended to be paid back with interest whether the business does well or not. If the loan is to an entity, it might cease to exist, insist on a personal guarantee, make sure the loan is secured by the most valuable assets of the business. And by assets, other grant tours, a personal guarantee would be from the president of the corporation or the founding member. Maybe he uses his house as collateral, you put a lien against his house, when they're talking about assets of the business. Got to make sure those assets don't have other loans attached to them. Are they paid off? Are they free and clear? Is it a specialty equipment that is gonna be hard to sell. Because if you get that equipment, you have to get rid of it to get your money back. If you can't sell it, you might be stuck with something you don't want. Just a note. Make sure the founders also have something to lose. Don't get into business where the founders have nothing to lose, make sure the founders would lose money or end up in debt if the business fails. This fear of failure should motivate them even when the possibility of success does not. The business need to have incentives and disincentives for management and the founders other way they may be willing to operate a worthless business as long as your money provides income to them. And that is probably the number one reason why they cannot get a loan from a bank or financial institution. They have nothing at stake in that business. And this would be a startup business would be the number one item whereas somebody wants to start a business. I have no money. I have an idea. They think they can do it. It makes See, they don't, but they need somebody so they can either get started, maybe get a website set up, maybe to get inventory, and they have absolutely nothing to lose, and they don't try very hard and you lose all your money and they give up and go away and you'll never see your money again. So make sure whoever's business you're putting your money into has their own money, and their own reputation, their own everything in that business, or don't do it. Seven, do it right. Make sure your paper works in order. Even if you're investing in a business have a friend, check to see if any of your rights as an investor must be covered in the articles of incorporation. In order to be valid. If necessary, these articles of incorporation is amended, be sure to follow your security interests in the right places. If any of these assets is to be used as collateral, our trademarks, patents or copyrights and security interests must be filed with their appropriate federal offices. Most security interests and assets are filed with Secretary of State, you must check with the filing requirements for the different types of assets you use as collateral. If you're providing significant funding for a business, you shouldn't system other rights, which go beyond collateral, you should have the right to receive financial reports on a regular basis to inspect the books and the facility and to audit the financial status of the company. Number one, they're telling you here you need an attorney, you need to have the paperwork drawn up, and you need to make sure it's filed in all the right places. Number two, an A an accountant to review the financial statements to make sure they're still profitable in their operation, or soon will be so that you will get your money back over time. Eight, get it in writing cover all the important aspects of your arrangement and their written documents. Don't rely on oral promises or general trust because that will go down the tubes very quickly. Keep copies of all documents. That's you know, you gotta get in writing, then you got to keep it you got to know what's in it. And number 10 plan to get money out how you get money out of the business, will you be an employee? Will you spend enough time on the business to justify the income you want? Will you be paid consulting fees? Will you want dividends paid? What do you need to elect S corp status as a basis distribution of profits to you, again, have an attorney, an accountant could help you understand these things. 11 don't invest money, you can afford to lose self evidence. If you can't afford to lose it. Don't do it. And vast responsibly. Even if you can afford to lose the money, even if the beneficiary of your investment is your child. Don't be reckless require even your child's business to meet high standards of business planning. Ill responsible investing encourage ill responsible business management, a business out of control is a poor investment for you. And I poured training ground for your child. I highly recommend do not invest with family members. It could cause problems down the road that you won't believe I had clients who started a business maybe it was a partnership between them and the friend, they went together they started a business. They didn't make much money. They both were struggling. And you know, one thing leads that another and both they're out of business and they all lost money and they didn't succeed in doing anything other than not being friends anymore. So you never know what's on down the road. You never know what's going to happen. Maybe the business was operating great, making tons of money, then COVID-19 hit and they had to shut down for six months, nine months. And they're struggling because they still got to pay rent. They still got some utilities, they got inventory they had to get rid of. Or if they could get it back. They were lucky they might have lost a chunk of money. And maybe after they reopened they could take off again. That could be a good business investment opportunity. Or the back in one moment was my final thoughts. Whether you're going to start a business from the ground up or you want to invest in the business with some money you have saved up. You need to do your homework first. You need to educate yourself what a business plan is, what should be in a business plan? What your market is, who your competitors are, what's the upside, what's the downside, anything that could happen, probably will happen. He just need to be aware of everything that could possibly go wrong, you need to be aware of everything that possibly could go correctly. Without that knowledge, without knowing what you're getting into, you're asking for troubles. So whether you're starting a business like I did from home, and gonna expand on it, and continue working, that's always a possibility. Whether you have 25,000, or 50,000, to invest in the business, to help a business says sane, it's gonna be up to you to do your homework, no matter which way you go, you got to know what you're doing, and what you're getting yourself into, you need to have a exit strategy, you need to realize that if it doesn't happen, or you're willing not to put more money into it, if you already lost $25,000 putting in another $25,000 in o that busines may not be a good option. So knowing what's going on, knowing who is in control, who is making the daily business decisions. And knowing if those decisions are good or bad, seeing the results, all those decisions are good or bad, and most business fail, because lack of capital or lack of money, you got to get started, you got to advertise. If your customers don't know you're there, they're not your customers have to advertise. When I was an accountant, I would say most of the small businesses I did the books for lack the money to properly advertise. And they struggled because of that. Do your homework, avoid investing money with relatives or friends, try to keep it strictly on a business partnership level. He go in with that thought and keep it that way and draw up everything to your benefit. He needed an attorney who understands the different types of businesses and can understand contracts and can't write up those contracts to your benefit and have an accountant that can explain to you by looking at the income statement, the balance sheet and working capital or cash flow statement. If that business is a good risk or not. They may be struggling. They might have good income. They could have a great balance sheet. But they could have a poor cash flow because their receivables are too big. There have sells to customers who are slow in paying them. Maybe they just need cash to get over that hump. Or maybe they need somebody that can go out and collect those receivables could be anything. A good accountant could probably point those things out to you. But whatever you do, you got to educate yourself firs , before starting a busi ess and or before investing in a business.