Self Employed and Small Business Finances

Financial sharkSmall business is the lifeblood of the American dream. To be able to make your own decisions, your own money, and your own life from your thoughts and actions is what makes this country great. However, lately things seem to be changing a bit for the small business owner, and believe me I’m there too. Taxes are high on small businesses and the government seems to benefit our big brothers more than us small little guys.

So, in order to survive, or thrive, small businesses need to be limber, ready, and educated to make the financial decisions that will help them get to the next level. There are strategies that work that you may not know about, tax advantages that you might need today, and financial reminders that will keep you going in the right direction. That’s what I want to talk about on this blog.

I have been self-employed myself for the last 10 years. Not only have I been running my own company but I have done work for many other small business owners in the area of financial planning. I’ve seen the small fish and the big fish and each one has their own set of strengths and weaknesses. I’ve gone through the ups and downs myself as well, I know what it feels like to prosper and I know what it feels like to make a lot of money and feel like none of it is ending up in my own pocket.

I want this information to be relevant. It won’t always be new, cutting edge information–sometimes we just need a reminder. However, it will be useful advice or information based on what I have seen. How you control your finances can make or break your company. You are constantly making decisions and I want to help you make the best decisions.

It’s all right there for us to take. There is so much money out there in the world for you to earn. I know you are into social media, marketing, accounting, training, sales, and finances. As a small business owner, or self employed individual, you have to take on every role.

That’s the first half of what this blog is about; talking about how the finances in your business are run. The other half is going to be about being an investor yourself. That’s the goal in life, right?

On one hand you earn the money and put it in your pocket. Then, we transfer it from our right pocket to our left pocket and begin our life on the investment side. That’s where we want to end up. That’s where a good majority of our money can be made, if we can learn the game.

I want to talk to you about investments, how they work. The good and bad investments I have made and seen others make. The mistakes, and successes, that have made me what I am today. With all of this information at your fingertips you can be successful as an investor, if you take the time to practice and find your strengths.

Just like you took the time to decide on a business you were good at running, you have to take the time to find the investments that you will be good at finding. What is your gut telling you? What investments do you just get?

It’s a process and it always will be. However, it will be the most exciting and beneficial process that you can go through; the transformation from a big fish to a shark. That’s what you want to be, the investment shark. The guy or girl who knows how to win. Your money working for you, not against you.

This is the time, right now. Start your path to enlightenment. Start making the decisions that will provide you and your family with what you want. You have to take it. Get excited. Taste success, and let it get a taste for you.

Debt-Free Solutions for the Debtor Who Wants to Dig Out Independently

getting out of debt independentlyIt may be better not to sit down and “do the math” on what your debt is costing you. If you did, you’d surely be inspired to pay it all off as soon as possible no matter what the cost! But what if you can’t do that? If you’re deeply in debt, the sad reality is that you more than likely can’t pay it all off any time soon.

If it’s any consolation, you are not alone. There are many reasons why individuals, companies and governments (such as one close to home, the United States of America federal government) accumulate a mountain of debt. Debt has historically been a driver for economic advancement and reform. If every innovator had to wait until he or she had cash in hand to begin realizing his or her inspired vision, the human race might be several decades behind in terms of advancement. Student loans have enabled thousands of young people to obtain the skills they needed to enter careers that have had major long-term benefits for their lives – while also saddling them at an early age with significant debt loads.

  • Debt-management strategies abound, as do companies (some of questionable repute) eager to “help” debtors in a pinch. Before you throw up your hands and sign up with one of those debt-solution companies (remember, nothing in life is free – those companies will profit from your debt one way or another, unless they are non-profit, government-subsidized), look at a few strategies and see if you can help yourself.
  • Debt consolidation and refinancing. This is a tempting solution for those with a few different credit accounts. It involves batching your entire debt load into a single large debt with one interest rate (hopefully a lot lower than that of many of your credit cards) and one monthly payment (instead of several). Unfortunately, if you are a distressed debtor (and you likely are if you are seriously considering different debt-reduction options), it will be difficult to secure a loan large enough to absorb all of your unsecured debt unless you tie in some of your unsecured equity. And even with that, you may need to enlist the help of a co-signer. Usually the equity used will be in your home, the one asset to which you really don’t want to attach any more debt than you absolutely have to. But consolidation can be accomplished through refinancing a mortgaged property to cover the remaining mortgage balance as well as your other debts at the lowest possible rate.
  • Debt stacking vs. snowballing. These are two similar approaches but different methods. Both involve a commitment to make minimum payments on schedule and to not take on any more debt (i.e., cut up the cards!). The conventional wisdom is to pay off the debts with the highest interest rate first. Debt stacking involves listing debts from highest to lowest by interest rate. Minimum payments are made on schedule. Any extra income hanging around is put toward the top debt, the one with the highest interest rate. Once this one is paid off, payments designated for it do not stop, but its minimum and extra payments are instead waged against the next debt (the one with the second-highest interest rate) – while still continuing to pay the minimum payments attached to this second debt. And so on down the list.

    By the time the debtor finally reaches the last credit account, it is speedily paid off because all of the previous minimum payments plus its own along with whatever extra has been set aside is funnelled into it. Snowballing is almost exactly the same procedure but instead of ranking the credit accounts by interest rate they are tackled by amount due, from lowest to highest. The psychology here is that we humans are results-oriented. You’ll gain confidence and enthusiasm as you are rewarded with results – i.e., watching one credit account after the other biting the dust! In the long run, though, the stacking approach is more cost-effective by minimizing overall interest expense. What is ideal is when the accounts with the least amount owing also involve the highest interest rate!

Live below your ability to obtain credit. As stated previously, there are many reasons why people fall into debt. Sometimes personal debt is used to fund a new business, to pay for an education and even to contribute to a cause in which you believe. But in our consumer-oriented society, there exists a mindset that actually encourages us to believe that we can have whatever we want as long as we have or can access enough credit to pay for it. Getting out of this quagmire necessitates a change of attitude. When it comes to discretionary consumer spending, try to live happily with less.

Tips for Passing Your Entire Estate on to Your Loved Ones

estate planning and passingThere’s one phenomenon the wealthiest person who has ever lived has in common with the very poorest. At the moment of bodily death, everything they own of the physical, material world stays behind, even the shirts on their backs! It is a cruel, inescapable reality that a person may sacrifice much to get ahead in life, but none of it goes with him or her.

If you’re like me, you will want the tangible results of your life’s success to pass untouched to the ones you love. There are ways to protect your estate so that as little of it as possible is siphoned off by third-party intruders.

Joint assets. This involves a trust factor, but it can be an effective way to preserve an asset for a loved one. Many elderly people set up a joint bank account with a child to simplify the bill-paying process in the event they become mentally or physically incapacitated. Some may even put their loved one’s name on the deed of their most valuable asset, their house, so that this property will pass automatically to their designate. This works well for the person who has only one or two children. If there are more, the sparks may fly!

Set up a trust. The word trust sounds intimidating, but an individual can create one (for a fee, of course) to incorporate his or her personal assets. Trust agreements can be made revocable so that you aren’t locked into the agreement if you (while still legally capable) change your mind at a future date. The assets within the trust agreement will eventually become the responsibility of your designated trustees. Those assets will be excluded from will probation.

Write a will. Wills are your way to communicate from the dead. Though most significant assets can be included in a trust, there are some items that are simply better listed in the appendix to a will – such as your sterling silverware set or mint Beatles album autographed by the band. If you want your nephew to receive that Beatles’ album after your death, the appendix to your will is your chance to tell everyone so. You may have a favorite charity that you want to receive a portion of your estate. Spell it out as heirs can be uncharacteristically miserly when it comes to sharing their inheritances! You can select an executor for your will – either a family member or a law professional. Some choose the law professional because depending on the complexity of the estate, it can be a big and thankless job – making sure all debts and taxes are paid, closing accounts, notifying government agencies, distributing assets specified in the will according to the deceased’s instructions.

A living will (or advance directive) is primarily a guide for what type of medical intervention you want to be employed to save your life. Being able to refer to a living will can be a blessing for your loved ones, especially if you become dependent on life support for physical survival.

Designate your Power of Attorneys for health care and finance. Whom you choose can be extremely important to you, while you are still alive. It goes without saying that you should choose someone you trust. None of us likes the idea of becoming incapacitated in this life, but it happens – sometimes due to an accident, sometimes due to natural decline. Your Power of Attorney can, if you are declared incapable of making your own decisions, take over your role of decision-maker for your life. He or she is required to act in your best interest, but your concept of your best interest and his or hers may differ! However, he or she may need to act decisively to protect your assets – and your physical well-being. If the your P.O.A. is also your heir (and quite often POA’s are family members), he or she will be sure to preserve that all-important inheritance you have worked so hard to protect.

Move to a different state. A few states have their own separate inheritance taxes, most don’t. The federal government exemption is safe for most of us at $5 plus million. And the states that do impose them generally start with a $1-million exemption.

Rental Property Investment: A Smart Alternative to the Stock Market, or Not?

rental properties or the stock marketInvesting in the stock market may be safer than investing in the lottery, but it definitely is not for the faint of heart. Riding high one day may mean a big crash the next. Investors are known to be fickle and not immune to mass panic attacks. Before you even have time to react, much of the value of your investment is wiped out.

Real estate may be an attractive alternative. Especially if it can be purchased at a historically low price. Real estate prices have recovered in most of parts of the country after the unprecedented drop of the late 2000s, but there are still some good buys out there.

And what about buying real estate not to live in but to rent out? That way you own an asset that will hopefully appreciate in value while at the same time earning an income that is likely more than the current yield in today’s low-interest environment. After all, if you buy a residential property for $100,000 and rent it out for $1,000 per month, you will be earning $12,000 for the year, or 12%. Not a bad rate of return.

I’m not saying it isn’t a sound idea, but before you run out and put in that offer, here are a few points to consider.

Will you have to borrow to make this investment? This isn’t necessarily a bad thing. Mortgage interest rates are among the most favorable around. And if your mortgage payments are $500 per month, you are still making $500 cash. Basically your tenant is paying your mortgage, and you get to keep the property once the mortgage is paid off. You may own investments that you could cash in so that you don’t have to borrow to buy the property, but you will have to weigh the advantages and disadvantages carefully. Holding onto the investment may be more financially rewarding than selling it simply to avoid paying the mortgage payments.

Tax considerations. A rental property is treated as commercial from a tax standpoint. This is beneficial in many ways. You can claim the mortgage interest as an expense. Any costs to improve the property are either expenses (minor, immediate repairs) or capital improvements (major, long term). Yes, if you sell the property, you will have to pay capital gains tax if you hopefully sell it for more than you paid, but you can deduct from that gain the cost of capital improvements, legal fees, commissions.

Insurance. Insurance on a rental property is often pricier than on the residential property that you call home. From the insurance company’s standpoint, it is riskier. Tenant and landlord may have a disagreement; the tenant may take it out on the property. Many tenants really don’t care about the property as it doesn’t belong to them so they are not likely to take care of it as well as the owner would. Liability risks are higher with people other than the owner living on the property.

Good tenants, bad tenants. Screening prospective tenants is like rolling dice, though there are steps you can take to protect yourself during this critically important step. Ask for references from previous landlords. What are their income sources? Check them out on social media sites such as Facebook (you can learn a lot from their choice of friends and their posts – are they partyers?) Go with your gut feeling. If they look like clubhouse bouncers when you first meet them; you may want to consider a few more applications. Good tenants are a dream. They pay the rent on time, complain only when it is warranted.

Some of them take pride in their home, rental or not, and may actually make improvements at their expense. They keep the grounds neat and tidy. But bad tenants are like characters out of the worst Halloween horror flick. They don’t pay their rent on time – or at all; turn your hard-won property into the social hub of the neighborhood, or worse yet, a grow-op. Evicting them can be a drawn-out ordeal, involving court orders and sheriffs … meanwhile, your house is deteriorating in value, and you are not receiving any income from it. You may be stuck with their hefty utility bills when they finally leave. You will wish you had never bought the property to begin with!

One way to safeguard yourself is to ask for a significant amount of money to start – first and last, damage deposit (if allowed by tenancy legislation in your area). Many questionable would-be tenants won’t be able to come up with that much cash up front. In a nutshell, wise tenant selection is key to making this investment work.

Cash Flow Good, Debt Bad

cash flow flowsEver since the time of cavemen we’ve been looking at cash flow as an important part of survival. Sure, back then the math was instinctual, but it went something like – food I have – spoiling food = amount of energy to find new food. We understood on a basic level that being in the negative was a bad thing–today it leads to debt and failure, back then it led to death and starvation.

Dumb comparison? Maybe. But the point is the same–cash flow is your life.

The reason I mentioned a balance sheet in the last post was because of how important that balance sheet is to your business. The cash flow of your business can make or break you.

What are some things you need to be doing as a business owner to stay on top of cash flow?

The first thing I would do is run what the accountants call a cash flow acid test. This will give you a fairly good idea of where you stand today. Once you have this information you can start preparing for tomorrow.

Debt is the Killer?

Debt can kill you. However, at the same time it can be your best ally. I know many people who run their business off of loans; loans from themselves. This may sound crazy but it is a proven system that works. If you have debt to a bank you pay interest. When you start using your own money you treat it the same way as bank debt. This won’t affect your business much, however, it will affect your retirement. This is just a good little personal cash flow tip to help you get ahead. Your welcome.

Where Will You Be Tomorrow?

Keep a very good eye on where you plan to be tomorrow. Factor in new expenses and what types of changes are coming around the corner. This will give you a good idea of what your cash flow is going to look like in the future. Our goal is to get to positive cash flow and keep it that way. If you can stay on top of the new upcoming changes then you will keep your cash flow in the positive.

It Really Is All About Cash Flow

Business owners, investors, even day to day workers need to understand one simple thing: it is all about cash flow.

When you look at it this way it could change your entire perspective on your decision making process. I’ve talked to many business owners who have a mentality that a business is things and work. It isn’t. A business is about cash flow. If a decision you are going to make is going to affect your cash flow in a negative way, then don’t make that decision.

It may not be that simple to figure out, however I have had many business owners change their mind about big decisions once they started thinking about it in cash flow terms.

Your Accountant is You

Of course you have an accountant, you have to. However, your accountant only wants to keep his job, you need to keep your life. You will always be more of an asset to yourself than anyone you hire. Your financial life is the life blood of your business. Take the time to be invested in your financial outlook. Understand the cash flow in your business and you will be much more likely to succeed.

Last Works

Take cash flow seriously. Get a balance sheet, run the acid test, find out where you are today and where you are going. Don’t let too much debt way you down and treat your money with the most respect possible. This is the formula for getting ahead. Getting to a positive cash flow situation is the best thing you can do for your business, it will make you or break you. Make cash flow a priority to track and understand.

Keeping a Small Business Budget

budgets are importantLet’s be honest. Things can get behind in a small business extremely fast. When you start getting behind then you find corners to cut. I’ve found one of the easiest corners for a self employed or small business owner to cut is budgeting.

I mean really budgeting; following your money, taking care of every dollar, thinking ahead about expenses to come. It’s an easy to thing to lose track of. In fact, whether things are going good or bad, it seems like many small business owners want to lose track of these things. It seems easier to just let things flow and see where it goes. You cannot have an “if it’s meant to be it will work out” mentality with a small business…it won’t work out.

We all know the statistics that 90% or so of businesses fail in the first year, but do you know why? According to the Small Business Administration of the US there are 8 reasons–and 5 of these have to do with money and using your money.

Budgeting then is not a lifestyle choice for the nerdy guy down the road who has a calculator in his front pocket all day long. No, budgeting is for you. You need to be that nerdy guy down the road. Know your business finances and expenses down to the smallest decimal point.

Here are a few things I have done in the past to keep on top of my business finances. I think some of these, if not all of these, could be really helpful for you.

  1. Mint.com – If you haven’t heard of Mint.com then check it out immediately. They do a great job of incorporating modern day technology with budgeting and tracking your money. This works wonders for a business owner. You can track everything that you are doing in a very simple way while you are doing it. You will get alerts, graphs, and anything else you can think of. It’s a great, simple way to stay on top of your budget.
  2. Paper and a Pen – I’m not going to lie, I still like paper. It may be less convenient but I still write down all of the expenses and monetary decisions I make in real time. Mint can do this without paper, basically, tracking things as you spend them, however, I like thinking about what I am spending money on.

    There are many times, more than I can count, where I have decided not to get something because of my handy notebook. Before I make a purchase it makes me think through what I am doing and if I really need what I am purchasing. It’s been a great help to me.

    I also still plan my days on paper, and I’m not an old man. I find that writing things down clears my head and helps me plan, organize, and budget in a more clear and more effective way. Either way, you should be doing something similar to #1 or #2 on a daily basis.

  3. Balance Sheets – I love planning. Honestly, sometimes I like planning more than doing.Along with this, I’ve always loved Robert Kiyosaki. I don’t know how much he actually did to get rich, beside writing books, but it’s a pretty good “pump me up” session watching his stuff. Here is a video I like.

    Balance sheets will do wonders. I keep one at all times and I continue to update it. I use this not only as a method to view where I am, but also a great way to see where I am going.

    Also, some good advice in this video on assets and liabilities. Good information if you haven’t heard it before.

    The balance sheet could be your saving grace. You need to have a good idea of where you are in your business. Many times your balance sheet will include personal and business information. I know for many small business owners and self employed individuals these are not two separate pieces but indeed they are one in the same. Learn to use a balance sheet, it will teach you more than you might think.

By really taking the time to plan and budget you will find that you have more money than you think. Often times we waste money on things that aren’t necessary. By taking the time to figure out where you are you can more successfully get to where you are going.

Budgeting seems simple, but it needs to be a habit. It isn’t glamorous, but it’s a good first step into the financial portion of your business. It’s the stepping stone to everything else we will be talking about in this blog, so start there, and then we can branch out into new areas and topics of financial conversation.