Tuesday, January 7, 2014

Starting Your First Business Off Right

Starting Your First Business Off Right
One of his former students is selling genetically altered glow-in-the-dark goldfish. Another is developing a diaper with built-in baby wipes. For John Butler, a professor of entrepreneurship and management at the University of Texas at Austin’s McCombs School of Business, such occurrences are part of daily life in a town bursting with startups.
“We’re in the business of wealth creation,” Butler says.
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With the exception of Silicon Valley and its hordes of startups vying to be the next Google or Hewlett-Packard , few places are as closely associated with entrepreneurial capitalism as Austin. But the truth is that new businesses are set up everywhere–especially in tough times like these. Whether it’s by choice or by necessity, starting your first business has several things going for it: a way to create wealth and opportunity when both seem to be in short supply; a chance to be your own boss; and a chance to try something that could take you far beyond the bounds of cubicle culture.
“Destruction is painful, but it creates opportunity,” says Jerome Engel, director of the center for entrepreneurship at the University of California Berkeley Haas School of Business. “Now is a great time for entrepreneurs to reset their agendas for their next 10 years.”
In Pictures: Five Common Financial Mistakes Small Businesses Make
Although millions of people set up businesses each year, even highly competent professionals often manage to fumble the basics. Veterans of big companies, for example, often fail to spend enough time laying the foundations necessary for their new ventures to grow, Engel says. These can run the gamut from lining up financing to buying the computer and accounting systems necessary to run even a one-person show. It’s also a good idea to consult with an accountant, lawyer and, possibly, an insurance agent before setting up shop.
First, it’s important to keep in mind that even the best idea in the world doesn’t make a great company; a sound business plan does. You’ll want to develop a strategy that will identify what your product or service is, how you will market it to potential customers and what it will take to feed your family and keep the lights on until your venture starts to turn a profit. You’ll also want to know who your customers will be: Are you going to be selling goods or services to other businesses, or are you going to try to reach consumers?
Once you have an idea of what you’re going to do, you’ll need to secure startup capital. The Small Business Administration offers a micro-loan program that lends up to $30,000 to startups. Banks and other financial institutions may also be willing to lend, although they have been notoriously tight-fisted in the wake of the recent financial crisis. Another possibility is to tap savings–or friends, relatives and business associates who have high regard for your abilities.
“It’s near impossible to borrow any money these days, and that could be the best thing that ever happens to you,” said Mickey Cargile, a financial planner in Midland, Texas.

Often the biggest financial challenge new entrepreneurs face is coming up with enough working capital to stay in business for 90 days or so until revenues start coming in the door, says Alice Magos, a small-business analyst at Chicago’s CCH.
“Most people don’t understand that you can have a really successful business and even post a profit, but if you don’t have a positive cash flow you will be out of business,” she says.
One factor that many new entrepreneurs overlook: payment lags. Even if you manage to sell your product or service, it can often take 30 to 90 days until your new customer pays you. Magos suggests starting out with a financial plan that conservatively estimates when you can expect to begin receiving revenue and comparing it with the dates and amounts that your new venture will owe.
Don’t forget that Uncle Sam will expect a cut too. At the top of his list will likely be quarterly estimated tax payments. If instead you wait until the end of the year to pay what you own, the government will likely hit you with a penalty–as well as a big bill for back taxes. Those quarterly payments can be larger than you expect by the time you get done with federal, state and possibly local taxes, plus both the employer’s and employee’s share of Social Security contributions. Most small businesses are taxed at the same rates as an individual’s ordinary income tax level.
The upside: You will probably be able to deduct legitimate business expenses and possibly a portion of the costs associated with the use of a dedicated home office. Another nice thing about small businesses are the organizations dedicated to offering help, such as the Small Business Administration and local Chamber of Commerce.
In Pictures: Five Common Financial Mistakes Small Businesses Make
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See Also:

Choosing A Second Career
How to Become a Consultant

Tuesday, December 3, 2013