STAYING IN BUSINESS

Starting a new business can be difficult. You will probably face many problems and most of them will be financial. It is important to be prepared for discouraging situations. During the beginning cash flow may not keep up with expenses and you will have to get as much work as possible to keep things going.

It is important to have some reserve funds before getting started and to keep adding to those funds as time progresses. You should be depositing at least 10% of your gross income into a reserve fund to handle those unforeseen situations and to keep you from getting behind on your expenses. If you do have to use some of these funds during one month, you should make every effort to repay the fund as promptly as possible. This fund may well keep your business afloat if you have some slow times.

I suggest you do your own accounting using an accounting application on your computer. Do your accounting regularly. Keep up with all income and expenditures so you will have a good idea how things are going at all times. Watch the expenses and cut out any unnecessary costs. Avoid waste even if you can afford it. Save the money instead to help overcome those tough situations.

Open a separate business bank account and keep close track of funds by using online banking. It is easy to do now and very inexpensive. Perhaps you can have a family member do the accounting. However you do it, make certain it gets done regularly so you know where you stand when an expense or an opportunity arises.

Many small businesses fail because of tax problems. You would probably be surprised by how many small businesses are having problems with income taxes. Some of them are making payments to the Internal Revenue Service for taxes from the previous year. Some are even paying for several previous years. Don’t let this happen to you. Make certain that you begin depositing a percentage of your income to pay your taxes. Create a saving account just for this purpose. Better yet, get the forms from the IRS and pay estimated taxes every quarter. At the end of the year your taxes will be paid and all you have to do is complete and submit your tax forms. It certainly makes things much easier and you will be able to use your money for profit instead of past due taxes.

Don’t mess around with the IRS. Pay your taxes every year when they are due. If you do have a problem and can’t afford to pay the IRS, complete and submit your income tax form on time and with a check for whatever amount you can afford. The IRS will bill you for the balance and will probably work out a payment arrangement for you. Pay as much as you can as quick as you can. It can be a real drain paying past and present taxes.

Income taxes are high for self-employed persons. Right off you have to pay the full 15% for Social Security, unlike employees who only pay half that amount. Then you have to pay a percentage on your income depending on the amount you make. These two figures can add up significantly. Plus, if you live in a State that collects income taxes, you have yet another percentage over and above those two.

I’ve noticed that most people believe that IRS employees derive pleasure out of ruining people financially. That has not been my experience. I was audited once and on two occasions I had to arrange monthly payments to finish paying my taxes. During all of that time the IRS employees I dealt with were helpful and non-threatening. It seems to me that we get back what we put out. I suggest that you be honest, courteous and concise in your dealings with the IRS. Chances are you will be treated in the same way.

I’ve stressed the importance of good and consistent accounting practices. There is one area of accounting that requires special attention. That area is accounts receivables. This is the money you have coming for your work. I strongly suggest that you avoid billing except for long term regular customers that you have come to know for many years. In all other cases the sales should be handled with a credit card, cash or check. Any contracts should be handled with a 50% deposit when the job is contracted and the balance upon completion of the work.

I know you are probably thinking that this 50% deposit policy will lose you many potential customers. Well, the truth is it will cut out some customers. You will probably not be doing any work for government agencies since they are not willing to pay deposits. And, you may not be doing any work for general contractors who most often like to pay you after you have signed a lien waiver and they have received their draw from the bank. This is not as bad as it sounds.

In the first place, government agencies are known for being slow payers. I once did a job for the Internal Revenue Service and it took them more than three months to pay me after I completed the work. And, contractors are notorious for agreeing to one amount and then trying to reduce the amount once they see that their profits are too low on a house or building that they are constructing. A contract and a deposit will help protect you from these situations. The important thing is that you will cut out all the customers that could fail to pay you.

I’ve had many friends in business that got beat out of some or all of the funds on jobs because they simply did the work and then submitted a bill. That is not the best way to handle jobs under contract. It is definitely not the best way to make certain that you collect the full amount owed to you. During the beginning it is critical that you get paid in full for every job. You can’t afford to come up short. You are much better off without these customers instead of risking a loss. Wait until you are on firm solid financial footing before you consider any billing.

In my more than 20 years as a one-person business, I never failed to get paid for a job. I did lose a few jobs that I would have enjoyed getting because of my deposit policy but I did not lose money. On two different occasions I bid jobs for large firms and was awarded the bid. Then I insisted on the 50% deposit and they refused. I walked away from the jobs. Both of the jobs came through because I had been highly recommended and they decided to relent and pay me the deposit. With this deposit, even if something happens and you fail to collect the rest, at least your costs will have been covered so all you lose is your labor. Don’t be foolish and compromise on this. If you do, it could place your business at risk.

Even with a 50% deposit, you must pay close attention to accounts payable. When the job is completed, make certain you collect. One of the problems I faced with one customer is that he gave me a bad check for almost $300.00. For a long time I was unable to collect for that check because he kept giving me excuses. I started dropping by his bank every time I was in the neighborhood and I would try to cash the check. One day, almost two months after he gave me the check, I went into the bank and he had just made a deposit and they cashed my check. The next day I got a call from this customer. He was angry because a very important check had bounced because I collected mine. Now that guy had some nerve but I would never have collected without persisting. As it turned out he called me for another job six months later and I refused the work. He persisted until finally I told him that I would do the job if he would pay me in full and in cash up front. He was offended and I did not do the work. It is up to you to take care of yourself. Doing a lot of work does you no good unless you collect for it.

Profit is very important to a business. You must keep an accounting of all your expenses in order to determine if you made a profit. Remember, to pay yourself a good salary for all the work you do. There are many self-employed persons who calculate all of their costs except for their own time and then say that they made a good profit on the job. If you did not figure in the hours that you worked at a fair hourly rate, your profit figures are overstated. Profit is the amount that is left when the job is finished and the labor, materials and expenses have been paid in full. I suggest that you pay yourself a good living wage and stash all the profits in the reserve account during the first year or two. This will help you build much needed capital to operate your business.

Remember that time is money. When you are self-employed you will probably have to run your own errands. This will consume many valuable hours. If you have someone who can run those errands, it is better to spend your time building projects. If you do run your own errands, set aside a certain time of the day when the traffic is most ideal to run the errands. Do them quickly and get back to work.

It should be clear that you have to keep track of many things when you are self-employed. It is difficult but worth the effort because it will ensure your success.