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Write a Business Plan That Works [Part 1]

07.20.2011 by Dallon Christensen //

Your startup business does not need a large, fancy business plan. It does need a success roadmap created using the good old fashioned planning process.

It’s rare to hear “startup” without “business plan” in the same conversation. Universities and venture capital firms hold business plan competitions with thousands of dollars in funding available to winners. Venture capital firms receive thousands of business plans and hear hundreds of company presentations every year. It’s tempting to believe you need an elaborate, colorful plan full of figures and charts to even think of starting a business. Well, breathe easy because you do not need a formal business plan to launch your new business. However, you do need a planning process to guide your thinking and reduce the impact of surprises.

Here are four reasons every aspiring entrepreneur needs to write a business plan focused on planning the future of their business.

1. Faster reaction to unforeseen events

One of my favorite quotes from General Dwight Eisenhower summarizes my ideas about business plans very well:

“In preparing for battle, I have found that plans are useless, but planning is indispensable.”

General Eisenhower understood the real reason behind business planning – charting a course for the future. Planning is uncertain by its very nature. We are making our most educated guess about future events, but we know the future will not go exactly according to plan. A strong planning process allows you to change course quickly, because you will understand where you wanted to go. I like using the vacation analogy when discussing planning with my customers. When my family goes on vacation, we plan what we want to do each day. For example, we are planning to visit a water park near my grandparents’ condominium on Friday during our upcoming vacation. However, we know we cannot go to the water park on Friday if it is raining. A good vacation plan allows us to move the water park trip to Saturday and go to the outlet mall or an indoor attraction on Friday.

2. A benchmark to compare what is working

“If you don’t know where you are going, any road will get you there.” – Cheshire Cat, Lewis Carroll’s “Adventures of Alice in Wonderland”

Good business planning will let you see if what you are doing is working. Marketing is a great example to show why business planning is so important. Suppose your monthly revenue goal is $2,000 as you build your company slowly. You must market your business to generate exposure and find people interested in what you are selling. If your planned revenue was $2,000 and you only generated $1,000, you can look at why you didn’t meet your goal. When you find the real reason for your revenue shortfall, then you can make the necessary changes. If you exceeded your revenue goal, then you can see if the increase was because of a special circumstance or if you really did something worth repeating. Planning your expenses works the same way. If you consistently spend more money on software or memberships than what was in your plan, then you have a way to identify what you must do to become successful.

3. A way to look forward instead of backward

I hate to make fun of my accounting background, but accounting is really like driving your car by looking in the rear-view mirror. It’s always important to know what is behind you, especially if an emergency vehicle or police car is racing behind you! However, there is a reason why the rear-view mirror is so small compared to the windshield. It’s much more important to know what’s ahead of you when driving a vehicle, and it’s more important to look forward instead of backward in your business planning. It’s always good to have accurate and reliable accounting numbers to help you make decisions moving forward, but future events and circumstances can make yesterday’s results meaningless. Good business owners are constantly looking for the opportunities and threats in front of them.

4. Earning support from your network

I saved the most important reason for last, because no aspiring entrepreneur can make a business work alone. As I discussed in my initial article for Debt-Free Adventure, I want my family to understand when I expect my business to become a viable, self-sustaining business. I regularly share my planning process with my wife to show her how I foresee future months’ activity. This keeps her involved with the business and bolsters her confidence about my future success. My business planning also becomes a part of our personal financial planning.

In my next article, I will provide several tips to help you create a planning process that balances simplicity, detail, numbers, and story. You will then have the philosophy and tools required to make planning an important and even enjoyable part of your path to entrepreneurial success.

Categories // Earn Money Tags // business, entrepreneur

Business Debt in a Sole Proprietorship

06.04.2010 by Robert Espe //

Have a question of your own?  Ask DFA writers for free!  🙂

Business debt mixed with our personal finances

DFA Reader Micki asked:

How should we begin to address this financial debt? How do we untangle our personal/business debt and does it even matter since our business is a sole proprietorship? (I have worked outside the business to earn extra money, but my absence cripples the business even more.)

Here is an explanation of their detailed situation:

I have been married for 20 years and have 3 teenage children. My husband, Ron and I own a small wholesale business and have done so for about 15 years. My husband initially started the business, and I took care of bookkeeping. As Ron discussed the venture with his father, Bill, he was encouraged to allow Bill to “help” him; So, because the two had a strong relationship, Ron agreed. Bill took over all finances while Ron was responsible for all sales and customer/vendor relationships and activities. I had entered all invoices and bills into the computer. Bill had never used a computer and refused to do so, therefore, all financial records were kept in his home and all bills and payments sent there as well. My mother-in-law entered all receipts, bills, and taxes. Any time questions arose about the finances, we were assured things were handled and that was Bill’s job. We eventually conceded control. We knew the sales numbers and monthly expenditures and felt confident in our business stability. The business grew quickly and was very profitable. At this point, Bill encouraged Ron to take on a partner who agreed to invest capital in return for a percentage of profits. Trusting his father’s advice, Ron agreed. Terms were agreed upon including a set draw for Bill and commissions for Ron. We spent months developing relationships with vendors that resulted in a preliminary agreement for importation and exclusive rights to inventory. After a short time, Bill realized that Ron’s income was increasing and became dissatisfied with the plan, so, instead of renegotiating the agreement, Bill began paying himself bonuses and selling merchandise to his “friends” under the table and pocketing the money. Our business began losing inventory by the thousands each quarter. The financial partner discovered the inconsistencies and insisted on immediate full return of his investment or face legal action. We paid this from our personal accounts, since Bill insisted there was no other way. Then Ron entered the office one afternoon to hear his father berating our importer for his lack of English skills and culture. He insulted the vendor’s daughter to whom we were personally close and whose wedding my husband had attended and explained that our company had no need of their involvement. The relationship was irreparably severed. Gradually, Ron’s time at the office was increasingly spent arriving late, taking long lunches, napping at his desk, then leaving early. Soon thereafter, I was involved in a severe automobile accident and was unable to work for a couple of months. When I returned, I found things even more unsettling. I overheard my father-in-law on the phone discussing business credit card payments to our vendors, and when I inquired as to the details, I was told it was not my business. Bill was handling the finances. This was the “final straw”. After many years of his promises to retire and leave the company to us, he again gave a date of his departure, and, on that day, we held him to it. He was enraged. He threatened to bankrupt us and said personal things I never imagined a father could say to his son. Upon his leaving he brought bills that we were now responsible for assuring us he would bankrupt our business if we held him responsible for any debt. We were hundreds of thousands in credit card debt. He had apparently forged Ron’s name on some documentation and, on others, had simply claimed full decision-making ability. Ron refused to hold Bill legally responsible or to claim bankruptcy on moral grounds, and we have since been tortured month after month with the magnitude of the debt with which we have been saddled. We continue to pay the bills on time, even those that are in Bill’s name, and his credit has been bolstered as a result. We struggle daily to “rob Peter to pay Paul”. The situation has, over three years time, broken us and nearly our marriage. Initially we were able to begin recovery and advanced repayment of the debts. Then the economy failed. Our business was in the direct line of losses, and customer bankruptcies hit us hard. I am responsible for all finances now, and it is overwhelming. Ron cannot reason with the situation and refuses to talk it through. He did make the decision to use all our available personal credit to shore up the business. We had previously made the decision not to carry any revolving debt. He has cut off all friendships and relationships and looks to me to be his strength. I am at the end. We take full responsibility for our failure to adamantly address the financial questions with his father. We are now paying the price for that mistake. We have forgiven Bill. It remains difficult, however, each month as we see Ron’s parents brandishing new purchases as we struggle to meet minimal obligations and upcoming college expenses. So I guess we are in the process of continual forgiveness.

Business debt, personal finance, and family partnerships

Unfortunately, there is no way to “untangle” your debt from the business. You say it is a sole-proprietorship, although to me it appears to be a partnership, both of which leave the proprietors/partners personally liable for business debt, unless they are incorporated. How to address this debt is more complicated. It is one thing to acknowledge that money is owed, in this case, it will be figuring out what to do about it that will be tricky.

The first thing that strikes me about this situation is how far back the problem goes. You say you have had this business (and these financial problems) for 15 years. Any situation that long in the making will not be fixed quickly. However, decisions must be made and a course set to correct the situation, or you may eventually find yourself in bankruptcy. You say that until recently the two of you did not carry revolving debt, so you know how to handle money, but there may be no realistic way for you to support your business and finance your father-in-laws debts.

Your story is the perfect example of why people should be careful with whom and how they conduct business. Reluctance to confront family members when they do something wrong often makes a bad situation worse. This appears to have been the case here, and I think the first step to dealing with your situation is to be honest with yourself about your father-in-law’s actions. He robbed you and your husband when he paid himself more than was agreed upon and stole the merchandise he sold off the books.

It is one thing to admit that your father-in-law stole from you, quite another to decide what to do about it. I understand your husband’s reluctance to take legal action against his father, however I believe it is misguided. While the Bible does say we are not to take Christian brothers to court, in context that is an injunction against civil disputes. You are dealing with criminal actions, and I see nothing immoral about pursuing legal action in this case, especially if your father will not do right by you after speaking with church leadership about the situation.

I would recommend meeting with an attorney to discuss options. Once you have a good idea of what is open to you, you will be able to decide what you want to do. It sounds to me like your-father-in-law was a full partner in the business, which would make him equally liable for business debt. Even if you pursue no other legal action, at the very least, I would not make any more payments on anything in your father-in-law’s name, what would be the point? If they are his debts, he should pay them, and you gain nothing by paying them for him. Let the collectors come knocking on his door. His threat to bankrupt you if you send him his bills rings hollow.

Finally, I would recommend that the two of you reconnect with your church, other family, and friends. Meet with your pastor to discuss your struggles, especially where you are concerned about legal action against family, and how these business troubles are affecting your marriage. This type of situation is not the kind of thing you two can afford to handle on your own. You need the prayers of others, you need fellowship, and you need counsel. You need to face this challenge as a team, communicate with each other, and make decisions together. Remember that your marriage is more important than the business.

Do You Have Any Other Advice for Micki?

Something you think I missed? Drop a line in the comments below.

Have a question of your own?  Ask DFA writers for free!  🙂

*Disclaimer*
We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/adviser relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

Categories // Debt, Earn Money, Money Management Tags // Advice, business, Debt, Finances, personal, relationships

SEP IRA – Contribution Limits and Deadlines

01.22.2010 by Matt Jabs //

Summary of SEP IRA, contribution limits, and deadlines

A SEP is a simplified employee pension plan and is designed to furnish business owners with an easy way to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP IRA).  Contributions are tax deductible and investments grow tax deferred.  10% early withdrawal penalties exist if participants make withdrawals prior to turning 59 1/2 – much like other tax sheltered plans (401(k) and traditional IRA.)

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Follow this link for information on Traditional and Roth IRA contribution limits.

Details of SEP IRA, contributions limits, and deadlines

The SEP IRA was designed as a low cost solution for allowing small businesses to provide employees with a pension without shouldering the high administrative costs of 401k’s and defined benefit plans. When an employer contributes to a SEP IRA the money goes into an IRA owned and managed by the employee.

Know the difference between contributions and deductions.

  • Contribution – The amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant.
  • Deduction – The plan contributions you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible.

Which broker should you use to manage your SEP IRA?  Good question.  I highly recommend using a discount broker and of the firms I’ve worked with I like TradeKing the best.

SEP IRA contribution limits

For corporations:

One of the primary benefits of a SEP IRA is that it has a high contribution limit. The 2009, 2010, and 2011 contribution limits for eligible employees are the lesser of either $49,000 or 25% of total employee compensation.

  • Example 1: Your employee earned $50,000 for 2010. The maximum allowable contribution to their SEP IRA is $12,500 (25% x $50,000.)
  • Example 2: Your employee earned $200,000 for 2010.  The maximum allowable contribution to their SEP IRA is $49,000 (because 25% of $200k is $50k which exceeds the $49k limit.)

For sole proprietors:

Contribution limits for the self-employed are not quite as straight forward but, barring limits, are approximately 20% of net profits with a maximum of $49,000. Remember that any contributions to a 401(k) or IRA, along with any employer matches to your 401(k) contributions, reduce your $49,000 maximum. Basically… all combined investments in defined contribution plans cannot exceed $49,000.

  • Example 1:  You earned $50,000 for 2010.  Your maximum allowable contribution to your SEP IRA is $10,000 (20% x $50,000.)
  • Example 2:  You earned $250,000 for 2010.  Your maximum allowable contribution to your SEP IRA is $49,000 (because 20% of $250k is $50k which exceeds the $49k limit.)

Only income from the business can be contributed.  Put another way, you cannot contribute money from another job separate from your business. Also, an adjustment is necessary to account for their ability to deduct both FICA taxes paid, and contributions to their own SEP IRA, both of which count toward their maximum deductible income for the year.

SEP IRA contribution and deduction deadlines

The contribution deadline for previous year SEP IRA contributions is the same as the due date of your employer’s return, including extensions. That means it is not too late for those with small businesses to lower their taxable income by contributing to their SEP IRA.

Other SEP IRA details

As mentioned above, most of the same rules that govern a Traditional IRA also apply to a SEP IRA. Specifically the minimum, no-penalty withdrawal age of 59-1/2, and the required minimum distributions beginning at age 70 1/2. Since the money contributed to a SEP IRA is pre-tax, distributions will be taxed at whatever rates are in effect for your bracket during the year of distribution.  Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70 1/2 . If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70 1/2.  Just remember that participants age 70 1/2 or over must take required minimum distributions. As a final consideration, the IRS does not allow a loan to be taken out against the remaining account balance. This common feature of 401k plans provides a semi-liquidity option many have come to expect, the absence of which should be considered before large sums are contributed.

Which broker should you use to manage your SEP IRA? Good question. I highly recommend using a discount broker and of the firms I’ve worked with I like TradeKing the best.

Note:  I am not a tax professional. Consult IRS Publication 560 and/or your tax professional for details.

Categories // Investing, Retirement, Savings, Taxes Tags // business, Investing, Retirement, sep ira, Taxes

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