Article contributed by Leah Nevada Page of MicroMentor.org, an organization that helps emerging entrepreneurs grow their businesses through mentoring and advising relationships with experienced peers and business professionals.
Sturdy McKee’s journey to small business success started with a pink slip. The hospital where he had been working as a physical therapist downsized and after a frustrating job search, Sturdy sat down with his wife and had a conversation about what it would take to open his own physical therapy practice.
Once started, Sturdy rapidly built a successful business, and was soon operating at the full capacity of his staff and building space. But when Sturdy began looking for a loan to help him open additional offices, banks were refusing to finance his planned expansion. Then Sturdy found MicroMentor. MicroMentor is a pioneering web-based community and social network that helps aspiring entrepreneurs build successful businesses by matching them with volunteer business mentors from around the country.
After signing up online at www.MicroMentor.org, where he described his business and mentoring goals, Sturdy was matched with a mentor, Jayshree Miller, who had worked as an accountant in the U.K. and was now looking for an opportunity for skills-based volunteering.
As Sturdy’s mentor, Jayshree worked with Sturdy through a series of phone calls and emails to help him make sense of his balance sheets, cash flow statements, and profit & loss statements. She also helped him identify areas in need of expansion. “She reinforced our opinions that we were a healthy company and that we were viable, even though we were unable to secure funding from a bank. [It] gave us the confidence to fund our own growth from our own profits.”
Now, just six years after opening its doors, Study’s physical therapy company has 5 branches and over 20 employees. And just two years after he first sought help on MicroMentor, Sturdy has returned to MicroMentor as a volunteer mentor. “Moving the business to profitability changed a lot of things in my business and my life and I hope to help other people to do that. I want to help people figure out how to plan and make their businesses viable.”
Category: Entrepreneurship
You’ll pay too much in taxes if you don’t understand that cash in minus cash out does not equal profit.
This is the most important thing you need to know before you start keeping records for your business…cash in minus cash out does not equal profit. It simply equals cash left over. Or, in many cases, it’s a negative number, so it equals cash you owe somebody.
What this means is that you’ll need to understand the IRS rules and keep your records according to those rules so you report your profit correctly and take (and be able to prove) all the deductions you’re allowed to take. Because you want to pay the least amount of tax possible, right?
The way you’ll need to keep your books will be different depending on whether your business is a sole proprietorship, a partnership or a corporation. The rules for calculating income and deductions (and therefore profit) and the forms used for reporting to the IRS are different for the different business types.
What counts as income? Most or all of the money you take into your business will count as income. This includes fees for services and/or product sales.
But not all the cash that comes into your business counts as income.
If you get a rebate for a purchase you made at your local office supply store, that’s cash in, but it’s not income. It’s a reduction in your supplies expense.
If you get a refund of part of your insurance premium at the end of the year, that’s cash in, but it’s not income. It’s a reduction in insurance expense.
If you borrow money (and it doesn’t matter if it’s from your brother or the bank), that’s cash in, but it doesn’t count as income.
What counts as expenses? Most of the money you spend for your business will probably count as expenses. This includes advertising, postage, office supplies, and similar items.
But not all the cash that goes out of your business counts as expenses.
When you buy business property like cars, computers, and furniture that will last longer than a year, you’re not allowed to deduct their entire cost as an expense in the year of purchase (except in special circumstances).
These items are called capital assets. Sometimes they’re referred to as fixed assets.
You have to depreciate them over several years. Basically, depreciation is a process of spreading the cost of an item over its useful life.
You might have cash of several hundred or thousands of dollars go out the door when you purchase fixed assets, but you can’t deduct the entire amount of the purchase price as an expense when you buy them.
Some things that your business pays for might only count as partial expenses. An example of that is business meals and entertainment where you can only deduct half of the cost.
That doesn’t mean that your business can’t pay for 100 % of the cost, but only that you’re limited in the amount of the tax deduction you can take. This is another example of cash out that doesn’t translate directly to expenses.
Some things your business pays for might not be tax deductible at all.
An example of this would be a contribution to a Political Action Committee. That doesn’t mean that the business can’t pay for it, just that it’s not a deductible expense on your tax return.
Some more examples of cash that goes out the door that doesn’t count as expenses are: draws for sole proprietors and distributions for partners or S corporation shareholders.
There’s also one type of expense that can be more than the amount of cash that the business actually spends. It’s the home office deduction that some sole proprietors can take.
So you see why it’s so important to understand that cash in minus cash out does not equal profit.
Unfortunately, the IRS rules and regulations don’t always make logical sense; they might seem complicated and unfair. One thing is certain. They are the way they are, so we have to deal with them. Learn what you can. And get help when you need it.
Sheryl Schuff, CPA, is a Certified Public Accountant, author, and consultant who teaches entrepreneurs how to get their businesses organized, keep good accounting records, and maximize their business tax deductions. She is President of Schuff & Associates, PC and has been in private practice for over 30 years. She recently started an information products company www.TaxesForSmallBusiness.com to provide individual training materials for small business owners.
Young Entrepreneur: After polling our Young Entrepreneur readers, here is our list of the top 20 mistakes that startups make when creating a new business. I’ve also included a few of the comments that were left for some of the top points.
#1: Not Having a Clear Plan or Vision
“The biggest mistake people make is not looking far enough ahead in your market. So many businesses are losing ground to new technologies as example, so think ahead on how to better utilize these new technologies. With the current recession, how many planned for it? Every business will go through cycles of growth and market demize, just as we are all now seeing, so again, think ahead, have vision beyond today is one of the keys to success.”
#2: Surrounding Yourself With People Who Don’t Believe In Your Idea
“Another mistake would be surrounding yourselves with people (whether by accident or because they’re family, etc) who don’t believe in your idea. You need to be around positive feedback all the time.”
#3: Not Having Enough Money
“I think this is big for those businesses that have the incentive to only reap the benefits and not focus on the longevity of your venture. Taking out $10k now may prevent making $100k in a few months. Mindsets should not be “Yeah I own a buiness I make this much” but rather “Yeah I own a business, we invested in XYZ and were able to afford this new service/expand here/etc” Also, too many people plan on the basic expenses of starting up, and don’t think about the increased expense that come with a more successful, growing, developing business.”
#4: Doing It All Alone
“Lots of CEO personalities think they have to be the answer to all problems, and this is not the case. Their pride and mindset of “I must live up to this role” is skewed and they may fail to tap the most important and valuable resources that surround them in their management team and affiliates.”
#5: Not Seeking Mentors
“I think having a mentor – a much more experienced entrepreneur that can give you some valuable advice is so IMPORTANT…especially when you are a young and overly ambitious… and with so many challenges to meet on the way to success.”
#6: Losing Momentum
“Being satisfied and content with functioning can lead to “big headedness” and false hope that it will always be this way. You need to constantly improve your product/service, research your around-the-clock changing market and competition, and promote innovation and forward progress amongst your management and team.”
#7: Not Marketing Your Business / Expecting People To Come To You
“A few mistakes that I personally made was the lack of focus on a targeted marketing plan, and the miscalculation on future expected growth.”
#8: Not Looking At Your Competition
“I think it is a big mistake to start a business without really understand the market.”
#9: Being Overly Enthusiastic and Not Having Realistic Goals
“A few mistakes that I personally made was the lack of focus on a targeted marketing plan, and the miscalculation on future expected growth.”
#10: Not Thinking Survival
“Too many people think that so long as everything is done “textbook” and they have the proper set up, and plans down on paper, that they will succeed. Also, many people have the idea that it is easy to keep it up after they get an initial consumer base. Not true. small businesses are small fish in a big pond, constantly competing against emerging and growing bigger competitors that have the backing, both monetarily and resourcefully, to push them out of the picture.”
The remaining 10 common startup mistakes are:
* Doing It Just For The Money
* Not hiring right away
* Getting to year 1, past year 2
* Not getting involved in the community
* Working in your business instead of on it
* Going wide instead of deep into a niche
* Not using email marketing
* Having a lack of ambition
* Failing to network with others
* Growing too quickly
The Top 20 Startup Mistakes – Entrepreneur Poll Results [Young Entrepreneur]
Categories
When Your Business Fails
BusinessPundit: With the current economic crisis, we are seeing businesses fail at a greater pace. Companies that have had past success records are downsizing at substantial rates, not to mention those that are completely closing their doors.
Large companies aren’t the only ones feeling the crunch of economic hardship. Small businesses are going out of business as well. On top of the challenge to survive the first two years of business, inflated costs of doing business are growing at rates never seen before.
The question then is, “What do you do when your business fails?” For many small businesses they started with someone’s savings, an investment fund, loans from friends and family just to get started. Now that’s gone, the reality of “shutting down shop” sinks in and the entrepreneur/small business owner is again with his idea and the thoughts of what could have been.
At some point you have to embrace the reality that it’s over and when that happens now what?
Focus on the Positive Things that Were Accomplished
It doesn’t matter how long you were in business every business has had bright days. It could have been new contacts and partnerships. Patients for products that you know can work. Systems that you developed and implemented. Perhaps, it was the day or week you reached records sales.
Ask The Hard Questions
Why did it fail? Was it poor planning? Was there lack of knowledge of the market? Did it come down to personnel? Maybe it was the wrong sales strategy. Whatever it was, as an entrepreneur asking the hard questions will help get away from the blame game and addresses the facts, both good and bad.
Learn and Move On!
Entrepreneurs can be extremely strong-willed individuals. It’s because of that they experience success and reach their goals. However, the one thing that separates them from others, is that the fail, learn and move on. Often times it’s in the same type of business and same product: just a new approach.
How to Cope When Your Business Fails [BusinessPundit]
When most small business owners think about taxes, they think about Federal income taxes. But there are other taxes that I want to let you know about, so you’re not surprised if you have to pay them.
The first is self-employment tax. If you’ve ever worked for someone else, you know that social security and Medicare taxes get deducted from your paycheck. When you’re self-employed, you don’t actually get a paycheck.
Here’s what happens if you’re a sole proprietor. Following the IRS rules and regulations for calculating income and expense, you report your results for the year on your personal 1040 by filling out Schedule C.
Then you take the net profit and put it on Schedule SE for self-employment tax. After a small deduction, you calculate 15.3 % as your self-employment tax. This is double the rate of 7.65 % that’s deducted from employee paychecks because as a sole proprietor you’re both the employer and the employee so you have to pay both parts.
You get to take half of the amount of self employment tax as a deduction from your income on the front of your 1040. This has the effect of reducing your taxable income.
The self employment tax itself goes on the back of the 1040 in the section called Other Taxes on the line that says self employment tax. For the 2006 filing year that was line 58. This tax gets added to your Federal income tax and any other taxes you owe and is paid when you file your 1040.
If you (and/or your spouse on a joint return) have had Federal income tax withheld during the year that adds up to more than your total taxes for the year (which includes self employment tax), you’ll still qualify for a refund.
If your business is operated as a corporation AND you’re active in your business, you should receive W-2 wages and you won’t be subject to self employment tax on your earnings. Distributions from S corporations are generally not subject to self employment taxes.
If your business is operated as a partnership, you might have some items of income that are subject to self employment tax and some that are not. These items will be reported to you on a schedule K-1 that is part of the business tax return.
Sales tax
Many States have sales taxes. If you sell products to customers, you’ll have to charge them sales tax and pay it to the State. In some cases, digital downloads are considered products as far as the sales tax rules are concerned and certain services might also subject to sales tax. In Indiana, where I live, the rules are put out by the Indiana Department of Revenue. There will be a similar agency in your state who you can contact to find out the rules.
Local Taxes
Some cities and school districts have local taxes that you might have to pay. Some of these depend on your type of business. There might be additional sales taxes, property taxes, innkeeper’s taxes, or food and beverage taxes. Check with the authorities in your area for details.
And then there’s the often dreaded Estimated Taxes
This is a subject that confuses many people.
First, let’s try to understand the reason that the estimated payment system exists. Our system of Federal taxes is a “pay as you go” system. When you think about it, that makes sense. The government needs money all year long to pay for various things.
When you work for someone else, taxes are withheld from your paycheck each pay period, so the government gets its money over the course of the year. If you’re a sole proprietor, this doesn’t happen, so you’re expected to make estimated payments.
As with many IRS rules, there are some exceptions, and some penalties if you don’t pay enough or pay on time. There are some cases where you might not be required to make estimated payments (and you won’t have a penalty if you don’t), but it would still make sense to make them anyway, to avoid having to pay a large amount on April 15th.
If you have another job in addition to your self-employment, you can increase your Federal withholding on that job to cover the amount of the estimated taxes that you would otherwise have to pay. And if you’re married and file a joint return and your spouse has wages from another job, he/she can have additional Federal withholding taken out to cover the estimated payments.
Or, you can make quarterly payments using Form 1040-ES. You can also sign up to make the payments on-line. You might also need to make estimated payments towards your State taxes.
Payroll
If you have employees, you’ll need to pay various Federal, State, and local payroll taxes. But we’ll have to save that conversation for another time.
The most important thing you need to understand is that it’s your responsibility to find out what taxes your business has to pay. And that the laws vary from place to place and by type of business.
A good source of information is an accountant who specializes in consulting with small businesses.
Sheryl Schuff, CPA, is a Certified Public Accountant, author, and consultant who teaches entrepreneurs how to get their businesses organized, keep good accounting records, and maximize their business tax deductions. She is President of Schuff & Associates, PC and has been in private practice for over 30 years. She recently started an information products company www.TaxesForSmallBusiness.com to provide individual training materials for small business owners.